A N N U A L R E P O R T

Contents

2 Company Profile

3 Corporate Information

4 Company Directors

6 Chairman’s Statement

8 Operational Locations

9 Chief Executive’s Review

18 Report of the Directors

24 Independent Auditor’s Report

26 Statement of Accounting Policies

31 Consolidated Income Statement

32 Consolidated and Company Statements of Recognised Income and Expense

33 Consolidated Balance Sheet

34 Company Balance Sheet

35 Consolidated Cash Flow Statement

36 Company Cash Flow Statement

37 Notes to the Financial Statements

55 Share Information

A N N U A L R E P O R T

�

Company Profile

Petroceltic International PLC is an independent international oil and gas

exploration, development and production company, operating principally

in North Africa and Italy. Petroceltic’s strategy is to achieve superior growth

in shareholder value through acreage acquisition, exploration and appraisal,

with a geographical focus on North Africa, the Mediterranean basin and the

Middle East. The Company’s shares are listed on the Alternative Investment

Market (“AIM”) of the London Stock Exchange (PCI.L) and on the IEX Market

of the Irish Stock Exchange.

The Company does not yet generate revenue from its ongoing operations,

because its activities in Italy and North Africa are in the exploration and

appraisal phase. Income is generated from interest on Company funds held

on deposit, and from the overriding royalty interest which the Company

holds on the revenue from the Kinsale Head Gas Field in the Celtic Sea.

�

Corporate Information

Directors

B. O’Cathain, Executive Chairman †

J. Craven, Chief Executive

A. Bostock, Non-Executive *^

C. Casey, Non-Executive *^†

C. Schaffalitzky, Non-Executive *^†

* Member of the Audit Committee.

^ Member of the Remuneration Committee. † Member of the Nominations Committee.

Registered Office

Styne House

Upper Hatch Street

Dublin �

Ireland

Telephone: +�5� 1 4�18�00

Fax: +�5� 1 4�18�01

Email: info@petroceltic.ie

Web: www.petroceltic.com

Company Number: 101176

Secretary

C. Casey, FCCA

Auditors

KPMG

1 Stokes Place

St. Stephen’s Green

Dublin �

Bankers

Anglo Irish Bank

Stephen Court

St. Stephen’s Green

Dublin �

Solicitors

McCann Fitzgerald Solicitors

Riverside One

Sir John Rogerson’s Quay

Dublin �

Stockbrokers

J & E Davy

Davy House

49 Dawson Street

Dublin �

Mirabaud

�1 St. James’s Square

London SW1Y 4JP

Registrar and Transfer Office

Computershare Investor Services (Ireland) Ltd.

Heron House

Corrig Road

Sandyford Industrial Estate

Dublin 18

4

Company Directors

Brian O’Cathain (48) Executive Chairman

Mr O’Cathain is a geologist and petroleum engineer with �4

years’ experience in senior technical and commercial roles in

upstream oil and gas exploration and production companies,

including Shell International, Enterprise Oil and Tullow Oil

plc. He has experience in working in West Africa, North

Africa, onshore Europe, the North Sea, the Gulf of Mexico,

South Asia and offshore Ireland. He was formerly Chief

Executive of AIM-listed Afren plc.

As Executive Chairman, Brian is responsible for leadership of

the Board and ensuring Board effectiveness in conformity

with corporate governance. He also ensures effective

communication with shareholders and provides long-term

vision and objectives for the Company. Brian chairs the

nominations committee to ensure an effective and

complementary Board, initiating change and planning

succession on Board and Group executive appointments.

Brian ensures that all Board committees are properly

established, composed and operated.

John Craven (58) Chief Executive and Managing Director

Mr Craven has over �0 years’ experience in the Upstream Oil

and Gas Industry with Executive and Senior Management

positions in Majors and Independents, including Gulf Oil,

Dana Petroleum and Vanco Energy. His experience includes

the North Sea, offshore Ireland, onshore Europe, North Africa

and West Africa. John is a co-founder of Petroceltic

International plc.

As Chief Executive, John is responsible for leadership and

management of the business and provides executive

stewardship of the Company. John develops the strategy and

annual plan for the Company, he ensures that capital

investment proposals are reviewed thoroughly and that

associated risks are managed. John is responsible for human

resources and leads the executive team. He also has prime

responsibility for all operational matters and leads the

Company on a daily basis.

5

Con Casey (47) Company Secretary and Non-Executive Director

Mr Casey is a Chartered Certified Accountant,

Managing Partner of LHM Casey McGrath

and a member of the Board of Petroceltic

International Plc since October �000. He

has over �5 years’ experience in advising

companies in the natural resources sector

as well as acting as adviser to a number of

publicly quoted companies and semi-state

organisations and specialises in the area of

corporate finance.

As Company Secretary, Con is responsible

for ensuring that the Company complies

with relevant legislation and regulation and

keeps Board members informed of their legal

responsibilities. It is also his responsibility

to maintain all Company records. As Non-

Executive Director, he monitors the executive

activity and contributes to the development

of strategy. Con is a member of the

remuneration committee, the nominations

committee and the audit committee.

Christian Schaffalitzky (54) Non-Executive Director

Mr Schaffalitzky is an experienced and

successful minerals geologist with strong

international profile and long experience in

managing exploration companies. He was

a co-founder of the CSA Group of companies,

Ireland’s leading natural resource consultancy

practice in the minerals, energy and

environmental sectors. Mr Schaffalitzky is

currently the Managing Director of the

AIM-listed Eurasia Mining plc and serves as

an independent director of Raspadskaya

Coal Company and Chelyabinsk Zinc Plant,

both public Russian companies.

As a Non-Executive Director, Christian

monitors the executive activity and

contributes to the development of strategy.

Christian is a member of the remuneration

committee, the nominations committee

and the audit committee.

Andrew Bostock (45) Non-Executive Director

Mr Bostock is a Petroleum Engineer with

�� years of operational, technical and

commercial experience in upstream oil and

gas, latterly as the Technical Director of

Dana Petroleum plc, a position he held

until June �006. After beginning his career

with Shell International, he progressed

through increasingly senior technical and

commercial roles in a number of independent

oil and gas companies, including Enterprise

Oil, Talisman Energy and Venture Production

before being appointed to the Board of

Dana in �001. He is currently Chairman of

Purepower Group Limited, a privately

owned renewable energy company.

As the senior independent Non-Executive

Director, Andrew provides independent

views on resources, appointments and

standards of conduct. He also monitors the

executive activity and contributes to the

development of strategy. Andrew is a

member of the remuneration committee

and the audit committee.

6

Chairman’s Statement

Since my last statement to shareholders, the Company has

made significant progress in its objective of building a

significant exploration and production business in both major

areas of focus, North Africa and Italy.

These two prolific petroleum provinces both have the potential

to add significant discoveries and reserves. These areas are on

the doorstep of Europe where increasing focus on security of

supply and heightened demand for ownership of equity gas

amongst utilities has increased the competition for and

attractiveness of good hydrocarbon portfolios. This provides

real opportunity for Petroceltic.

Our business model is focused on the acquisition of good

quality acreage in areas of proven oil and gas, the development

of drillable prospects through the application of our exploration

skills, and the addition of step-change value through the drill

bit in exploration and appraisal. We seek to mitigate risk by

taking partners from the industry or through strategic alliances

where appropriate.

The current climate for small market capitalisation exploration

and production companies is challenging. Hydrocarbon prices

are at record highs, but drilling and seismic costs have increased

to record levels also, and there is a very competitive and scarce

market for equipment and people.

The exploration and production industry is prone to cyclical

activity. The advent of the current period of high commodity

prices, combined with the worldwide decline in liquidity

following the “sub-prime” crisis of �007 has led to a period

when the capital required for investment in oil and gas

exploration and production is more readily available from the

industry than from the traditional sources of investment. The

Company has invested serious time and energy in developing

its industry profile and relationships over the past year.

It is the primary strategic objective of the Board to seek to

create the most value for all of our shareholders over the long

term. The benefits of fostering industry relationships which

this strategy requires may not always be obvious in the short

term; this has been reflected in our recent share price

performance. However, we are confident that our current

efforts are laying solid foundations for a period of significant

growth in shareholder value in the near future.

We are now poised for a period of investment in drilling and

proving up reserves, where we believe that the value in our

portfolio will be demonstrated.

Typical terrain in the Isarene Block, Illizi Basin.

7 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

It is also the Company’s intention to complement our organic

growth programme by pursuing both corporate and asset

acquisition opportunities. High oil prices have led to a seller’s

market in the international oil industry, but for experienced

technical and financial teams such as Petroceltic’s with detailed

technical knowledge, good regional contracts and advisors

and strong commercial partners, the opportunity to create

value through acquisition still exists. The Board will look carefully

at all opportunities which arise in our area of focus, seeking

always to maximise shareholder value and the potential upside.

The results of Petroceltic International plc have been prepared

this year for the first time in accordance with International

Financial Reporting Standards (“IFRS”). As a result last year’s

comparative figures have been restated. The accounting

policies adopted and the impact of the move to IFRS for the

comparative financial statements, including quantification of

the main accounting differences, are set out in the attached

financial statements. These changes provide considerably more

detail than required before, and result in a longer annual

report, which I hope that you will find more useful.

On behalf of the Board of Directors, I would like to thank the

Company’s shareholders for their continued support over the

past year. I have personally spoken to many of you over the

year, and I understand that you have been patient while we

put our industry partnerships in place. I look forward to

rewarding your patience with a year of more operational

progress over the coming twelve months.

In summary, we have an exciting year of technical work

and operational activity ahead of us. The stage is set for an

active and exciting drilling campaign, and I confidently expect

to see our Company making even greater strides during the

coming year.

On behalf of the Board of Directors,

Brian O’Cathain

Chairman

�7 June �008

Isarene �D seismic acquisition, vibro-seismic truck in action.

8

Operational Locations

IrelandKINSALE HEAD

GAS ROYALTY

ItalySICILY

CENTRAL ADRIATIC

PO VALLEY

TunisiaKSAR HADADA PERMIT

AlgeriaISARENE PERMIT

9

Chief Executive’s Review [Algeria]

�007 was a very active year for Petroceltic in which we have

prepared the groundwork in terms of new seismic acquisition

and new licenses necessary to form the basis of an active

drilling programme which in Algeria is planned to commence

in late �008 or early �009.

ALGERIA

Illizi Basin Isarene PSC (Blocks 228/229A) Petroceltic 75% Interest

Highlights

n 4 appraisal areas and 1 exploration area identified for

further drilling

n Commenced � D seismic acquisition and processing over

the Ain Tsila Ridge

n Nearby discoveries on adjacent permits – extending in to Isarene

n Successful entry in to second exploration period

n Tenders issued for drilling rigs and related services for 7 wells.

In Algeria, we initiated the acquisition of the Company’s

largest ever 3D seismic survey, which covers 850 sq. km.

over the Ain Tsila Ridge Ordovician prospect, and re-

processed 1,500 km of 2D seismic on our acreage. The 3D

acquisition programme is now over 75% complete at the

time of writing, and I am very pleased to report that to

date the field operations have been carried out safely

and professionally, with no significant injuries or lost

time incidents. The initial results from the early field

seismic processing look very encouraging, and we look

forward to firming up our inventory of drilling targets on

this very prospective Isarene licence.

