23.06.05

HIGHLIGHTS

 

• Strong cash position

• A significant entry position established in the Netherlands

• Independent valuation of £51.6 million (19.3p per share) placed on the Group’s Proven and Probable reserves in the South of England

• Two well drilling programme on the Isle of Wight to commence shortly with the potential for recoverable reserves of 47 to 156 million barrels of oil net to the Group

• Expansion of licence positions in South of England and Italy

Chairman, Richard Latham, commented,

“We look forward to the results from the imminent drilling of two wells on the Isle of Wight, as well as development programmes for production in the Netherlands, re-perforation work in Spain and further progress towards drilling onshore Italy. I am extremely encouraged by the considerable progress that we have made in the last year. Our prospects, particularly with the addition of the Netherlands transaction, remain stronger than ever.”

CHAIRMAN’S STATEMENT

Quite apart from the interest in preparing for the imminent drilling of two wells in the summer of 2005 on the Isle of Wight, which are key to our projects in the Wessex/Channel basin, much has happened since I last wrote to shareholders.

Our work on licences in the Weald basin reached such an interesting point and enhanced value that we considered it necessary for it to be independently reviewed by Exploration Consultants Limited (“ECL”) who, based upon the progress to date, allow me to report an attribution net to the Company of Proven and Probable recoverable reserves of 10.24 million barrels of oil. These reserves are valued at £51.6 million if discounted at 10% per annum and acknowledge an upside potential of 186 million barrels in the Possible category of reserve estimation. The next act is to start a wider programme in 2006 to drill appraisal wells to confirm their profitability and thereafter work towards their development into production.

The one feature of the report that I wish to highlight is the conclusion that the Horndean field is considered to extend eastwards into our PEDL 126 licence acquired in 2003. We are currently in discussion with local residents and landowners to identify a suitable site for drilling and production activities. I believe that this more than compensates for the delays in drilling Avington-3 and not yet acquiring a site from which to drill Hedge End-2. The latter was a regrettable event considering the numerous consultations with the local planning officers and the Hampshire County Council Estates Department whose advice we took, only for the previous offer of a site lease to be later summarily withdrawn. We will most certainly return to locate a suitable site for drilling now the local elections have taken place.

Helped by the ECL report we have commenced efforts to bring to the attention of all interested parties in the region the scale of the potential for oil production in the Weald and Wessex basins, the potential for renewable thermal energy resulting from drilling wells for oil and the need for a regional environmentally acceptable and lower cost approach for the disposal of associated water production. I believe that a new regional policy will help to bring benefits to all stakeholders in the area if planned for at this stage.

I also ask you to join me in welcoming our entry into the Netherlands, both as an applicant for a Production Licence for the Papekop field and in an imaginative Joint Venture partnership with the joint ExxonMobil and Shell owned Nederlandse Aardolie Maatschappij, a company known throughout the industry as NAM. The Joint Venture brings to us six suspended oil and gas discoveries, some with producible oil columns, which we intend to move to bring into production on a rapid schedule with the Company obtaining a 130% return of the capital invested before a equal division of pre-tax profits. In our assessment this would bring to the Company estimated net Proven plus Probable recoverable reserves in the order of 8.3 million barrels of oil and 50 bcf of gas when taken together with Papekop, a contested application. This is a substantial threshold justifying our move into The Netherlands. The NAM Joint Venture also provides us with the first phase of a considerable upside potential through exploration, with commitment to an initial portfolio of three prospects to be drilled as farm-in wells, but allowing the Company a full cost recovery before tax prior to profit sharing with NAM. The first of these wells is at Steenwijk and is scheduled for drilling by NAM in 2006 but thereafter the Company’s local subsidiary will be the Operator. I look forward to a long and mutually beneficial relationship with NAM and the local people who I wish to assure will find our operations will be environmentally safe.

In Italy much progress has been made in the award of licences and I now anticipate the advance to an active programme, with the drilling of a number of shallow gas wells in the Po Valley gas province, perhaps as early as 2006. In late 2004 we assigned 20% out of all save one of our licences and applications to ATI Oil Plc (“ATI”) and supported that company’s entry to a listing for trading on Ofex. The Company currently owns 38.25% of the shares in ATI which is currently treated as an associate undertaking in conformity with advice from our auditors, though it is our longer term intention that this shareholding becomes solely an investment. I draw to your attention the magnitude of our joint position with ATI that through existing licences and uncontested applications covers an area equal to approximately 45 North Sea blocks and would in number be over 10% of all the exploration licences in Italy. Including our investment in ATI, the Company still holds a net beneficial interest of 69.13% in each Italian licence, which conforms to our strategic policy to hold a significant position wherever we operate.

Production during the year was 7,539 barrels from our 10% interest in the Horndean oil field and 20,859 barrels from our interest in the Ayoluengo oil field in Spain. With the higher prevailing price of crude oil, the revenues from these fields have contributed to the small gross profit of £12,000 that I report to you.

The result for the year was a loss of £491,000, well within budget, and even more remarkable when you consider it includes the provision for National Insurance mentioned in the Finance Report. The most important contribution to the improved result for the year has been the continued tight cost control of a hard working team which has seen a greatly increased activity level and expansion in size more than matched by their productivity. I thank them. The outcome is that we entered 2005 with £5,140,000 of cash in hand, sufficient to follow up our ambitious plans beyond the two wells on the Isle of Wight.

