Heritage Oil Plc Annual Report & Accounts 2009

Head Office and

Directors’ Business Address: Heritage Oil Plc
Fourth Floor, Windward House
La Route de la Liberation Annual Report & Accounts 2009
JE2 3BQ Jersey
Channel Islands

Tel +44 1534 835 400

Fax +44 1534 835 412
SECURING OUR FUTURE
www.heritageoilplc.com
Overview
01 Highlights
04 Company Overview
08 Chairman’s Statement

Heritage Oil Plc is an independent oil

Business Review and gas exploration and production
company with a Premium Listing on the
12 Chief Executive’s
Statement
14 Chief Executive’s Q&A
16 Strategy
17 Reserves and Resources
18 Operations Review
London Stock Exchange (“LSE”) (symbol
20 Kurdistan
22 Malta
HOIL). The Company is a member of
23 Pakistan
24 Democratic Republic
of Congo
the FTSE 250 Index. The Company
25 Tanzania
26 Mali has Exchangeable Shares listed on
the Toronto Stock Exchange (“TSX”)
27 Russia
28 Uganda
30 Financial Review
34 Principal Risks
38 Corporate Social
Responsibility
(symbol HOC) and the LSE (symbol
HOX). The Company has core activity
areas focused on Africa, the Middle
East and Russia.
Corporate Governance
46 Board of Directors
48 Corporate Governance
Report
55 Remuneration Report
62 Directors’ Report
65 Responsibility Statement
of the Directors

Financial Statements
68 Independent Auditors’
Report to the Members
of Heritage Oil Plc
70 Consolidated Income
Statement
71 Consolidated Statement
of Comprehensive
Income
72 Consolidated Balance
Sheet
73 Consolidated Statement
of Changes in Equity
75 Consolidated Cash Flow
Statement
76 Notes to Consolidated
Financial Statements

Other
99 Glossary of Terms and
Definitions
102 List of Advisers Front cover picture designed by Hawnaz Wahab, 5th Grade, Halgurd School, Kurdistan
104 Financial Calendar (for more information see page 43).

HIGHLIGHTS
OPERATIONAL
>> Discovered the Miran West Field
in the Kurdistan Region of Iraq
(“Kurdistan”)
>> Tests on the Miran West-1 well,
Kurdistan, indicate potential for
production from the well of
8,000-10,000 bopd
>> Miran West-2 well has intersected
significant hydrocarbon-bearing
intervals over approximately
1,800 metres
>> The Miran West-2 well is drilling to
the deeper Jurassic and Triassic
exploration targets which could add
significantly to the hydrocarbon
potential of the Miran structure
>> Three zones identified in the
Cretaceous, in the Miran West-2
well, also to be tested when
exploration drilling is completed
>> Completed the successful Block 1
drilling programme in Uganda
with the discovery of the world-
class Buffalo-Giraffe Field
outlook
>> Heritage’s most diverse work
programme ever planned in
several core areas
>> High impact exploration well in
Malta planned for the fourth
quarter of 2010
>> Exploration and appraisal drilling
on the Miran structure, Kurdistan,
to continue in 2010
All dollars are US dollars unless otherwise stated
Overview
Business Review
Corporate Governance
FINANCIAL
>> Proposed sale of Ugandan
interests for up to $1.5 billion.
Expect transaction to complete
within the first half of 2010
>> Intention to pay special dividend
Financial Statements
of 75p to 100p following
completion of the sale of the
Ugandan interests
>> Sale of non-core holdings in Oman
realised cash of $28.4 million
>> Successful placing of 25.4 million
new shares raised gross proceeds
of $217 million
Heritage Oil Plc Annual Report & Accounts 2009
>> Back costs of $6.7 million were
received on the exercise of third
party back-in rights for 25% in the
Miran Block, Kurdistan
>> Strong balance sheet; cash of
$208 million at 31 December
2009, which is stated before the
sale of the Ugandan interests and
potential payment of a special
dividend
>> Net average daily production of
329 bopd
>> Exploration well planned in
Pakistan for the fourth quarter
of 2010
>> Production expected to increase
in Russia with additional
development drilling
>> Examine opportunities to
generate further value for
shareholders
01
 OVERVIEW
04 Company Overview
04 Our Assets
04 Strategic Positioning
04 Our Business Model
05 Geographical Presence
07 Track Record
08 Chairman’s Statement

Fishermen on Lake Albert, Uganda

02
Overview Business Review Corporate Governance Financial Statements
Heritage Oil Plc Annual Report & Accounts 2009

03
 Overview

COMPANY
OVERVIEW

Operational success has transformed Heritage

dramatically but its strategy remains
unchanged. The Company typically focuses on
regions which may have been overlooked and
where it can be an early entrant. Heritage will
seek out opportunities for high impact
exploration, targeting the potential for
significant hydrocarbon reserves.

OUR STRATEGIC OUR BUSINESS

ASSETS POSITIONING MODEL
>> Kurdistan remains a core area of >> Focus on core areas where we Our business model is underpinned
focus with near-term exploration have technical understanding by our core values
and appraisal drilling
>> First mover advantage – as
>> High impact exploration drilling demonstrated in Uganda and
Business Model Strategy
to commence in Malta in 2010 Kurdistan
Production and Access to Capital
Commerciality
>> Geographical diversification >> Focus on high impact exploration Balanced Portfolio
Exploration and
across Africa, the Middle East and targeting regions with significant Development
Strategic Positioning
Russia hydrocarbon reserves potential, Key Partnerships
Acquire and Invest
such as Kurdistan and Malta and Relationships
>> Diverse portfolio of assets Vision and
Responsible Business
Identification
encompassing a mix of >> Strong balance sheet giving
exploration, development and Heritage the ability to grow
Experience & Knowledge
production through acquisitions and farm-ins

04

GEOGRAPHICAL
PRESENCE
Kurdistan Region of
1 2
Iraq (“Kurdistan”)
Significant discovery announced in 2009 with
the Miran West discovery well. Exploration
and appraisal drilling continues in 2010.
The Miran West-2 well has intersected
hydrocarbon-bearing intervals over
approximately 1,800 metres within the
Cretaceous formations. The well is drilling to
the deeper Jurassic and Triassic exploration
targets with the potential to contain substantial
volumes of additional hydrocarbons.
democratic
republic of congo
4 5
(“DRC”)
Currently awaiting Presidential Decree.
Management considers the DRC side of the
Albert Basin to be potentially as prospective
for significant oil accumulations as the
Ugandan side.
7 8
russia
Production set to increase over the year
with additional development drilling. The
Zapadno Chumpasskoye Field
development project was approved in
2009 to develop the field utilising
horizontal drilling technology and expand
the current production facilities.
Overview
7
2 1
Business Review
3
8
4
5
Corporate Governance
exploration
production
Financial Statements
3
malta pakistan
Planned to acquire 1,000 kilometres of A number of structural leads have been
seismic in 2010 with the first exploration well mapped in the Zamzama North Block.
in the area planned for the fourth quarter. Further seismic data is being acquired with
The well will target a structure with a the first exploration well planned for the fourth
potential 500 mmboe. quarter of 2010.
Heritage Oil Plc Annual Report & Accounts 2009
6
tanzania mali
Seismic data was acquired in 2009. The Seismic data shows the presence of tilted
data is currently being analysed and will be fault blocks. Previous drilling in the region
used as the basis for a drilling programme. encountered oil and gas shows indicating
the potential for a working hydrocarbon
system. An infill seismic programme of
approximately 1,000 kilometres is planned
for this year to identify potential drilling
targets.
uganda
Pioneering company with entry into Uganda
in 1997. Six successful wells drilled. Proved
up a multi-billion barrel basin. Commercial
threshold for development achieved.
Proposed sale of the assets for up to $1.5
billion expected to complete within the first
half of 2010.
05
 Overview

COMPANY
OVERVIEW continued

Experienced management and technical teams

with a track record of finding world-class
oilfields. The Company has long-established
relationships and an extensive network of
contacts in its core activity areas.

(top)
from left to right

Gregory Turnbull
Non-Executive Director

John McLeod
Non-Executive Director

General Sir Michael

Wilkes
Non-Executive Director
and Senior Independent
Director

Salim Macki
Non-Executive Director

(bottom)
from left to right

Paul Atherton
Chief Financial Officer

Anthony Buckingham
Chief Executive Officer

Michael J. Hibberd
Chairman

06

TRACK RECORD
>> Exceptional track record of
creating shareholder value and
monetising assets
>> Expect to receive approval from
the Government of Uganda and
complete the proposed disposal
of the Ugandan interests for up to
$1.5 billion within the first half
of 2010
>> Sold Oman holdings in 2009 for
$28.4 million, including working
capital adjustments
Successful equity placement raising
>> Raised approximately $100
million from the sale of assets in
the Republic of Congo between
2002 and 2006
>> Development expertise gained
from developing and operating the
Zapadno Chumpasskoye Field,
Russia
Overview
Business Review
January 2009
Discovered the Buffalo-Giraffe Field
in Block 1, Uganda
February 2009
Completed the successful
Corporate Governance
Kingfisher-3A well, Uganda
First oil from West Bukha Field, Oman
April 2009
Sale of Oman holdings
May 2009
Confirmation of a major oil
discovery with the Miran West-1
well, Kurdistan
Financial Statements
June 2009
gross proceeds of $217 million
August 2009
Successful production test of the
Miran West-1 well, Kurdistan
November 2009
Commenced drilling Miran West-2
Heritage Oil Plc Annual Report & Accounts 2009
appraisal well
December 2009
Executed a Sale and Purchase
Agreement with ENI International B.V. to
sell Ugandan interests for up to $1.5 billion
January 2010
Tullow Uganda Limited exercised its
right to pre-empt the sale of the
Ugandan interests
April 2010
Letter received from the
Government of Uganda stating it
supports the sale and transfer of
Heritage’s Ugandan interests
Miran West-2 well intersected
significant hydrocarbon-bearing
intervals over approximately
1,800 metres
Three zones identified for testing
once drilling has completed
07
 Overview
CHAIRMAN’S
COMPANY
OVERVIEW
STATEMENT
Michael J. Hibberd
Chairman
I am pleased to report that
2009 has been another
momentous year for
Heritage. We have
crystallised value with the
disposal of our Omani
interests and the proposed
disposal of our Ugandan
interests. We are now
moving forward into a
new chapter of core area
activities.
08
It is with some sadness that we prepare to
leave Uganda, but this is countered with
pride that we have left a lasting legacy
which has benefited people in our
concession areas and has established a
hydrocarbon future capable of supporting
infrastructure and industrial development.
This will have lasting benefits for the people
of Uganda. We have established a solid
base for other companies to build upon and
we fully expect new entrants into Uganda to
continue with the numerous corporate
social responsibility (“CSR”) programmes
that we have initiated and pursued with
enthusiastic support from Ugandans
individually and from the Ugandan
Government.
As we prepare to dispose of our interests in
Uganda, which has been a core area of
focus for us, it seems appropriate to reflect
briefly on the evolution of Heritage. We
listed on the Toronto Stock Exchange at the
beginning of 1999 with a market
capitalisation of less than $15 million and
assets focused in Uganda and Congo.
Through our own initiatives and technical
expertise, combined with excellent strategic
guidance, Heritage has evolved into a
company with a market capitalisation at
year end of $2.0bn with an extensive
portfolio of core assets focused on Africa,
the Middle East and Russia.
Heritage was the pioneering company in the
Albert Basin. Entering Uganda in 1997,
Heritage was the first company to explore
for and operate Ugandan oil and gas
interests in almost 60 years. Our entry into
the region was exploration-led because we
believed, from the geology, that it had the
potential to be a significant oil basin. Our
first licence covered the original Block 3. We
were active on our licence for four years
before Energy Africa farmed into our
acreage. In 2004, part of Block 3 was
relinquished and Block 3A, which covered
most of the exploration acreage in the
original Block 3, was re-licenced along with
Block 1 at the northern end of the basin.
Over the last 13 years we have carried out
extensive work in the basin. Since 2006, we
have drilled six wells on our licences, all of
which have found hydrocarbons. The two
wells tested in our licence areas each
produced at rates in excess of 12,000 bopd.
In addition to new field discoveries, we
also established many other leads and
prospects in our licence areas which
have confirmed the Albert Basin to have
multi-billion barrel resource potential.
Our operations in Uganda have adhered
consistently to CSR policies which we are
now beginning to extend to our other core
area holdings as work commences in these
new areas. We expect to achieve significant
value accretion for our shareholders in a
work environment that benefits local
populations and establishes legacy assets
that sustain long-term benefits for the
countries in which we are working.
Operations
Uganda
In 2009, in Uganda, we continued building
on successes achieved in 2008. The Giraffe
discovery in Block 1, at the beginning of
2009, allowed us to exceed comfortably the
required commercial threshold for
development. This enabled us to progress
methodically with our work with the
Government of Uganda to plan for an early
phased development, based initially on our
Kingfisher discovery in Block 3A and
progressing to commercialisation of
the Albert Basin.
Kurdistan
Heritage commenced drilling the Miran
West-1 well in December 2008, less than
15 months after being awarded the licence,
demonstrating both the Company’s
operational efficiency and our commitment
to the region. Initial testing operations
concluded in May 2009. The Miran Field has
been estimated to have oil-in-place of
3.4 billion barrels. Further testing on the
Miran West-1 well indicated that it could
produce at between 8,000–10,000 bopd.
 Overview
Drilling operations,
Kurdistan

We announced in April 2010, that the Miran
West-2 appraisal well had intersected
significant hydrocarbon-bearing intervals
over approximately 1,800 metres within the
Cretaceous formations. The well is now
drilling down to the deeper Jurassic
and Triassic exploration targets with the
potential to contain substantial volumes
of additional hydrocarbons.
processes for reviewing Director
appointment and succession planning,
establishing a Reserves Committee and
establishing a CSR Committee.
Corporate Social Responsibility
We remain committed to adhering to our
CSR policies and recognise the importance
of engaging with local stakeholders at an
early stage. The framework of our CSR
Business Review
Corporate Governance
successful track record. Development of
our Company could not have been achieved
without the determination, commitment and
dedication of our management team and
our staff, together with contractors and
suppliers. The Board thanks them all for
their continued efforts and professionalism.

