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Message: NR still alive , farm in by Edison Int SPA

Tuesday 26 June 2012

Falkland Oil and Gas Limited

("FOGL" or "the Company")

Execution of Farm Out Agreement and Exploration Update

FOGL, the oil and gas exploration company focused on its extensive licence areas to the South and East of the Falkland Islands, is pleased to announce the execution of a farm out agreement with Edison International S.p.a. ("Edison").

On 20 March 2012, the Board of FOGL announced that it had granted an option to enter into a Farm Out Agreement (FOA) to an industry counterparty. That counterparty was Edison which was unable to conclude the farm out agreement at that time as it was undertaking a corporate reorganisation which led to EDF becoming a controlling shareholder.

Summary terms of the Farm Out Agreement

  • Edison will farm in and earn a 25% interest in FOGL's northern area licences. Edison will contribute its pro-rata share of the costs of the 2012 drilling programme, comprising two exploration wells.
  • Edison will farm in and earn a 12.5% interest in FOGL's southern area licences and will contribute its pro-rata share of the 2012 work programme.
  • Edison will also pay its pro-rata share of certain historical costs incurred by FOGL during 2011 related to the 2012 drilling programme.
  • Edison's share of historical expenditures, together with their share of the 2012 drilling programme costs, are expected to be of the order of $50 million.
  • In addition Edison will make a separate cash contribution to FOGL of $40 million; $20 million on completion of the FOA and a further $20 million in 2013.
  • In order to obtain the option, Edison had already paid a $3 million non-refundable fee.
  • FOGL will retain operatorship of the northern and southern area licences.

Edison is a long established international exploration and production company which currently produces 48,000 barrels oil equivalent (boe) per day. Edison has approximately 360 million boe of reserves from over 80 licences spanning countries such as Italy, Egypt, Norway, Croatia, Algeria and the UK. Edison has experience in a wide variety of operating environments and has participated in a number of deep-water ventures elsewhere, including offshore Egypt. Edison is now controlled by EDF, the world's leading electricity company, who are looking to use Edison as a vehicle to expand its position in upstream oil and gas projects.

This farm out will considerably strengthen FOGL's financial position. In the event that the two exploration wells are drilled within budget it is estimated that on completion of the wells the Company's cash balances will not be less than $100 million and they will be available to fund additional exploration work. This may include further drilling and/or the acquisition of 3D seismic.

The farm out to Edison has been approved by the Falkland Islands Government.

Darwin Result

As the option had not been exercised before the announcement by Borders & Southern Petroleum plc (B&S) of its Darwin well result and there had been a significant increase in FOGL's share price as a result, FOGL exercised its right to reduce Edison's holding from 25% to 12.5% in the southern area licences with no reduction in the $40 million cash contribution.

FOGL believes the Darwin well results are positive for the South Falklands Basin and in particular, for its southern area licences. The Darwin gas condensate discovery has demonstrated the presence of mature source rocks and a working hydrocarbon system. Good quality Cretaceous aged reservoir sandstones have now been proven in two wells (Darwin and Toroa) and this is encouraging for the Cretaceous Play in all of FOGL's licences. The well results have reduced the risk on at least six of FOGL's prospects and leads that exhibit similar characteristics to the Darwin discovery and lie 10 to 50 kilometres from it.

FOGL will now consider acquiring a 3D seismic survey over a portion of the southern area licences in order to evaluate possible future drilling targets.

Rig update

FOGL now expects to receive the Leiv Eiriksson rig in July following completion of the drilling of the B&S Stebbing well. FOGL intends to drill its first well on the Loligo prospect and the second well will be selected based on the Loligo well results. If the initial Loligo results are encouraging, it will either be a further well on Loligo or a well on Nimrod. Otherwise, a well will be drilled on the Mid Cretaceous Scotia prospect. Further drilling in this campaign would be subject to these well results and to rig availability.

Tim Bushell, Chief Executive of FOGL, said:

"We are delighted to have agreed favourable farm out terms with Edison. Edison is an experienced international exploration and production company, now owned by a major European energy company. The discussions we have held with Edison over the past few months augur well for a successful relationship. This farmout provides further industry validation of the potential of our licences and gives us greater financial flexibility for our future exploration programme."

- Ends -

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