ALGERIA

MOROCCO TUNISIA

LIBYA

SPAIN

FRANCEITALY

PORTUGAL

AlgiersTrans-

MediterraneanPipeline

ProposedGalsi

PipelineProposedMedGazPipelineMaghreb-

EuropePipeline

HassiR’mel

HassiMessaoud

Petroceltic’sIsarene

Permit Area

Algiers

10

Petroceltic has identified five highly prospective areas namely

the Ain Tsila Ridge, Issaouane South (ISAS), Issaouane NW

(INW), Hassi Tab Tab (HTT) and SW Isarene following an

extensive review of all reprocessed seismic, well and geological

information, including well test and core data. These project

areas will be the focus of drilling and other necessary work to

progress towards commercialisation of potential hydrocarbon

resources. Four of these project areas already have existing

discoveries made by Petroceltic and previous operators and

hence are considered appraisal areas. The other remaining

prospect is SW Isarene which is an oil exploration target.

The Ain Tsila Ridge

This is the largest prospect in the Isarene permit area. It is a

north plunging structural high extending some 70 kms from

south to north. Petroceltic is the first foreign company to have

a permit over the whole of the ridge area, and consequently

the opportunity to explore this feature as a single entity.

Previous operators have drilled 5 wells on or just outside

structural closure on this prospect. In these wells, drilled some

40 years ago, the target Ordovician sandstone reservoir was

gas saturated but only flowed gas at moderate rates due in

part to the location of the wells mainly outside optimal

structural closure but also the quality of the Ordovician

reservoir.

In the Illizi Basin Ordovician sandstones are the most important

reservoirs in terms of hydrocarbon volumes. The key to success

is to identify areas of high quality reservoir and increasingly

operators are using state of the art wide azimuth �D seismic to

mitigate reservoir risk.

Petroceltic’s strategy going forward is to employ the latest

seismic technologies and a key objective of the wide azimuth

�D seismic survey is to identify high permeability sweet spots

in the target Ordovician reservoirs in order to optimise drilling

and well testing procedures. This technique has been successfully

deployed by BP in the appraisal and development of the

adjacent Tiguentourine Field in the Illizi Basin (to the east of

the Isarene Permit) – where average development well flow

rates of 80 mmscf/d from the Ordovician reservoir, have been

reported.

Petroceltic has contracted Global Geophysics to acquire a �D

WAZ seismic survey over the northern part of the ridge and as

of May �008 some 650 square kilometres of data has been

acquired. Acquisition of the data is expected to be completed

in August �008 and processing by year end �008. The data

will be used to optimise new drilling locations in terms of

structural position and reservoir quality.

Petroceltic estimates prospective hydrocarbon resources for

the ridge to be in excess of � trillion cubic feet of gas.

ISAS and INW

New mapping utilizing all the wells and newly reprocessed

seismic data over the ISAS structure demonstrates that at the

Devonian F� level it is a gas cap with an oil rim. Three wells

ISAS 1, INE 1 and TMZ 1 all flowed gas whereas the down dip

GTT 1 well flowed oil also from the F� sands. In addition GTTN

1 drilled in adjacent block ��6 flowed gas from this horizon on

the same structure.

In �007 Medex, operator of the adjacent block ��6 and

Petroceltic undertook a joint technical study of the ISAS-INW

area using a common data base. The main conclusions from

this study were that at the F� level the ISAS and INW structures

extend in to both blocks. In �007 Medex drilled a successful

well NIS 1 which tested gas at 7mmscf/d on the INW structure.

Petroceltic plans to drill further wells on the ISAS and INW

structures in �009.

HTT

Following the successful drilling of Petroceltic’s HTT � discovery

well the HTT structure is being remapped using newly

reprocessed seismic data. On completion of this work further

appraisal drilling is planned.

SW Isarene

In �007 we completed seismic reprocessing over this prospect

area. Subsequent mapping of this data has identified �

prospects, SW Isarene and El Biod south.

It is planned to conduct further �D seismic acquisition followed

by drilling in �009. Both prospects are considered oil targets

with main reservoir objectives in the Devonian and Ordovician.

Chief Executive’s Review [Algeria]

11

Successful Entry in to the Second Exploration Period

Petroceltic received approval to enter the second exploration

period in the Isarene PSC. The second period officially

commenced on �6 April �008 and is in force for two years

until �5 April �010. After this time discoveries can be retained

for appraisal, development and production.

Petroceltic has retained 70 per cent of the original Isarene

Permit area (7,5�0 sq. km) into the second exploration period,

in line with the provisions of the Production Sharing Contract.

The retained area contains all of the prospects and discoveries

previously identified by Petroceltic in the permit area.

Future Plans

Petroceltic has issued tender documents for a minimum of

seven exploration and appraisal wells. Drilling of these wells is

planned for the Ain Tsila Ridge and the other discovery areas

mentioned above. Our programme is aimed at commercialisation

of all prospective discovery areas before the end of the second

exploration period in April �010.

RelinquishedPermit Area

Hassi Tabtab

PCI Isarene PermitPCI Isarene Permit

TotalTin Fouye -Tabankort

BPTiguentourine

IssaouaneNW

IssaouaneSud

3D Seismic Survey

Couloir

AinTsila

Irrarrarren East

SW Isarene

El BiodSouth

CouloirNord

Irrarrarren

40 km

Oil Pipeline

Gas Pipeline

Well – Dry & Abandoned

Well – Gas or Gas Shows

Well – Oil or Oil Shows

Devonian Prospects

Ordovician Prospects

Petroceltic’s Isarene Permit, Illizi Basin

RelinquishedPermit Area

Hassi Tabtab

PCI Isarene PermitPCI Isarene Permit

TotalTin Fouye -Tabankort

BPTiguentourine

IssaouaneNW

IssaouaneSud

3D Seismic Survey

Couloir

AinTsila

Irrarrarren East

SW Isarene

El BiodSouth

CouloirNord

Irrarrarren

40 km

Oil Pipeline

Gas Pipeline

Well – Dry & Abandoned

Well – Gas or Gas Shows

Well – Oil or Oil Shows

Devonian Prospects

Ordovician Prospects

Algiers

1�

ITALY

Italy is a good place to do business. The fiscal terms are

very favourable with a simple tax and royalty regime.

Entry costs are low, there is a well developed infrastructure

and producers enjoy high oil and gas prices. Against this

background I am pleased to report that in 2007 Petroceltic

made significant progress in Italy by acquiring new

licences, including a package of onshore permits in the

Po Valley from the BG Group and by generating prospects

in existing permits for future drilling.

In Italy, we have substantially increased our acreage portfolio,

by acquisition in the Po Valley area, and through successful

licence application in the Central Adriatic. We are excited

about possible oil prospects in both of these areas. We are

now working with our partners in firming up drilling locations

and rig slots for the Italian portfolio.

Chief Executive’s Review [Italy]

Tunis

BOSNIA &HERZEGOVINA

ITALY

CROATIA

HUNGARY

SLOVENIA

AUSTRIASWITZERLAND

TUNISIA

SERBIA& MONT.

ALBANIA

Palermo

Rome

Genoa

Turin

Milan

AdriaticInterests

Sicily ChannelInterests

Po ValleyInterests

PCI Existing Blocks

PCI Permit Applications

Petroceltic’s Italian Portfolio

1�

BR 268 RG (Elsa) Petroceltic 40% Interest

This block contains the Elsa oil discovery. Seismic data over the

discovery has been obtained from ENI the previous operator.

This data has been reprocessed and is currently being

mapped.

It is planned to drill a well in this block in late �009 or early

�010. Potential recoverable reserves for Elsa have been

independently estimated to be 18� million barrels.

There is farm-in interest in this block from a number of major

oil and gas companies.

Civitaquana Exploration Permit Petroceltic 35% Interest

In �007 Petroceltic received final ministerial approval for the

Civitaquana exploration permit onshore Italy.

The permit is located in the Marche-Abruzzi Basin of central Italy,

west of the onshore Miglianico oil and gas discovery and close

to Petroceltic’s BR �68 RG Offshore Permit, in the Adriatic Sea.

The block contains several potential oil and gas targets,

including a shallow Pliocene gas play and possible extensions

of the intra-Cretaceous Maiolica formation that yielded light

oil and gas in the nearby Miglianico discovery well, drilled by

ENI in �001.

Petroceltic’s Adriatic Interests

Olivella

Fortana

Trebbiano

Moscatello

Elsa West

Aleatico

Pampanuto

RospoMare

OmbrinaMare

S. StefanoMare

Miglianico ElsaBR268RG

Civitaquana

APULIANPLATFORMMARGIN

Fiume Treste

d500BR d496BR

d495BR

d492BR d493BR

d494BR

d499BR

d505BR

d498BR

d497BR

20 km

Petroceltic’s Existing Permits

Petroceltic’s Permit Applications

Gas Pool

Prospect with Oil Flows

Prospect/Lead

Oil Pool

Well – Dry & Abandoned

Well – Gas or Gas Shows

Well – Oil or Oil Shows

Oil Pipeline

Gas Pipeline

Civitaquana

Cigno-Vallecupa

Fields

Milan

Rome

Olivella

Fortana

Trebbiano

Moscatello

Elsa West

Aleatico

Pampanuto

RospoMare

OmbrinaMare

S. StefanoMare

Miglianico ElsaBR268RG

Civitaquana

APULIANPLATFORMMARGIN

Fiume Treste

d500BR d496BR

d495BR

d492BR d493BR

d494BR

d499BR

d505BR

d498BR

d497BR

20 km

Petroceltic’s Existing Permits

Petroceltic’s Permit Applications

Gas Pool

Prospect with Oil Flows

Prospect/Lead

Oil Pool

Well – Dry & Abandoned

Well – Gas or Gas Shows

Well – Oil or Oil Shows

Oil Pipeline

Gas Pipeline

Civitaquana

Cigno-Vallecupa

Fields

14

Po Valley PermitsIn October �007 Petroceltic acquired a portfolio of acreage

comprising 4 exploration permits from BG Italia. The interests

in these permits vary from 50 per cent to 95 per cent. In

addition, the deal included interests in two exclusive permit

applications, one in the Po Valley and one offshore in the Sicily

Channel in Southern Italy.

These permits, Carisio, Torrente Nure, Casalnoceto and Vercelli

contain an inventory of prospects with estimated unrisked

recoverable resources in excess of 1 TCFe (trillion cubic feet gas

equivalent). Some of these are ready to drill and are well

defined by an extensive � D seismic data base. Also Triassic oil

leads have been recently identified on trend to the nearby ENI

operated Villafortuna oil fields.

Petroceltic’s activity in the Po Valley will focus on the Carissio

and Torrente Nure Licences. In Carissio (Petroceltic Operated,

95% interest) there are two gas prospects well-defined by �D

seismic, Rosso and Arborio. These low-risk prospects are

adjacent to existing gas infrastructure. The Company intends

to mature these to fully-permitted, ready-to-drill prospects

during the year, with drilling planned for �009, subject to rig

availability. There is also a significant Triassic oil lead which will

require further seismic before drilling. In Torrente Nure (ENI

operated, Petroceltic 55% interest) the operator intends to

shoot additional �D seismic, and plans to drill an exploration

well in �009.