Combined Code of Corporate Governance
We recognise our responsibility to
shareholders for the Company’s standard
of governance and we also recognise the
importance of maintaining responsible
corporate governance practices. I am
pleased to advise our shareholders that
we have made further progress during the
year to advance our adherence to the
Combined Code on Corporate Governance
Financial Statements
policy has been refined through our
experiences in Uganda where we have
worked diligently with stakeholders to allay Michael J.Hibberd
potential concerns arising from our activities Chairman
and to address needs and requirements in
a way that establishes a respected local
reputation and identity for us. We believe
that our active, ongoing involvement in
community projects in Uganda and
Kurdistan is fundamental in developing

Heritage Oil Plc Annual Report & Accounts 2009

published in 2008 (the “Combined Code”).
In 2009, General Sir Michael Wilkes was
appointed Senior Independent Director to
comply with the Combined Code. His
chief responsibility is to maintain sufficient
contact with major shareholders to help
develop a balanced understanding of their
issues and concerns. In this role, General
Sir Michael Wilkes is available to
shareholders who have concerns
that have not been, or cannot be, resolved
through discussion with the Chairman,
Chief Executive Officer or Chief Financial
Officer or where such contact
is inappropriate.
Other significant developments during
2009 and early 2010 included establishing
a performance evaluation process for the
Board and Board committees and for the
Chairman, developing a formal framework
for remuneration policy across the
Company, confirming no annual bonuses
would be paid to the Non-Executive
and maintaining strong relationships within
these regions.
Outlook
Kurdistan remains a focus area for Heritage
this year. As we continue with drilling on the
Miran West structure and in the second half
of the year plan to start exploration drilling MARKET CAPitalisation
on the Miran East structure, we expect to AT YEAR END, $m
confirm the enormous potential of the Miran
Block. 2010 will also bring to the fore a new
set of projects and initiatives based on
2,025
seismic and drilling campaigns in Malta and
Pakistan scheduled for the second half of
the year.
752
13
The Board believes that Heritage, with its
technical and financial strengths, will
1999 2008 2009
continue to identify further attractive growth
opportunities. The portfolio of assets within
Heritage offers shareholders geographical
diversification combined with a mix of
CASH AT YEAR END, 2009
exploration, development and production.
This, together with a strong financial base,
positions Heritage perfectly to pursue

Directors, undertaking an independent
review of Executive Directors’
remuneration, developing the Company’s
processes for reviewing key risks, internal
controls and assessments, initiating
$208m
exciting opportunities.
Our management team has a track record
of creating value for shareholders and holds
a strong determination to continue that

09
 BUSINESS
REVIEW
12 Chief Executive’s Statement
14 Chief Executive’s Q&A
16 Strategy
17 Reserves and Resources
18 Operations Overview
20 Kurdistan
22 Malta
23 Pakistan
24 Democratic Republic of Congo
25 Tanzania
26 Mali
27 Russia
28 Uganda
30 Financial Review
34 Principal Risks
38 Corporate Social Responsibility

Kingfisher-2 well, Lake Albert, Uganda

10
Overview Business Review Corporate Governance Financial Statements
Heritage Oil Plc Annual Report & Accounts 2009

11
 Business Review
CHIEF EXECUTIVE’S
STATEMENT
We are demonstrating the success of our
strategy as a first-mover by the proposed
monetisaton of our Ugandan interests and
are considering many new opportunities
with the potential to generate value for our
shareholders.
After reaching five-year lows, equity markets
saw a recovery during 2009. Brent Oil prices
moved up from the low of $36.40 per barrel
in January 2009 to a high of $79.20 per
barrel in November 2009 and the outlook for
the oil and gas markets remains positive.
Leading figures around the world
acknowledge that demand for hydrocarbons
will continue to increase as both populations
and economies grow. Since much of the
Anthony Buckingham “easy oil” has already been discovered, it is
Chief Executive Officer frontier exploration that will be required to
satisfy this growth. These areas often come
with their challenges which we consider we
are well equipped to manage through our
2009 saw further experienced management and technical
significant operational teams and our proven operating capability.
success and corporate Uganda
developments in our core At the beginning of 2009, we announced
the successful Giraffe discovery in Block 1,
assets in Uganda and Uganda, adding to our previous discoveries in
Kurdistan propelling the block, Warthog and Buffalo. Pressure and
seismic data indicate that the Giraffe discovery
Heritage forward into a is structurally connected to the Buffalo Field,
new phase as we enter a creating a combined Buffalo-Giraffe Field
covering approximately 48 square kilometres
new decade. with an oil column of approximately
140 metres. This was a pivotal discovery that
confirmed the viability of the Albert Basin as a
commercial oil basin. The success of our
multi-well programme, which began in
October 2008, is evident with net contingent
resources that have been estimated at 250
million barrels.
In February 2009, we completed the drilling
of the successful Kingfisher-3A sidetrack well
which appraised the Kingfisher discovery in
Block 3A. This well intersected all three
Kingfisher reservoir intervals encountered in
the Kingfisher-1A and -2 wells. All three
Kingfisher wells have been suspended as
future producers.
12
Since discovering the Kingfisher Field in
2007, net contingent resources in Heritage
operated Blocks 1 and 3A have been
estimated at 355 million barrels with a value
of $1.126 billion, based on a discount rate
of 10%.
Kurdistan
Kurdistan remains a core area for Heritage.
Since signing the licence in October 2007, we
have shot seismic, drilled a discovery well on
the Miran West structure and are currently
drilling the Miran West-2 well. This is a huge
achievement demonstrating our commitment
to the region and confirming the high level of
operational expertise within Heritage.
The Miran West-1 exploration well
commenced drilling on 21 December 2008
and initial testing operations completed in
May 2009. A gross oil bearing column of
approximately 700 metres was discovered and
the oil in place for the field has been estimated
to be approximately 3.4 billion barrels with net
combined contingent and prospective
resources totalling approximately a billion
barrels. Excellent recoveries, of between
50–70%, are expected from the fractured
carbonate reservoirs, based on fracture
porosity alone. During testing operations,
concluded in August 2009, the Miran West-1
well flowed at a maximum rate of 3,640 bopd
from a single reservoir interval.
We announced in April 2010 that the Miran
West-2 appraisal well had intersected
hydrocarbon-bearing intervals over
approximately 1,800 metres within the
Cretaceous formations. Three zones,
determined from logging, within the
Cretaceous formations have been identified
for testing once drilling operations have
completed.
The well is being deepened to approximately
4,600 metres to explore further potential in the
underlying Jurassic and Triassic structures.
These exploration targets have the potential to
contain substantial volumes of additional
hydrocarbons. We are planning to acquire 3D
seismic over the Miran Block in the second

half of 2010 to enable further appraisal drilling
to encounter the fracture networks efficiently.
The Miran West-1 well has previously
demonstrated that where open fractures are
encountered in wells the reservoir will support
potential production rates of approximately
10,000 bopd.
Future plans for drilling of the Miran East-1
exploration well are progressing and we are
looking to contract a rig for later this year.
Russia
The Zapadno Chumpasskoye Field is located
in Western Siberia. Approval was received at
the end of 2009 for a Field Development Plan
to enable us to commence horizontal drilling
to improve the recovery efficiency and also to
enhance the economics of the field. The field
was shut in for most of the first quarter of
2009 following a temporary reduction in
domestic oil prices in Russia. After
production restarted, measures were
undertaken to increase output to the current
production rate of approximately 650 bopd.
Financial and Corporate
With the disposal of the Oman operations
in April 2009, oil production and revenue
is now generated from the Zapadno
Chumpasskoye Field in Russia. Heritage’s
net production decreased by 13% to an
average of 329 bopd during 2009, compared
to 2008, as a result of the field being shut in
during 2009.
During 2009, our liquidity was enhanced
through two initiatives. Firstly, in April 2009,
$28.4 million was realised through the sale of
Eagle Energy (Oman) Limited (“Eagle Energy”).
Secondly, in June 2009, 25.4 million new
Ordinary Shares were placed successfully at a
price of £5.20 per share for total gross
proceeds of $217 million.
In November 2009, we announced that a
Letter of Intent (“LOI”) had been signed with
ENI International B.V. (“Eni”) to sell our
Ugandan interests for up to $1.5 billion. In
December 2009 a Sale and Purchase
Agreement (the “SPA”) was executived with
Eni. Subsequently, Tullow Uganda Limited,
our partner in the blocks, exercised its right of
pre-emption on the same terms and
conditions as agreed with Eni. In April 2010,
we announced that we had received a letter
from the Ugandan Government stating that it
supports Heritage’s sale and transfer of its
Ugandan interests and that it will conclude its
review of the transaction within eight weeks.
Following this, Heritage expects to receive
formal consent and to close the transaction
shortly thereafter.
On completing the disposal we will have
operations in seven countries and some of
the disposal proceeds will be used to
accelerate exploration, appraisal and
development of these areas. Furthermore,
Heritage will have the financial flexibility to
participate in opportunities to generate
further value for shareholders.
Other 2010 Operations
Operations are planned to expand in Malta this
year with the acquisition of 1,000 kilometres
of seismic and the drilling of an exploration
well. Heritage has already identified a number
of large targets from over 3,500 kilometres of
seismic acquired when the Company was
awarded the Malta licences at the end of 2007.
In Pakistan, we are in the process of acquiring
infill seismic in the Zamzama North Block. The
current seismic database used to map the
Zamzama North Block comprises some 750
kilometres of fair to good quality, 2D seismic.
On the basis of this data we have mapped a
number of structural leads. An exploration well
is planned to be drilled in the second half of
this year following interpretation of the current
seismic programme.
Genel Enerji A.S.
In June 2009, Heritage announced that it had
entered into a non-binding Memorandum of
Understanding with Genel Enerji A.S. (“Genel”)
to acquire the entire share capital of Genel
Energy International Limited (“Genel Energy”).
In November 2009, after signing a LOI with
Eni for the sale of our Ugandan interests,
discussions with Genel were terminated
before the terms of a definitive agreement
had been settled.
Overview
Business Review
Operations at Miran West-1,
Kurdistan
Corporate Governance
Operating Capability
We are proud of both our environmental and
safety records. We have continued our goal
of pursuing operational excellence and have
achieved the challenging goals set for last
year. In addition, we have also maintained
an excellent track record of no significant
environmental issues. Last year’s lost time
incident frequency rate was well below
industry average and was achieved at a
Financial Statements
time when Heritage’s operational scope
increased significantly.
Outlook
2010 is set to be another significant year
for Heritage. We have never been stronger
financially and we believe that we have a
very valuable and prospective portfolio
which will see high impact drilling in
Kurdistan, Malta and Pakistan. Capital
Heritage Oil Plc Annual Report & Accounts 2009
expenditures in 2010 are expected to be
approximately $155 million, of which
approximately $100 million will be allocated
to exploration and appraisal activities and
approximately $55 million to production and
development activities.
In summary, 2010 promises to be a year
of significant change for Heritage as we
increase production, continue with high
impact exploration and look for further
exciting opportunities for our portfolio.
As always, I am very grateful to our talented
management team and employees and
supportive Board for their dedication and
contribution to the remarkable progression
made by Heritage this past year.
Finally, to our shareholders, thank you for your
continued support and interest in Heritage.
Anthony Buckingham
Chief Executive Officer
13
 Business Review

CHIEF EXECUTIVE’S
Q&A

Anthony Buckingham, CEO, answers some frequently
asked questions about the progress and future of
Heritage.
What, for you, were the
highlights of 2009?
A. 2009 was a remarkable year for Heritage
and marked another milestone in our
development. Operational success continued
in Uganda where we concluded our
successful drilling campaigns in both blocks
and in Kurdistan where we announced the
significant Miran West-1 discovery. From a
corporate perspective, we are in the process
of disposing of our Ugandan interests and
we raised $217 million through a successful
offering of Ordinary Shares last summer. The
proposed sale of our Ugandan interests is a
demonstration of our ability to seek an early
opportunity, based on our strong technical
capability and network of relationships,
and to successfully operate, explore and
monetise. Delivering on our promises in this
respect has been a wonderful achievement.

What does 2010 hold for

Heritage?
A. 2010 will continue to be a very
interesting year for Heritage as we have
a diversified drilling programme and the
financial flexibility to accelerate programme
execution in several of our core areas. In the
near-term the main priorities for the Group
are to continue to drive our current portfolio
forward with drilling in Kurdistan, Malta and
Pakistan. 2010 will be full of many exciting
opportunities for our Company.

14
 Overview
Drilling operations at the
Kingfisher-2 well, Uganda

What are the key components
of your strategy?
A. We aim to continue to generate growth
in shareholder value by focusing on high
impact international plays with the potential
to discover significant hydrocarbon
reserves. We look to acquire and invest
in exploration and early development
What is the Company’s
approach to CSR and how has
this developed?
A. Heritage has always recognised that our
licence to operate is closely linked to our
adoption of CSR concepts. A key element
of this is our approach to the conduct of
our business matters. It is an important
Business Review
Corporate Governance
How does the Company engage
with shareholders?
A. The Chairman, with input from the
Senior Independent Director, is responsible
for ensuring effective communication of
shareholders’ views to the Board as a whole
and will update the Board accordingly.
We employ an investor relations specialist

opportunities throughout the world, with
a particular emphasis on our core areas
where we have a strong technical
understanding. By entering into regions
early we seek to obtain a large equity
interest and operatorship.
How would you describe the
culture at Heritage?
management priority to ensure that our
relationships in the countries in which we
operate are conducted in a transparent and
responsible manner. Our systems in this
area are reviewed regularly and will be an
important responsibility of our new CSR
committee.
We work closely with a variety of local
stakeholders in the areas where we operate.
Financial Statements
and an investor relations programme is in
place for Executive Directors and senior
management to meet with institutional
investors in European and North American
cities. The website is updated continually
to keep investors informed of our activities.
Do you have a message for
shareholders?

Heritage Oil Plc Annual Report & Accounts 2009

A. We have an excellent track record of
attracting and retaining talented personnel.
All staff are encouraged to participate in the
development of the Company. Heritage is
an ambitious company that is moving fast.
We attract individuals, therefore, with the
same ambitions who want to seek out high
impact, value creating opportunities.
We aim to ensure that the economic value
generated by our operations is applied to
A. The Company has an excellent track
record built over many years, one that we
address important aspects of local need.
continue to live up to. Since we listed in
We have worked closely with the local
London in March 2008, we have enjoyed
authorities in Uganda to develop important
incredible success. We have delivered on
health, educational and economic
our promise to generate shareholder value,
infrastructure projects. For example, we
expand analyst coverage and to increase
have built a school and a potable water
liquidity and we are firm in the knowledge
project for the local villagers. We aim to
that we have the right people and the right
apply our experience in Uganda to the other
assets to allow us to continue to deliver high
parts of the world in which the company
impact results for our shareholders.
operates. This approach is already being
reflected in a number of our activities in
Kurdistan.

What distinguishes Heritage

from its peers?
A. The Company has many competitive
strengths including:
>> a strong balance sheet;
>> a proven management team;
>> strong and established technical
expertise;
>> a geographically diversified portfolio of
high impact exploration plays; and
>> well-established connections in all areas
in which we operate.

15
 Business Review
STRATEGY
01
First Mover Advantage
Achievements
>> Pioneering company in the Albert Basin,
Uganda, entering in 1997
>> One of the first companies to enter
Kurdistan in 2004 and one of the first to
be awarded a licence
>> Early entry into areas such as the
Democratic Republic of Congo, Malta
and Mali
>> Successful monetisation of holdings in
the Congo and Oman
>> Proposed sale of Ugandan interests
Objectives 2010
>> Complete the sale of our Ugandan
interests
>> Identify significant hydrocarbon
accumulations in our core areas
>> Utilise our strong balance sheet to
secure interests in new areas at the
ground floor level
16
02
Focus on Technical Expertise Strong Management
Experience
Achievements
>> Discovered the M’Boundi field in the
Congo in 2001
>> Proved up sufficient resources in the
Albert Basin to justify commercial
development and unlocked a multi-
billion barrel basin
>> Discovered the Miran West Field with
resources valued at $4.4 billion
Objectives 2010
>> Extend that success with high impact
drilling scheduled in 2010 for Kurdistan,
Malta and Pakistan
03
Achievements
>> Management background grounded in
many aspects of the oil industry has
enabled Heritage to create value for
shareholders
>> Extensive network of well-established
contacts with Governments and local
businesses
Objectives 2010
>> Continue to draw upon the wealth of
experience in Heritage
>> Examine opportunities to generate
further value for shareholders
 Overview
Business Review

RESERVES AND
RESOURCES

Business Review
Corporate Governance
During the year an independent Mineral Expert’s Report including assets in
Kurdistan and Russia was prepared by RPS Energy (“RPS”), an independent
consultancy specialising in petroleum reservoir evaluation and economic analysis.
The range of reserves and resources is as at 30 June 2009 and is based on the data
and information available up until that date.

The table below shows Heritage’s working interest reserves following the proposed

Financial Statements
sale of the Ugandan interests.

