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Dragon Oil Trading Statement and Reserves Update

Dragon Oil plc, an international oil and gas exploration and production company, today issues the following trading statement, which includes an operational update, financial highlights for 2011 and the results of the latest reserves assessment. All information referred to in this update is unaudited and subject to further review. Dragon Oil expects to publish its 2011 full-year financial results on 21 February 2012.

Key operational highlights

· 30% increase in average daily production rate to approximately 61,500 barrels of oil per day (“bopd”) in 2011 compared to 47,200 bopd in 2010;

· 70,000 bopd target production rate reached in mid-December 2011 with the final 2011 exit rate higher at 71,751 bopd;

· Thirteen new development wells successfully put into production against an initial guidance of 11 wells; and

· Drilling from the Dzheitune (Lam) C platform commenced.

Key corporate highlights

· Year-end oil and condensate reserves increased by 41 million barrels to 658 (December 2010: 639) million barrels at year-end 2011; gas reserves and contingent gas resources remained at similar levels of c. 3 TCF;
· Farm-in agreement for an exploration asset in Tunisia with a 55% participating interest signed;

· Limited buyback programme concluded on 4 November 2011 with five million shares purchased at a weighted average price of GBP 4.84 per share; and

· Marketing route for full entitlement volumes secured until end-2012.

Key financial highlights

· Capital expenditure on infrastructure and drilling amounted to US$351 million for 2011 (2010: US$460 million); and

· Group’s cash balance (net of abandonment and decommissioning funds) as at 31 December 2011 was US$1,527 million (31 December 2010: US$1,163 million).

Dr Abdul Jaleel Al Khalifa, CEO, commented:

“2011 was an impressive year in terms of production and reserves growth: we succeeded in increasing gross field production by almost a third from the 2010 level thanks to an intensive drilling programme and strong results from the Dzheitune (Lam) West area. Encouraging results from the Dzheitune (Lam) West area have been meeting and at times surpassing our expectations since we entered this previously undrilled area in 2007 and have led to a significant upgrade of our oil and condensate 2P reserves. This year, we were able to achieve a 183% organic replacement of produced reserves, a remarkable achievement.

“As a result of strong oil prices and production growth, we have generated over US$1 billion in revenues, the highest annual earnings ever; this further strengthens our financial position as we continue our growth towards the production target of 100,000 bopd and actively pursue acquisition opportunities following the Tunisian farm-in of last year.”
OPERATIONAL UPDATE

Production

Gross field production for 2011 averaged 61,500 bopd (2010: 47,200 bopd). The increase over the previous year is an impressive 30% as a result of an extensive drilling programme undertaken during the year. The initial plans of completing 11 wells during 2011 were upgraded to 13 wells allowing us to achieve production growth significantly above the initial guidance of 10-15%.

The entitlement production for 2011 was approximately 53% (2010: 61%) of the gross production. Entitlement barrels are finalised in arrears and are dependent on, amongst other factors, operating and development expenditure in the period and the realised crude oil price. The lower proportion of entitlement barrels in 2011 is primarily due to the higher realised crude oil price and lower development expenditure during the year.

Marketing

Dragon Oil sold 11.4 million barrels of crude oil in 2011 (2010: 10.8 million barrels). The 6% increase in the volume sold over the previous year is mainly due to higher production. The increase in the volumes of crude oil sold was less than the production growth rate due to a combination of a lower entitlement rate in 2011 compared to 2010 and changes in the lifting and inventory positions.

In 2011, Dragon Oil exported approximately 99% (2010: approximately 60%) of its crude oil production through Baku, Azerbaijan with the balance sold to an independent third party.

The current marketing route via Baku, Azerbaijan has been extended until 31 December 2012 for the full entitlement production volume giving us comfort in being able to sell our share of the crude oil production this year. The terms of the contract remain FOB the Aladja Jetty primarily using the BP-operated BTC (Baku-Tbilisi-Ceyhan) pipeline. It is expected that for 2012 realised crude oil prices will be less favourable (10% to 13% discount to Brent) than the historic realised prices generated through that route in 2011.

The Group was in an underlift position of approximately 0.05 million barrels of crude oil at the end of 2011 (31 December 2010: overlift position of 0.2 million).

