Dragon Oil: 2014 Interim Management Statement

Interim Management Statement

Dragon Oil plc, an international oil and gas exploration, development and production company, today issues its Interim Management Statement in accordance with the EU Transparency Directive. The statement covers the period from 1 January 2014 to date. The financial, production and drilling results data are for the period from 1 January2014to 31March 2014.All other information, including details on operations, is up-to-date as at 21 April 2014.

Dr Abdul Jaleel Al Khalifa, CEO, commented:

“Now we have three rigs drilling and one more to commence operations shortly, the pace of drilling will pick up considerably; albeit the completion of wells will be weighted more towards the second half of the year. We expect production to increase from now to the year end.

“On the exploration front, we are pleased to report that the drilling of an exploration well has commenced in Iraqi Block 9.”

OPERATIONAL UPDATE

Turkmenistan

Production and entitlement

Gross field production for 1Q 2014 averaged approximately 72,300bopd (1Q 2013: 71,800 bopd). This represents a 0.7% increase compared to the level of gross production in the first quarter of last year, measured at observed temperature. One sidetrackwasput into production in 1Q 2014.

The entitlement production for 1Q 2014 was approximately 47% (1Q 2013: 43%) of the gross production. The entitlement barrels are finalised in arrears and are dependent upon, amongst other factors, operating and development expenditure in the period and the realised crude oil price. Higher entitlement barrels in 1Q 2014 arose from operation of the fiscal terms of the Production Sharing Agreement and are due primarily to higher development expenditure.

Marketing

Marketing agreements were renegotiated in January 2014 to secure a relatively better discount resulting from acloser correlation between realised oil prices and monthly average Brent prices. The discount is expected to be in the range of a 14%-17% discount to Brent in 2014. The current arrangement expires at the end of 2014 and we are examining future options for 2015 and beyond.

In 1Q 2014, Dragon Oil sold 2.7(1Q 2013: 2.4) million barrels of crude oil, which is 13% higher than the volume sold during the corresponding period last year. Highersales in 1Q 2014are primarily due to an increase in entitlement barrels as compared to the corresponding period last year.In 1Q 2014, Dragon Oil exported all (1Q 2013: 100%) of its crude oil production through Baku, Azerbaijan.

Drilling

During 1Q 2014, Dragon Oil completed one sidetrackin the Dzheitune (Lam) field.

The Dzheitune (Lam) B/155A sidetrack was completed by the jack-up rig Elimaas a single producer to a depth of 2,447 metres and tested in February 2014 at an initial production rate of 1,027 barrels of oil per day.Currently, the well is producing 1,175 barrels of oil per day. The jack-up rig is now drilling the Dzheitune (Lam) 4/187Bwell to appraise a location for a future platform.

In March 2014, the Neptune rig spudded the Dzhygalybeg (Zhdanov) 21/101 development well and Land Rig 1 is currently drilling the Dzheitune (Lam) 22/188 well. Work is ongoing on the Dzhygalybeg (Zhdanov) A platform to accept Land Rig 2, which is expected to spud the Dzhygalybeg (Zhdanov) A/102 well in 2Q 2014.

There are three drilling rigs presently operating in the Cheleken Contract Area with Land Rig 2 expected to commence drilling later this quarter. We anticipate the arrival of the Caspian Driller in 2H 2014.

Water injection project and artificial lift

The water injection pilot project is ongoing in the pilot Dzheitune (Lam) 75 area. We continue to inject at a rate of about 3,600 barrels of water per day into the reservoir. The reservoir pressure in the pilot area is showing a sustained rising trend. Meanwhile, the tendering process to acquire water injection facilities to be installed at the Dzheitune (Lam) 10 and 13 platforms has been initiated to expand the waterfloodprogramme in the Dzheitune (Lam) main field. The aim of the water injection programme is to maintain pressure, sustain production rates and increase reserves recovery.

The tender is ongoing to procure jet pump systems for up to 14 more wells, which are expected to be installed in 2H 2014 – 1Q 2015. The objective of this artificial lift systemis to increase production and enhance recovery.

Infrastructure

In February 2014, Dragon Oil awarded a contract for the construction and installation of the wellhead and production platform Dzheitune (Lam) E and associated pipelines. The work is expected to take two years with the platform being ready in 1H 2016. The platform will have eight fitted slots with space for another four slots to be fitted later, and suitable for a jack-up drilling rig use.

Work is to commence shortly on relocation of the Dzhygalybeg (Zhdanov) B platform to the Dzheitune (Lam) field, location Lam F. Modification work and subsequent installation are expected to be completed in 4Q 2014.

The project to quadrupleour crude oil storage capacity at the Central Processing Facility is progressing as planned. The tank farm is anticipated to be completed in 1Q 2016 with three tanks built and commissioned on a priority basis.

The tendering process to select a contractor to build another 30-inch trunkline from the Dzheitune (Lam) field to the Central Processing Facility is in the tendering stage. Construction is expected to take two years after the contract is awarded.

Dragon Oil has recently awarded a contract to dredge the harbour area and the Aladja export Jetty. The project is expected to take two years; the aim is to increase offshore vessel handling capacity and to enhance crude oil loading capacity.