Proved & Probable Contingent Prospective Total

Proved & Probable & Possible Resources2 Resources3 Reserves and
Reserves Additional Mean Mean Resources4,5
mmbbls mmbbls mmbbls mmbbls mmbbls

Kurdistan1 – – 53 850 1,014

Heritage Oil Plc Annual Report & Accounts 2009

Russia 61 103 – – 164

1 In the event of discovery and development, the Group’s net entitlement resources will be a function of the contract terms and will be less than the net working interest resources.
The Kurdistan Regional Government (the “KRG”) has the right to back-in for up to 25% which could, if fully exercised, reduce the Group’s working interest to 56.25%.
2 Stochastic consolidation of contingent resources with Geological Probability of Success (“GPoS”) of 100%.
3 Stochastic consolidation of prospective resources with appropriate GPoS for each prospect.
4 Stochastic consolidation of contingent resources and risked prospective resources for Kurdistan.
5 This information is not covered by the audit opinion of the independent registered public accounting firm that has audited and reported on the Consolidated Financial
Statements.

17
 Business Review

OPERATIONS
REVIEW
Heritage’s success in monetising assets stems from seeing
an opportunity at an early stage and drawing on its
knowledge and skills – both technical and managerial.
The Company looked favourably at the balance of risk and
reward in Uganda in 1997 and was the first company to
explore for and operate Ugandan oil and gas interests in
almost sixty years. After establishing the potential for oil,
the Company had to establish a work programme and
deliver results.

Why did Heritage consider Uganda to
be a potential oil basin?
Several geological elements are necessary
for oil and gas to accumulate in sufficient
quantities to justify commercial production.
These elements include a source rock to
generate the oil (or gas), a porous reservoir
rock to store the oil in and a trap to stop it
leaking away.
The Heritage technical team were first
attracted to the Albert Basin because
surface geology maps indicated a large
sedimentary basin with numerous oil seeps
around the margin of the basin. Geologists
determined that, over a period of time, the
level of Lake Albert varied and developed a
sequence of sand and shale. The source
rock, shale, is where the hydrocarbons
actually form and the reservoir rock, the
sand, is where the hydrocarbons are held.
Regional satellite data was suggestive of a
strike-slip origin to the basin, thereby
generating the traps. Analogous rift basins in
Africa were reviewed because they were
considered to be similar.
How did the work programme develop?
Seismic data is used to probe the structure
of the subsurface. This is done by generating
sound waves at the surface which are
reflected back from the different rock layers
in the sub-surface and are detected using
geophones. This data is then converted into
seismic lines which will be interpreted by
geophysicists.
Early seismic surveys confirmed at least five
kilometres of sediment in the basin and a
number of drillable structures. Subsequent
regional seismic surveys allowed detailed
mapping of the Ugandan side of the basin
confirming yet more drillable structures
amongst which Kingfisher was evidently
one of the largest structures in the Basin.
In 2008, the large Buffalo-Giraffe Field
was defined.
What are the results?
Heritage went to Uganda because of the
potential for exploration elephants which
could transform the Company and the
results have been very successful. In Block
3A and Block 1 Heritage has drilled six wells
and all have encountered hydrocarbons.
Kingfisher, in Block 3A, was the first
discovery in 2007, where three wells were
drilled and two tested at over 12,000 bopd.
A five month drilling programme in Block 1
resulted in another three discoveries and
opened up a new play type in the northern
part of the Basin. In 2009, the Buffalo-Giraffe
Field was discovered which management
considers to be the largest onshore oil field
to be discovered in Sub-Saharan Africa for
more than two decades.

18
 Overview
Business Review
Corporate Governance
Financial Statements
Heritage Oil Plc Annual Report & Accounts 2009

100% success rate
100% success rate $1.5 billion
Six wells drilled in Heritage operated
Blocks 3A and 1
Kingfisher was the first discovery in Block 3A
where two wells tested at over 12,000 bopd
and Kingfisher 3 increased the areal extent of
the field. Warthog was the first success in the
Block 1 drilling campaign that began in 2008
followed by the Buffalo-Giraffe discovery.
Proposed Disposal of
Ugandan Interests
Consideration of up to
RPS estimated the Ugandan assets to have:
• mean working interest share of risked
resources of 543 million barrels of oil
equivalent
• contingent resources, discounted at 10%,
with a mean expected value of $1.1 billion
• risked prospective resources with a mean
expected value, discounted at 10%, of
$485 million

19
 Business Review
Exploration
KURDISTAN
In October 2007, the Group signed a PSC
Heritage was one of the with the Kurdistan Regional Government
first companies to be (“KRG”) and was appointed operator of the
Miran Block in the southern part of Kurdistan.
awarded a Production The licence area covers approximately 1,015
Sharing Contract (“PSC”) square kilometres. The Miran structure lies
approximately 65 kilometres from the giant
in Kurdistan. Kurdistan is Kirkuk oilfield, which has remaining reserves
an autonomous region in thought to be in excess of 10 billion barrels,
and 30 kilometres from the Taq Taq Field,
federal Iraq bordering which is on production. In April 2009, Heritage
Syria, Iran and Turkey. announced that Genel Energy had been
nominated as the third party participant in
the Miran Block. This right of appointing
an additional party to the PSC is typically
included as standard in contracts
in Kurdistan.
Area Date Heritage
Licence (sq km) Awarded Equity Partners Operator
Miran 1,015 Oct 2007 75%1 Genel Energy Heritage
1 Back-in rights exist which if exercised fully could result in a minimum holding of 56.25%
20
As an early entrant in the Kurdistan region,
the Group is strongly positioned to benefit
from development of this significant
hydrocarbon-prone region especially as the
already stable security situation continues
to improve.
It is generally acknowledged that there is
huge potential in the Kurdistan region for as
yet undiscovered hydrocarbons, estimated
by the US Geological Survey at
approximately 40 billion barrels of oil and 60
trillion cubic feet of gas. Additionally, it has
been reported that 80% of all wells drilled in
Iraq have encountered hydrocarbons.
The Miran Block contains two large
structures, Miran West and Miran East,
which have been mapped from the
332 kilometres of excellent quality 2D
seismic data acquired by Heritage in the
second quarter of 2008. The Miran West
structure is believed to be one of the larger
structures in Kurdistan, with an estimated
areal extent of approximately 200 square
kilometres. Miran East has an estimated
areal extent of 130 square kilometres.
Upon completion of seismic interpretation,
the Company decided to accelerate the
Miran work programme. Consequently,
drilling commenced on the Miran West-1
well in December 2008.
In March 2009, drilling of the Miran West-1
well was completed having reached a
total depth of 2,935 metres. The well
encountered oil shows over a 1,100 metre
interval including the three principal proven
reservoir formations in the region.
The initial test programme on the Miran
West-1 well was completed in May 2009.
Miran West-1 drilling operations were
designed to cope with the potential for high
reservoir pressures and this resulted in the
loss of drilling fluid and lost circulation
material in the highly permeable fractured
reservoirs. The large volumes of lost fluids
severely constrained initial testing operations.
The second phase of testing on the Miran

West-1 discovery was completed in August
2009 with a flow rate of 3,640 bopd recorded
from a single upper reservoir interval. The well
was suspended as a future producer.
The Miran West-2 appraisal well, located
approximately four kilometres north-west
of the Miran West-1 discovery well,
commenced drilling in November 2009.
Overview
Business Review
Corporate Governance
RPS Energy Report A summary of RPS’ estimated expected
A summary of RPS’ estimated net working value of Heritage’s assets in Kurdistan,
interest contingent and prospective resources discounted at 10%, as of 30 June 2009, is
for Heritage as of 30 June 2009 is set set out below:
out below:
Net Present Value
($ million in money of the day)
Heritage Working Interest Share1
Miran West Miran East Miran Total
Low Best High Mean
Expected Expected Expected
mmboe (P90) (P50) (P10)
Value Value Value
Contingent (Mean) (Mean) (Mean)

In April 2010 it was announced that the
Miran West-2 appraisal well had intersected
significant hydrocarbon-bearing intervals
over approximately 1,800 metres within
the Cretaceous formations. Three zones,
determined from logging within the
Cretaceous formations have been identified
for testing once drilling operations have
been completed.
Resources2 25 53 92 53
Prospective
Resources3 87 849 2,248 850
Consolidated
Total4 128 902 2,306 1,014
1 In the event of discovery and development, Heritage’s
net entitlement resources will be a function of the
contract terms and will be less than the net working
interest resources. The KRG has the right to back-in
for up to 25% which could, if fully exercised, reduce
Financial Statements
Contingent
Resources 275 0 275
Prospective
Resources 3,645 479 4,125
Total 3,920 479 4,400
Notes:
The total expected value is the probability weighted
mean of the value of all possible outcomes of the
contingent resources plus the drilling of the prospective

Heritage Oil Plc Annual Report & Accounts 2009

The well is currently being deepened to
approximately 4,600 metres in order to
explore further potential in the underlying
Jurassic and Triassic structures. These
targets have been identified from additional
seismic data acquired in January 2010, after
the Miran West-2 well had commenced
drilling. These exploration targets have the
potential to contain substantial volumes of
additional hydrocarbons.
Heritage’s working interest to 56.25%.
2 Stochastic consolidation of contingent resources with
GPoS of 100%.
3 Stochastic consolidation of prospective resources
with appropriate GPoS for each prospect.
4 Stochastic consolidation of contingent resources and
risked prospective resources.
TURKEY
Tawke
resources. This is also known as the Expected Mean
Value (“EMV”).
The expected value of the contingent resources
represents the probability weighted mean value of the
resource volume range. This is sometimes known as the
Expected Net Present Value (“ENPV”).

Heritage is planning to acquire 3D seismic SYRIA Shaikan

data over the Miran Block to enable further
appraisal drilling to encounter the fracture IRAN

networks more efficiently. The Miran West-1 Mosul

well has previously demonstrated that where Erbil
open fractures are encountered in wells, the Taq Taq

reservoir will support potential production

rates of approximately 10,000 bopd. Miran

Chemchemal Suleimaniah
Future plans for the drilling of the Miran
IRAQ
East-1 exploration well are progressing and Kirkuk
the Company is looking to contract a rig for
later this year.

Heritage Licence
Oil Fields
Gas Fields

Gas Condensate Field

Prospect

21
 Business Review
Exploration

MALTA

In December 2007, the

SICILY
Group entered into a Siracusa

PSC with the Maltese Tunis

Government for a 100%
interest in Areas 2 and 7
in the south-eastern
offshore region of Malta. MALTA

The licences cover almost 18,000 square Area 2

kilometres and are situated approximately 80
TUNISIA Medina Bank-1
kilometres and 140 kilometres, for Area 2 and
Area 7 respectively, from the south-eastern Stax
Maltese coast in water depths of
approximately 300 metres. The two Areas are Area 7
close to a number of producing fields
offshore Libya and Tunisia.

The licences are under-explored with only

one well previously drilled in Area 2; the Heritage Licence
Medina Bank-1 well in 1980. The well was Exploration Well
drilled to a depth of 1,225 metres but failed Oil and Gas Shows
Oil Field
to reach the target horizons, estimated to Gas Field
Tarãbulus (Tripoli)
be between 1,500 and 4,500 metres. The Condensate
LIBYA
well did, however, encounter gas shows in Maltese Licences

porous, fractured carbonates.

Current seismic interpretation is based on

an extensive data set of almost 3,500 Area Date Heritage
kilometres of 2D seismic acquired in 2000. Licence (sq km) Awarded Equity
This data indicates the presence of a variety Area 2 9,190 December 2007 100%
of potential prospects. Primary targets are Area 7 8,778 December 2007 100%
Miocene, Lower Eocene and Cretaceous
mounded carbonates that are recognised
as major hydrocarbon producing zones in
the central part of the Mediterranean. In
addition, the Company has recognised the
presence of a north-south trending shelf
margin on the eastern margin of the blocks
and a number of attractive reef prospects
have been mapped.

Heritage will acquire a further 1,000 kilometres

of 2D seismic this year and a high impact
exploration well is planned for the second
half of 2010 targeting approximately 500
mmboe.

22
 Overview
PAKISTAN

Business Review
Corporate Governance
The Sanjawi Block
(number 3068-2) in
Zone II (Baluchistan) was
awarded in November
AFGHANISTAN Islamabad
2007. Heritage has a 54% Peshawar

interest and is operator.

Financial Statements
This onshore exploration licence covers a PAKISTAN
gross area of 2,258 square kilometres. The San Ragha-1 Lahore
block is considered highly prospective due to
Quetta Sanjawi
the recent oil discovery to the west of the
licence and a number of gas fields to the
south-east of the licence as well as the
presence of oil seeps. The block is
New Delhi
dominated by a series of broad east-west IRAN
trending surface features including the
Dabbar and Warkan Shah anticlines. These Zamzama
North

Heritage Oil Plc Annual Report & Accounts 2009

are large structures, the Dabbar anticline INDIA
being some 300 square kilometres in area.

In December 2008, Heritage obtained a 48% Karachi

interest in the Zamzama North Block (number
Heritage Licence
2667-8) and was appointed operator. The
Oil Field
Zamzama North Block is located in the south
Gas Field
of Pakistan in the western part of the Sindh
Condensate
Province approximately 200 kilometres
north-west of Hyderabad and comprises
an area of 1,229 square kilometres.

Any discovered hydrocarbons could be

readily connected to the existing infrastructure
as one of the main pipelines runs through
the block. To the south of, and adjacent to
Zamzama North, is the Zamzama Gas Field,
a major Upper Cretaceous gas accumulation.

The current seismic database used to map

the Zamzama North Block comprises some
750 kilometres of fair to good quality, 2D
seismic. On the basis of this data, Heritage
has mapped a number of structural leads.
Further seismic is being acquired with a
well on the Zamzama North Block planned
for the second half of 2010.
Area Date Heritage
Licence (sq km) Awarded Equity Partners Operator
Sanjawi Permit 2,258 November 54% Hycarbex Heritage
2007 American Energy
Sprint Energy
Trakker Energy
Zamzama North 1,229 December 48% Hycarbex Heritage
2008 American Energy
Sprint Energy
Trakker Energy

23
 Business Review
Exploration

DEMOCRATIC
REPUBLIC OF CONGO

Heritage holds a 39.5%

non-operating interest in Heritage Licence (DRC)
Heritage Licence (Uganda)
two blocks in the Albert Exploration and appraisal
well
Basin on the DRC side of
the border – Blocks I and BLOCK 1
Heritage
II. These blocks, which
include the entire DRC Buffalo-1

side of Lake Albert, cover Democratic Republic of Congo

Giraffe-1
Warthog-1

more than 6,000 square

kilometres and are BLOCK I

adjacent to Block 3A and

Block 2 in Uganda.
The overall broad symmetry of the lake BLOCK II
would indicate that the DRC side of the
basin should potentially be as prospective Kingfisher-1
as the Ugandan side. There are oil seeps Kingfisher-2
Kingfisher-3
around the basin indicating that oil has
migrated throughout the basin in both the BLOCK 3A Heritage
DRC and Uganda.

In 2006 the Group, with its partners in these Area Date Heritage
licences, executed a Production Sharing Licence (sq km) Awarded Equity Partners
Agreement (“PSA”) with the Government of Block I 3,825 Signed July 2006 39.5% Tullow Oil
the DRC. The initial exploration term is five (awaiting Presidential Decree) COHYDRO
years, during which seismic data will be
Block II 2,634 Signed July 2006 39.5% Tullow Oil
acquired and exploration wells drilled.
(awaiting Presidential Decree) COHYDRO
However, the programme only commences
following receipt of a Presidential Decree,
the timing of which is still uncertain. The
validity of the licences has been disputed,
however, Heritage is working closely with
the operator and Government of the DRC
and continues to be confident in the title
granted through the PSA with the
Government of the DRC.

