Italy

Strategy summary

Italy represents the country that holds the most exciting and significant long-term opportunities in Northern’s portfolio of assets. In Italy Northern has pursued a focused approach to acreage acquisition and now has 14 permits, 20 uncontested applications and three contested applications. This position of strength is rivalled by only the former Italian state oil company Eni. The continued enhancement of Northern’s considerable asset base in Italy is a major success for the Group.

Northern, ahead of nearly all the competition, accumulated positions in four onshore permits, 10 offshore permits and has 22 offshore applications with a concentration in three prospective core areas, mainly in deep waters. The Group has assets in the onshore gas province of the Po Valley, offshore Sicily and has two oil fields and multiple exploration prospects in the Southern Adriatic.

To realise shareholder value from this portfolio Northern is seeking to achieve further third party finance for exploration and appraisal drilling to confirm the vast potential. The involvement of such a major international group as Shell as a farm-in partner in six of its Sicily Thrust and Fold Belt permits has brought endorsement of the Company’s strategy. The addition of two more partners, Orca Exploration Group Inc. in the Po Valley Basin and Azimuth Limited in the Southern Adriatic Sea, brings additional resources and skills to progress exploration and development. Northern’s plans are for an aggressive, but realistic, strategy to enhance the value of the acreage portfolio.

Review of 2010

Northern made good progress last year in responding to the important challenge of drilling and realising the very large potential of our projects offshore Italy. Development of our assets there will not be materially affected by new Italian environmental legislation announced in mid 2010, although the consequent delay in the award of new offshore permits has slowed down planned progress. The new Law essentially bans drilling within 12 nautical miles of the Italian coast and marine parks. Our permits and applications are predominantly further offshore. Thus Northern does not expect this Law to impact upon its reported reserves or materially affect our two key core areas of the Southern Adriatic and Thrust and Fold Belt offshore West of Sicily.

Working with our major joint-venture partner Shell Italia in the Thrust and Fold Belt core area offshore Sicily, the (1,520km²) 3D seismic evaluation is completed. The 3D seismic was acquired at no cost to Northern. Northern retains the operatorship of the joint-venture but the role of “Rappresentante Unico”, the sole representative with respect to the Italian authorities has been transferred to Shell. Work is continuing with the evaluation of the permits and operatorship of the joint venture will transfer to Shell for the drilling of an exploration well. Under the farmout agreement with Shell the cost of drilling and testing the first well will be at no cost to Northern.

Significant further progress has been made in 2011 on a key area for Northern with the signing of an agreement involving permits F.R39.NP and F.R40.NP in the Southern Adriatic. Our new partner is Azimuth Limited, a specialist E&P business created to acquire oil and gas assets worldwide. The primary objective of the agreement with Azimuth is to make progress with both development and exploration activities – taking the development of the Rovesti and Giove discoveries a step closer with the acquisition of 3D seismic to define suitable appraisal locations, and also provide the data required for development well locations. Additional 3D seismic coverage will be sought over a number of exploration prospects to define drilling targets. Northern recognises significant exploration potential in the two Southern Adriatic permits for both oil prospects, with a mean volume of over 3 billion barrels of oil in place and gas prospects with a mean volume of over 2 trillion cubic feet of gas. This adds up to over 1 billion barrels of oil equivalent of prospective resource in the two permits, split approximately equally between oil and gas prospects. Azimuth will become a 15% interest partner in both permits by funding a promoted share of future work programmes prior to the drilling stage. The future assignment of permit interests to Azimuth and implementation of aspects of the agreement are subject to receiving approvals from the Italian authorities.

The two oil discoveries in these permits are Rovesti, to which Blackwatch Petroleum Services has assigned 2P reserves of 33.56 million barrels of oil equivalent and Giove, for which the figure is 19.67 million barrels of oil equivalent with the advantage of 3D seismic coverage be better placed for attracting additional partners for their development. Blackwatch in 2007 assigned a Post-Tax Net Present Value (NPV@10%) of $610 million at a $70 oil price based on developing the two fields independently, each with a new build Floating Production and Storage Offloading Vessel (FPSO). Leasing of an FPSO is likely to improve the economics. The Rovesti P50 initial annual production profile is approx 9,000 barrels of oil per day declining to just under 6,000 barrels of oil per day after 5 years and for Giove the P50 initial annual production profile is over 20,000 barrels of oil per day declining to just under 10,000 barrels of oil per day after 2 years.

It is important to recognise that these southern Adriatic permits are next to a developed oil field. In the adjacent production permit Eni operates the Aquila oil field, located in 815 metres water depth. The field is located 12 kilometres from the Giove discovery which is in 600 metres water depth. The Aquila field came on stream initially in 1998 and produced approximately 24 million barrels over eight years before production was suspended in 2006 due to the required decommissioning of the FPSO “Firenze”. Eni plans to re-develop the field in 2011 with production to a new FPSO commissioned from Saipem with a storage capacity of 700,000 barrels and a production capacity of 12,000 barrels of oil per day. Eni have announced plans for eight years of additional field production with an initial rate of 9,000 barrels of oil per day.