Gas Treatment Plant

The bids for an engineering, procurement, installation and construction projectof the Gas Treatment Plant are in the evaluation stage. We anticipate the construction phase to take two to three years after the contract is awarded.

EXPLORATION

Tunisia

The Hammamet West-3 well remainstemporarilysuspended due to difficultiesexperienced during testing in 2013 as a result of continuous blockage caused by lost circulation material. Alternative Sidetrack-2of the Hammamet West-3 well will be drilled in the Abiodformation from the original HammametWest-3 wellbore to intersect fractures and to test the formation.A new rig is expected to be secured to drill Sidetrack-2 in the near future.

The joint venture partners (Dragon Oil 55%; Cooper Energy, 30% and operator; and Jacka Resources Ltd, 15%) applied for another year of extension taking the initial phase contract to 2Q 2015 during which time Sidetrack-2 could be performed. The estimated cost for Sidetrack-2 is approximately US$35 million of which Dragon Oil will contribute on a pro rata basis.

Iraq

In Iraq, the consortium of Dragon Oil (30%) and Kuwait Energy Corporation (70% and operator) spudded an exploration well using a drilling rig from the Iraqi Drilling Company on 25 March 2014. The well is targeting two prospective reservoirs andtesting is expected to take place in 2H 2014.

Afghanistan

In Afghanistan, seismic acquisition and related services have been approved by the Ministry of Mines and Petroleum of Afghanistan and Dragon Oil (40%, operator of Sanduqli block), TurkiyePetrolleri A.O. (TPAO, 40% and operator of Mazar-i-Sharif block) and the Ghazanfar Group (20%) plan to commence the 2D seismic acquisition activities over a line of 1,275 kilometres in 2H 2014.

Egypt

In November 2013, we were notified by Ganoub El Wadi Holding Petroleum Company (Ganope), one of the main entities of the Petroleum Ministry responsible for all exploration and production activities in the southern part of Egypt, that the Group’s offer for Block 19 East Zeit Bay, offshore the Gulf of Suez, Egypt, had been initially accepted. Dragon Oil is going through a normal process of final government approvals, which will result in an official decree awarding Dragon Oil the block in due course.

The Philippines

In January 2014, Dragon Oil signed a farm-in agreement with Nido Petroleum Philippines Limited (ASX: NDO) (“Nido”) for Service Contract 63 (SC 63) NW Palawan Basin, offshore the Philippines.

We are pleased to advise that the first stage of the farm-out process involving Dragon Oil initially acquiring a 40% participating interest from Nido’s current 50% participating interest in the Service Contract63 is in the process of being approved by the Department of Energy of the Philippines.

Preparations for the Baragatan-1 well are now in the final stages with drilling expected to commence later in 2Q 2014 on location in the Philippines.

FINANCIAL UPDATE

Realised prices

With Brent averaging about US$108.2 per barrel during 1Q 2014 (1Q 2013: US$112.6), the average realised crude oil price during the quarter was approximately US$92/bbl (1Q 2013: average provisional realised crude oil price of US$92/bbl), which was at a 15% (1Q 2013: 18%) discount to Brent.

Cash and cash equivalents 

The cash and cash equivalents and term deposits at 31March 2014 were approximately US$1,895 million (31December 2013: US$1,924million), excluding the funds set aside for abandonment and decommissioning activities.

Capital expenditure

Capital expenditure for 1Q 2014 was around US$107 million (1Q 2013: US$57 million). Of this capital expenditure, approximately 43% was attributable to drilling (1Q 2013: 58%),50% spent on infrastructure (1Q 2013: 36%)with the balance spent on exploration assets. The infrastructure spend during 1Q 2014 included construction of a new platform, crude oil storage tanks and other onshore and offshore infrastructure facilities.

MATERIAL EVENTS

Final dividend for 2013

The Board of Directors of Dragon Oil recommended the payment of a final dividend of 18 US cents per share. Together with the interim dividend of 15 US cents, the total dividend for the year ended 31 December 2013 is 33 US cents. The final dividend of 18 US cents is subject to shareholder approval at the Annual General Meeting to be held in London, UK on 23 April 2014. If approved, the final dividend of 18 US cents is expected to be paid on 1 May 2014 to shareholders on the register as of 4 April 2014.

The following is the dividend timetable for the shareholders’ information:

18 February 2014: Declaration of final dividend

2 April 2014: Ex-Dividend Date

4 April 2014: Record Date

23 April 2014: AGM

1 May 2014: Dividend Payment Date.

OUTLOOK

During2014, we expect to grow production at around 10% and between 10% and 15% during 2015-16. The production growth plan for this year calls for completion of between 14 and 16 wells and around 20 wells in 2015 based onthe current and expected availability of drilling rigs. Drilling activity in 2014 will be weighted towards the second half of the year given a delayed start to the drilling programme at the beginning of the year.This drilling programme would allow us to reach the 100,000 bopd target late in2015 with the aim of maintaining the average daily gross production of 100,000 bopd as a plateau for a minimum period of five years from 2016.

We expect to spend US$1.5 billion on capital expenditure for infrastructure and drilling in 2014-16.The infrastructure spend in 2014 is expected to amount to approximately US$200 million with about US$300 million to be spent on drilling.