24

TANZANIA
In April 2008, Heritage
entered into farm-in
agreements on two
licences in eastern
Tanzania, comprising
four areas (Latham,
Kimbiji, Kisangire and
Lukuliro licence areas).
The four areas have a total area of
approximately 25,000 square kilometres.
The Kimbiji and Latham licence areas cover
approximately 9,300 square kilometres and
are held under one PSA, whilst the Kisangire
and Lukuliro licence areas cover
approximately 16,100 square kilometres and
are held under a second PSA.
The licence areas are close to the
Mkuranga-1 gas discovery which was drilled
in 2007 and reportedly flowed gas at a rate
of 20 mmcf/d from an Upper Cretaceous
reservoir. The large Songo Songo producing
gas field is located to the south-east of the
licence areas. The Wingayongo oil seep is
present within the Kisangire licence area,
indicating the presence in the region of a
working hydrocarbon system that is
generating both oil and gas. The recent Mafia
Deep discovery has an estimated
recoverable gas of 4 TCF and is close to the
Latham licence area.
Latham and Kimbiji
The Latham and Kimbiji licence areas,
encompasses onshore (1,881 square
kilometres), near shore (2,981 square
kilometres) and deep water (4,491 square
kilometres) areas. The PSA was awarded to
Petrodel Resources Limited (“Petrodel”) by
the Tanzanian Government in September
2006. In October 2009, the partnership was
granted 12 month extensions on the
exploration periods for both the Kimbiji and
Latham licence areas
Overview
Business Review
Corporate Governance
Under the terms of the farm-in agreement
with Petrodel, the Group has the right to earn
Under the terms of the farm-in agreement
with Dominion, the Group has the right to
a 70% working interest in the Kimbiji licence earn a working interest of 55%, initially, in
area, and a 29.9% working interest in the both the Kisangire and Lukuliro licence
Latham licence area, by funding all seismic areas. The Group also has an option to earn
costs of the required work programmes on an additional working interest of 15% thereby
both blocks. Heritage is acting initially as increasing its participating interest to 70%.
work programme operator, being responsible
for all technical and operational aspects of The acquisition of 207 kilometres of 2D
the work programmes, and will be appointed seismic commenced in the onshore part of
Financial Statements
operator of the licence upon drilling the the Kimbiji licence area in September 2008
second exploration well in the Kimbiji Area. and was followed by the acquisition of
198 kilometres of 2D seismic in the Kisangire
Kisangire and Lukuliro licence area. The data is currently being
The PSA was originally awarded to Dominion analysed and will be used as a basis for a
Oil & Gas Limited (“Dominion”) in May 2005. drilling programme, which is expected to
An extension to the initial exploration period commence in 2011.
for the Kisangire and Lukuliro licence areas
for 18 months was granted in 2009.
Heritage Oil Plc Annual Report & Accounts 2009
Heritage Licence
Gas shows
Oil andGas shows
Oil Fields
Gas Fields
Kimbiji
TANZANIA
Dar es Salaam
Mkuranga-1
Latham
Kisangire-1
Wingayongo
oil seep
Mafia Deep-1
Lukuliro Kisangire
Area Date Heritage
Licence (sq km) Awarded Equity Partners Operator
Kisangire 7,280 May 2005 55% Dominion/Maurel & Prom1 Heritage
Lukuliro 8,829 May 2005 55% Dominion/Maurel & Prom1 Heritage
Kimbiji 4,298 September 2006 70% Petrodel Heritage2
Latham 5,056 September 2006 29.9% Petrodel Heritage2
1 Announced on 15 February 2010, yet to be finalised.
2 Operator of the work programme.
25
 Business Review
Exploration

MALI

Heritage announced in A two year extension to the licences was

March 2008 that the
Government of Mali had
approved Heritage’s farm-
in on two exploration
licences.
The two licences have a gross area of over
72,000 square kilometres in the Gao
Graben. Heritage has been appointed
operator with the right to earn a 75%
awarded in January 2009 allowing the
Group a better opportunity to refine the
work programme. Over the next 12 months
the Group will proceed with a programme of
seismic acquisition, of approximately 1,000
kilometres, and reprocessing to support
selection of initial drilling locations.
Heritage Licence

working interest in each of Blocks 7 and 11 Exploration Well

ALGERIA
by financing 100% of the minimum work Oil and Gas Shows
programme of seismic acquisition and the MALI
drilling of one exploration well. The Group’s
partner is Mali Oil Developments SARL, a
wholly owned subsidiary of Centric Energy
Corporation (“Centric Energy”).

The two licences are located in the eastern

BLOCK 7
part of the country that includes the Gao
Graben; a Mesozoic basin that
management considers geologically similar Kidal

to other Mesozoic interior-rift basins within

MAURITANIA
North Africa, such as the Muglad Basin of
Sudan and the Doba Basin of Chad. The
BLOCK 11
Gao Graben has been delineated by various Timbuktu Tin Bergoui-1
surveys conducted since the early 1970’s,
Gao
including over 2,000 kilometres of 2D
seismic and a comprehensive gravity and
magnetic survey. This data shows the
presence of tilted fault-blocks and indicates Mopti
NIGERIA
the possible presence of up to 4,000 metres
of sediments above basement. Segou BURKINO FASO
Niamey
Koulikoro
Previous drilling in the Gao Graben has
encountered oil and gas shows. The Tin Bamako
Bergoui water well, which lies approximately Ouagadougou

30 kilometres to the west of Block 11, Sikasso

was drilled to a depth of 350 metres and
encountered oil and gas shows in a number
of horizons, indicating the potential for a
working hydrocarbon system.

Area Date Heritage

Licence (sq km) Awarded Equity Partner Operator

Block 7 39,804 July 2006 75% Centric Energy Heritage

Block 11 32,810 June 2005 75% Centric Energy Heritage

26

Business Review
Production
RUSSIA
Since 2005, the Group has
held a 95% equity interest
in ChumpassNefteDobycha
Limited, a Russian
company whose sole
asset is the Zapadno
Chumpasskoye licence.
This licence, which expires in 2024, is in the
hydrocarbon-rich West Siberian province of
Khanty-Mansiysk, approximately 100
kilometres from the city of Nizhnevartovsk and
in the area of the region’s prolific Samotlor oil
field, which makes it accessible to existing
development and production infrastructure
and facilities. The licence covers an area of
about 200 square kilometres and contains the
Zapadno Chumpasskoye Field, discovered in
1997. A total of nine wells were drilled on the
licence prior to 2005, and the Group has
drilled a further three wells.
RPS, in an independent evaluation, estimated
that Zapadno Chumpasskoye contains
proved and probable reserves of 60.6 million
barrels of oil net to the Group as at 30 June
2009. Net Present Value, discounted at 10%,
is $298 million net to the Group.
Since 2006, the Group has acquired 2D
seismic data covering an area of 200
kilometres, constructed pilot production
facilities, drilled three wells and re-entered
existing well #226. Production facilities were
commissioned and production commenced in
May 2007. In 2009, an electric submersible
pump (“ESP”) was installed on well #226 to
arrest the natural well production decline. Also,
in 2009, a water shut-off was completed on
well P4 which was concurrent with the
installation of an ESP. The well is continuing to
clean up and the oil rate is increasing.
At the end of 2009 the Zapadno
Chumpasskoye Field Development Project
was approved, enabling horizontal drilling
which should improve the recovery
efficiency and improve economics.
Overview
Business Review
Corporate Governance
The plan calls for thirteen wells including six
horizontal wells. One of these horizontal
domestic oil prices in Russia. The current
production rate is 650 bopd and is expected
wells will be drilled in the second half of to increase further over the year as a result
2010. Production and testing results among
the different type of wells will be compared
of drilling.
to evaluate optimal effectiveness for During March 2010, Heritage re-entered a
suspended Russian oil well, P14, to
improved productivity and drainage. Current
production facilities will be expanded to investigate possible Cretaceous oil
handle increased volumes of fluid from the accumulations within the licence area.
new wells and permanent water injection Cretaceous production is known in the
Financial Statements
facilities will be added. adjacent licence to the east.
The crude is light, sweet, 42o API crude Independent Reserves at the Zapadno
oil, with moderate gas-to-oil ratios. In 2009, Chumpasskoye
production averaged 329 bopd, a decrease of A summary of RPS’ estimated net working
approximately 13% from 2008 levels due to interest reserves and their net present value of
the field being shut in for most of the first Heritage’s assets in Russia, based on forecast
quarter as a result of temporary lower prices and costs, discounted at 10%, as of
30 June 2009, is detailed below.
Heritage Oil Plc Annual Report & Accounts 2009
WESTERN SIBERIA
Zapadno
Chumpasskoye
licence
4
226
3
2
P14
Heritage Licence
Oil pipeline
Gas pipeline
Fields
Exploration and
Appraisal Well
Net Working and
Entitlement Reserves Net Present Value
mmbbls ($ million in money of the day)
Proved 23.4 60
Probable Additional 37.2 238
Total Proved + Probable 60.6 298
Total Proved + Probable + Possible 164.0 935
27
 Business Review
Exploration
UGANDA
In 1997, Heritage became
the first oil and gas
company in almost
60 years to undertake
exploration in Uganda
after being awarded a
licence in the Albert Basin
of western Uganda.
28
In 2001, the Group farmed out 50% of the
licence to Energy Africa, which was
subsequently acquired by Tullow Oil plc
(“Tullow”). 29 wells have been drilled in the
Albert Basin since the beginning of 2006
with 28 finding hydrocarbons and three of
the wells testing at over 12,000 bopd.
Blocks 1 and 3A are located in the Albert
Basin which straddles the border with the
DRC in the western arm of the East African
Rift Valley. Approximately 80% of Block 3A
is covered by the south-eastern part of Lake
Albert and the remainder of the block
comprises the Semliki flats to the south of
the lake.
The Mineral Expert’s Report, prepared by
RPS and included in the circular issued on
21 December 2009, estimated Heritage’s
mean working interest share of contingent
resources in Uganda of 355 mmbbls was
valued at $1.126 billion, based on a discount
rate of 10%.
Block 3A
The original Block 3 licence was awarded
in 1997. Most of the exploration acreage
which previously constituted Block 3 was
reconfigured and re-licenced as Block 3A
in 2004 for a term of six years. Block 3A is
located in the southern portion of the Albert
Basin and covers an area of 2,024 square
kilometres. All three wells drilled since 2006
on the Kingfisher field have been successful
and found hydrocarbons. Energy Africa
(now owned by Tullow) farmed-in to the
licence in August 2001, acquiring 50% in
return for funding a seismic survey and
partly funding the costs of a well.
The discovered oil in Block 3A is good
quality, light (between 30o and 32o API) and
sweet with a low gas-oil ratio and some
associated wax. The reservoirs are highly
permeable sandstones with an estimated
permeability of up to 3,000 milliDarcies. In
February 2009, the successful Kingfisher-
3A sidetrack completed drilling. The same
three sandstone reservoir intervals were
encountered in all of the Kingfisher wells
highlighting the continuity and the lateral
extent of the reservoirs. All three Kingfisher
wells drilled to date have been suspended
as future producers. A number of other
prospects, including the large Pelican and
Crane prospects, have been mapped in the
lake from various seismic surveys acquired
by Heritage.
 Overview
SUDAN
BLOCK 1
Heritage

Heritage Licence (Uganda)

Buffalo Buffalo East
Heritage Licence (DRC)
Buffalo-1
Aru Giraffe-1

Hartebeest Paraa Oil Seep B

Paraa Oil Seep A
Giraffe
BLOCK 1 Crocodile
Warthog-1
Warthog Kob Leopard

Business Review
DRC
Lake
Albert

UGANDA Oil Field

Prospect
Pelican
BLOCK 3A Prospect

Corporate Governance
Heron
Prospect

Crane Kingfisher-2
Kampala Prospect Kingfisher-1
BLOCK 3A Kingfisher-3

UGANDA
Lake
Edward Rwenzori
Masaka Mountains

Lake Victoria

Financial Statements
0 100 200 300 400 500 Miles

0 100 200 300 400 500 600 700 Kilometres

Block 1 Potential Development In April 2010, Heritage announced that it

Heritage Oil Plc Annual Report & Accounts 2009

Block 1 is located at the northern end of
Lake Albert, and encompasses an area of
3,659 square kilometres. A seismic survey
comprising approximately 670 kilometres of
2D data was completed on Block 1 in
February 2008 and identified many
encouraging direct hydrocarbon indicators.
A successful drilling campaign which began
in 2008 discovered the Warthog and
Buffalo-Giraffe Fields. The Buffalo-Giraffe
Field covers approximately 48 square
kilometres and has an oil column of
approximately 140 metres.
All wells drilled in Block 1 are relatively
shallow with total depths of between 600
and 920 metres. Downhole pressure testing
and sampling and the recovery of oil to
surface has confirmed the presence of
moveable oil in the Block 1 discoveries. Log
interpretation and core analysis has
confirmed excellent reservoir quality with
porosities of up to 35%. All three wells
drilled to date in Block 1 have been
suspended as future producers.
Development studies have been undertaken had received a letter from the Ugandan
to optimise and fast-track the development Government stating that it supports
of the basin. Options include local use, Heritage’s sale and transfer of the Disposed
powerstations and refinery schemes, use of Assets and that it will conclude its review of
the existing rail infrastructure in Kenya or the transaction within eight weeks.
Tanzania or the building of an export Following this, Heritage expects to receive
pipeline to the east coast of Africa for crude formal consent and to close the transaction
oil export. shortly thereafter.
Proposed Disposal of Ugandan Interests
On 18 December 2009, Heritage
announced that the Company, and its
subsidiary Heritage Oil & Gas Limited, had
entered into a SPA, with Eni for the sale of
its 50% interests in Blocks 1 and 3A in
Uganda (“the Disposed Assets”). On 17
January 2010, Tullow Uganda Limited
exercised its right to pre-empt the sale of
the Disposed Assets to Eni on the same
terms and conditions as agreed in the SPA
entered into between Heritage and Eni. The
transaction was overwhelmingly approved
by shareholders at the General Meeting on
25 January 2010.