I look to an improvement in revenues in 2005 with better oil pricing in the year so far and in anticipation of a positive result from a well re-perforation programme at Ayoluengo.

The Company has also a small investment and commitment in a licence covering the whole of the offshore of Guyane. The holding of a 1.25% interest is small with a commensurately small commitment; however we assess the potential as large – six prospects have been mapped, each with the potential to yield in excess of one billion barrels of recoverable oil. It is a reward to risk profile that I find attractive. We are waiting for the Operator, Hardman Resources, to take action to drill the first well.

In line with the prospective expansion of the Company’s production and drilling programmes a full reassessment of the Heath, Safety and Environmental policies and procedures has been undertaken. I am pleased that we are constantly improving in these areas. They are as vital to us as profits and must be of the highest standard especially with our heavy emphasis of onshore exploration projects bringing us in contact with so many lives.

Your Board wishes to bring forward the point at which the Company could be in a position to pay a future dividend and in the process eliminate the effect of historic losses upon the balance sheet. We have been aware for some while that the deferred shares are probably valueless. Accordingly, we are proposing to take steps to eliminate the deferred shares and also to write off a substantial part of the historic deficit on the profit and loss account against the paid up share capital on the deferred shares and the share premium account. We further propose to consolidate the ordinary shares on a one for five basis. It is hoped that this will result in the removal of any preconception that we are a “penny share” company. For further explanation I refer both the Company’s deferred and ordinary shareholders to the Finance Report and my letters to them included within the annual report. I hope that you will support our proposals on these issues.

I am sure that you look forward with me to the results from the drilling of two wells on the Isle of Wight, development programmes for production in The Netherlands, re-perforation work in Spain and further progress towards drilling onshore Italy. I also reflect upon the considerable progress made year upon year, a goal that we intend to maintain and, with the Netherlands transaction, have already taken significant steps towards achieving.

OPERATIONS REPORT

REVIEW OF OPERATIONS: OVERVIEW

The past twelve months have seen a confirmation by ECL of our assets in the Weald and Wessex Basins. Work upon our understanding of old oil discoveries and indeed certain dry holes has resulted in the attribution of 10.24 million barrels of Proven plus Probable recoverable reserves. To this can now be added, subject to the approval by Government authorities, a new position in The Netherlands which it is estimated would add a further 8.3 million barrels of oil and 50 billion cubic feet of gas, in total 15.9 million barrels of oil equivalent, of which 7 million barrels of oil equivalent is behind pipe in suspended wells.

On the exploration front further Italian exploration licences have been awarded and further applications made and, through NAM, drillable prospects in The Netherlands are available. The overall result is that, short of a major production purchase, the Company has now built a well balanced profile of assets from exploration concept through to developable proven and probable reserves.

REVIEW OF OPERATIONS: UNITED KINGDOM

When Northern took over the Operatorship of activities in the south west Weald Basin and the Isle of Wight (Wessex Basin) it placed a major emphasis on the acquisition of existing seismic and well data from the area. Concluding a data exchange agreement with Star Energy Plc during 2003 was of major assistance.

Benefiting from modern computer processing capabilities and production data from the producing wells in the region, Northern was able to develop through paleo-reconstruction a regional model of the structures available to receive oil during the period of oil migration and determine which structures were either late in formation or breeched during the period of inversion during the Tertiary. Utilising this information, petrophysical analysis of many wells and a more recently developed understanding of the effect of different drilling mud systems upon oil contained within the Great Oolite, it has been possible to come to an understanding of past exploration results and make a prediction of probable oil reserves and indeed in some cases proven oil reserves. This work has been evaluated and summarised in the ECL report announced to shareholders on 4th May 2005.

The first well to be drilled will be the Sandhills-2 appraisal well in the Wessex Basin. The sequence is more dictated by the historical sequencing of the licences and their drilling or relinquishment dates than a ranking of risk or reward.

The overall strategy is to drill and test at least four Great Oolite wells to prove or modify our modelling in both the Wessex and Weald Basins which should be treated as separate identities having two distinct sources.

ECL REPORT

In early 2005 the potential value of the licence holdings was verified through an independent geological, geophysical and petroleum engineering assessment undertaken by ECL which has provided for the first time recognition of the potential value resulting from our extensive work and licensing in these two basins in the South of England. Reporting under The Society of Petroleum Engineers definitions and compliant with the UK Listing Authority guidelines, ECL have confirmed as oil fields attributed with proven and possible reserves as Avington, Hedge End, Horndean, Horndean (easterly extension) in the Weald Basin and Sandhills in the Wessex-Channel Basin. Net to Northern 10.24 million barrels proven plus probable reserves have been assigned.

The ECL report makes the judgement that previous drilling and testing of wells in the area has proven the existence of three oil fields to which reserves have been attributed in the proven category. A further seven discovered oil fields have been attributed reserves in the probable and possible categories. These fields have undergone a full reserves evaluation in the proven, probable and possible categories as defined by The Society of Petroleum Engineers and summarised below. In addition, ECL has evaluated the prospective reserves (i.e. reserves multiplied by probability of success) for defined exploration prospects and the contingent reserves applicable in the event of higher recovery factors in oolite reservoirs to be achieved mainly from the successful implementation of multi-lateral drilling techniques and an improvement in capabilities for the handling of associated waters.