Chief Executive’s Review [Italy]

Rosso

Arborio

La Pavona

LowerRobbio

ZemeLomellina

Villanova

VolpedoCarone

Rusti-gazzo

Carini

MignanoDeep

Ottobiano

CARISIO

VERCELLI

CASAL-NOCETO

TORRENTENURE

CS

MILANO

NOVARA

PAVIA

ALESSANDRIA

PIACENZA

MONZA

Villafortuna-Trecate

Gaggiano

Brugherio

Settala Sergnano

Ripalta

Cignone

Corte-maggiore

PontetidoneCasteggio

CaviagaDesana

Oil Pipeline

Gas Pipeline

Planned Pipeline

Gas Pool

Oil Pool

Well – Dry & Abandoned

Well – Gas or Gas Shows

Well – Oil or Oil Shows

Miocene Prospect/Lead

Triassic Prospect/Lead

Permit ApplicationPCI’s Existing Acreage 20 km

Petroceltic’s Po Valley Interests

Rosso

Arborio

La Pavona

LowerRobbio

ZemeLomellina

Villanova

VolpedoCarone

Rusti-gazzo

Carini

MignanoDeep

Ottobiano

CARISIO

VERCELLI

CASAL-NOCETO

TORRENTENURE

CS

MILANO

NOVARA

PAVIA

ALESSANDRIA

PIACENZA

MONZA

Villafortuna-Trecate

Gaggiano

Brugherio

Settala Sergnano

Ripalta

Cignone

Corte-maggiore

PontetidoneCasteggio

CaviagaDesana

Oil Pipeline

Gas Pipeline

Planned Pipeline

Gas Pool

Oil Pool

Well – Dry & Abandoned

Well – Gas or Gas Shows

Well – Oil or Oil Shows

Miocene Prospect/Lead

Triassic Prospect/Lead

Permit ApplicationPCI’s Existing Acreage 20 km

Milan

Rome

15 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

Included in the BG Italia acquisition are two exclusive permit

applications Case Sparse in the Po Valley and Licata in the Sicily

Channel. A prospect in the Licata application area is similar to

and on trend with the Pande Gas Field which is now being

developed by ENI.

Adriatic Permit Applications Petroceltic 100% Interest

The Gazette of the Ministry of Economic Development,

published in April �007, confirmed that seven new permit

applications in the Central Adriatic offshore were awarded on

an exclusive basis to Petroceltic Elsa Srl (‘Petroceltic’) a wholly

owned subsidiary of Petroceltic International plc.

These exploration permit areas were primarily selected to

access the extension of the proven Elsa-Miglianico oil fairway,

into the Central Adriatic, to the east and southeast of the

existing Petroceltic blocks. They are adjacent to four oil and

gas fields, the Miglianico, Rospo Mare and Ombrino Mare oil

fields and the Santo Stefano Mare Gas field.

Petroceltic will operate the seven exclusive exploration permits

with a 100% working interest. These permit areas, which

cover approximately �,040 sq kms, lie in water depths ranging

from �0 to 150 metres.

The seven exclusive exploration permits are part of an

application for nine permits, in the central Adriatic area,

submitted by Petroceltic in October �006. A decision from the

Ministry regarding the other two applications is expected from

the Ministerial Commission in the coming months.

Since year end Petroceltic has applied for � further permits in

the Adriatic.

Future Plans

We plan to mature existing oil and gas prospects in the Po

Valley for planned drilling in �009/10. In addition, we intend to

farm-out the Adriatic blocks for a carried seismic and drilling

programme commencing in �010.

Italy, land rig drilling in the Po Valley.

16

TUNISIA

Tunisia Petroceltic 57% Interest/Operator

New interpretation of seismic and well data on the Ksar

Hadada permit has yielded positive results with the validation

of a number of Ordovician and Silurian prospects in the

southern part of the block. These prospects have been

enhanced recently by positive drilling results on adjacent

permits where an oil discovery in the Ordovician in the TT�

well, approximately �0 kilometres to the south, has been

announced by the co-venturers in this well.

It was intended to farm-out Tunisia for drilling in late �008.

However this process has been suspended pending the final

results of testing of the TT� well in the adjacent block.

Since year end Petroceltic as operator of the Ksar Hadada

permit has been informed by the Tunisian government that the

application to enter the first renewal period has been approved.

The first renewal period of the permit begins on �0 April �008

and lasts for three years. In line with the Production Sharing

Contract, Petroceltic and its’ co-venturer Independent

Resources have retained 80% of the original Ksar Hadada

permit (5,600 sq. km) into the first renewal period.

Chief Executive’s Review [Tunisia]

PCI Ksar HadadaPermit

PCI Ksar HadadaPermit

40 km

LIBYA

TUNISIA

El BibanEcumed

MakhrougaENI

EzzaouiaEcumed

Oil Pipeline

Gas Pipeline

Planned Pipeline

Silurian Prospect

Oil Pool

Well – Dry & Abandoned

Well – Gas or Gas Shows

Well – Oil or Oil Shows

Ordovician Prospect

Ordovician Prospect w/ shows

TT-2

Kasbah Leguine

Sidi Toui 3

Sidi Toui 1

Oryx

Gazelle

Antelope

RelinquishedPermit Area

South Saleh

Petroceltic’s Ksar Hadada Licence

Tunis

PCI Ksar HadadaPermit

PCI Ksar HadadaPermit

40 km

LIBYA

TUNISIA

El BibanEcumed

MakhrougaENI

EzzaouiaEcumed

Oil Pipeline

Gas Pipeline

Planned Pipeline

Silurian Prospect

Oil Pool

Well – Dry & Abandoned

Well – Gas or Gas Shows

Well – Oil or Oil Shows

Ordovician Prospect

Ordovician Prospect w/ shows

TT-2

Kasbah Leguine

Sidi Toui 3

Sidi Toui 1

Oryx

Gazelle

Antelope

RelinquishedPermit Area

South Saleh

17

IRELAND

Kinsale Gas Royalty

The Marathon operated Kinsale Head, SW Kinsale and

Ballycotton Gas fields continued production in �007 yielding a

net royalty to Petroceltic of $549,000.

Outlook

In �007 we focused on extending the existing portfolio with

additional quality assets in Italy and maturing our exciting

prospects in Algeria, Italy and Tunisia towards the drilling phase.

We are now poised for the most exciting drilling campaign in

the history of the Company, when we will begin to unlock the

value which we believe exists in our portfolio. I would like to

thank the Staff of Petroceltic, and our partners and stakeholders,

for all of their hard work and loyal support in bringing us to

this very exciting period. I am confident that significant value

uplift will be realised for shareholders in the near future.

John Craven

Chief Executive

�7 June �008

Chief Executive’s Review [Ireland]

IRELAND

Petroceltic’sKinsaleRoyalty

Cork

Dublin

Helvick

Ardmore

Kinsale Gas Field (Marathon Gas Storage Project)

Old Head of Kinsale

Ballycotton

Seven HeadsGas Field

Galway

18

Report of the Directors

The Directors submit their report together with the audited

financial statements of Petroceltic International plc (“the

Company”) and its subsidiaries (collectively “the Group”), for

the year ended �1 December �007.

These are the Group’s first consolidated financial statements

prepared in accordance with International Financial Reporting

Standards as adopted by the EU (‘EU IFRS’). The key impacts on

the financial statements arising from the transition to EU IFRS

are set out in detail in Note 19 of the financial statements.

DIRECTORS

The following were the Directors of Petroceltic International

plc – all of whom were in office for the full year except as

stated:

Brian O’Cathain, Executive Chairman, who was appointed on

�4 April �007.

John Craven, Chief Executive.

Con Casey, Non-Executive Director and Company Secretary.

Christian Schaffalitzky, Non-Executive Director.

Andrew Bostock, Non-Executive Director, who was appointed

on �1 June �007.

Brian Cusack, Non-Executive Director, resigned as a Director

on �0 July �007.

See pages 4 to 5 for biographical details of Directors.

DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the Annual Report

and the Group and Company financial statements, in

accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and

parent Company financial statements for each financial year.

As required by AIM and IEX rules and as permitted by company

law, the Directors have prepared the Group financial statements

in accordance with International Financial Reporting Standards

(IFRSs) as adopted by the EU (EU IFRS) and have elected to

prepare the Company financial statements in accordance with

EU IFRS, as applied in accordance with the provisions of the

Companies Acts, 196� to �006.

The Group and Company financial statements are required by

law and EU IFRS to present fairly the financial position and

performance of the Group; the Companies Acts 196� to �006

provide, in relation to such financial statements, that references in

the relevant part of the Acts to financial statements giving a true

and fair view are references to their achieving a fair presentation.

In preparing each of the Group and Company financial

statements, the Directors are required to:

n select suitable accounting policies and then apply them

consistently;

n make judgements and estimates that are reasonable and

prudent; and

n prepare the financial statements on the going concern

basis unless it is inappropriate to presume that the Group

and Company will continue in business.

The Directors are responsible for keeping proper books of

account that disclose with reasonable accuracy at any time the

financial position of the Company and enable them to ensure

that its financial statements comply with the Companies Acts

196� to �006. They are also responsible for taking such steps

as are reasonably open to them to safeguard the assets of the

Group and Company and to prevent and detect fraud and

other irregularities.

The Directors are also responsible for preparing a Report of the

Directors that complies with the requirements of the Companies

Acts 196� to �006.

The Directors are responsible for the maintenance and integrity

of the corporate and financial information included on the

Company’s website. Legislation in the Republic of Ireland

governing the preparation and dissemination of financial

statements may differ from legislation in other jurisdictions.

GOING CONCERN

The Directors have reviewed budgets, projected cash flows

and other relevant information, and on the basis of this review,

are confident that the Company and the Group will have

adequate financial resources to continue in operational

existence for the foreseeable future. Consequently, the

Directors consider it appropriate to prepare the financial

statements on a going concern basis.

19 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

GROUP ACTIVITIES AND RESULTS

The Group is involved in oil and gas exploration. In addition,

through a subsidiary undertaking, the Group receives income

from the production of gas from the Group’s interest in certain

Kinsale gas fields.

A loss of US$�,461,000 was recorded for the year (�006: loss

of US$4,795,000). This loss is after a share award cost of

US$1,757,000 as outlined in note 1�. Net assets of the Group

at �1 December �007 amounted to US$70,81�,000 (�006:

US$71,477,000). No dividends or transfers to reserves are

proposed.

Details of the state of the Group’s affairs; the development of

its various activities and key performance indicators during the

year; and details of the Group’s plans for �008 are given on

pages 6 to 17.

The Group’s policy in relation to managing financial and related

risks is set out in note 17 of the financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES

The Group’s activities are carried out principally in North Africa

and Italy. Accordingly, the principal risks and uncertainties are

considered to be the following:

Exploration Risk

Exploration and development activities may be delayed or

adversely affected by factors outside the Group’s control, in

particular; climatic conditions; performance of joint venture

partners or suppliers; availability, delays or failures in installing

and commissioning plant and equipment; unknown geological

conditions resulting in dry or uneconomic wells; remoteness of

location; actions of host governments or other regulatory

authorities (relating to, inter alia, the grant, maintenance or

renewal of any required authorisations, environmental

regulations or changes in law).

Commodity Prices

The demand for, and price of, oil and gas is dependant on

global and local supply and demand, weather conditions,

availability of alternative fuels, actions of governments or

cartels and general global economical and political

developments.

Currency Risk

Although the reporting currency is the US dollar, which is the

currency most commonly used in the pricing of petroleum

commodities and for significant exploration and production

costs, other expenditure (in particular central administrative

costs) and equity funding is denominated in other currencies,

principally the euro, thus creating currency exposure.

Political Risks

As a consequence of activities in different parts of the world,

the Group may be subject to political, economic and other

uncertainties, including but not limited to terrorism, military

repression, war or other unrest, nationalism or expropriation

of property, changes in national laws and energy policies and

exposure to less developed legal systems.