29
 Business Review
FINANCIAL
REVIEW
The Company has changed its accounting
policy in relation to the recognition of equity
or financial liabilities arising from the issue of
convertible bonds. As a result, the loss for
the year ended 31 December 2008 has
been restated to increase the previously
reported net loss attributable to owners of
the Company by $4.9 million to $46.2
million. Uganda and Oman operations have
been classified as discontinued operations
and therefore the 2008 numbers have been
restated accordingly.
Corporate Performance
Production and Sales Volumes
Following the disposal of our Oman
operations, with effect from 1 January
Paul Atherton 2009, all production revenue from
Chief Financial Officer continuing operations is generated from the
Zapadno Chumpasskoye Field in Russia.
For the 2009 and 2008 statements Oman
has been classified as discontinued
2009 saw several operations following its sale in April 2009.
corporate developments
Average daily production from continuing
leaving the Company with operations decreased by 13% from 379
a strong balance sheet and bopd in 2008 to 329 bopd in 2009. This
decrease resulted from the shut in of the
financial flexibility for Zapadno Chumpasskoye Field between
2010. December 2008 and February 2009 due to
unfavourable domestic market conditions in
Russia. Crude production recommenced in
March 2009 and averaged 420 bopd for the
remainder of 2009.
Notwithstanding lower average daily
production, average daily sales volumes
increased by 9% year on year due to
increased sales from inventories.
Revenue
Petroleum revenue, from continuing
operations, decreased 29% to $2.7 million,
due to lower average realised prices
mitigated by slightly higher volumes of
crude oil sales. The average realised price
per barrel in 2009 of $20.20 was 35% lower
than in 2008, driven by lower average
commodity prices in Russia in 2009.
30
Operating Results
Petroleum operating costs, from continuing
operations, decreased by 10% to
$1.5 million in 2009, due to lower crude
oil production.
Production tax in Russia decreased from
$2.6 million in 2008 to $1.3 million in 2009
as a result of both lower volumes of oil
production and decreased average
commodity prices in 2009 used in the
calculation of production tax.
General and administrative expenses
decreased from $21.0 million in 2008 to
$18.7 million in 2009. This is due, principally,
to lower non-cash share-based
compensation expenses. Share-based
compensation expenses were lower as the
fair value of a number of share options
issued previously had been fully recognised
by the end of 2008.
If share-based compensation expenses are
excluded, net general and administrative
expenses increased from $13.6 million in
2008 to $15.6 million in 2009. This 15%
increase resulted mainly from an increase in
the bonuses in 2009 in comparison with
2008. In 2009, the Group capitalised $3.5
million (2008 – $6.3 million) of general and
administrative costs relating to exploration
and development activities, including
share-based compensation of $2.1 million
(2008 – $4.6 million).
Corporate reorganisation and subsequent
listing costs of $9.7 million incurred in 2008
represent a one-off expense relating to the
Company’s re-domiciling to the LSE in
March of that year.
Acquisition expenses of $7.1 million in 2009
represent one-off expenses relating to an
aborted acquisition of Genel Energy. In
November 2009, Heritage announced that
the discussions with Genel had been
terminated and consequently all expenses
incurred with respect to the planned
acquisition of Genel Energy were expensed.
 Overview
Business Review
Corporate Governance
Selected Operational and Financial Data decided to change accounting policy from
the former option to the latter believing that
Restated1 the latter option better reflected the
2009 2008 Change commercial terms of the financial
Production from continuing operations bopd 329 379 (13%) instruments operative currently. Prior year
Sales volume from continuing operations bopd 368 339 9% results have been restated to reflect the new
policy.
Average realised price $/bbl 20.2 31.0 (35%)
On the basis of the changed policy, on
Petroleum revenue from continuing operations $ million 2.7 3.8 (29%) expiry of the Company’s call option in

Financial Statements
February 2008, the bondholders’
Loss from continuing operations $ million (36.8) (43.3) 15% conversion option has been reclassified
from a liability classification (with all changes
Loss from discontinued operations $ million (2.5) (2.9) 14%
in fair value being reflected in the income
Net loss $ million (39.3) (46.2) 15% statement) to an equity classification.
Consequently, the fair value of bondholders’
Total cash capital expenditures $ million (104.1) (103.2) conversion option of $30.6 million has been
transferred to equity at that date with no
Year end cash balance $ million 208.1 90.6 subsequent income statement impact; a
gain of $6.1 million was recognised up to

Heritage Oil Plc Annual Report & Accounts 2009

1 See basis of accounting and presentation and significant accounting policies (note 2 of the financial statements) and
discontinued operations (note 6 of the financial statements).
Depletion, depreciation and amortisation
expenses decreased by 18% to $1.7 million
in 2009, primarily due to lower production
volumes.
Exploration expenditures, expensed in the
year and not capitalised, decreased from
$0.8 million in 2008 to de minimis levels in
2009 due to the Group’s focus on its
existing exploration portfolio.
In 2009, the Group recognised an
impairment write-down of property, plant
and equipment of $2.9 million (2008 –
$0.7 million) relating to a reduction in the fair
value of the corporate jet due to
unfavourable economic conditions. The
impairment loss of $0.7 million in 2008
related to the write-down of a drilling rig.
In 2009, interest income was $0.6 million
(2008 – $4.0 million). Cash and cash
equivalents are typically held in interest
bearing treasury accounts. This reduction in
interest income is primarily due to a
reduction in average interest rates received
in 2009.
Convertible bonds are separated into equity,
liability and derivative liability components
(being the bondholders’ conversion option
of the host bond contract and the
bondholders’ put option) and each
component is recognised separately. The
Company had the right to redeem, in whole
or part, the bonds for cash at any time on or
before 16 February 2008, at 150% of par
value (the “Company call option”).
Due to significant volatility that movements
in the Company’s share price created in the
income statement under its previous
treatment, the Company reassessed its
accounting policy in respect of its
convertible debt. The Company previously
assessed the debt/equity classification of
each component of a compound financial
instrument only on issue or where there was
a change in contractual terms. However, an
alternative policy is to make this assessment
throughout the life of the instrument and, in
particular, to treat changes in effective
terms, such as the lapsing of the
Company’s call option, in the same way as
changes in contractual terms, i.e. as
requiring reassessment. The Company
that date.
At 30 June 2009, the carrying value of
investments in unlisted securities (shares of
SeaDragon Offshore Limited (“SeaDragon”))
was written down to nil following completion
of a financial reorganisation by SeaDragon
and resulted in an impairment write-down of
$2.4 million in 2009. It is not possible to
determine whether any of the original
investment will be recoverable in the near
future.
Other finance costs decreased from
$11.3 million in 2008 to $4.3 million 2009,
due primarily to bondholders exercising
their conversion rights in respect of
$30.6 million of convertible bonds in 2009
and forgoing the right to earn any interest.
Additionally, the level of interest costs
capitalised was higher in 2009 compared to
2008 due to increased cumulative amounts
of capital expenditures financed from
interest bearing borrowings.

31
 Business Review
FINANCIAL
REVIEW continued
The Group incurred foreign exchange
losses of $1.0 million in 2009 (2008 —
$5.6 million), primarily as a result of the
strengthening of sterling against the US
dollar, as the loan secured on an office in
London is sterling-denominated. An office
building in London is not revalued for
exchange rate purposes, but acts as a
natural hedge against adverse movements
in exchange rates with this loan.
Heritage recognised an unrealised gain of
$1.0 million in 2009 compared to a loss of
$1.7 million in 2008, in the fair value of its
investment in Afren plc (“Afren”) warrants.
The gain or loss is determined by the
performance of the share price of Afren.
Heritage holds 1,500,000 warrants in Afren
with an exercise price of £0.60 per warrant,
received as partial consideration from the
sale of Heritage Congo Limited in 2006. The
warrants have a term until 22 December
2011. At 31 December 2009, Afren’s share
price was £0.85 per share.
Heritage’s loss from continuing operations
in 2009 was $36.8 million, compared to
$43.3 million in 2008. The adjusted loss
from continuing operations in 2009 was
$21.2 million compared to $20.8 million in
2008 if certain non-cash items (share-based
compensation expense, gain on derivative
financial liability, property, plant and
equipment impairment write-down,
impairment of investment in unlisted
securities, foreign exchange gains/losses
and unrealised gain/loss on revaluation of
Afren warrants) and the one-off aborted
acquisition costs and reorganisation costs
are excluded.
Disposals and Proposed Disposal
On 7 April 2009, the Company completed
the sale of Eagle Energy, a wholly owned
subsidiary of Heritage, to RAK Petroleum
Oman Limited for $28 million, plus a
working capital adjustment of $0.4 million,
both of which were received in 2009. Eagle
Energy, which had a 10% interest in Block 8
offshore Oman, was acquired by the
Company in 1996. Block 8 contains the
32
Bukha field which has been producing since
1994 and the West Bukha field which
commenced production in February 2009.
On 18 December 2009, Heritage
announced it had entered into a SPA for
the sale of its 50% interests in Blocks 1
and 3A in Uganda. The Disposed Assets
consideration comprises cash of $1.35
billion and a further contingent, deferred
consideration of either $150 million in cash
or an interest in a mutually agreed
producing oil field independently valued
at a similar amount.
The results of operations in Uganda and
Oman have been classified as discontinued
operations. The loss on disposal of
discontinued operations in Oman was $0.7
million in 2009. The loss from discontinued
operations in Uganda was $1.8 million in
2009 compared to the loss from
discontinued operations of $2.9 million in
2008 relating to discontinued operations in
Oman.
In 2009, the basic and diluted loss per
share from continuing operations was $0.13,
compared to the basic and diluted loss per
share from continuing operations of $0.17
in 2008.
Heritage’s net loss in 2009 was $39.3 million,
compared to $46.2 million in 2008. The
adjusted net loss in 2009 was $23.7 million,
compared to $23.7 million in the previous
year if certain non-cash items (share-based
compensation expense, gain on derivative
financial liability, property, plant and
equipment impairment write-down,
impairment of investment in unlisted
securities, foreign exchange gains/losses
and unrealised gain/loss on revaluation of
Afren warrants) and one-off aborted
acquisition costs and reorganisation costs
are excluded.
In 2009, the basic and diluted loss per
share was $0.14, compared to the basic
and diluted loss per share of $0.18 in 2008.
Cash Flow and Capital Expenditures
Cash used in operating activities was $20.7
million in 2009 compared to $32.8 million in
2008. Total cash capital expenditures in
2009 of $104.1 million were broadly in line
with the previous year (2008 – $103.2
million). The following major work
programmes were undertaken in 2009:
>> in March 2009, Heritage completed
drilling of the Miran West-1 well in
Kurdistan. The Miran West-1 well reached
target depth of 2,935 metres in March
2009. Testing completed in August 2009
and a flow rate of 3,640 bopd was
recorded from a single reservoir interval.
The well was suspended as a future
producer, with an anticipated production
rate of between 8,000 – 10,000 bopd for
the well;
>> the Miran West-2 well commenced drilling
in November 2009;
>> in February 2009, Heritage completed
successful drilling of the Kingfisher-3A
well in Block 3A, Uganda. The well
reached a total measured depth of 2,712
metres (1,875 metres true vertical depth)
and was suspended as a future
production well, along with previously
drilled and suspended Kingfisher-1A and
Kingfisher-2 wells; and
>> in February 2009, Heritage completed the
acquisition of 2D seismic in the Kimbiji
and Kisangire licence areas in Tanzania.
Financial Position
Liquidity
Heritage had a net increase in cash and
cash equivalents in 2009 of $117.5 million.
At 31 December 2009, Heritage had a
working capital surplus of $337.8 million,
including cash and cash equivalents of
$208.1 million.

Like most oil and gas exploration
companies, Heritage raises financing for its
activities from time to time using a variety of
sources. Sources of funding for future
exploration and development programmes
will be derived from inter alia disposal
proceeds from the sale of assets, such as
the sale of the Company’s holdings in Oman
in 2009 and the proposed disposal of its
interests in Blocks 1 and 3A in Uganda (see
disposals section of the Financial Review on
page 32), using its existing treasury
resources, new credit facilities, reinvesting
its funds from operations, farm-outs and,
when considered appropriate, issuing debt
and additional equity. Accordingly, the
Group has the ability to access a number of
different sources of finance.
Capital Structure
Heritage’s financial strategy has been to
fund its capital expenditure programmes
and any potential acquisitions by selling
non-core assets, reinvesting funds from
operations, using existing treasury
resources, finding new credit facilities and,
when considered appropriate, either issuing
unsecured convertible bonds or equity.
On 7 April 2009, the Company completed
the sale of Eagle Energy, a wholly owned
subsidiary of Heritage, to RAK Petroleum
Oman Limited for $28 million, plus a
working capital adjustment of $0.4 million.
On 18 June 2009, the Company completed
the placing of 25,400,000 new Ordinary
Shares at a price of £5.20 per share for
gross proceeds of $216,848,944
(£132,080,000). Share issue costs were
$11,820,609 (£7,157,379).
Heritage had net cash of $41.7 million (cash
and cash equivalents less total liabilities)
and nil gearing (net debt as a percentage of
total shareholders’ equity) at 31 December
2009 compared with net debt of
$121.1 million (excess of total liabilities over
cash and cash equivalents) and gearing of
39% at 31 December 2008.
Important Events Subsequent to the
Year End
On 18 December 2009, Heritage
announced that the Company, and its
subsidiary Heritage Oil & Gas Limited, had
entered into a SPA, with Eni for the sale of
its 50% interests in Blocks 1 and 3A in
Uganda. On 17 January 2010, Tullow
Uganda Limited exercised its right to
pre-empt the sale of the Disposed Assets to
Eni on the same terms and conditions as
agreed in the SPA entered into between
Heritage and Eni. The transaction was
overwhelmingly approved by shareholders
at the General Meeting on 25 January 2010.
In April 2010, Heritage announced that it
had received a letter from the Ugandan
Government stating that it supports
Heritage’s sale and transfer of its Ugandan
interests and that it will conclude its review
of the transaction within eight weeks.
Following this, Heritage expects to receive
formal consent and to close the transaction
shortly thereafter.
Risk and Internal Controls
Heritage’s business, financial standing and
reputation may be impacted by various
risks, not all of which are within its control.
The Group identifies and monitors the key
risks and uncertainties affecting the Group
and runs its business in a way that
minimises the impact of such risks where
possible. A summary of the Group’s key
risks, as currently identified, is provided on
pages 34 to 37.
There is further information on the risks
facing the Company in the Directors’ Report
on pages 62 to 64 and also in note 3 of the
financial statements on pages 83 to 84.
Internal Controls
A system of internal controls was designed
and tailored to ensure key risks are
addressed appropriately and to provide
assurance regarding the reliability of
financial reporting and preparation of
financial statements. Risk and internal
controls are assessed continually. One
Overview
Business Review
Corporate Governance
possible weakness has been identified,
concerning accounting for complex
transactions, although the Company seeks
third party advice to mitigate against this
weakness.
As part of the internal controls, all
transactions with related parties are
identified, scrutinised and disclosed in the
financial statements appropriately.
Financial Statements
Heritage maintains insurance policies in
accordance with industry standards.
Heritage believes that the level of insurance
cover it maintains is adequate based on
various factors such as the cost of the
policies, industry standard practice and the
risks associated with the exploration and
development of oil and gas properties in the
countries in which it operates. Heritage
Heritage Oil Plc Annual Report & Accounts 2009
does not insure against political risk and,
therefore, shareholders have full exposure
to the risks and rewards of investing in its
territories.
Heritage maintains detailed financial models
which allows the Company to plan future
operating and capital activities in an
efficient manner.
Paul Atherton
Chief Financial Officer
33
 Business Review

PRINCIPAL
RISKS

Description of Risk Mitigation

Strategic Risks

Identification and Management of Risk The Group’s level of risk and its management approach is
discussed and reviewed by the Board, Audit Committee and senior
management. The Group maintains comprehensive risk
management procedures.

Portfolio Mix The Group maintains a diverse portfolio of assets across a range
of geographies and life cycles in order to minimise exposure to
local geographical, political and cyclical market risk.

Business Model Our experienced management team and our highly knowledgeable
advisers devised the Company’s business model at the outset and
review it regularly in light of current economic and political
circumstances.

Acquisitions and Disposals The Group and its advisers have considerable experience in
the business environment in which the Group operates. This
experience is applied regularly and carefully to assess potential
merger, acquisition and disposal opportunities.

Political The Group recognises political risks and opportunities associated

with parts of the globe where it conducts business. The Group’s
management and advisory network have considerable experience
in this area and apply this knowledge to regularly assess and
monitor this aspect of activities.

Reputation The Group maintains strong and positive relationships with host
country Governments, local communities, regulators and domestic
industry partners. The Group’s operations are carried out to the
highest industry standards.

34
 Overview
Business Review
Corporate Governance
Description of Risk Mitigation

Operational Risks

Exploration and Development Expenditure and Success Rates The Group has experienced management and technical teams
with a track record of finding attractive oil discoveries and has a
diversified portfolio of exploration, development and production
assets. Considerable technical work is undertaken to reduce
related areas of risk and maximise opportunities.