Net Northern Reserves (Million barrels)

Reserve Category	Wessex Channel Basin	Weald Basin	Total
Proven		1.27	1.27
Proven + Probable	6.64	3.6	10.24
Proven + Probable + Possible	28.7	26.5	55.2
Contingent Reserves	9.7	5.5	15.2
Prospective	53.3	2.9	56.2

Net Northern NPV10* (£ Millions)

Reserve Category	Wessex Channel Basin	Weald Basin	Total
Proven		4.65	4.65
Proven + Probable	35.7	15.9	51.6
Proven + Probable + Possible	151.2	122.2	273.4

*calculated using a discount rate of 10%

The report does not cover all the leads and prospects that Northern is working on. There is another logged oil discovery contained within PEDL 154 and with the licence surrounding the Storrington oil field additional potential can be expected. A Sherwood sandstone level prospect mapped in Blocks 98/7a and 98/8a on trend east of Wytch Farm and Great Oolite level prospects in PEDLs 152 and 155 have also been identified. It is a very satisfactory list of prospects developed at low cost.

SOUTH OF ENGLAND – Towards the realisation of significant value

In 2004 Northern consolidated its licence position in the south of England with the successful award of all five of its 12th Round of UK onshore licensing applications for which Northern is the designated Operator.

The additional licences are on the Isle of Wight (PEDL 152), the western Solent (PEDL 151) in the Wessex-Channel Basin, licences in the south west Weald Basin (PEDL 154 & PEDL 155) and in the north east Weald Basin (PEDL 153). These licences are all adjacent to existing interests and have already recognised prospectivity to augment the significant undeveloped oil reserves now established in the earlier awarded licences.

The 2005 Drilling Campaign – Testing the Wessex Basin

Drilling of the Sandhills-2 appraisal well and Bouldnor Copse-1 exploration well on the Isle of Wight within the Wessex-Channel Basin will evaluate the potential of a logged oil column within the Great Oolite at Sandhills-1. ECL has evaluated these to contain probable oil reserves and the potential for a large Sherwood sandstone oil accumulation with the potential to be a company maker in the event of success.

The Sandhills discovery in the Great Oolite on the Isle of Wight, being within the Wessex-Channel Basin, is considered a slightly higher risk than the Great Oolite discoveries in the Weald Basin as there is no experience as to reservoir productivity from producing oil fields. This makes the data from Sandhills-2 important to our interpretations in the area.

An Avington Appraisal Well

It is planned that the Avington-3 appraisal well of the Avington-2 oil discovery made in 2003 will be drilled later this year, this well having been delayed since 2004 by the Operator Pentex Oil Limited.

2006 Onwards

It is intended that the summer 2005 wells will be followed by a 2006 drilling programme focused upon the Weald Basin.

In the Weald Basin a low risk appraisal of an eastwards extension of the Horndean field into PEDL 126 and an appraisal of the Hedge End-1 oil discovery are attributed proven plus probable reserves by ECL within the Great Oolite and are obvious targets. Three other structures are still being evaluated.

In the Wessex Basin the Hurst Castle prospect could be a very interesting target subject to a re-evaluation after gaining Sherwood level data from Bouldnor Copse-1. On the Isle of Wight there is one further prospect and one lead at the Great Oolite level.

KENT

In this north east part of the Weald Basin we have adopted the same approach as in the south west. As seismic data has been obtained a paleo-reconstruction of the basin was made for the prognosed time of oil migration in order to understand and eliminate as too late, the many structures which were drilled deeper into the basin and closer to the zone of oil generation during earlier exploration campaign. From this work it has been concluded that in this quadrant of the Weald Basin there were no barriers to oil migration before reaching the centre and western areas currently under licence.

In Kent we have two prospects defined and a number of leads with Upper Jurassic Corallian and Portland sandstones being the primary reservoir targets. These prospects and leads are being integrated into a full interpretation and paleo-reconstruction of the seismic data on the two licences in order to define and select an initial prospect for drilling in 2006.

SUMMARY

In the near future we are looking forward with reasonable confidence to taking a number of oil discoveries through into development and building a production base in the UK under our management.

REVIEW OF OPERATIONS: ITALY

THE STRATEGY

Northern holds a 50% interest and is operator of 21 oil and gas permits and applications at various stages of progression both on and offshore Italy, covering an area in excess of 10,000 km². In addition Northern holds a 38.25% shareholding in ATI Oil Plc (“ATI”), the holder of the remaining 50% interests, thus bringing the total Northern net beneficial interest to 69.13%.

We have approached this endeavour as a large scale project, building a portfolio of more than twenty licences which would be about one eighth of the total number of exploration licences for the country, in our view a major position. On this scale it is reasonable to apply a statistical approach to the exploration risk and reward to assess the possible profit expectation of the exploration activities. This approach is designed to ensure that in the Italian arena, which we assess as profitable, we should hold access to sufficient opportunities to accrue a benefit by ensuring that the number of prospects is sufficient to overcome any short-term exploration failure.

Northern entered into Italy well ahead of recent oil price increases and has been able to build its portfolio of licences nearly always covering plays following up past oil and gas discoveries.