SHARE PRICE

The share price movement in the year ranged from a low of

Stg£0.07 to a high of Stg£0.16 (�006: Stg£0.1� to Stg£0.�4).

The share price at year end was Stg£0.08 (�006: Stg£0.15).

�0

Report of the Directors [continued]

DIRECTORS’ INTERESTS

The interests of the Directors and Secretary and their families who held office at �1 December �007 in the share capital of the

Company are as follows:

27 June 31 Dec 31 Dec 2008 2007 2006 (or date of appointment if later)

A. Bostock – – –

C. Casey �9�,178 �9�,178 �9�,178

J. Craven 14,�4�,940 14,�4�,940 14,�4�,940

B. O’Cathain 1,170,000 – –

C. Schaffalitzky 5,150,089 5,150,089 5,150,089

Share Options: (all held at start and end of year except as indicated below, €)

Original Scheme

Share Exercise Market price Expiry Grantee Options price at grant date date (i)

C. Casey �,500,000 1.�5c 1.�7c �� July �010

J. Craven 6,000,000 1.�5c 1.�7c �� July �010

C. Schaffalitzky 6,000,000 1.�5c 1.�7c �� July �010

2004 Incentive Scheme (Std = Standard; Spr = Super)

Share Exercise Market price Expiry Grantee Options price at grant date date (i)

C. Casey (Std) �,750,000 1.�5c 1�.�4c �0 Apr �011

C. Casey (Spr) �,750,000 1.�5c 1�.�4c �0 Apr �011

J. Craven (Std) 1�,000,000 1.�5c 1�.�4c �0 Apr �011

J. Craven (Spr) 1�,000,000 1.�5c 1�.�4c �0 Apr �011

C. Schaffalitzky (Std) 1,000,000 1.�5c 1�.�4c �0 Apr �011

C. Schaffalitzky (Spr) 1,000,000 1.�5c 1�.�4c �0 Apr �011

B. O’Cathain (Std)* 5,�81,690 �0.55c �1.�c �5 Mar �014

B. O’Cathain (Spr)* 5,�81,690 �0.55c �1.�c �5 Mar �014

* Granted on 19 April 2007

(i) Grants have a seven year life from date of grant – they become exercisable if certain performance conditions are met.

All the above shareholdings are beneficially held. No Director, Secretary or any member of their immediate families had an

interest in any subsidiary.

See Note 1� for details of the option scheme. In addition, the rules of both of the Company’s share option schemes are available

for inspection at the registered office of the Company on request.

�1 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

There have been no contracts or arrangements of significance during the year in which Directors of the Company were interested

other than as set out in Note 15 to the financial statements.

There are service contracts in place with the Executive Directors of the Company. The related contracts are available for inspection

at the registered office of the Company on request.

SIGNIFICANT SHAREHOLDINGS

The Company has been informed that, in addition to the interests of the Directors, as at �0 June �008, the following shareholders

own �% or more of the issued share capital of the Company:

Cantor Fitzgerald Europe 7.69%

RAB Energy Fund Limited 4.17%

RAB Octane (Master) Fund Limited 4.56%

FMR Corp & Fidelity International Limited 4.96%

L-R Managers LLC 4.10%

Gartmore Investment Management plc �.80%

The Directors are not aware of any other holding of �% or more of the issued share capital of the Company.

POLITICAL DONATIONS

No political donations were made during the year (2006: Nil).

SUBSIDIARY UNDERTAKINGS

Details of principal subsidiary undertakings are given in Note 18 to the financial statements.

CORPORATE GOVERNANCE STATEMENT

The Directors are committed to maintaining the highest standards of corporate governance commensurate with the size, stage

of development and financial status of the Group.

Board: The Company currently has five Directors, comprising two Executive Directors and three Non-Executive Directors. Andrew

Bostock is the senior independent Non-Executive Director. The Board met formally on 1� occasions during �007.

An agenda and supporting documentation was circulated in advance of each meeting. All the Directors bring independent

judgement to bear on issues affecting the Group and all have full and timely access to information necessary to enable them to

discharge their duties. The Directors have a wide and varying array of experiences in the oil and gas industry. Appropriate training

is provided on the first occasion that a new Director is appointed, if that person is without previous plc experience. Non-Executive

Directors are not appointed for specific terms. Each Director comes up for re-election automatically at least once every three

years and each new Director is subject to election at the first Annual General Meeting after appointment.

The roles of Executive Chairman and Chief Executive are not combined and there is a clear division of responsibilities between

them.

��

Report of the Directors [continued]

The following committees deal with specific aspects of the Group affairs:

Audit Committee: This committee is currently comprised of the three Non-Executive Directors. The external auditors have the

opportunity to meet with the members of the Audit Committee without executive management present at least once a year. The

duties of the committee include the review of the accounting principles, policies and practices adopted in preparing the financial

statements, external compliance matters and the review of the Group’s financial results.

Remuneration Committee: This committee is currently comprised of the three Non-Executive Directors. The committee

determines the contract terms, remuneration and other benefits of the Executive Directors. Further details of the Group’s policies

on remuneration, service contracts and compensation payments are given in the Remuneration Committee Report below.

Nominations Committee: The committee is currently comprised of B. O’Cathain, C. Casey and C. Schaffalitzky, and is

responsible for identifying and recruiting new Directors.

Communications: The Group maintains regular contact with shareholders through publications such as the annual report and

interim report, via press releases, the Group’s website (www.petroceltic.com) and through communications from our PR agencies

in Ireland and the UK.

Meetings are also held with institutions from time to time and with brokers representing individual shareholders. The Directors

are responsive to shareholder telephone enquiries throughout the year. The Board regards the annual general meeting as a

particularly important opportunity for shareholders, Directors and management to meet and exchange views.

INTERNAL CONTROL

The Board is responsible for maintaining the Group’s system of internal control to safeguard shareholder investments and Group

assets.

The Board has had in place for some years an established system for reviewing the internal financial controls of the Group. The

Board has established a process of internal controls to include not just financial risk management, but also operational and

compliance risk management.

During �007, the Directors continued their ongoing review of the key commercial and financial risks facing the Group, and of

the effectiveness of the Group’s system of internal control.

Among the processes applied as part of the system of internal control are the following:

n Budgets are prepared for approval by the Board.

n Expenditure and income are compared to previously approved budgets.

n The Board has established treasury risk policies.

n All commitments for expenditure and payments are compared to previously approved budgets and are subject to approval

by personnel designated by the Board of Directors.

n Cash flow forecasting is performed on an ongoing basis to ensure efficient use of cash resources.

n The Directors, through the Audit Committee, review the effectiveness of the Group’s system of internal financial control.

The Board has considered the requirement for an internal audit function. Based on the scale of the Group’s operations and close

involvement of the Board, the Directors have concluded that an internal audit function is not currently required.

�� P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

REMUNERATION COMMITTEE REPORT

The Group’s policy on senior executive remuneration is designed to attract and retain individuals of the highest calibre who can

bring their experience and independent views to the policy, strategic decisions and governance of the Group.

In setting remuneration levels, the Remuneration Committee takes into consideration the remuneration practices of other

companies of similar size and scope. A key philosophy is that staff must be properly rewarded and motivated to perform in the

best interests of the shareholders.

Remuneration, excluding share based payments, during the year ended �1 December �007 was as follows:

Basic Salary Fees Pension 2007 Total 2006 Total US$ US$ US$ US$ US$

B O’Cathain* �1�,57� – 119,870 4��,44� –

J.Craven 607,887 – �0,�09 6�8,096 689,568

A Bostock** – �0,180 – �0,180 –

C.Casey – – – – –

C.Schaffalitzky – 50,005 – 50,005 �0,149

B.Cusack*** �5,96� �7,970 – 6�,9�� 100,498

P. O’ Quigley**** – – – – 64�,5�4

957,4�� 98,155 150,079 1,�05,656 1,46�,749

* Appointed to the Board on 24 April 2007.

** Appointed to the Board on 21 June 2007.

*** Resigned from the Board on 30 July 2007.

**** Resigned from the Board on 13 October 2006.

BOOKS AND ACCOUNTING RECORDS

The Directors are responsible for ensuring proper books and accounting records, as outlined in Section �0� of the Companies

Act 1990, are kept by the Company. The Directors, through the use of appropriate procedures and systems and the employment

of competent persons, have ensured that measures are in place to secure compliance with these requirements. These books and

accounting records are maintained at Styne House, Upper Hatch Street, Dublin �.

AUDITOR

KPMG will continue in office in accordance with Section 160(�) of the Companies Act, 196�.

On behalf of the Board

Con Casey John Craven

Director Director

�7 June �008

�4

Independent Auditor’s Reportto the Members of Petroceltic International plc

We have audited the Group and Company financial statements (the “financial statements”) of Petroceltic International plc for

the year ended �1 December �007 which comprise the Group income statement, the Group and Company statements of

recognised income and expense, the Group and Company Balance Sheets, the Group and Company Cash Flow Statements and

the related notes. These financial statements have been prepared under the accounting policies set out therein.

This report is made solely to the Company’s members, as a body, in accordance with section 19� of the Companies Act 1990.

Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state

to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume

responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or

for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR

The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable

law and International Financial Reporting Standards (IFRSs) as adopted by the EU, are set out in the Directors’ responsibility

statement on page 18.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and

International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view in accordance with IFRSs as

adopted by the EU and, in the case of the Company, as applied in accordance with the provisions of the Companies Acts 196�

to �006, and have been properly prepared in accordance with the Companies Acts 196� to �006. We also report to you our

opinion as to: whether proper books of account have been kept by the Company; whether at the Balance Sheet date, there

exists a financial situation requiring the convening of an extraordinary general meeting of the Company under Section 40(1) of

the Companies (Amendment) Act 198�; and whether the information given in the Directors’ Report is consistent with the

financial statements. In addition, we state whether we have obtained all the information and explanations necessary for the

purposes of our audit, and whether the Company financial statements are in agreement with the books of account.

We also report to you if, in our opinion, any information specified by law regarding Directors’ remuneration and Directors’

transactions is not disclosed and, where practicable, include such information in our report.

We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial

statements. The other information comprises only the Chairman’s Statement, Chief Executive’s Review and the Directors’ Report.

We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with

the financial statements. Our responsibilities do not extend to any other information.

BASIS OF AUDIT OPINION

We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices

Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial

statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation

of the financial statements, and of whether the accounting policies are appropriate to the Group’s and Company’s circumstances,

consistently applied and adequately disclosed.

�5 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in

order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material

misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall

adequacy of the presentation of information in the financial statements.

INTANGIBLE ASSETS

In forming our opinion, we have considered the adequacy of the disclosures made in Note 7 to the financial statements in

relation to the Directors’ assessment of the carrying value of the Group’s intangible assets, which amount to US$47.49 million.

Our opinion is not qualified in this respect.

OPINION

In our opinion

n the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the

Group’s affairs as at �1 December �007 and of its loss for the year then ended;

n the Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU and as applied

in accordance with the provisions of the Companies Acts, 196� to �006, of the state of the Company’s affairs as at

�1 December �007; and

n the financial statements have been properly prepared in accordance with the Companies Acts, 196� to �006.

We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our

opinion, proper books of account have been kept by the Company. The Company financial statements are in agreement with

the books of account.

In our opinion, the information given in the Directors’ Report on pages 18 to �� is consistent with the financial statements.