Availability of Rigs and Services The Group applies its knowledge of the industry to devise

Financial Statements
structured planning processes which allow sufficient time for
procurement of services.

Factors Associated with Operating in Developing Countries, The Group maintains close contact with Governments in the areas
Political and Regulatory Instability within which it operates and, where appropriate, invests in
community projects. Considerable work is undertaken before
commencing operations in any new territory.

Title Disputes Notwithstanding potential challenges in the DRC, Kurdistan and

Malta, the Group believes that it has good title to its stated oil and
gas properties. However, the Group cannot control or protect itself

Heritage Oil Plc Annual Report & Accounts 2009

completely against the risk of title disputes or challenges and there
can be no assurance that claims or challenges by third parties
against the Group’s properties will not be asserted at a future date.
Naturally the Group strives to employ the best internal and advisory
knowledge available to help to minimise this risk associated with
its activities.

Local Community Issues Continual dialogue exists between the Group and its stakeholders
which is central to operations. Local labour is employed wherever
possible and there is a transfer of skills.

Loss of Key Employees Remuneration packages are reviewed regularly to ensure key
executives and senior management are properly remunerated.
Long-term incentive programmes have been established.

Environmental Issues The Group undertakes operations to the high international

environmental standards of the oil industry. Environmental impact
assessments are prepared before any major capital expenditures
are incurred.

Health and Safety The Group is aware of the local cultural issues that can impact
its management of health and safety matters. It has devised a
comprehensive policy framework as well as health and safety
management and reporting systems. These are regularly monitored
and reviewed by our CSR committee and senior management.
The Group also works closely with the local authorities where
it is based to manage this aspect of our activities.

CSR Detailed CSR policies and programmes are implemented across

operations.

35
 Business Review

PRINCIPAL
RISKS continued

Description of Risk Mitigation

Financial Risks

Oil and Gas Sales Volumes and Prices Whilst not under the direct control of the Company, a material
movement could have an impact on the Group. The Group did not
hedge oil prices in 2009.

Interest Rate Risk Reviewed periodically by the Board. No hedges in 2009.

Foreign Exchange Exposure Generally, it is the Group’s policy to conduct and manage its business
in US dollars, which is its reporting currency. Cash balances in Group
subsidiaries are primarily held in US dollars but small amounts may be
held in other currencies in order to meet immediate operating or
administrative expenses or to comply with local currency regulations.

Liquidity Risk A formal budgeting and forecasting process is in place and cash
forecasts identifying liquidity requirements of the Group are reviewed
regularly to ensure compliance with the approved funding plans.

Credit Risk Trade debtors of the Company are subject to internal credit review to
minimise risk of non-payment. Additionally, the Group monitors closely
the funding position of joint venture partners and key contractors.

Compliance and Ethical Risks

Legal, Regulatory and Litigation The Group’s activities are subject to various laws and regulations
around the world. Changes could affect the short, medium and
long-term value of the Group. Risks are mitigated by employing
skilled and experienced staff and advisers to conduct proactive
assessment, contingency planning and, where necessary, the use
of appropriate mitigation techniques.

Relations with Local Stakeholders The Group believes that maintenance of good relations with local
communities is an important and integral part of its strategy. The
Group therefore maintains regularly reviewed relationship protocols
to ensure that this is the situation at all of its sites. More information
is recorded within the CSR section of this report on pages 38 to 43,
and in the separate CSR report.

Business Conduct Risks The Group recognises the importance of maintaining close,
transparent and responsible relationships with a wide variety of
stakeholders (including host Governments). The Group is developing
its systems in this area continually to ensure that it is managing
related areas of risk effectively.

36
 Overview
Business Review
Corporate Governance
Description of Risk Mitigation

Other Risks

Investor Sentiment The Company maintains a regular dialogue with the Group’s
shareholder base and the general public. A Senior Independent
Director has been appointed and the Company employs an investor
relations specialist.

Corporate Governance The Group recognises the importance of maintaining strong

corporate governance procedures and processes. The Group is

Financial Statements
developing systems in this area continually and generally this is
managed by employing the skill, expertise and resources of the
Group and its advisers. The Board reviews compliance with the
Combined Code and other regulatory guidelines regularly.

Heritage Oil Plc Annual Report & Accounts 2009

Forward-Looking Statements
The Business Review
(pages 12 to 43) contains
forward-looking statements
with respect to the financial
condition, results and
operations of the Group. By
their nature, forward–looking
statements involve a number
of risks, uncertainties or
assumptions that could cause
actual results or events to
differ materially from those
expressed or implied by the
forward-looking statements.
These risks, uncertainties
or assumptions could
adversely affect the outcome
and financial effects of the
plans and events described
herein. The completion of
the sale of the Disposed
Assets is subject to certain
conditions, certain of which
are beyond the control of the
Company. Forward-looking
statements contained in the
Business Review regarding
past trends or activities
should not be taken as a
representation that these
will continue in the future.
Heritage undertakes no
obligation to update the
forward-looking statements
contained in this review or
any other forward-looking
statements made.

37
 Business Review

CORPORATE SOCIAL
RESPONSIBILITY
Heritage has always recognised that its licence to
operate is closely linked to adoption of CSR
concepts. We work closely with stakeholders to
ensure that the economic value generated by our
operations is applied effectively to address
important aspects of local need.

Establishing a Legacy A Blueprint for our Future Activities

Our investments in the communities around our Ugandan
licences have been significant, but it is the legacy that we
will leave there that will ultimately have the greatest
impact on the lives of Ugandans locally and nationally.
Our presence and investment in Uganda have played a
large part in uncovering vast oil resources which will, on
development, generate revenues that will contribute
significantly to the development of the domestic
economy.
We are confident that our business partners will continue
to work effectively with the local authorities within the
country and carry on the process in which we have been
closely involved in.
Our experiences in Uganda have enabled us to develop
our CSR strategy, policies and performance.
In particular, we are now working in partnership with the
local authorities in Kurdistan on a variety of social and
educational projects and contributing towards the
development of the local economy.
Our aim is to apply the knowledge base and skill set we
acquired in Uganda to ensure that we contribute
significantly and responsibly to the parts of the world
where we operate. We wish to secure a sustainable
future for the communities where we are based and to
conduct our business responsibly and transparently in
partnership with them.

38
 Overview
Business Review
Lost Time Incidents Local Employment in
(“LTIs”) Heritage Operated Licences
Uganda  1 Russia 98%
Kurdistan  0 Uganda 90%

Corporate Governance
Russia  0 Kurdistan 65%
Tanzania 90%
Only one lost time incident Mali 100%
was recorded during a Malta 100%
very busy operational year. Pakistan 100%

Financial Statements
Heritage Oil Plc Annual Report & Accounts 2009
Key Elements of our CSR Policies
>> we strive to meet the challenges presented by climate change;
>> safety is a natural priority and a core element of all of our activities;
>> we strive to protect the physical health of all of our employees and contractors whilst they are in the workplace;
>> we support human rights consistent with the stipulations contained within the Universal Declaration of
Human Rights;
>> we strive to ensure that our relationships with our neighbours and local communities are conducted sensitively
and with mutual respect;
>> we ensure that we receive the widest possible support for our proposals, throughout the life cycle of
our activities;
>> we strive to contribute positively to global sustainability;
>> we are opposed to bribery and corruption in whatever forms they may take;
>> we always aim to compete vigorously with our competitors, but in a fair and ethical way;
>> we ensure that all of our suppliers are treated fairly and responsibly;
>> we strive to construct, maintain and further develop world-class safety systems across all of our operations; and
>> we comply fully with all relevant national and international laws and act in accordance with local guidelines
and regulations.

39
 Business Review

CORPORATE SOCIAL
RESPONSIBILITY

Strategy
Our CSR strategy is a key factor in securing
long-term success. We have always
understood that good relationships within
the Company and good relationships with
external stakeholders, are essential to our
business. For Heritage, CSR is about
managing these relationships and
developing a reputation for the Company as
a trusted and favoured partner, one that
takes care to respect and protect the
people and environment in each area in
which we operate.
We have identified six areas of impact and
opportunity that form the CSR aspect of our
business model. These are governed by a
policy framework, approved and monitored
by the Board, with implementation managed
at a local level.

Our Vision

We aim to be a responsible and transparent business in all the

areas of the world in which we operate.

Our Areas of Impact & Opportunity

Environment & Sustainability Health & Safety Employees

Community & Human Rights Business Conduct Corporate Governance

Our Approach

Devise & Measure Communicate Apply

Set policies maintain & monitor & report to stakeholder
systems performance stakeholders feedback

40

Operations at Miran West-1,
Kurdistan
Environment & Sustainability
Wherever possible, Heritage prevents,
mitigates and remediates the harmful
effects of our operations on the
environment. Recognising our Company’s
contribution and exposure to climate
change, we operate all our sites to the
highest standards and promote
environmental awareness and stewardship
throughout our business.
>> Heritage had no environmental incidents
in 2009, continuing 2008’s record;
>> environmental impact assessments are
conducted for all new projects; and
>> our Russian production site is planning to
replace diesel powered gensets with
associated gas powered gensets, saving
costs and reducing greenhouse gas
emissions.
Health & Safety
The health and safety of our employees and
other stakeholders is a natural priority and a
core element of all our activities. Our goal is
zero injuries and fatalities and to minimise
exposure to health and safety risks.
>> training contractors and employees in
health and safety remained a priority in
2009. Our personnel receive training
regularly in safety regulations, technical
codes, field safety, handling dangerous
materials, fire safety, and first aid; and
>> sadly, in 2009 one sub-contractor at our
Uganda operations died in a motor
vehicle accident. The accident was not
related to drilling or camp operations. As
a consequence we are taking every
possible measure to improve the safety
culture at all our operations to reduce the
probability of this type of incident to an
absolute minimum.
Total Injuries, Blocks 1 and 3A, Uganda
Type of incident Block 1 Block 3A
First aid cases 11 9
Major medical treatment cases 0 3
Lost time incidents 1 0
Fatalities 1 0
Overview
Business Review
Corporate Governance
Malaria
>> malaria remains the biggest health
care risk for Heritage’s personnel in
Uganda, as well as the local
population;
>> a total of 36 workers were treated for
malaria in Block 1 and 89 in Block 3A
during 2009, down from 2008’s
figures, demonstrating that our
Financial Statements
preventative measures are effective;
>> in early 2009 Heritage sponsored the
UAE Charity Challenge to raise funds
for worthy causes including
supporting malaria control
interventions near Lake Albert,
Uganda. The UAE charity, with
Heritage’s support, funded distribution
of Long Life Insecticide treated Nets
(“LLIN”) in the Buhuka parish. 100%
Heritage Oil Plc Annual Report & Accounts 2009
coverage across the villages in the
catchment area was achieved and
Heritage also provided logistical
support; and
>> Heritage operates clinics for its staff at
all operational sites. We make these
available for public use, and treat a
number of people who may not
otherwise have access to health
services in their areas.
41
 Business Review
CORPORATE SOCIAL
RESPONSIBILITY
Heritage is committed to restore sites
where we operate to their original state
and to comply with conditions imposed
by bodies such as the National
Environmental Management Authority
(“NEMA”) in Uganda. In this picture the
suspended well is in the process of being
covered. This is done so as to protect
42
both the infrastructure for future use and
so that the local wildlife can return to the
area in safety. We have worked closely
with the relevant authorities to ensure
this process fulfils all requirements.
Consequently, our operations have the
minimum impact on biodiversity in the
area.

Employees
Heritage ensures that all employees
understand and appreciate the business
strategy, goals and values of the Company.
It is important to Heritage that staff feel
valued, safe and free to raise any concerns.
There are equal opportunities in career
development for all employees and with a
geographically diversified portfolio we
believe that the workforce should reflect the
Human Rights Commitments
>> we do not employ forced or
child labour;
>> we will take strong measures should
any breach of our human rights
policies occur;
>> we pay fair and competitive wages;
Overview
Business Review
Corporate Governance
Business Conduct
We uphold the highest standards of
business conduct across our Group. We are
resolutely opposed to bribery and
corruption in whatever forms they may take,
do not participate in, or finance party
politics, and support the Universal
Declaration of Human Rights.
>> Heritage recorded no breaches of our
business conduct policies in 2009;

communities in which we operate.
>> we aim to attract and retain the best
employees and maximise our investment
in them;
>> we recruit locally wherever possible;
>> Heritage offers training to develop
employees;
>> Heritage does not discriminate;
>> Heritage supports the four fundamental
principles contained within the
and
>> we work closely with stakeholders to
ensure that their rights are respected,
that they can monitor our activities and
have access to grievance processes
should they be needed.
Financial Statements
>> Heritage has a robust whistle-blowing
policy in place that gives employees
access to senior executives, with whom
they can raise any concerns; and
>> Heritage ensures all contractors perform
according to our safety and
environmental standards.

Heritage Oil Plc Annual Report & Accounts 2009

International Labour Organisation (“ILO”)
Declaration; and
>> Heritage recognises achievement, and
creates opportunities for employees at all
levels of our business.

Community & Human Rights

We ensure that our relationships with our
neighbours and local communities are
conducted sensitively and with mutual
respect. These relationships will apply active
and enduring partnerships as a central and
fundamental element. We aim to promote
the sharing of the economic value created
by our activities, through the conduct of our
community relationships.
>> through our investment in local
communities, local hiring and excellent
relationships built with host Governments,
we have developed a reputation as a
trusted partner, bringing better access to
new growth opportunities;
>> in Uganda, we drilled several new water In 2009 Heritage engaged with four requirements for various educational
wells to provide locals with access to schools local to the Miran West-2 drilling tools. The top three individuals from each
clean, safe water. In 2009, we also began a site and ran a competition for the school also won a personal prize and the
potable water project which will provide schoolchildren to draw a picture of the overall winner was selected by Anthony
6,000 people with running fresh water; and drilling rig. As part of this exercise Buckingham to appear on the cover of
>> we have had no incidents of breaches in donations were made to the schools that this year’s annual report. Congratulations
our human rights policies or local laws at participated. These donations varied from to Hawnaz Wahab!
any of our sites, and aim to continue this school to school depending on the
record in 2010.

43
 CORPORATE
GOVERNANCE
46 Board of Directors
48 Corporate Governance Report
55 Remuneration Report
62 Directors’ Report
65 Responsibility Statement of the Directors

Drilling rig at the Buffalo–1 well, Uganda

44
Overview Business Review Corporate Governance Financial Statements
Heritage Oil Plc Annual Report & Accounts 2009

45
 Corporate Governance

BOARD OF
DIRECTORS

1. 2. 3.

4. 5. 6.