ITALY – WHY ARE WE THERE?

The Company considers there to be the potential for the discovery of oil fields of 50 up to 500 million barrels in size range and gas fields of up to 1 or more tcf.

Italy is the third largest producer of oil and gas in Europe (after the UK and Norway), and offers the benefits of having an accessible existing database There are five major hydrocarbon producing basins, of which the Po Basin and Adriatic Sea have well developed gas infrastructures. Elsewhere, major oil and gas fields are located on and offshore Sicily and in the southern Apennines. Production is from a wide range of geological settings.

Importantly the fiscal and licensing terms in Italy, are considered to be very favourable within our business model as a smaller oil and gas exploration company.

• Annual licence rentals are only 5 euro per km²;
• Licences can be applied for in any open area at any time, there are no licensing rounds and applications may be for areas as large as 750 km²;
• Licences are awarded for an initial six year period, and it can be five years before a firm obligation to drill is required;
• The existing regional offshore seismic data is available;
• There is a limited production royalty rising to a maximum of only 7% (4% for offshore oil), however no royalties are due on the first annual 20 million cubic metres of gas and 20,000 barrels of oil produced from individual accumulations;
• Italian source income is subject to both regional taxes and taxation on corporate profits at rates of up to 35%.

The Company considers that, after the oil discoveries made in the late 1980s, there was an excessive concentration on the onshore Southern Apennine thrust area and a virtual hiatus of effort in the southern offshore zones. Most of the prospects being examined lie in 200-700m of water which in the early 1980s presented frontier level engineering challenges which are now “run of the mill” and the development of which has been greatly enhanced by advances in sub-sea completion and in reservoir horizontal drilling technologies. Also, the relatively recent termination of the ENI SpA (“ENI”) monopoly over the Po Basin at the end of 1997, together with the opening up of the Italian electricity generating market, presents a good opportunity for the Company to benefit from reworking the existing seismic data. Use can now be made of powerful modern computer processing to quickly reconstruct seismic sections and map prospects. In some areas the shooting of modern offshore 2D or 3D data is expected to confirm and to upgrade the prospects. In essence it is reasonable to believe that new technologies could be utilised to our advantage in returning to old oil discoveries and plays.

THE FOCUS

Italy has a wide range of oil and gas opportunities, but onshore Northern’s focus is on the older established oil and gas rich provinces that have been somewhat sidelined over the last decade. These regions include the prolific Po Basin gas and oil province and the northern Adriatic - Marche onshore gas basin. The Southern Apennine oil province has been rejected due to both the high cost even for poor quality seismic data and perceived local difficulties. Offshore a major effort has been directed at the South West Sicily oil and gas province round to the more established south-east of Sicily and a second area in the southern Adriatic over an old oil discovery. In addition one licence is held offshore within the Tiber Delta area to the west of the Colombo-1 well in which Northern participated in 2000.

FAST TRACK PLAN

In order to accelerate the first drilling activity and to not have all the licence activities at the same point in the same year a fast track plan has been agreed:

1. Acquire all seismic necessary to bring several Po Basin shallow gas prospects to drill readiness (Nibbia, Longastrino and Savio);
2. Reprocess seismic data in the G.R17.NP area sufficient to show that the play concept may be pursued to advantage through modern geophysical techniques;
3. Prepare the data over E.R51.NP and C.R147.NP for full prospect definition;
4. Reservoir engineering petro-physical analysis of the Giove-2, Medusa-1 and Rovesti-1 wells to determine the case for a re-drill and completion (d57FR.-NP and d58FR.-NP).

PO BASIN – IN SHORT TERM PURSUIT OF SHALLOW GAS DISCOVERIES

This region, which only opened up to competition in 1997, provides the company with the opportunity to drill several shallow gas targets of 25-125bcf in the next two years whilst preparing the approach to drilling the possible deeper oil plays. The basin is within an Alpine compression belt underlying the Italian industrial heartland. The finding of a large number of gas fields, and several light oilfields has resulted in the establishment of a sizeable gas pipeline infrastructure. From 1953 until 1997 the Po Basin was the exclusive preserve of the state company ENI but is now opened up to competition in compliance with EU law. That process saw ENI relinquish 75% of its exploration areas. The Po Basin contributes more than 30% of the country’s natural gas and nearly 50% of its oil.

SAVIO, LONGASTRINO, LA SACCA AND PUNTA MARINA - Chances to drill shallow gas sub-thrust structures and on-lap plays in front of the known thrusts and in the lows behind.

More detailed seismic processing works will be carried out prior to drilling at an early date. The Savio licence, granted in a March 2004 decree, lies in the south eastern and most prolific gas producing part of the Po Basin and covers an area of 459 km². The targets in the area are relatively shallow gas accumulations in the Middle and Lower Pliocene sands.

Now using the greatly improved processing power of modern computer systems it is possible to reprocess the existing seismic data to better define stratigraphic and pinchout traps. In recent years both stratigraphic and structural traps on the flanks of the large thrust induced anticlines that have been explored with success and with discoveries of small to medium size gas reserves. Several asymmetric anticlines cross the area in a NW/SE trend and despite several dry wells in the area, potential exists for gas fields in the northern part of the licence. This is to be evaluated through the purchase and reprocessing of the numerous seismic lines crossing the area utilising amplitude versus offset (AVO) analysis and bright spot indications, which led Agip to discover the Dosso degli Angeli field to the east. Though this method reduces the risk it does not guarantee success in all cases. Prospects supported by AVO analysis coinciding with geological factors will be the primary targets.