The net assets of the Company, as stated in the Company Balance Sheet on page �4, are more than half of the amount of its

called-up share capital and, in our opinion, on that basis there did not exist at �1 December �007 a financial situation, which

under Section 40 (1) of the Companies (Amendment) Act, 198�, would require the convening of an extraordinary general

meeting of the Company.

KPMG

Chartered Accountants

Registered Auditor

�7 June �008

Dublin

�6

Statement of Accounting Policies

Petroceltic International plc (“the Company”) is a company incorporated in Ireland. The Group financial statements consolidate

those of the Company and its subsidiaries (together referred to as the “Group”).

The Group and Company financial statements were authorised for issue by the Directors on �7 June �008.

A. STATEMENT OF COMPLIANCE

As permitted by the European Union and in accordance with AIM and IEX rules, the Group financial statements have been

prepared in accordance with International Financial Reporting Standards (IFRSs) and their interpretations issued by the International

Accounting Standards Board (IASB) as adopted by the EU (IFRS). The individual financial statements of the Company (‘Company

financial statements’) have been prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the

Companies Acts, 196� to �006 which permits a company, that publishes its company and group financial statements together,

to take advantage of the exemption in Section 148(8) of the Companies Act 196�, from presenting to its members its company

income statement and related notes that form part of the approved company financial statements.

These are the Company’s and Group’s first financial statements prepared in accordance with IFRS as adopted by the EU and IFRS 1,

First-time Adoption of International Financial Reporting Standards, has been applied.

The IFRSs adopted by the EU as applied by the Company and Group in the preparation of these financial statements are those

that were effective at �1 December �007.

The following provides a brief outline of the likely impact on future financial statements of relevant IFRSs and interpretations

adopted by the EU which are not yet effective and have not been adopted in these financial statements:

n IFRS 8 Operating Segments, effective for accounting periods beginning on or after 1 January �009, sets out the requirements

for disclosure of financial and descriptive information about an entity’s operating segments, its products and services, the

geographical areas in which it operates, and its major customers. IFRS 8 will replace IAS 14 Segment Reporting and will

require additional disclosures.

n IFRIC 11, IFRS � Group and Treasury Share Transactions, effective for accounting periods beginning on or after 1 March �007.

IFRC 11 requires a share-based payment arrangement in which an entity receives goods or services as consideration for its

own equity instruments to be accounted for as an equity settled share-based payment transaction, regardless of how the

equity instruments are obtained. IFRIC 11 will become mandatory for the Group’s �008 financial statements, with retrospective

application required. It is not expected to have any impact in the Group financial statements and is not expected to have a

material impact on the Company financial statements, as the accounting policy currently applied is consistent with the

requirements of the interpretation.

B. FIRST TIME ADOPTION OF IFRSs

The Group and Company are required to determine their EU IFRS accounting policies and apply them retrospectively to establish

their opening Balance Sheets under EU IFRS at their date of transition. The date of transition to EU IFRSs for the Group and

Company is 1 January �006. The impact of the transition to EU IFRS is outlined in Note 19. Where estimates had been made

under Irish GAAP, consistent estimates (after adjustments to reflect any difference in accounting policies) have been made on

transition to EU IFRS. Judgements affecting the Balance Sheets of the Company and Group have not been revisited with the

benefit of hindsight.

�7 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

IFRS 1, First Time Adoption of International Financial Reporting Standards, allows a number of exemptions on adoption of EU

IFRS for the first time. The Group has applied the following exemption as permitted by IFRS 1:

Currency Translation Reserve

The Group has deemed the currency translation reserve at 1 January �006 to be nil.

C. BASIS OF PREPARATION

The Group and Company financial statements are prepared on the historical cost basis, except for available-for-sale assets, which

are carried at fair value. The accounting policies have been applied consistently by Group entities. The financial statements are

presented in US dollars, rounded to the nearest thousand. See accounting policy ‘G’ for details of functional currencies.

The preparation of financial statements in conformity with EU IFRS requires management to make judgements, estimates and

assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The

estimates and associated assumptions are based on historical experience and various other factors that are believed to be

reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of

assets and liabilities that are not readily apparent from other sources.

In particular, significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the

most significant effect on the amount recognised in the financial statements are in the following areas:

n Measurement of the impairment of intangible assets

n Utilisation of tax losses

n Measurement of share-based payments

D. CONSOLIDATION

The consolidated financial statements comprise the financial statements of Petroceltic International plc and its subsidiaries for

the year ended �1 December �007.

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern

the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting

rights that are currently exercisable or convertible are taken into account. Subsidiaries are fully consolidated from the date that

control commences until the date that control ceases. Accounting policies of subsidiaries have been changed where necessary

to ensure consistency with the policies adopted by the Group.

E. REVENUE

Revenue represents royalty income and is recognised as the royalty falls due.

F. INTANGIBLE ASSETS

Intangible assets comprise a royalty over a gas field in Kinsale Head and exploration and evaluation assets.

�8

Statement of Accounting Policies [continued]

Royalty

The royalty asset is carried at cost, net of accumulated amortisation. Amortisation is charged in the proportion that the current

year’s production bears to the total anticipated production from the start of the financial year to the end of the field’s life.

Changes in estimated production are accounted for prospectively.

Exploration and Evaluation Assets

Expenditure incurred prior to obtaining the legal rights to explore an area is written off to the income statement. Expenditure

incurred on the acquisition of a licence interest are initially capitalised on a licence by licence basis. Exploration and evaluation

expenditure incurred in the process of determining exploration targets on each licence is also capitalised. These expenditures are

held undepleted within the exploration licence asset until such time as the exploration phase on the licence area is complete or

commercial reserves have been discovered.

Exploration and evaluation drilling costs are capitalised on a well by well basis within each licence until the success or otherwise

of the well as been established. Unless further evaluation expenditures in the area of the well have been planned and agreed or

unless the drilling results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are

commercial, drilling costs are written off on completion of a well.

Impairment

Royalty and exploration and evaluation assets are reviewed regularly for indicators of impairment and costs are written off where

circumstances indicate that the carrying value might not be recoverable. Any such impairment arising is recognised in the income

statement for the period.

G. FOREIGN CURRENCY

On transition to IFRS, the Directors determined that, in accordance with IAS �1, the functional currency of the Company and

most of its subsidiaries is the US dollar; previously certain subsidiaries had the euro as their functional currency. Those subsidiaries

which now have the euro as their functional currency (principally Petroceltic Elsa S.R.L., which operates the Group’s Italian

interests) had no material net assets at the year end and have not recorded any income or expense during the year, and

accordingly no foreign currency translation reserve has arisen since the transition to IFRS.

Foreign Currency Transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the

dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated

to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies

that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that fair value was

determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on

the retranslation of available-for-sale equity instruments, which are recognised directly in equity.

Foreign Operations

The assets and liabilities of foreign operations are translated to US dollars at exchange rates at the reporting date. Any income

or expense of foreign operations is translated to US dollars at average exchange rates for the year. Foreign currency differences

arising will be recognised in the foreign currency translation reserve in equity.

�9 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

H. TAXATION

Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent

that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at

the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts

of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised

for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a

transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to

investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured

at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have

been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which

temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that

it is no longer probable that the related tax benefit will be realised.

I. RETIREMENT BENEFIT OBLIGATIONS

The Group contributes to a defined contribution pension scheme for certain executives. Pension scheme costs are accounted for

on an accruals basis.

J. SHARE BASED COMPENSATION

The Group issues share options as an incentive to certain key management and staff (including Directors). The fair value of share

options granted to Directors and employees under the Company’s option schemes is recognised as an expense with a

corresponding credit to the share based payments reserve. The fair value is measured at grant date and spread over the period

during which the awards vest. The fair value is measured using a binomial lattice model, taking into account the terms and

conditions upon which the options were granted. A discount for market conditions has been applied to the fair values determined

by the binomial model based on a Monte Carlo simulator analysis.

The options issued are subject to both market-based and non-market based vesting conditions. Market conditions are included

in the calculation of fair value at the date of the grant. Non-market vesting conditions are not taken into account when

estimating the fair value of awards as at grant date; such conditions are taken into account through adjusting the number of

equity instruments that are expected to vest.

The Group has issued warrants to its Italian licence interest partners in return for interests in the exploration licence BR.�68.RG

offshore Italy. The fair value of these warrants was determined in accordance with IFRS � based upon a valuation model. The

deemed cost of these warrants has been capitalised as ‘Intangible assets – exploration and evaluation assets’ in the Group

Balance Sheet. The deemed cost of these warrants has been reflected as ‘Investment in Subsidiaries’ in the Company’s Balance

Sheet, as representing capital contributions to the Group’s Italian subsidiary. The corresponding credit has been recorded in the

share based payment reserve in both the Group and Company Balance Sheets.

�0

Statement of Accounting Policies [continued]

The proceeds received net of any directly attributable transactions costs will be credited to share capital (nominal value) and share

premium when options or share warrants are converted into ordinary shares.

The cost of share based payments is borne by the Company and not recharged to subsidiary entities, on the basis that the share

awards have been made principally to Directors and senior management of the Company.

K. EARNINGS PER SHARE

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the

profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares

outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and

the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which

comprise share options granted to employees and warrants.

L. OPERATING LEASES

Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.

M. FINANCIAL INSTRUMENTS

Available-for-sale Assets

Investments in equity securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are

measured at fair value and changes therein are recognised in equity, via the statement of recognised income and expense.

Impairment losses are calculated by reference to current market value and recognised in profit or loss.

Cash and Cash Equivalents

Cash and cash equivalents in the Balance Sheet comprise cash at bank and in hand and short term deposits with an original

maturity of three months or less. Bank overdrafts that are repayable on demand and form part of the Group’s cash management

are included as a component of cash and cash equivalents for the purpose of the statement of cashflows.

Trade and Other Receivables/Payables

Trade and other receivables and payables are stated at cost less impairment, which approximates fair value given the short-dated

nature of these assets and liabilities.

N. FINANCE INCOME

Finance income comprises interest income on funds invested, gains on disposal of available-for-sale financial assets and foreign

currency gains. Interest income is recognised as it accrues, using the effective interest rate method.

�1 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

Consolidated Income Statementfor the year ended �1 December �007

2007 2006 Notes US$’000 US$’000

Continuing Operations

Revenue 1 549 1,�66

Administrative expenses (2,817) (�,577)

Amortisation of intangible assets (53) (51)

Exploration costs written off 7 (210) (5,756)

Cost of share based payments 13 (1,757) (1,8��)

Results from operating activities (4,288) (8,950)

Finance income 2 1,827 4,�57

Loss before tax 3 (2,461) (4,69�)

Income tax expense 4 – (10�)

Loss for the year – all attributable to equity holders in the Company 14 (2,461) (4,795)

Basic loss per share (cent) 6 (0.33) (0.70)

Diluted loss per share (cent) 6 (0.33) (0.70)

The accompanying notes on pages �7 to 54 form an integral part of these financial statements.

On behalf of the Board

Con Casey John Craven

Director Director

��

Consolidated Statement of Recognised Income and Expense for the year ended �1 December �007

2007 2006 Notes US$’000 US$’000

Loss for the year (2,461) (4,795)

Income recognised directly in equity

- net change in fair value of available-for-sale assets 9 50 �99

- related deferred tax (10) (59)

Total recognised income and expense for the year, all attributable to equity holders of the Company (2,421) (4,555)

The accompanying notes on pages �7 to 54 form an integral part of these financial statements.