7. n Audit Committee
l Remuneration Committee
s Nomination Committee
t Reserves Committee
u CSR Committee

46

1. Michael J. Hibberd nstu
Chairman and Non-Executive Director
Mr Hibberd has extensive international
energy project planning and capital markets
experience. Mr Hibberd has been president
and chief executive officer of MJH Services
Inc., a corporate finance advisory company,
since 1995, prior to which he spent 12 years
with ScotiaMcLeod in corporate finance and
held the position of director and senior
vice-president, corporate finance. He is
chairman of Canacol Energy Ltd., co-
chairman of Sunshine Oilsands Ltd. and
currently serves on the boards of directors
of AltaCanada Energy Corp., Avalite Inc.,
Iteration Energy Ltd., Pan Orient Energy
Corp. and Zapata Energy Corporation.
Mr Hibberd also served as a director of
Rally Energy Corp. until October 2007 and
as a director of Deer Creek Energy Limited
until December 2005. Mr Hibberd joined
Heritage in March 2006.
2. Anthony Buckingham su
Chief Executive Officer
Mr Buckingham is the founder of Heritage.
Mr Buckingham commenced his
involvement in the oil industry as a North
Sea diver and subsequently became a
concession negotiator acting for several
companies including Ranger and Premier
Oil plc. He was previously a security adviser
to various Governments.
3. Paul Atherton tu
Chief Financial Officer
Mr Atherton is a qualified accountant,
having qualified with Deloitte & Touche, and
holds a degree in geology from Imperial
College London. He has a corporate finance
background with specific experience in the
international mining and resource sectors.
He joined Heritage in 2000 and
subsequently joined the Board of Directors
in 2005.
4. Gregory Turnbull
Non-Executive Director
Mr Turnbull is the Regional Managing
Partner of the Calgary office of the law firm
of McCarthy Tétrault LLP. Mr Turnbull has
extensive knowledge of corporate
governance issues and has acted for many
boards of directors and special committees
in that regard. Mr Turnbull started his career
with the law firm of MacKimmie Matthews in
1979. From 1987 to 2001, he was a partner
with Gowlings LLP (formerly Code Hunter
LLP). In 2001 and 2002, he was a partner
with the law firm of Donahue LLP. Mr
Turnbull has been a partner with the law firm
of McCarthy Tétrault LLP since July 2002.
He is a non-executive director of Crescent
Point Energy Corp., Storm Exploration Inc,
Seaview Energy Inc., Hawk Exploration Inc.,
Canadian Superior Energy Inc., BNP
Resources Inc. and Sunshine Oilsands Ltd.
He joined Heritage in 1997.
5. John McLeod nlt
Non-Executive Director
Mr McLeod is a Professional Engineer with
nearly 40 years of varied resources
extraction experience. He is the president of
McLeod Petroleum Consulting Limited, the
president, chief executive officer and a
director of Tuscany Energy Ltd., Paris
Energy Inc. and California Oil and Gas
Corporation. He has held positions and has
served on various boards including
Constellation Oil & Gas Ltd. and CanArgo
Energy Inc., as president and chief
executive officer of Arakis Energy Company,
as vp, operations of Pengrowth Gas
Company, chief executive officer and
director of Rally Energy Corp. and Canoro
Resources. Currently, Mr McLeod serves as
a director of Diaz Resources Ltd., Ranger
Energy Ltd and Ralliste Energy Corp. He is a
Past-President of the Association of
Professional Engineers, Geologists and
Geophysicists of Alberta. He joined Heritage
in 1998.
Overview
Business Review
Corporate Governance
6. General Sir Michael Wilkes nls
Non-Executive Director and Senior
Independent Director
General Sir Michael Wilkes KCB, CBE,
retired from the British Army in 1995 as
Adjutant General and Middle East Adviser to
the British Government. As Adjutant
General, Sir Michael was the most senior
administrative officer within the Army and a
Financial Statements
member of the Army Board. During his
distinguished career, he has seen active
service across the world while also
commanding at every level from Platoon to
Field Army including commanding 22
Special Air Service Regiment and serving
as the Director of Special Forces. Sir
Michael is a non-executive director of the
AIM listed companies Stanley Gibbons
Group and Blue Star Capital plc. In addition,
he holds non-executive positions on a
Heritage Oil Plc Annual Report & Accounts 2009
number of private companies including
Britam Defence. He joined Heritage in 2008.
7. Salim Macki nl
Non-Executive Director
Mr Macki was a Member of the State
Council, Former Ambassador, Government
of Sultanate of Oman and has been a
director of Oman Oil (a wholly owned
Government company) since 1996. Mr
Macki holds a master’s degree in
petrochemical engineering and has spent
most of his working life in the oil industry,
where he is highly regarded internationally.
He holds, or has previously held, many
senior executive positions in various private
and state-owned entities in Oman and
internationally. He joined Heritage in 2008.
47
 Corporate Governance Report
The Directors recognise the importance of
maintaining good corporate governance practices.
This report demonstrates the commitment to
applying the highest industry standards of business
ethics, health and safety, environment, risk
management and corporate social responsibility
throughout the Group.
The Company is incorporated in Jersey where there is no formal
code relating to corporate governance. However, the Board
recognises that it has a responsibility to ensure good governance of
the Company in order to help it fulfil its obligations to all its
stakeholders, not just shareholders. It is, therefore, strongly
committed to the highest standards of corporate governance and
has decided to adhere, wherever possible, to the provisions of the
Combined Code on Corporate Governance published in 2008 (the
“Combined Code”), in the same way as if the Company was
incorporated in the United Kingdom. A copy of the Combined Code
is publicly available on the website of the UK Financial Reporting
Council (www.frc.org.uk). The Board continues its commitment to
work towards voluntary compliance with the Combined Code in all
material respects.
The Directors recognise the importance of maintaining good
corporate governance practices. This report demonstrates the
commitment to applying the highest industry standards of business
ethics, health and safety, environment, risk management and CSR
throughout the Group.
The Company maintains a Premium Listing on the Main Market of
the LSE and is a member of the FTSE 250 Index. As such, the
Directors recognise their responsibility as guardians of the interests
of a broad range of investors and stakeholders and are determined
to continually review and develop the corporate governance
framework in which the Company operates. To this end, the Board
has made significant progress in adopting policies and procedures
to conduct and monitor its activities, along with working practices,
and to establish a business culture that ensures openness and full
accountability. Developments and initiatives during 2009 and early
2010 include:
>> appointing General Sir Michael Wilkes as the Senior Independent
Director;
>> establishing a performance evaluation process for the Board and
Board Committees and for the Chairman;
>> developing a formal framework for remuneration policy across the
Company;
>> confirming that no annual bonuses would be paid to the
Non‑Executive Directors;
>> undertaking an independent review of the Chief Executive
Officer’s and Chief Financial Officer’s remuneration;
>> developing the Company’s processes for reviewing the key risks,
internal controls and assessments, which are subject to annual
review;
48
>> initiating processes for reviewing Director appointment and
succession planning;
>> establishing a Reserves Committee; and
>> establishing a CSR Committee.
Compliance with the Combined Code on Corporate Governance
This report describes the extent to which the Company is in
compliance with the principles set out in Section 1 of the Combined
Code and how it intends to work towards voluntary compliance with
those principles going forward. At the year end, the Board
considers that the Company has complied with Section 1 of the
Combined Code, save in the following respects. The Board has
addressed one area of non-compliance, but believes that
implementing the remaining changes would be inappropriate at this
stage in the Company’s strategic development:
>> Code Provision A.3.3: Until June 2009, the Company was not
compliant with the requirement to have a Senior Independent
Director. In June 2009, General Sir Michael Wilkes was appointed
as the Senior Independent Director.
>> Code Provision B.1.6: Notice periods for the Executive Directors
are 24 months. The Company has discussed the Executive
Directors’ employment contracts with external advisers and
internally within the remuneration committee. After taking these
views into consideration, the Company has decided, for
Board of Directors
The Board is currently comprised of seven Directors, five of whom
are Non-Executive Directors. The Chairman and three of the
Non-Executive Directors are deemed to be independent under the
terms of the Combined Code.
Chairman
The Chairman’s role is to ensure the effective running of the Board
on all aspects of its roles and setting its agenda. His other key
responsibilities include leading the Board, ensuring effective
communication with shareholders, ensuring constructive relations
between all Directors and that all Directors are encouraged to
participate fully in the activities and decision-making process of
the Board.
Chief Executive
The Chief Executive Officer is responsible for managing the
Group’s business, proposing and developing the Group’s strategy
and overall commercial objectives in consultation with the Board
and, as leader of the executive team, implementing the decisions
of the Board and its Committees.

Heritage Oil Governance Structure
Communications
SHAREHOLDERS
Elect
Audit Committee Remuneration Nomination
4 members = Committee Committee
All independent 3 members = 3 members =
Non-Executive All independent 2 independent
Directors Non-Executive Non-Executive
Directors Directors + CEO
commercial reasons, to retain the existing Executive Director
notice period structure because of their importance to the
business at this stage in its development. We believe that this
policy best protects the interests of our shareholders.
>> Code Provision C.3.1: The Chairman of the Company is a
member of, and chairs, the Audit Committee. The Board believes
the Chairman is the most appropriate person to be a member of,
and chair, the Audit Committee given his extensive financial
experience. The Chairman is also considered by the Board to
have maintained his independent status.
Board of Directors
Role of the Board
The Board recognises the importance of creating and delivering
strong sustainable financial performance and long-term shareholder
value. The Board is responsible for ensuring the effectiveness of the
Company’s system of internal controls including managing and
considering the commercial risks and financing needs, the disposal
of businesses and assessing the most appropriate balance
between acquisition-led growth and organic growth. Individual
Directors evaluate and challenge the Company’s business strategy
constantly to ensure they identify areas where improvements can
be made or where new opportunities exist so that strategies remain
appropriate and relevant to the Company’s business. In order to
ensure the Company complies with its obligations as a company
with a Premium Listing on the Main Market of the LSE, the Board
also has responsibility for communications with shareholders,
health and safety policy and review of the Company’s management
and financial performance. Further details of compliance with these
obligations are set out below.
Composition
The Board is currently comprised of seven Directors, five of whom
are Non-Executive Directors. The Chairman and three of the
Non-Executive Directors are deemed to be independent under the
terms of the Combined Code. All of the Directors bring either
extensive experience of the oil industry, or a broad range of
business, commercial and corporate governance experience, to the
Overview
Business Review
Chairman
BOARD
Corporate Governance
Reserves CSR Committee
Committee 3 members =
4 members = CEO, CFO + 1
2 independent Non- Non-Executive
Executive Directors + Director
CFO + VP Exploration
Financial Statements
Board. The Executive Directors have close involvement with the
operations of the business through their operational roles. The
Directors are aware of their responsibilities and feel able to raise any
concerns at Board meetings which are minuted accurately in the
Board meeting minutes. The Board is supported by a strong and
experienced senior management team. The biographies of the
Board are set out on page 47.
Heritage Oil Plc Annual Report & Accounts 2009
Chairman, Chief Executive Officer and Senior
Independent Director
There is a clear division of responsibility between the roles of the
Chairman, Michael Hibberd, and the Chief Executive Officer,
Anthony Buckingham, to ensure an appropriate balance of
responsibility and accountability. These responsibilities have been
formalised in writing and approved by the Board.
The Chairman’s role is to ensure the effective running of the Board
in all aspects of its roles and setting its agenda. His other key
responsibilities include leading the Board, ensuring effective
communication with shareholders, ensuring that Board Committees
function effectively within their terms of reference, ensuring
constructive relations between all Directors and that all Directors
are encouraged to participate fully in the activities and decision-
making process of the Board. The Chairman also ensures that the
Directors receive accurate, timely and clear information with all
Board and Committee meeting information being issued to
members in advance. At each meeting there is an update on
operational and financial performance including a review of the
performance and future potential of all material assets. The
Chairman’s other significant appointments are disclosed to the
Board and may be found in the Directors’ biographies on page 47.
The Chief Executive Officer is responsible for managing the Group’s
business, proposing and developing the Group’s strategy and
overall commercial objectives in consultation with the Board and, as
leader of the executive team, implementing the decisions of the
Board and its Committees.
49
 Corporate Governance Report continued
As part of the Company’s commitment to comply with the
Combined Code, General Sir Michael Wilkes was elected as the
Senior Independent Director with the chief responsibility of
maintaining sufficient contact with major shareholders to help
develop a balanced understanding of their issues and concerns. In
this role General Sir Michael Wilkes is available to shareholders who
have concerns that have not been, or cannot be resolved through
discussion with the Chairman, Chief Executive Officer or Chief
Financial Officer or where such contact is inappropriate. The Senior
Independent Director is also responsible for leading the
Non‑Executive Directors in reviewing the performance of the
Chairman for the year.
Board Balance and Independence
The Board comprises the following Directors:
Michael Hibberd Chairman and Non-Executive Director
Anthony Buckingham Chief Executive Officer
Paul Atherton Chief Financial Officer
Salim Macki Non-Executive Director
John McLeod Non-Executive Director their areas of responsibility and to keep them fully briefed on the
Gregory Turnbull Non-Executive Director
General Sir Michael Wilkes Non-Executive Director and Senior
Independent Director
The Board is satisfied that its composition will ensure that no
individual or group of individuals will dominate the decision-making
process and that there is a strong presence on the Board of both
Executive and Non-Executive Directors.
The Board considers that John McLeod, Salim Macki, General
Sir Michael Wilkes and Michael Hibberd are independent in character
and judgement and free from relationships or circumstances which
may affect their judgement. The Board acknowledges that John
McLeod does not meet the independence criteria set out in the
Combined Code as he has served on the Board for more than nine
years and was previously granted options. John McLeod’s
performance as Board member and Chairman of the Remuneration
Committee was assessed by the other Directors as part of the
Board’s evaluation process undertaken during the year. Following this
exercise, the Board has satisfied itself that neither of the factors
described above impact on John McLeod’s independence in
character and judgement. His length of service on the Board
enhances his ability to perform his duties effectively and helps
maintain an appropriate balance between experienced Non-
Executive Directors and those more recently appointed to the Board.
On appointment, the Chairman was also considered to be
independent and continues to be so.
Gregory Turnbull does not meet the independence criteria set out
by the Combined Code as he is a partner of McCarthy Tétrault LLP,
the Canadian legal advisers to the Company.
In addition to the requirements of the Combined Code, the Board’s
assessment of independence and effectiveness includes their total
number of commitments, relationships with major suppliers or with
charities receiving material support from the Company.
Albion Energy Limited (“Albion”), the Company’s largest shareholder
and Anthony Buckingham entered into a relationship agreement
with the Company on 28 March 2008 (the “Relationship
Agreement”) as part of the process to list the Company on the Main
Market in 2008. The purpose of the Relationship Agreement is to
50
ensure that transactions and relationships between the Group,
Albion and Anthony Buckingham are at arm’s length and on normal
commercial terms. The Relationship Agreement prescribes that at
all times, the Board shall comprise of a majority of Directors who
are all independent of Anthony Buckingham.
How the Board Operates
Board Meetings
The Board met in formal meetings nine times during the year and
also engaged informally in numerous ad-hoc information calls which
were not minuted as properly called formal meetings. The Board will
continue to meet sufficiently regularly to discharge its duties by way
of formal Board meetings as well as through ad-hoc meetings as
required. The Board intends to meet at least four times a year. A
formal schedule detailing matters specifically reserved for its
decision has been agreed. The attendance record of each Director
at formal Board and committee meetings is shown in the table
below. In addition to the formal meetings of the Board, the
Chairman, Chief Executive Officer and Chief Financial Officer
maintain frequent contact with the other Directors to discuss any
issues of concern they may have relating to the Group or as regards
Group’s operations and initiatives. Additionally, the Chairman and/or
the Non-Executive Directors met and spoke regularly during the
year, and on an ad-hoc basis, without the Executive Directors
being present.
Committees
The Board has delegated some of its responsibilities to certain
committees in line with recommendations of the Combined Code
and to facilitate the business of the Company. These are the Audit,
Remuneration, Nomination, Reserves and CSR Committees. The
Reserves Committee was established in 2009 and met for the first
time in January 2010. The CSR Committee was established in April
2010. Further details of these committees and their activities can be
found later in this report on pages 51 to 53 and also in the
Remuneration Report on pages 55 to 61.
A table of attendance of members of the Board and the main Board
Committees at meetings during the year is set out below:
Audit Remuneration Nomination
Board Committee Committee Committee
(9 meetings) (5 meetings) (1 meeting) (2 meetings)
Michael Hibberd 9/9 5/5 – 2/2
Anthony Buckingham 9/9 – – 2/2
Paul Atherton 9/9 – – –
John McLeod 9/9 5/5 1/1 –
Salim Macki1 9/9 3/3 1/1 –
Gregory Turnbull 9/9 – – –
General Sir Michael Wilkes 8/9 5/5 1/1 2/2
1  Appointed to the Audit Committee in April 2009.
Given the size of the Company, the Board feels that it is in the
shareholders best interests not to employ a Company Secretary at
this time. The current Company Secretary is a corporate entity
based in Jersey that deals with the normal statutory compliance for
the Company. The Board and its committees are, therefore,
serviced by the Company Secretary or its nominee. The other
duties that would normally be carried out by the Company
Secretary, such as the provision of information flows to the Board,
are dealt with by either the Chairman or Chief Financial Officer or