In 2002 ENI made a new discovery, Agosta, adjacent to Longastrino and an application for a production concession has been filed. Many of the major gas fields in the area, largely discovered in the period 1950-1970, are on asymmetric anticlines draped over thrust features, and are near to or have reached exhaustion. Several are now being turned into subsurface gas storage facilities. Some of the largest in the vicinity are Dosso degli Angeli, Angilli, Ravenna and Alfonsine which between them had recoverable reserves of half to one trillion cubic feet.

Adjacent to the north the San Marco licence was awarded earlier than Savio, and is where Grove Energy Limited in January 2005 reported a 15mmcfd gas discovery in its Abbadesse -1 well at 2,600-2,800 metres depth. The same play trend has been extrapolated into the north of the Savio licence.

NIBBIA - Targeting shallow Tertiary channel gas plays and a deep oil potential being actively explored by BG Group Plc (“BG”) and ENI in the adjacent areas.

This permit, with an area of 253 km², is in the western Lombardy zone of the prolific Po Basin, 15 km to the west of ENI’s large Villafortuna light oil field, a deep play not actively pursued during the period of lower oil prices. It is only recently that a Tertiary Miocene channel play has been recognised and pursued by BG and ENI. Northern believes that the Nibbia permit is well placed within the play zone.

The primary objective is to locate shallow, 1,500 – 3,000 metre gas bearing channel sands in the Miocene, as at the Dasena field 15 km to the south west. BG and ENI are believed to be pursuing the same channel sands in the proposed Robbio-1 well just to the south of Northern’s licence, where a prospect has seemingly been identified as a result of a 2003 3-D seismic survey.

The other objective is to define the tilted pre-Cretaceous fault blocks and adjacent grabens which determine the location of the porous carbonate reservoir rocks and the nearby troughs in which oil has been generated. In the past this has been difficult as the whole region has been subjected to later Alpine thrust movements.

Northern has been approached by companies interested in a farm-in to this licence.

GATTINARA - A major deep oil play in the Alpine thrust belt.

A now uncontested application has been made to licence an area of 462 km² in an area to the NNE of Nibbia and close to the border with Switzerland. One known mapped prospect with the potential for about 300 million bbl of recoverable oil has been identified within the application area. Two other leads exist in stacked south facing Alpine thrusts. This is analogous to the Molossa oil and condensate field to the east of Milan and the Gattinara area contains the same oil source rocks as the Villafortuna oil field. In these days of higher oil prices we consider this to be a very attractive oil play in the heart of Europe and it should be of interest to both northern Italian and Swiss industry and investors.

Onshore Adriatic Coast

CERASA - Working to substantiate a 50-100bcf gas target in an area of shallower gas fields.

This licence covers an area of 382 km² located within the well established Marche Basin, a region of Lower Pliocene gas production in a south eastern extension of the Po Basin province. The Cerasa licence was awarded to Northern in competition with the Italian company Petren. There are three substantially depleted shallow gas fields in the licence area; Fano, Marotta and San Costanza. These are simple anticlinal traps at 500 – 850 metre depths producing from sands of 20 – 30% porosity and merit consideration for gas storage facilities. We have identified several other features displaying similar amplitude anomalies. The task is to plan a sufficiently cheap drilling method.

Utilising the existing seismic data base we have also identified a large on-lap trap in the south of the licence area with the potential for up to 100 bcf of gas.

Offshore Tiber Delta

E.R51.NP - Encouraged by the Colombo-1 experiences of Northern in 2000.

Northern consider there to be a good potential for gas fields in the Pliocene and underlying Miocene turbidites in similar geological settings to parts of Sicily where the 3tcf Gagliano gas field has been found.

This licence of 724 km² has been taken in the thickening off-shore portion of the same deltaic basin in which Hardman Resources, with Northern as a ten per cent partner, drilled the Colombo-1 sub-economic gas discovery in 2000 on the adjacent Fiume Tevere permit. Traps within and against Tertiary turbidite fans provide a major gas exploration play throughout the Mediterranean region. Italy, a stable EU member state with a strong gas distribution industry, provides a good location in which to pursue it. Ministerial owned seismic data, shot by ENI for Zone “E”, has been utilized and five leads have been identified. The play concept is solely for gas in both Pliocene sands and silts and the underlying thrusted Miocene-Oligocene turbidite series which are productive in similar geological situations in ENI’s giant Gagliano (North Sicily) and Luna (Calabrian coastal basin) fields.

OFFSHORE SICILY – An opportunity to deploy newer deeper water technology in a prolific basin and also prove the offshore potential on-trend to a billion barrel oil field.