On behalf of the Board

Con Casey John Craven

Director Director

2007 2006 Notes US$’000 US$’000

Loss for the year (1,757) (1,8��)

Income recognised directly in equity

- net change in fair value of available-for-sale assets 9 50 �99

- related deferred tax (10) (59)

Total recognised income and expense for the year, all attributable to equity holders of the Company (1,717) (1,59�)

Company Statement of Recognised Income and Expense for the year ended �1 December �007

�� P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

Consolidated Balance Sheetas at �1 December �007

2007 2006 Notes US$’000 US$’000

Assets

Non-current assets

Intangible assets 7 47,490 41,767

Investments 9 758 708

Total non-current assets 48,248 4�,475

Trade and other receivables 10 632 985

Cash and cash equivalents 23,463 ��,410

Total current assets 24,095 �4,�95

Total assets 72,343 76,870

Equity

Share capital 13,14 26,191 �6,191

Capital conversion reserve fund 14 51 51

Share premium 14 113,079 11�,079

Share based payment reserve 14 9,220 7,46�

Fair value reserve 14 562 5��

Retained earnings 14 (78,290) (75,8�9)

Total equity 14 70,813 71,477

Liabilities – current

Trade and other payables 11 1,390 5,�6�

Liabilities – non current

Deferred tax 12 140 1�0

Total liabilities 1,530 5,�9�

Total equity and liabilities 72,343 76,870

The accompanying notes on pages �7 to 54 form an integral part of these financial statements.

On behalf of the Board

Con Casey John Craven

Director Director

�4

Company Balance Sheetas at �1 December �007

2007 2006 Notes US$’000 US$’000

Assets

Investments in subsidiaries 8 3,921 �,9�1

Investments 9 758 708

Total non-current assets 4,679 4,6�9

Receivables – amounts due from subsidiaries 55,367 55,�67

Total current assets 55,367 55,�67

Total assets 60,046 59,996

Equity

Share capital 13,14 26,191 �6,191

Capital conversion reserve fund 14 51 51

Share premium 14 113,079 11�,079

Fair value reserve 14 562 5��

Share based payment reserve 14 9,220 7,46�

Retained earnings 14 (89,197) (87,440)

Total equity 59,906 59,866

Liabilities

Deferred tax 12 140 1�0

Total non-current liabilities 140 1�0

Total equity and liabilities 60,046 59,996

The accompanying notes on pages �7 to 54 form an integral part of these financial statements.

On behalf of the Board

Con Casey John Craven

Director Director

�5 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

Consolidated Cash Flow Statementfor the year ended �1 December �007

2007 2006 US$’000 US$’000

Cash flows from operating activities

Loss for the year (2,461) (4,795)

Adjustments for:

Finance income (1,827) (4,�57)

Income tax expense – 10�

Amortisation of intangible assets 53 51

Exploration costs written off 210 5,756

Cost of share based payments 1,757 1,8��

Cash from operations before changes in working capital (2,268) (1,�11)

Decrease/(increase) in trade and other receivables 353 (190)

(Decrease)/increase in trade and other payables (626) 4,681

Net cash from operating activities (2,541) �,180

Cash flows from investing activities

Expenditure on intangible assets (9,233) (�4,4�7)

Interest received 1,515 1,870

Sale of investments – 1

Net cash from investing activities (7,718) (��,556)

Cash flows from financing activities

Proceeds from the issue of new shares – 40,994

Net cash from financing activities – 40,994

Net (decrease)/increase in cash and cash equivalents (10,259) 11,618

Effect of foreign exchange fluctuations on cash and cash equivalents 312 �,�87

Cash and cash equivalents at start of year 33,410 19,405

Cash and cash equivalents at end of year 23,463 ��,410

The accompanying notes on pages �7 to 54 form an integral part of these financial statements.

�6

Company Cash Flow Statementfor the year ended �1 December �007

2007 2006 US$’000 US$’000

Cash flows from operating activities

Loss before tax (1,757) (1,8��)

Adjustments for:

Cost of share based payments 1,757 1,8��

Net cash from operating activities – –

Cash flows from investing activities

Advances to subsidiary companies – (40,995)

Sale of financial investments – 1

Net cash from investing activities – (40,994)

Cash flows from financing activities

Proceeds from the issue of new shares – 40,994

Net cash from financing activities – 40,994

Net increase in cash and cash equivalents – –

Cash and cash equivalents at start of year – –

Cash and cash equivalents at end of year – –

�7 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

Notes to the Financial Statementsfor the year ended �1 December �007

1. REVENUE AND SEGMENTAL INFORMATION

Group revenue is generated in the Republic of Ireland and comprises royalty income from the production of gas from the Group’s

interest in certain Kinsale gas fields. All of the Group’s activities relate to a single segment, oil and gas exploration. A geographical

analysis of the Group’s exploration and evaluation assets is set out in Note 7.

2. FINANCE INCOME

2007 2006 US$’000 US$’000

Interest income 1,515 1,870

Foreign currency gains 312 �,�87

1,827 4,�57

3. STATUTORY INFORMATION

2007 2006 US$’000 US$’000

Group

The loss for the financial year is stated after charging:

(i) Auditor’s remuneration

- audit services 50 �5

- other services 51 –

(ii) Directors’ remuneration

Fees 98 74

Executive services, incl. pension contributions 1,108 1,�90

Cost of share awards relating to Directors 1,269 1,715

Total Directors’ remuneration 2,475 �,179

(iii) Operating lease rentals – premises 64 67

Company

Auditor’s remuneration 30 15

The loss for the financial year in the Company amounted to (1,757) (1,8��)

�8

Notes to the Financial Statements [continued]

4. TAX ON LOSS ON ORDINARY ACTIVITIES

2007 2006 US$’000 US$’000

Current tax

Charge for the year – �19

Overprovision in prior year – (117)

– 10�

Deferred tax

Origination and reversal of timing differences – –

Total tax charge – 10�

Tax charge recognised directly in equity

Deferred tax on increase in fair value of available-for-sale assets 10 59

The difference between the total current tax shown above and the amount calculated by applying the standard rate of Irish

corporation tax to the loss before tax is as follows:

Loss on ordinary activities before tax (2,461) (4,69�)

Tax credit on Group loss on ordinary activities at Irish corporation tax rate of �5% (�006: �5%) (615) (1,17�)

Effects of:

Expenses not deductible for tax purposes 489 1,957

Timing differences (48) (565)

Losses carried forward 174 –

Overprovision in prior year – (117)

Tax charge for the year – 10�

5. EMPLOYEE DATA

2007 2006 US$’000 US$’000

Group

Employee costs (including Executive Directors)

Salaries 1,252 1,01�

Social insurance costs 122 100

Pensions 162 5�9

Cost of share awards 1,041 1,4�8

2,577 �,080

�9 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

5. EMPLOYEE DATA [continued]

2007 2006 Number Number

Average number of employees (including Executive Directors)

Operations and exploration 4 �

Finance 2 �

Administration 5 �

11 9

The Group contributes to a defined contribution pension scheme for certain executives. The scheme is administered by Trustees

and is independent of the Group’s finances. Total contributions by the Group to pension schemes for the year amounted to

US$161,855 (�006: US$5�9,74�). Of this amount, none was outstanding at year end (�006: US$199,679).

Company

All Group employees are employed in subsidiary companies. The only employee cost in the Company, therefore, is the cost of

share based payments, which is borne by the Company.

6. LOSS PER SHARE

The calculation of basic and diluted loss per share for the year was based on the loss attributable to equity holders of US$�,461,000

(�006: US$4,795,000) and a weighted average number of ordinary shares outstanding of 7�7,��7,818 (�006: 687,988,51�),

calculated as follows: 2007 2006

Basic and diluted loss per ordinary share: Loss on ordinary activities after taxation (US$000) (2,461) (4,795)

Number of ordinary shares in issue – start of year 737,327,818 578,69�,194

Effect of shares issued during the year – 109,�96,�19

Weighted average number of ordinary shares in issue – basic and diluted 737,327,818 687,988,51�

Basic (loss) per ordinary share (in cent) (0.33) (0.70)

Diluted (loss) per ordinary share (in cent) (0.33) (0.70)

The average market value of the Company’s shares for the purposes of calculating the dilutive effect of share options and

warrants was based on quoted market prices for the period in which the options and warrants were outstanding.

Share options and warrants which could potentially dilute basic earnings per share in the future have not been included in the

calculation of diluted earnings per share as they are antidilutive for the periods presented. The dilutive effect as a result of share

options and warrants in issue as at �1 December �007 would be to increase the weighted average number of shares by

96,141,151 (�006: 8�,764,�6�).

40

Notes to the Financial Statements [continued]

7. INTANGIBLE ASSETS

Exploration and Royalty Royalty evaluation assets Total Total

2007 2006 2007 2006 2007 2006 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000

Cost

At start of year �,9�� �,9�� 60,519 �6,09� 6�,451 �9,0�4

Additions – – 5,986 �4,4�7 5,986 �4,4�7

At end of year 2,932 2,932 66,505 60,519 69,437 63,451

Amortisation and impairment

At start of year �,696 �,645 18,988 1�,��� �1,684 15,877

Amortisation 5� 51 – – 5� 51

Exploration costs written off – – �10 5,756 �10 5,756

At end of year 2,749 2,696 19,198 18,988 21,947 21,684

Net book value

At start of year ��6 �87 41,5�1 1�,860 41,767 1�,147

At end of year 183 236 47,307 41,531 47,490 41,767

Oil and gas interests as at �1 December �007 comprise the Group’s interest in the following:

Country Permit/PSC Group Interest (%)

Algeria Isarene PSC 75%

Tunisia Ksar Hadada PSC 57%

Ireland Kinsale Royalty �5% of Royalty

Eastern Italy BR �68 RG permit 40%

Eastern Italy Civitaquana permit �5%

Italy – Po Valley Carisio permit 95%

Italy – Po Valley Casalnoceto permit 75%

Italy – Po Valley Trino permit 50%

Italy – Po Valley Torrente Nure permit 55%

Italy – Po Valley Vercelli permit 50%

Italy – Po Valley Case Sparse permit application 100%

Italy – Offshore Sicily Licata permit application �7.5%

Italy – Adriatic 9 permit applications (7 being exclusive)

41 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

7. INTANGIBLE ASSETS [continued]

The carrying values of oil and gas interests by geographical areas is as follows:

2007 2006 US$’000 US$’000

Ireland 1,004 1,057

North Africa 42,158 �9,1�8

Italy 4,328 1,58�

47,490 41,767

8. INVESTMENT IN SUBSIDIARIES

2007 2006 US$’000 US$’000

Company

Investment in subsidiary undertakings at cost:

Balance at beginning of year 3,921 �,477

Restructuring of investment in Group companies – 444

Balance at end of year 3,921 �,9�1

Details of subsidiaries are set out in Note 18.

9. INVESTMENTS – AVAILABLE FOR SALE ASSETS

2007 2006 US$’000 US$’000

Quoted investments

Balance at beginning of year 708 409

Increase in market value during the year 50 �99

Balance at end of year 758 708

The Group owns shares in the following: Market value Market value at year end at year end

2007 2006

Name Quoted on US$’000 US$’000

Dana Petroleum plc London Stock Exchange 540 476

ZincOx Resources plc AIM 218 ���

758 708

4�

Notes to the Financial Statements [continued]

10. TRADE AND OTHER RECEIVABLES

2007 2006 US$’000 US$’000

Amounts falling due within one year

Royalty income receivable 168 �86

Prepayments 122 –

Corporation tax recoverable 182 560

VAT 160 �9

632 985

All receivables are current and there have been no impairment losses during the year (�006: Nil). The Group’s exposure to credit

and currency risks related to trade and other receivables is set out in Note 17.