Drilling

During 2011, Dragon Oil completed a 13-well drilling programme in the Dzheitune (Lam) field. The following table summarises the results of this drilling programme:

We originally targeted the completion of 11 wells during 2011; however, we were able to upgrade our plans to 13 wells thanks to the optimisation of the drilling programme. A faster drilling rate by the NIS rig allowed us to complete six wells versus up to five wells planned at the beginning of the year; while availability of additional slots on the Dzheitune (Lam) A platform gave us an opportunity to drill an extra well using the Iran Khazar rig.

In early January 2012, we reported successful completion and testing of a sidetrack of the Dzheitune (Lam) 13/140 well performed by Rig 40 and we put into production the Dzheitune Lam A/165 well, a strong start to the 2012 drilling programme.

The table below summarises the results from drilling in the Dzheitune (Lam) field reported since the beginning of the year:

The Iran Khazar and the NIS rigs are currently drilling the Dzheitune (Lam) C/167 and 28/166 wells, respectively, while Rig 40 is working over the Dzheitune (Lam) 13/144B well.

During 2011, Dragon Oil employed three drilling rigs for all or part of the year. The same rigs are expected to be used in 2012 for all or part of the year, along with an addition of the Super M2 jack-up rig, which is expected in 1H 2012, as well as another 2,000 horse-power platform-based rig, which is planned for mobilisation in 2H 2012.

Infrastructure

Installation of the Dzheitune (Lam) C platform was completed on schedule and drilling commenced in early January 2012 with the Iran Khazar rig spudding the first well on this platform, Dzheitune (Lam) C/167.

In 2011, we carried out structural upgrades on four platforms adding four extra slots for drilling with a jack-up drilling rig on each of: the Dzheitune (Lam) platforms 21 and 22 and Dzhygalybeg (Zhdanov) platforms 21 and 60. This allows us to create additional capacity in our infrastructure from which we can benefit later should we need to adapt our drilling plans. Six slots were added on the Dzheitune (Lam) A platform allowing us to schedule the Iran Khazar rig for drilling from this platform in 2011.

The Dzheitune (Lam) Block-1 riser platform has been commissioned following the re-connection of the pipelines feeding into this gathering station from the old block. Block-1 will act as a gathering station and will help increase the throughput capacity of the Dzheitune (Lam) West area.

Completion of the Dzhygalybeg (Zhdanov) A and B platforms is anticipated in 3Q 2012 and 1H 2013, respectively. Each platform will have 16 slots and an accommodation facility; their design will allow the deployment of either a platform-based or a jack-up rig.

Completion of Block-4 riser platform and installation of the associated pipelines are expected in the second half of 2012. It will act as a gathering station for the production from new wellhead and production platforms in the Dzhygalybeg (Zhdanov) field.

Reserves and resources

Based on the results of the recent assessment by an independent energy consultant, the 2011 year-end oil and condensate 2P reserves were upgraded to 658 (31 December 2010: 639) million barrels. The gas 2P reserves decreased slightly to 1.5 (31 December 2010: 1.6) TCF corresponding to approximately 250 million barrels of oil equivalent dependent on the ongoing discussions with the government of Turkmenistan on a gas sales agreement

The oil and condensate contingent resources of 88 million barrels and the increase of approximately 41 million barrels in oil and condensate reserves are mainly due to an increase in reserves in the Dzheitune (Lam) West area. The Dzheitune (Lam) and Dzhygalybeg (Zhdanov) fields were discovered in the Cheleken Peninsula in Turkmenistan in the 1960s-70s. Since 2000, Dragon Oil managed to ramp up production ten-fold by introducing new drilling techniques and targeting previously undrilled areas, such as the Dzheitune (Lam) West in 2007. We have been drilling from the Dzheitune (Lam) 28 platform and have installed two new wellhead and production platforms, Dzheitune (Lam) B and C. Thanks to directional drilling certain wells drilled outside the proven hydrocarbon boundary in the Dzheitune (Lam) West area have shown a bigger area extension with a higher potential for the shallow reservoirs. These findings led to an increase in our oil and condensate reserves and resulted in a reserve replacement of 183% against the 2011 gross production.