A further seven applications have been made surrounding the two Southern Adriatic permits, containing the Rovesti and Giove fields, with additional exploration prospects recognised with potential for both oil and gas. With the full award of permits the planned work programme would be to acquire additional new 2D seismic data to provide a consistent data set on which to high grade the over thirty prospects identified. The 2D seismic will provide a basis for selecting areas for 3D seismic and thereafter drilling locations and be the point after which Northern will seek additional partners in the permits.

A third farmout in Italy was finalised in December 2010 for the drilling of the La Tosca Prospect in the Po Valley Basin, onshore Italy (Longastrino Permit). This deal with Orca Exploration, a Canadian exploration and production group will finance the drilling of the prospect and a well is scheduled for late 2011. The La Tosca prospect is estimated by Northern to have 45 billion cubic feet of gross mean prospective resource and will target an upside of 85 billion cubic feet gross prospective resource of gas. Northern will be the operator during the drilling and testing phase and Orca will assume operatorship of the permit thereafter.

Additional farmout efforts continue for C.R146.NP, with an internally estimated billion-barrels-plus sized prospect and for C.R147.NP, which our exploration team consider has been made more attractive by the Lambouka gas discovery recently announced by ADX Energy in nearby Tunisian waters.

Future

The important challenge is to drill and realise the very large potential of some of our projects offshore Italy. In the short term those are the Thrust and Fold Belt permits. Northern continues to be the operator of the joint venture. In April 2011 Northern assigned to Shell Italia the role of “Rappresentante Unico”, the sole representative with respect to the Italian authorities of C.R147.NP in the Sicily Channel and C.R146.NP close to Maltese waters. Efforts are in hand with the latter to progress the required environmental work required for drilling while continuing to evaluate the rig market for availability of vessels within the Mediterranean.

Alongside our joint venture partner Shell Italia, in the Thrust and Fold Belt the 3D seismic data has been interpreted and evaluation continues with respect to the future exploration plans for the permits. In the Southern Adriatic, we are waiting receipt of various approvals from the Italian authorities before announcing the details, but the plan is to define and delineate suitable appraisal and exploration drilling targets by the acquisition of a 2D seismic survey and two 3D seismic surveys that will progress the future development of reserves and the drilling of exploration prospects in permits F.R39.NP and F.R40.NP that form just a part of this key area in the Italian offshore.

Also on our schedule is a well on the La Tosca Prospect where we have recently announced the farmout with Orca Exploration.

Northern continues to step up work on the priority of realising more of our Italian potential but, in line with our low-cost strategy, we will continue to actively promote farmouts, predominantly at the drilling stage. Discussions are ongoing, but we will consider only those that offer adequate value to our shareholders. Further farmout promotions for permits in three of our offshore core areas, the Sicily Channel, the Southern Adriatic Sea and the Ionian Sea, can be expected with the aim of minimal initial cost or financial exposure for Northern, or the potential to increase the work programme to augment resources available to Northern.

We will continue to seek new permits to add to our extremely valuable portfolio of Italian assets.

Strategy for an exciting asset

Northern has built a portfolio of substantial prospective value in Italy at minimal financial exposure. Validation of the potential within this portfolio came first in 2008 with a farmout deal on its permits to the West of Sicily to Shell Italia. In 2010 Northern announced a farmout to the Canadian group Orca Exploration Group Inc. on its Longastrino Permit in the eastern part of the Po Valley Basin, onshore Italy. This has been followed with another farmout, this time to E&P specialist Azimuth Limited for the two Italian permits which contain the significant Rovesti and Giove oil discoveries. Now, growing interest in Italy is resulting in an increasing number of approaches for other farmouts.

The history, from first involvement in 1999, is proof of Northern’s strategy in building concentrated acreage positions that have the potential to attract major industry partners. Northern has a portfolio of exploration acreage rivalling that of former Italian state oil company Eni, with interests in 37 exploration permits and applications. The farmouts have brought to Northern not only international major project, exploration and production expertise, but access to the funding required to develop the permits with Northern retaining substantial stakes.

Northern has made full use of its first-mover advantages. Management’s considerable industry experience enabled Northern to recognise the considerable potential in Italy’s under-explored acreage ahead of most competitors and to appreciate the favourable fiscal and attractive licence regimes. The strategic oil and gas potential, and the low political risk of assets in this EU member country, exactly match Northern’s geographical strategy.

Also brought to bear in Italy has been Northern’s aim of always building good relations with governments and regulatory ministries. This helps it secure assets where it can add value. In Italy Northern has achieved a diversified and balanced portfolio of permits in a number of proven hydrocarbon basins both onshore and offshore. Northern’s focus is being rewarded as it attracts partnerships with top industry players. The distribution of Northern’s permits in Italy means that it will suffer minimal impact from the new Environmental Law restricting nearshore exploration and development activities. Northern is continuing to add to its assets in Italy. Success should be well rewarded in the medium and long term as the country is a high net importer of both oil and gas.