In the west the Apennine-Maghrebian thrust belt is covered by three licences and a further three licence applications. It is hoped that modern seismic, particularily 3D, will lead to the uncovering of oil prospects similar in size and nature to Agip and Shell’s Monte Alpi Val d’Agri complex on trend in southern Italy estimated at over one billion barrels recoverable. Elsewhere the main endeavour is to re-examine oil discoveries and prospects in the light of higher oil prices and significant advances in deeper water technology since the end of the last exploration phase in the mid-1980s. This is a prolific oil producing province with about 1 billion barrels of recoverable reserves in four oil fields found to date (Ragusa, Gela, Vega and Perla). The oil is produced from Mesozoic karst and shelf edge Miocene carbonate reservoir formations in horst block structures. In addition there has been the 2002 discovery by Agip of the Panda gas field in a Pliocene turbidite formation. The Company believes that further fields can be found from reprocessing of the existing seismic data and upgraded by recording modern data if necessary. The same or similar prospects may exist in Maltese, Tunisian and Libyan waters, but Italy is greatly preferred as offering more favourable licensing conditions, political stability and larger markets.

Licences G.R17-NP, d19GR.-NR, d20GR.-NP and Licence Application d22GR.-NP, d23GR.-NP and d24GR.-NP

This is a strategic move to licence over 4,000 km² covering the Apennine – Maghreb thrust belt offshore in Italian waters with the potential for finding very large fields. The thrust belt contains the giant Val d’Agri oil field in the southern Apennines, the Gagliano gas condensate field in central Sicily, the Tellian fold belt and oil fields in Algeria, where it is known as the Atlas thrust belt. Live oil seeps have been recorded over both the Italian and Tunisian portions of the thrust belt. Much of this area was licenced in the 1980s to ENI and Shell. With water depths up to 700 metres, this was towards and beyond the then limit of offshore platform based technologies.

The area is possibly one of the last in Europe in which the proverbial “elephant” oil field may be discovered. The Company is pursuing this play offshore, whilst rejecting it onshore, as it expects to gain from the lower cost and better definition obtainable from offshore seismic data. Even the existing 2-D seismic before reprocessing suggests a series of undrilled leads on a NE – SW trend. It is probable that they can be sufficiently defined for drilling utilising more modern reprocessing and even 3-D seismic. This view seems to be supported by the plans of PGS to record a speculative seismic survey in the adjacent Tunisian waters. The primary objective is for oil and gas in Miocene and Cretaceous carbonates as at the Nilde oil field to the east. There is a secondary objective for gas in the Oligocene turbidite fans in which the large 3tcf. Gagliano gas field was found onshore Sicily. It is reported that the Algerian authorities are currently offering to licence two blocks on the same geological trend.

The first task of re-processing key seismic lines is under way. It is anticipated that modern processing will provide a much clearer structural picture in the complex stacked thrust belt. We are considering the recording of new “trial” seismic lines later in 2005 when PGS intend to record a 3-D survey over the offshore Tunisian part of the thrust belt where a speculative 2-D seismic survey was recorded in 2004 and has proven the extension of this highly prospective trend into Tunisian waters.

Licence Application d21GR.-NP

Three prospects close to the now abandoned Nilde oil field have been mapped and now will be fully re-evaluated for their drilling and development potential in the light of modern completion technologies. This application covers a 712 km² offshore area surrounding ENI’s now depleted Nilde and satellite light oil field. A number of wells with gas and condensate shows have been drilled and abandoned. The application has covered the area up-dip and within the trend of the reservoir fairway to the northeast of the oil shows in the ENI/Shell Nora-1 well. One structural and one truncation lead have been identified towards the edge of the reservoir fairway as well as a further lead identified directly on trend with Nilde. To the north west three leads of a more exploratory nature have been identified in a thrust system running parallel to the Nilde structure, where the reservoir trend is as yet unproven.

Licence C.R147.NP

This offshore licence is located north of the Italian volcanic island of Pantelleria and against the Tunisian boundary and a licence held by Grove. It is 637 km² in area and covers the extension of the Gulf of Hammamet oil province into Italian waters where the Zibbibo oil field has been found by Agip and a production concession is currently awaited. This fairway of Birsa Miocene sandstones and Ain Grab calcarenite formations extends through the licence and northwards of the 36° API Nilde oilfield. Oil prospects in this area have become more attractive with the developments in technology for horizontal development wells and sub-sea completions. The next move is to re-process the seismic and verify the previous mapping before drawing up a drilling proposal. Detailed mapping of 1984 seismic data revealed two structures of considerable relief each with the potential for 30 – 40 million bbls of recoverable reserves of light oil. No wells have been drilled within the licence area. The Tazerka and Birsa oil fields across the border in Tunisia produced oil at rates of about 10,000 bopd each from sands and carbonates of Miocene age.

Licence C.R146.NP

Re-processing of old seismic data is necessary to enhance the prospectivity of the licence. This 620 km² licence is located on trend with the Vega field and up against the Italian – Maltese boundary. Oil is found in the Inici Platform carbonate reservoir sourced from the adjacent Liassic Streppenosa shale, an oil rich source rock. The field is situated at the carbonate platform margin edge which extends across the licence. One large undrilled structure and a satellite have been defined and mapped from the seimic. Only the Spigola Mare-1 well has been drilled in the licence encountering gas shows in the Liassic Rabbito not reaching the main Inici carbonates. Recent seismic interpretations show that the well was not drilled on a structure.