11. TRADE AND OTHER PAYABLES

2007 2006 US$’000 US$’000

Amounts falling due within one year

Trade creditors 572 �,76�

PAYE/PRSI 4 98

Accruals 814 1,40�

1,390 5,�6�

The Group’s exposure to currency and liquidity risks related to trade and other payables is set out in Note 17.

12. DEFERRED TAX

At At At 1 January Recognised 31 December Recognised 31 December 2006 in equity 2006 in equity 2007 US$’000 US$’000 US$’000 US$’000 US$’000

Group and Company Liabilities

Available-for-sale financial assets 71 59 1�0 10 140

Unrecognised deferred tax assets in the Group at �1 December �007, all of which related to unrecognised tax losses, amounted

to US$5.4 million (�006: US$4.8 million). The Company has no unrecognised deferred tax (�006 – nil).

4� P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

13. CALLED UP SHARE CAPITAL

2007 2006 € €

Authorised

900,000,000 Ordinary shares of €0.01�5 11,250,000 11,�50,000

�00,000,000 Deferred shares of €0.114�7 22,855,285 ��,855,�85

34,105,285 �4,105,�85

2007 2006 US$’000 US$’000

Issued, called up and fully paid

Balance at 1 January and �1 December, comprising 7�7,��7,818 Ordinary shares of €0.01�5 each 26,191 �6,191

Capital Management

The Board’s policy is to maintain a strong capital base so as to maintain investor and market confidence and to sustain future

developments of the business. There were no changes in the Group’s approach to capital management during the year. The

Group deems its shareholders’ funds to be its capital.

It is Group policy to incentivise Directors through the award of share options. At present, Directors hold �.86% of ordinary

shares, or 9.60% assuming that all outstanding share options vest and are exercised. The upper limit on the number of share

options that can be granted, excluding options granted under the Original scheme (see below), is 10% of issued share capital.

Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

Share Based Payments

The Group grants share options under two share option plans, the ‘Original Scheme’ and the ‘�004 Incentive Scheme’. Both

‘Standard’ and ‘Super’ options can be granted under the �004 Incentive Scheme. The options under the latter scheme may only

be exercised if predetermined growth rates in the Company’s share price are achieved. All options under the original scheme

have now vested.

The Group’s employee share options are equity-settled share-based payments as defined in IFRS �, Share based payment. This

standard requires that a recognised valuation methodology be employed to determine the fair value of share options granted.

The expense reported in the Group income statement of US$1,757,000 (2006: US$1,832,000) has been arrived at through

applying a binomial lattice model, with a discount for market conditions applied to the fair value determined by this model based

on a Monte Carlo simulator analysis.

44

Notes to the Financial Statements [continued]

13. CALLED UP SHARE CAPITAL [continued]

The movement on outstanding share options and warrants during the year was as follows:

2007 2007 2006 2006

Weighted Weighted Number of average Number of average options/ exercise price options/ exercise price warrants (c. per share) warrants (c. per share)

Outstanding at start of year 89,629,000 5.04 80,800,000 �.09

Granted during the year – options (a), (b) 11,763,380 20.19 6,500,000 18.4�

Granted during the year – warrants – – �,1�9,000 �6.64

Lapsed during the year – warrants (c) (3,129,000) 26.64 – –

Exercised during the year – options (d) – – (800,000) 1.�5

Outstanding at end of year 98,263,380 6.17 89,6�9,000 5.04

Of which:

Exercisable at year end 69,575,000 1.50 56,�00,000 1.�5

(a) Effective �6 March �007, 10,56�,�80 options with an exercise price of €0.�055 and an exercise period up to �5 March �014

were granted to the newly appointed Executive Chairman of the Company.

(b) On �1 July �007, 1,�00,000 options with an exercise price of €0.17 and an exercise period up to �0 July �014 were granted

to certain employees of the Company.

(c) On �7 April �007, �,1�9,000 warrants which had been awarded to the Group’s stockbrokers in �006 lapsed without being

exercised. Davy and Mirabaud had each been granted 990,000 warrants with a subscription price of Stg16.8p and 574,500

warrants with a subscription price of Stg�1.6p, in lieu of fees for their services in relation to the raising of equity capital in

the year ended �1 December �006.

(d) The average share price at date of exercise of these options was �7.15c.

45 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

13. CALLED UP SHARE CAPITAL [continued]

The assumptions used to determine the fair value of options granted were as follows:

2007 2006

Weighted average fair value of options granted (€) 20.19c 18.4�c

Weighted average share price at date of grant (€) 11.96c 11.5�c

Average exercise price (€) 6.17c 5.04c

Expected volatility (%) 77.28% 88.56%

Average expected term to exercise (years) 4.44 4.4�

Risk free rate (%) 3.51% �.��%

Expected dividend yield 0% 0%

The market-based vesting conditions requires the share price of the Company to increase from the exercise price, by 10% (standard

options) or �0% (super options) per annum, compounded year on year from the effective date of grant to the exercise date.

Expected share price volatility was determined by taking account the historic daily share price movements.

The average expected term to exercise used in the models has been adjusted based on the Directors’ best estimate, for the

effects of non-transferability, exercise restrictions and behavioural conditions, forfeiture and historical experience.

The risk free rate has been determined from market yields for government bonds with outstanding terms equal to the average

expected term to exercise for each relevant grant.

At �1 December �007, the following options and warrants over ordinary shares were outstanding:

Exercise price Exercise Number Type (euro cent) period

Original scheme

�0,500,000 Options 1.�5 Up to �� July �010

2004 Incentive scheme

49,500,000 Options 1.�5 Up to �0 April �011

4,000,000 Options 18.4� Up to �1 July �008

6,500,000 Options 18.4� Up to 5 November �01�

10,56�,�80 Options �0.55 Up to �5 March �014

1,�00,000 Options 17.0 Up to �0 July �014

Warrants

6,000,000 Warrants 14.6 Up to �8 June �009

46

Notes to the Financial Statements [continued]

14. STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Capital Share conversion based Fair Share reserve Share payment value Retained Total capital fund premium reserve reserve earnings equity US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000

Group

Balance at 1 January �006 ��,757 51 74,519 5,6�1 �8� (71,0�4) ��,�06

Shares issued �,4�4 – �8,560 – – – 40,994

Share based payment charge – – – 1,8�� – – 1,8��

Gain on investments, net of deferred tax – – – – �40 – �40

Loss for the financial year – – – – – (4,795) (4,795)

Balance at �1 December �006 and at 1 January �007 �6,191 51 11�,079 7,46� 5�� (75,8�9) 71,477

Share based payment charge – – – 1,757 – – 1,757

Gain on investments, net of deferred tax – – – – 40 – 40

Loss for the financial year – – – – – (�,461) (�,461)

Balance at 31 December 2007 26,191 51 113,079 9,220 562 (78,290) 70,813

Company

Balance at 1 January �006 ��,757 51 74,519 5,6�1 �8� (85,608) 18,6��

Shares issued �,4�4 – �8,560 – – – 40,994

Share based payment charge – – – 1,8�� – – 1,8��

Gain on investments, net of deferred tax – – – – �40 – �40

Loss for the financial year – – – – – (1,8��) (1,8��)

Balance at �1 December �006 and at 1 January �007 �6,191 51 11�,079 7,46� 5�� (87,440) 59,866

Share based payments charge – – – 1,757 – – 1,757

Gain on investments, net of deferred tax – – – – 40 – 40

Loss for the financial year – – – – – (1,757) (1,757)

Balance at 31 December 2007 26,191 51 113,079 9,220 562 (89,197) 59,906

47 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

15. RELATED PARTY TRANSACTIONS – GROUP AND COMPANY

The Group uses the taxation, payroll and consultancy services of LHM Casey McGrath on an arms length basis. Mr C. Casey is

the managing partner of this accountancy practice. The total fees invoiced to the Group during the year were US$16�,971

(�006: US$��1,975). Amounts owing to LHM Casey McGrath at year end amounted to US$19,5�9 (�006: US$8,901).

During the year the Group rented its head office from the Northbrook Property Partnership, of which Mr C. Casey is a partner,

on an arms length basis. Total fees invoiced to the Group during the year were US$64,084 (�006: US$67,�85). Amounts owing

to the Northbrook Property Partnership at year end amounted to US$�,557 (�006: US$510).

The Group uses the IT services of CMG Interactive on an arms length basis. Mr C. Casey is a Director of this Company. Total fees

invoiced to the Group during the year were US$�9,4�9 (�006: US$48,416). Amounts owing to CMG Interactive at year end

amounted to US$15,454 (�006: US$14,878).

The Group uses the consultancy services of Mr B. Cusack, who was a Director of the Group until �0 July �007. The consultancy

fees invoiced to the Group during the year were US$�67,150, none of which was outstanding at year end.

IAS �4 requires the disclosure of compensation paid to the Group’s key management personnel. In the case of the Group, key

management is deemed to comprise the Board of Directors. Details of the remuneration of the Directors are set out in Note �

while their interests in shares and share options are set out in the Directors’ Report.

16. LEASE COMMITMENTS

During the year ended �1 December �007, the Group entered into an operating lease in respect of its new head office premises.

This agreement expires in �011 and provides for an annual rental of €17�,000.

17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

Group

(a) Overview of risk exposures and risk management strategy

The Group’s operations expose it to various financial risks in the ordinary course of business that include credit risk, liquidity risk,

currency risk and interest rate risk. The Group’s financial exposures are predominantly related to changes in foreign exchange

rates and interest rates as well as the creditworthiness of counterparties. The Group has a risk management programme in place

which seeks to limit the impact of these risks on the financial performance of the Group and it is Group policy to manage these

risks in a non-speculative manner.

This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and

processes for measuring and managing the risk, and the Group’s management of liquid resources. Further quantitative disclosures

are included throughout this note.

The Board of Directors has the overall responsibility for the establishment and oversight of the Group’s risk management

framework. The Board has reviewed the process for identifying and evaluating the significant risks affecting the business and the

policies and procedures by which these risks will be managed effectively. The Board has embedded these structures and

procedures throughout the Group and considers there to be a robust and efficient mechanism for creating a culture of risk

awareness at every level of management.

48

Notes to the Financial Statements [continued]

17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT [continued]

The Group’s overall risk management programme seeks to minimise potential adverse effects on the Group’s financial performance

from fluctuations in financial markets.

(b) Financial assets and liabilities – fair values

The Group’s financial assets and liabilities are as follows:

Loans Other Total and Available- amortised carrying receivables for-sale cost amount US$’000 US$’000 US$’000 US$’000

Cash and cash equivalents ��,46� – – ��,46�

Investments – 758 – 758

Trade and other receivables 168 – – 168

Trade and other payables – – (57�) (57�)

��,6�1 758 (57�) ��,817

In each case, there is no difference between the carrying value of these assets and liabilities and their fair values.

Set out below are the methods and assumptions used in estimating the fair values of financial assets and liabilities:

Investments – available-for-sale financial assets

These assets comprise shares held in companies which are quoted on a recognised stock exchange. The fair value represents

the bid price on the Balance Sheet date.