The gas contingent resources remained at 1.4 (31 December 2010: 1.4) TCF. Necessary upgrades of and additions to offshore and onshore infrastructure are planned to allow the conversion of the contingent resources into reserves in the future.

No changes have been made to the estimates of recoverable oil from the Dzhygalybeg (Zhdanov) field, where we believe 15% of the total proved and probable recoverable reserves are contained and flow rates are expected to be lower than those seen in the Dzheitune (Lam) West area. We plan to start drilling in the Dzhygalybeg (Zhdanov) field later this year. This will enable us to understand better what the field is capable of producing.

FINANCIAL UPDATE
Capital expenditure

Capital expenditure for 2011 was approximately US$351 million (2010: US$460 million). Of the total capital expenditure, approximately 47% (2010: 55%) was attributable to infrastructure with the balance spent on drilling. The infrastructure spend during the year included construction of the Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A platforms, work on Block 2, 4 and 1 gathering stations, additional slots on the Dzheitune (Lam) A platform, upgrade of certain existing platforms and construction of a crane vessel, as well as the geophysical and geotechnical investigation to evaluate locations for future platforms.

Realised prices

Dated Brent for the year averaged approximately US$111 per barrel, about 41% above 2010’s average of approximately US$79 per barrel. The average realised crude oil price during 2011 was approximately US$101/bbl (2010: US$72/bbl), at a 9% (2010: 9%) discount to Brent. In 2012, the level of discount is expected to range between 10% and 13% to Brent, less favourable than the historic discount rates achieved.

Total revenue for 2011 is expected to be approximately US$1.1 billion (2010: US$780.4 million) subject to final audit. The full-year audited results will be reported on 21 February 2012.

OTHER EVENTS
Gas Monetisation

The commissioning of the gas compressor station in Hazar, Turkmenistan has enabled the Group to reduce gas flaring – a fact that is important to us as a good corporate citizen and one of the largest independent hydrocarbon producers in Turkmenistan. We continue to discuss with the government of Turkmenistan a range of options for the monetisation of gas, including a long-term gas sales agreement, targeted towards export markets. We are also reviewing options for the condensate recovery.

Diversification

On 10 October 2011, Dragon Oil announced that it had signed a farm-in agreement with a wholly owned subsidiary of Cooper Energy Limited through which Dragon Oil is to earn a 55% participating interest in the Bargou Exploration Permit, offshore Tunisia, subject to confirmation from the Government of Tunisia. Further, if the Joint Venture proceeds with a development phase, Dragon Oil will assume operatorship of the block.

In Iraq, Dragon Oil has been pre-qualified to participate in the fourth round of bidding (due to take place in 1H 2012).

Dragon Oil continues to screen and evaluate targets that fit our criteria within Africa, Central Asia, the Middle East and selectively south-east Asia in order to create a diversified balanced portfolio of assets for the Group.

Share Buyback Programme

In 2011, Dragon Oil launched a limited share buyback programme of up to five million shares in the Company. The buy-back programme commenced on 26 September 2011 and concluded on 4 November 2011. The sole objective and purpose of the programme was to meet all relevant obligations arising from the Company’s various share schemes.

As of 4 November 2011, 100% of the targeted number of shares was purchased at a weighted average price of GBP 4.84 per share.

OUTLOOK

For 2012, our target is to achieve a 15% gross production increase on the basis of 13-15 wells expected to be put into production and a number of workovers. The first well, the Dzheitune (Lam) A/165, and a sidetrack of the Dzheitune (Lam) 13/140 have already been completed, leaving the Iran Khazar and NIS rigs, Rig 40, Super M2 jack-up rig and a platform-based rig that is currently being sourced to complete the remainder of the wells planned for 2012.

Over the 2012-15 period, we expect to maintain an average production growth of 10% to 15% per annum, taking our gross field production to a level of 100,000 bopd in 2015 with the aim of maintaining this plateau for a minimum period of five years. Delivery of the production targets, including the attainment of the plateau production level is supported by a development plan that envisages deployment of up to three jack-up rigs, additional platform-based rigs, construction of new platforms and execution of a range of key infrastructure projects.

The Group expects to report its 2011 full-year financial results on 21 February 2012.

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