Licence Application d347CR.-NP

Notwithstanding the nearby ENI/BG/Monte Edison Panda gas discovery, our main interest is to re-work and re-process the existing seismic data in the area to upgrade the mapping of structural leads similar to the Palma-1 oil discovery close to the shelf edge. The main objectives lie in the northern part of this licence to follow up the nearby and on trend 43° API oil discovery at Palma-1 drilled in 1982 by Conoco in the Inici reservoir formation. This was hard to image using the existing older seismic data, but two leads have been mapped and we intend to conduct work to upgrade them. This offshore application for an area of 391 km² was made in November 2003 with the southern boundary close to and on trend and north-west of the Panda gas field discovered in 2002 by ENI/BG/Monte Edison, some 10km away. Panda is another example of the main productive Italian gas play with gas charged Pliocene sands abutting the impermeable shales of the “Gela Nappe”. This is a persistent gas trapping system throughout the fore-deep running from the Po Valley, through the Bradano basin into Sicily which accounts for most of the Italian gas reserves.

SOUTHERN ADRIATIC - Two applications to seize the opportunity to re-appraise three oil discoveries.

Licence Applications d57FR.-NP and d58FR.-NP

These applications cover 1,469 km² to include the ENI’s Rovesti-1 light oil and Enterprise Oil’s Giove-2 and Medusa-1 untested heavy oil discoveries together with the area south east towards and to the south of Agip’s deepwater Aquila oil field. The licence will be predominantly in Zona F beyond the 200 metre isobath and towards the boundary with Albania. We have interpreted three structural trends believed to be of interesting prospectivity.

The immediate interest centres on a full petro-physical and economic re-appraisal of the potential of these oil discoiveries. The Giove-2 well logged a gross oil column of 93 metres below a 12 metre gas column in Tertiary reefal carbonates.

REVIEW OF OPERATIONS: SPAIN

Progress towards reperforating in new formations - Overview

Our exploration efforts in Spain have concentrated on finding a partner for our licences and putting together a programme of appraisal wells where the production from these discoveries can be transported to the Ayoluengo oil field for processing. The potential for improved production from the Ayoluengo field is the key to an integrated approach to the future of oil production in the Sedano Basin and we are looking for a strategic partner who wishes to work with us in both these areas. Discussions are ongoing with parties who recognise the potential in the licences.

Ayoluengo oilfield and the La Lora licence – a frustrating year

We have been prevented by the seeming intransigence of our Spanish partners in making progress on any activity with respect to the redevelopment of the Ayoluengo field in 2004 following a technical review of the field. However a programme of re-perforation of the existing 11 production wells in the field has been agreed for 2005 by the partners and plans are in progress to implement a first phase programme of 4 wells. The increased oil price has given the opportunity for the partners to approve expenditure from operating profit to assess the potential for increasing oil production.

We look forward to implementing work in the field and applying the results of the re-perforation programme to our understanding of the considerable remaining potential of the field given the confidence that new investment in the field will result in the gains predicted from our technical studies. The reperforation activity is currently awaiting the granting of an explosive storage licence to our selected contractor.

Upgrading of our health, safety and environmental initiatives is continuing in 2005.

Exploration Licences: Huermeces, Valderredible, Basconcillos-H

Following completion of a technical review of the licences our efforts have been on finding a partner for the drilling of three appraisal wells that will enable a rig to be mobilised to the region.

As the re-perforation programme at Ayoluengo will provide an assessment of the potential for the re-completion of abandoned production wells in the field or the drilling of new wells, projects also requiring a rig, we are placing great importance on completing the re-perforation programme at Ayoluengo ahead of mobilising a rig to the region such that a comprehensive and cost effective drilling programme can be formulated to include the Ayoluengo field and the drilling on these licences.

REVIEW OF OPERATIONS: GUYANE

A small investment with great potential

The company concluded an agreement in 2004 with Wessex International, a privately owned company registered in Texas, whereby Northern acquired a 1.25% beneficial interest in a permit covering the whole of the offshore beyond the 12 mile coastal limit territory of Guyane, previously French Guiana. The Permit covers some 65,000 km². Hardman Resources Limited is the Operator and holds a 97.5% interest in the Permit.

In 2003 Hardman completed a 7500km 2-D seismic survey regarded as being of excellent quality to supplement 3,945km of 2-D seismic data recorded in the 1970’s by Elf, Shell and Esso. This resulted in six prospects or leads each in excess of one billion barrels of potential recoverable reserves being defined with a further 15 leads in the 100 to 500 million barrel range of reserve potential. This is a virtually unexplored basin with only two previous wells drilled offshore. It has been estimated that the Matamata Prospect (Lead A) alone could contain recoverable reserves in the order of 500 million to 5.6 billion barrels with the estimated mean recoverable reserves calculated to be 2.4 billion barrels which would result in 30 million barrels net to the company.

Under the terms of the Agreement Northern acquired its interest in the Permit for a consideration of US$17,500 on signature and a further £40,000 when Hardman conclude farm-out arrangements. Northern has also agreed to lend the company that holds the 2.5% interest US$200,000 in order to help finance the drilling and testing of a well at an interest rate of 2% per annum.

Whilst Guyane is in the EU it is not within our current core area of activity. This is however an opportunity that should not be passed up and as a non-operator partner the project will make only small demands on management resources. In addition, as an offshore operator in Italy we hope to gain valuable operational experience in Guyane which might be relevant to future offshore projects. This strategy worked well in the case of the 5% participation in the Avington-2 oil discovery of 2003.