Cash and cash equivalents

For cash and cash equivalents, all of which have a remaining maturity of less than three months, the nominal amount is deemed

to reflect fair value.

Trade and other receivables/payables

All receivables and payables have a remaining life of less than six months or are demand balances, and therefore the carrying

value is deemed to reflect fair value.

(c) Credit Risk

Credit risk arises from the Group’s holding of cash and cash equivalents. Given the nature of the Group’s receivables, it has no

significant exposure to credit risk arising from trade and other receivables. The Group’s maximum exposure to credit risk is the

carrying value of cash and cash equivalents and trade and other receivables.

Cash and cash equivalents

The Group enters into transactions with financial institutions for the purposes of placing deposits. From a credit risk management

perspective, it is the Group’s policy to enter into such transactions only with highly rated financial institutions and, accordingly,

the Group does not expect any counterparty to fail to meet its obligations.

49 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT [continued]

Details of these deposits, which are all for terms of three months or less, are as follows:

At 31 December 2007

Balance Weighted average invested interest rate Currency US$’000 %

US Dollar ��,��1 4.9

Euro 717 1.�

Sterling 4�5 6.1

��,46� 4.8

At 31 December 2006

Balance Weighted average invested interest rate Currency US$’000 %

US Dollar �9,914 5.1

Euro 80� 1.0

Sterling �,69� 5.�

��,410 5.0

At �1 December �007 and �006, the Group did not have any interest bearing liabilities.

(d) Liquidity risk

The Group has significant cash balances on hand, and accordingly, no liquidity risk exists at present.

All cash and cash equivalent amounts are on demand, and all trade and other receivables and trade and other payables are due

within three months of the Balance Sheet date.

The Board monitors the availability of and requirements for funds in the Group. Surplus cash within the Group is put on deposit

in accordance with limits and counterparties agreed by the Board, the objective being to maximise return on funds whilst

ensuring that the short-term cashflow requirements of the Group are met.

(e) Interest rate risk

Cash and cash equivalents are invested primarily in U.S. dollars and euro. Exposure to interest rate risk on cash and cash

equivalents is actively monitored and managed. If interest rates rose by 0.5%, the Group’s loss for the year would decrease and

equity at year end would increase by approximately US$140,000.

(f) Currency risk

The US dollar and euro are the primary currencies in which the Group conducts business. The US dollar is used for planning and

budgetary purposes and as the presentation currency for financial reporting. The Group also has some costs, assets and liabilities,

principally relating to head office operations, denominated in euro and sterling.

50

Notes to the Financial Statements [continued]

17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT [continued]

The Group manages the exposure by matching receipts and payments in the same currency and monitoring the residual net position.

The Group may, from time to time, with the approval of the Board, use derivative financial instruments to manage its exposure

to fluctuations in foreign currency exchange rates. No such instruments were in use at year end or prior year end. The Group

does not undertake any trading activity in financial instruments.

At the year end, the Group’s foreign currency balances were as follows:

Denominated Denominated in euro in sterling US$000 US$000

Trade and other receivables 6�1 –

Trade and other payables (1,��6) (141)

Cash and cash equivalents 717 4�5

1�� �84

If the US dollar increased by 5% in value against the above foreign currencies, the Group’s loss for the year would decrease and

equity at year end would increase by US$�0,000 approximately.

The exchange rates used in the preparation of the financial statements were as follows:

2007 2006 US$ per foreign currency US$ per foreign currency Average Year end Average Year end

Euro 1.�7 1.47 1.�6 1.�1

Sterling �.00 �.00 1.84 1.96

Company

The Company’s only assets are:

n available-for-sale financial assets

n amounts due from subsidiaries

See the disclosure above in relation to the fair value of available-for-sale assets.

The amounts due from subsidiaries are denominated in US dollars, are non interest bearing and are due on demand.

51 P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

18. SUBSIDIARY UNDERTAKINGS

The Company’s principal subsidiary undertakings at �1 December �007, all of which are wholly owned, are as follows:

Name Registered Office Activity

Petroceltic Investments Limited Styne House, Upper Hatch Street, Dublin �, Ireland �

Petroceltic Erris Limited Styne House, Upper Hatch Street, Dublin �, Ireland �

Petroceltic Ksar Hadada Limited Styne House, Upper Hatch Street, Dublin �, Ireland �

Petroceltic Isarene Limited Styne House, Upper Hatch Street, Dublin �, Ireland �

Petroceltic African Holdings Limited Styne House, Upper Hatch Street, Dublin �, Ireland 1

Petroceltic Elsa S.R.L. Lungotevere dei Mellini 45, 0019� Rome, Italy �

Key to activity:

1 Investment holding company

2 Oil and gas exploration and development company.

Each company’s registered office is located in the country in which it operates, except for Petroceltic Ksar Hadada Limited which

operates in Tunisia and Petroceltic Isarene Limited which operates in Algeria.

A full list of subsidiary companies will be filed with the Registrar of Companies.

19. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

As stated in the accounting policies, these are the Group’s and Company’s first financial statements prepared in accordance with

IFRS, as adopted by the EU.

The accounting policies set out on pages �6 to �0 have been applied in preparing the financial statements for the year ended

�1 December �007, the comparative information presented in these financial statements for the year ended �1 December �006

and in the preparation of an opening IFRS Balance Sheet at 1 January �006 (the Group and Company’s date of transition).

In preparing its opening IFRS Balance Sheet, the Company has adjusted amounts reported previously in its financial statements

prepared in accordance with Irish GAAP. An explanation of how the transition from Irish GAAP to IFRS has affected the Group’s

and Company’s financial positions, financial performance and cash flows is set out in the following tables and the notes that

accompany the tables.

In restating the Group and Company financial statements, the Group has availed of the following relevant exemptions in

accordance with IFRS 1, First-time adoption of International Financial Reporting Standards:

(i) The Group has deemed the foreign currency translation reserve at 1 January �006 to be nil.

5�

Notes to the Financial Statements [continued]

19. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS [continued]

Impact on Group financial statements

Reconciliation of loss for the year ended 31 December 2006

Effect of transition to Irish adopted Adopted GAAP IFRSs IFRSs US$’000 US$’000 US$’000

Revenue 1,�66 – 1,�66

Operating expenses (10,�16) – (10,�16)

Operating loss (8,950) – (8,950)

Finance income �,415 1,84� 4,�57

Loss before tax (6,5�5) 1,84� (4,69�)

Taxation (10�) – (10�)

Loss for the year (6,6�7) 1,84� (4,795)

Reconciliation of recognised income and expense for the year ended 31 December 2006

Recognised in equity

- gain in fair value of investments – �99 �99

- currency translation adjustments 1,84� (1,84�) –

- related deferred tax – (59) (59)

Loss for the year (6,6�7) 1,84� (4,795)

Total recognised income and expense (4,795) �40 (4,555)

5� P E T R O C E L T I C A N N U A L R E P O R T � 0 0 7

19. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS [continued]

1 January 2006 31 December 2006

Transition to Transition to

Irish Adopted Irish Adopted GAAP IFRS IFRS GAAP IFRS IFRS US$’000 US$’000 US$’000 US$’000 US$’000 US$’000

Assets

Non-current assets

Intangible assets 1�,147 – 1�,147 41,767 – 41,767

Investments 57 �5� 410 56 65� 708

1�,�04 �5� 1�,557 41,8�� 65� 4�,475

Current assets

Trade and other receivables 896 – 896 985 – 985

Cash and cash equivalents 19,476 – 19,476 ��,410 – ��,410

�0,�7� – �0,�7� �4,�95 – �4,�95

Total assets 33,576 353 33,929 76,218 652 76,870

Equity

Share capital ��,757 – ��,757 �6,191 – �6,191

Capital conversion reserve fund 51 – 51 51 – 51

Share premium 74,519 – 74,519 11�,079 – 11�,079

Share based payment reserve – 5,6�1 5,6�1 – 7,46� 7,46�

Fair value reserve – �8� �8� – 5�� 5��

Foreign currency translation reserve – – – – – –

Retained earnings (65,40�) (5,6�1) (71,0�4) (68,�66) (7,46�) (75,8�9)

Total equity ��,9�4 �8� ��,�06 70,955 5�� 71,477

Current liabilities

Trade and other payables 65� – 65� 5,�6� – 5,�6�

Non current liabilities

Deferred tax – 71 71 – 1�0 1�0

Total liabilities 65� 71 7�� 5,�6� 1�0 5,�9�

Total equity and liabilities 33,576 353 33,929 76,218 652 76,870

54

Notes to the Financial Statements [continued]

19. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS [continued]

The adjustments involved in the transition to IFRS were as follows:

n Under IFRS, investments are shown at market value, rather than at historic cost under Irish GAAP, with changes in the market

value taken to equity via the statement of recognised income and expense. The adjustment had the following effect:

l increasing investments by US$�5�,000 and deferred tax liability by US$71,000 at 1 January �006

l increasing investments by US$65�,000 and deferred tax liability by US$1�0,000 at �1 December �006

l increasing recognised income and expense for the year ended �1 December �006 by US$�99,000, net of related deferred

tax of US$59,000.

n The Group has determined that the functional currency of certain of its subsidiaries is, under IAS �1, the US dollar, rather

than under Irish GAAP when the functional currency used was the euro. In addition, the Group has availed of the transition

exemption available under IFRS �, and has deemed the foreign currency translation reserve at 1 January �006 to be nil.

Accordingly, the foreign currency translation reserve movement for the year ended �1 December �006 as reported under

Irish GAAP of US$1,84�,000, which arises principally from the holding of euro amounts in what is now a company with a

US dollar functional currency, is shown as a foreign exchange gain in the income statement.

n Under Irish GAAP, the equity reserve arising in respect of share based payment charges and foreign currency translation

reserve movements were included directly within retained earnings. Under IFRS, these reserves are shown separately. As

indicated above, no foreign currency transaction reserve has arisen since the date of transition to IFRS.

There are no changes to the reported cash flows arising from the transition to IFRS.

20. APPROVAL OF FINANCIAL STATEMENTS

The Directors approved these financial statements on �7 June �008.

55

Share Information

Shares in Issue

The number of shares in issue at �1 December �007 was 7�7,��7,818. The total number of share options and warrants

outstanding at �1 December �007 was 98,�6�,�80. The Petroceltic share price can be monitored at www.petroceltic.com.

Shareholder Profile

Petroceltic currently has 8,699 shareholders with the majority of shares held by institutional UK based shareholders.

The shareholding distribution at 4 June �008 is as follows:

Holdings Number of accounts Number of shares held

1-1000 �,076 1,�95,884

1,001-5,000 �,��8 8,484,094

5,001-10,000 1,1�8 8,890,184

10,001-100,000 1,846 60,99�,555

100,001-1,000,000 �14 90,767,4�7

over 1,000,000 87 566,797,664

8,699 7�7,��7,818

The geographical distribution at 4 June �008 is as follows:

Distribution Number of accounts Number of shares held

Republic of Ireland 5,114 170,99�,467

United Kingdom �,514 540,��8,�0�

Other 71 �5,997,149

8,699 7�7,��7,818

PETROCELTIC INTERNATIONAL PLC PETROCELTIC SHAREHOLDER HELPLINE

Styne House, Upper Hatch Street, Telephone: +353 1 4319825 (Ireland)

Dublin 2, Ireland Fax: +44 870 7036243 (UK)

Telephone: +353 1 4218300

Fax: +353 1 4218301

Email: info@petroceltic.ie

Web: www.petroceltic.com