REVIEW OF OPERATIONS: THE NETHERLANDS

A MAJOR BRIDGEHEAD

Subject to approvals from Netherlands Government Authorities, a substantial new area of operations has now been established. The intent is to place old discoveries of oil and gas into production as soon as possible, many having suspended wells on existing sites.

PAPEKOP

Work on The Netherlands began in early 2004 following a 1% royalty agreement granted to Concessions International Inc. over the Papekop discovery drilled in 1994 by Nederlandse Aardolie Maatschappij B.V. (“NAM”), a joint Royal Dutch Shell/ExxonMobil company. The 2D and 3D seismic data were acquired and analysed in conjunction with the well test results. With the increased oil and gas prices since then the case for immediate development was examined and as a result a Northern application for an immediate Production Concession was made in December 2004.

The application was contested in April 2005 on the last applicable date. The bid examination process is now underway and for that reason no further comment is offered on the scheme for development.

Combined Proven plus Probable Reserves have been assigned to be in the order of:

• 23 billion cubic feet of gas; and
• 5.8 million barrels of oil.

NAM AGREEMENTS

In late 2004 negotiations were initiated with NAM which in June 2005 resulted in a joint venture Agreement covering eight suspended gas discoveries, some with oil legs.

An initial package of up to eight undeveloped oil and gas discoveries will, following Northern’s exercise of an option, be transferred to our Netherlands subsidiary NP Netherlands B.V. (“NPN”) who will immediately assume operating responsibility after receipt of government approvals. NPN will develop the discoveries and receive 100% pay-back of its cost plus an uplift of 30%, thereafter splitting all future profits equally with NAM.

Six of the discoveries have suspended wells that were successfully tested. The gross in-place volumes are currently estimated at 170 billion cubic feet of gas (53 bcf net to NPN) and 41 million barrels of oil (12.4million barrels net to NPN).

Based on these figures a preliminary assessment of reserves has been made which, subject to further evaluation, would lead to an expectation of recoverable Proven plus Probable reserves in the order of:

• 27 billion cubic feet of gas; and
• 2.5 million barrels of oil.

The Agreement and a further agreement concerning Steenwijk-1, provide for NPN to acquire 50% of NAM’s interests in a number of additional onshore exploration areas where NAM has identified gas prospects. Gross in-place volumes of gas have been estimated at between 0.8 and 1.2 trillion cubic feet, in a total area equivalent to seven UK North Sea Blocks. This is 340bcf to 520bcf net to NPN, allowing for partners, other than NAM, where applicable. NPN will have the right to earn these interests by drilling and covering the combined NAM and NPN expenses of up to seven exploration wells, of which NPN has already committed to one, and will be obligated to an additional two upon exercise of its option. The agreements provide for NPN to recover all dry hole costs out of the pre-tax revenues from future discoveries and share the profits from the jointly held stakes with NAM on an equal basis.

Northern believes that these two projects, assuming the award of Papekop, provide an acceptable entry threshold into the onshore part of the Permian Basin in the Netherlands, especially as the company has additional projects in progress.

CONTACTS:

Derek Musgrove, Managing Director
Chris Foss, Company Secretary
Northern Petroleum Plc
Tel. 020 7743 6080

Chris Roberts / Ben Simons
Hansard Communications
Tel. 020 7245 1100

 

Consolidated Profit and Loss Account
For the year ended 31 December 2004

		Year ended 31-Dec 2004	Year ended 31-Dec 2003
	Notes	£’000	£’000
		Total	Total
Group turnover	2	468	437
Group cost of sales
Production costs		(332)	(334)
Depreciation, depletion and amortisation		(124)	(125)
		(456)	(459)
Group gross profit/(loss)		12	(22)
Administrative expenses		(786)	(581)
Other operating income		108	61
Group operating loss		(666)	(542)
Share of operating profit in associates		3	-
Operating loss for the group before interest and other income		(663)	(542)
Interest receivable		161	43
Profit on sale of fixed asset investments	3a)	16	-
Amounts written off current asset investments	3b)	-	(546)
Loss on ordinary activities before taxation		(486)	(1,045)
Tax on loss on ordinary activities		(5)	(16)
Retained loss for the group		(491)	(1,061)
Basic and diluted loss per share	4	(0.20)p	(0.62)p

All amounts relate to continuing activities.

Consolidated Statement of Total Recognised Gains and Losses

		Year ended 31-Dec 2004	Year ended 31-Dec 2003
	Notes	£’000	£’000
Loss for the financial year		(491)	(1,061)
Profit on deemed disposal of subsidiary to minority interests		-	67
Exchange differences on retranslation of net assets of subsidiary undertakings		(3)	19
Total recognised gains and losses		(494)	(975)

Loss for the financial year includes the Group’s share of associates’ profit after tax of £3,000.

Consolidated Balance Sheet At 31 December 2004

		2004	2003
	Notes	£’000	£’000
Fixed assets
Intangible assets	5	625	593
Negative goodwill	6	-	-10
Tangible assets	7	566	330
Investments in joint ventures:
Share of gross assets of joint ventures		3	-
Share of gross liabilities of joint ventures		(3)	-
		-	-
Share of net assets of associates		249	-
Total fixed assets		1,440	913
Current assets
Stocks		137	139
Debtors		667	467
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