their nominee. In terms of corporate governance issues, the Board
is advised by McCarthy Tétrault, a firm of registered foreign lawyers
& solicitors in London. The Board monitors the provision of
Company secretarial duties and takes any action as appropriate to
ensure its requirements are met. The appointment or removal of the
Company Secretary is a matter for the Board as a whole.
Independent Professional Advice
The Board ensures, in line with Board policy, that all Directors and
Committees have access to independent professional advice
whenever it is required and at the Company’s expense.
Appointment of Non-Executive Directors
Non-Executive Directors have executed letters of appointment
setting out their respective terms of appointment including the
expected time commitment which has been agreed and confirmed
with them. Further details can be found in the Remuneration Report
on pages 55 to 61.
Insurance Cover
As required by the Combined Code, the Company maintains
Directors’ and Officers’ Liability insurance cover, in respect of any
legal action taken against the Directors. This is reviewed annually.
Induction and Continuing Professional Development
The Board believes that the Directors possess a wealth of diverse
experience and business skills. Non-Executive Directors are actively
encouraged to take up opportunities for questioning, examining and
reviewing the Group’s businesses and to undertake training
applicable to their roles.
Upon joining the Board, if considered appropriate, a Director will
participate in an induction programme which helps establish them
in their role covering the principles and legal and regulatory duties
required of them. This training is tailored to an individual’s needs,
taking into account their qualifications and experience. In
addition, meetings are arranged with senior management to enable
Non-Executive Directors to develop a detailed understanding of the
Company’s business and of its strategy, and the key risks and
challenges the Company faces.
All Directors have the opportunity to update their skills and
knowledge on a regular basis, for example through further briefings
on issues, including changes in law and regulation, corporate
governance, financial reporting and operational matters. To build on
the formal induction programme, Directors are encouraged to make
site visits to the Group’s operations, and are offered access to
company secretarial services or independent professional advice at
the Company’s expense, should this be necessary for them to
discharge their responsibilities.
Furthermore, Directors are in regular communication with senior
executives through both formal and informal ad-hoc meetings, to
ensure the regular exchange of knowledge and experience between
management and Non-Executive Directors.
Board Assessment and Effectiveness
During the year the Chairman led a review and assessment of the
Board and its effectiveness. This exercise, in which all of the
Directors were involved, considered the processes around how the
Board works, as described above; the effectiveness of Board
Committees and their chairmen; and areas such as Board
composition, dynamics and leadership.
Overview
The assessment concluded that the Board and its Committees
remain effective in terms of operations, decision-making and
Business Review
leadership. During the year the Board has built on the review; in
particular by reviewing the succession planning process and by
making the changes described in the Induction and Continuing
Professional Development part of this report.
Re-election
All Directors’ appointed other than by shareholders are subject to
re-election by shareholders at the first Annual General Meeting
(“AGM”) following their appointment.
It is the Company’s policy that all Directors should retire and stand
Corporate Governance
for re-election at least once every three years. Details of Directors
retiring at the forthcoming AGM are shown in the Directors’ Report
on page 62.
Board Committees
As mentioned above, the Board has five committees, being the
Audit, Remuneration, Nomination, Reserves and CSR Committees.
The duties of these Committees are set out in formal terms of
reference, approved by the Board, that are available on the
Company’s website www.heritageoilplc.com. Membership of the
Financial Statements
committees was reviewed and confirmed during the year.
Audit Committee Report
Audit Committee n
Michael Hibberd, Chairman
Salim Macki (appointed April 2009)
John McLeod
General Sir Michael Wilkes
Heritage Oil Plc Annual Report & Accounts 2009
Main Responsibilities
>> monitoring the integrity of the financial statements, including
annual and interim reports and any other formal announcement
relating to the Group’s financial performance;
>> reporting to the Board, identifying any matters in respect of
which it considers that action or improvement is needed and
making recommendations as to the steps to be taken;
>> considering the establishment of an internal audit function;
>> reviewing the Group’s internal control procedures and risk
management systems;
>> making recommendations to the Board on the appointment,
review and removal of external auditors;
>> establishing the external auditors remuneration;
>> monitoring external auditors independence; and
>> monitoring the policy on external auditors’ non-audit services.
All members, including the Chairman, are independent Non-
Executive Directors. Other members of the Board may also be
invited to attend as and when appropriate. The auditors are also
invited to attend regularly.
The Chairman of the Company, Michael Hibberd, is a member of
the Audit Committee which is not in line with the recommendations
made in the Smith Guidance on the Combined Code. However, the
Board continues to believe that his recent and relevant financial
experience, including his experience on corporate financial matters
is invaluable in supporting the Audit Committee to perform its role.
51
 Corporate Governance Report continued
The Audit Committee engages in numerous ad-hoc discussions
and meets formally at least twice a year to discharge its
responsibilities which are set out in its Terms of Reference. The
Audit Committee also oversees the Company’s relationship with its
external auditors and reviews the effectiveness of the external audit
process. The Audit Committee pre-approves all audit and non-audit
services undertaken by the external auditor, to ensure
independence of the external auditors is not impaired.
In fulfilling its responsibility to monitor the integrity of financial reports
to shareholders, the Audit Committee reviews the accounting
principles, policies and practices adopted in the preparation of public
financial information and will examine documentation in relation to the
Annual Report and annual financial report announcements. The
ultimate responsibility for reviewing and approving the interim and
annual financial statements remains with the Board.
During the year the Audit Committee considered the following main
items of business:
>> review of operations;
>> review of the integrity of the financial statements and formal
announcements relating to the Group’s financial performance;
>> report of the external auditors, KPMG;
>> review of the financial statements;
>> update on internal controls;
>> review of whistle-blowing policy;
>> management representation letter and auditor independence;
>> audit engagement letter;
>> 2009 audit plan and key audit risks;
>> review of the committee’s Terms of Reference;
>> 2010 budget; and
>> potential asset sales and business combinations.
At present there is no internal audit function established. The
Committee reviewed the need for an internal audit function in 2009
and again in March 2010 and concurred with the opinion of the
Board, which maintains that the current control systems in place
and management oversight are sufficient to highlight any areas of
weaknesses in the financial reporting systems. The need for an
internal audit function is kept under review at least annually.
The Terms of Reference of the Audit Committee were reviewed
during the year, and part of that review involved consideration of
matters considered to be good practice in other listed companies.
Remuneration Committee Report
Remuneration Committee l
John McLeod, Chairman
Salim Macki
General Sir Michael Wilkes
Main Responsibilities
>> setting the remuneration policy for the Chairman, Executive
Directors and senior executives;
>> assessing and determining total compensation packages
available to the Executive and Non-Executive Directors;
>> monitoring the remuneration of senior management other than
the Executive Directors whose remuneration it sets;
>> determining policy and scope for pension rights and any
compensation payments and ensuring compliance with the
Combined Code in this respect; and
>> making recommendations to the Board for its approval, and that
of shareholders, on the design of long-term incentive plans and
making recommendations for the grant of awards to executives
under such plans.
52
All members, including the Chairman, are independent
Non‑Executive Directors. The Chairman of the Board,
Chief Executive Officer, Chief Financial Officer and external advisers
may also be invited to attend as and when appropriate.
The Remuneration Committee engages in numerous ad-hoc
discussions and meets formally at least once a year. The Terms of
Reference of the Remuneration Committee comply fully with the
requirements of the Combined Code. These were reviewed during
the year using the Hay Group, and part of that review involved
consideration of what was considered to be good practice in other
listed companies.
Further information on the Committee can be found in the
Remuneration Report on pages 55 to 61.
Nomination Committee Report
Nomination Committee s
Michael Hibberd, Chairman
Anthony Buckingham
General Sir Michael Wilkes
Main Responsibilities
>> formalising succession planning and the process for new
Director appointments;
>> identifying, evaluating and recommending candidates for
appointment or reappointment as Directors or Company
Secretary taking into account the challenges and opportunities
facing the Company;
>> reviewing the structure, size and composition (including the
balance of knowledge, skills and experience) of the Board in
order to recommend changes to the Board and to ensure the
orderly succession of directors; and
>> reviewing the outside directorships/commitments of
Non-Executive Directors.
The majority of the members are independent Non-Executive
Directors. External advisers may also be invited to attend as and
when appropriate. The Committee has the power to request the
attendance of any other Director or member of management, for all
or part of any meeting, as may be considered appropriate by the
Chairman of the Committee.
The Nomination Committee engages in numerous ad-hoc
discussions and meets formally at least once a year. The
Nomination Committee ensures, amongst other things, that there is
a formal, rigorous and transparent procedure for the appointment of
new directors. Recommendations are made objectively. The
activities that the Nomination Committee are responsible for are set
out in its Terms of Reference.
During the year the Nomination Committee considered the following
items of business:
>> the appointment of General Sir Michael Wilkes as Senior
Independent Director;
>> induction and professional development policy;
>> succession planning; and
>> independent evaluation of the Board, Board Committees and the
Chairman.
The Terms of Reference of the Committee were reviewed during the
year, and part of that review involved consideration of what was
considered to be good practice in other listed companies.

Reserves Committee Report
Reserves Committee t  effectiveness of the Company’s system of internal controls and risk
John McLeod, Chairman
Michael Hibberd
Paul Atherton
Brian Smith, VP Exploration
Main Responsibilities
>> assist the Board in fulfilling its oversight responsibilities generally
with respect to the oil and natural gas reserves evaluation
process and public disclosure of reserves data and related
information in connection with oil and gas activities;
>> review, at least annually, the Company’s procedures relating to
disclosure of information with respect to the oil and gas activities
of the Company, including its procedures for complying with any
disclosure requirements and restrictions;
>> review annually the qualifications and independence of an
independent qualified reserves evaluator(s) to be appointed or
re-appointed by the Board and in the case of any proposed
change in the independent qualified reserves evaluator(s),
determine the reasons for the proposed change and whether
there have been any disputes between the appointed qualified
reserves evaluator(s) and management of the Company; and
>> review any public disclosure or regulatory filings with respect to
any reserves evaluation and oil and gas activities.
It was felt appropriate at this stage of development of the Company
to establish a Reserves Committee to fulfil the duties above. The
Reserves Committee engages in numerous ad-hoc discussions and
will formally meet at least once a year. External advisers may also
be invited to attend meetings as and when required.
Corporate Social Responsibility Committee Report
Corporate Social Responsibility Committee u
Paul Atherton, Chairman
Anthony Buckingham
Michael Hibberd
Main Responsibilities
>> maintain the Company’s CSR policy framework in line with best
practice and appropriate international standards and guidelines;
>> develop a framework for submission, assessment and approval
of discretionary and obligatory community, social, educational
and charitable expenditures undertaken by the Company
worldwide;
>> to prepare the Annual Group CSR Report and ensure that it is
a fair reflection of the Company’s CSR approach, policies,
systems and performance, is coherent and published in a timely
manner; and
>> to review the internal CSR programme of the Company and
ensure it has the appropriate standing within the Company.
It was considered appropriate as the Company grows and operates
in more areas to establish a CSR Committee to fulfil the duties above.
The CSR Committee engages in numerous ad-hoc discussions and
will formally meet at least once a year. External advisers may also be
invited to attend meetings as and when required.
Accountability and Audit
Audit Committee Report
Details of the Audit Committee and the Audit Committee Report
were discussed on pages 51 to 52.
Overview
Internal Controls
The Audit Committee has responsibility for reviewing the
Business Review
management systems. The Board has taken into account the
relevant provisions of the Combined Code in formulating the
systems and procedures in operation in the Company. The Audit
Committee considers the system to be effective.
The Company’s system of internal controls is designed to manage,
rather than eliminate, the risk of failure to achieve business
objectives and can only provide reasonable and not absolute
assurance against material misstatement or loss. The Board will
Corporate Governance
continue to review and improve its system of internal controls.
The Board recognises the need for effective internal controls and
for evaluating and managing the risks of the Company. Such
matters are brought to the attention of the Board at its formal Board
meetings, ad-hoc discussions or via the whistle-blowing policy.
High level controls in operation include:
>> review of management accounts with comparison of actual
performance against prior periods and budget;
>> approval of orders, authorisation of invoices and two signatories
Financial Statements
required to make a transfer from the principal bank accounts;
>> quarterly reconciliation of all control accounts;
>> prior approval by the Board for major investments; and
>> segregation of duties between relevant functions and
departments.
The Board is aware of the need to conduct regular risk
assessments to identify any deficiencies in the controls currently
operating over all aspects of the Company. A formal risk
assessment is conducted periodically during the year on internal
Heritage Oil Plc Annual Report & Accounts 2009
controls to cover material controls, both financial and operational,
and risk management systems.
The risk assessment and a review of the effectiveness of the
Group’s system of internal controls are performed in accordance
with the Turnbull guidance and they were in place for the year end
review process.
Financial reporting procedures were reviewed as part of the
process to become listed on the Main Market of the LSE and a
Board memorandum was prepared. Having considered the
findings, the Directors were able to confirm that the financial
reporting procedures established provided them with a reasonable
basis on which to make proper judgements on the financial position
and prospects of the Company on an ongoing basis. However, one
main weakness was noted, concerning accounting for complex
transactions, although the Company seeks third party advice to
mitigate this weakness.
The Directors recognise the need to maintain financial reporting
procedures, to review them on an ongoing basis and to adapt them
to changing circumstances and will use the Board memorandum as
a basis for further developing the Board processes.
Details of principal risks and uncertainties are discussed in the
Financial Review on pages 34 to 37.
53
 Corporate Governance Report continued

The Company has a whistle-blowing policy in place and information
is available to all employees advising them that they can raise
concerns in confidence about possible wrong doing by contacting
the Chairman of the Audit Committee. In addition, whistle-blowing is
an agenda item at Board and Audit Committee meetings with
appropriate action taken as required.
Throughout 2009, Executive Directors and senior management met
with institutional investors in London and across the UK as well as
other European and North American cities. These roadshows,
combined with the attendance of various Directors and/or senior
management at several conferences, provided for comprehensive
and engaging dialogue with shareholders.

Auditor Independence
The Audit Committee and Board recognise the importance of the
independence and objectivity of the Group’s external auditors,
KPMG Audit Plc, when performing their role in the Group’s
reporting to shareholders. The external auditors are expected to
provide the Audit Committee with information about policies and
processes for maintaining independence and monitoring
compliance with current regulatory requirements, including those
regarding the rotation of audit partners and staff.
The overall performance, independence and objectivity of the
auditors is reviewed regularly by the Audit Committee. The Audit
Committee has a policy in place in respect of the provision of
non-audit services to the Company by the external auditor. Fees
billed by KPMG Audit Plc, the Company’s auditors and its
associates, during 2008 and 2009, may be summarised as follows:
2009 2008
US$ US$
The Group issues its results and other news releases promptly and
publishes them on the Company’s website at www.heritageoilplc.com.
Other corporate information, including the Annual Report, any circulars
issued during the year and other financial presentations is also
available on the website. Shareholders and other interested parties can
subscribe to receive news updates by email by registering online on
the website.
Analysis of the Company’s shareholder base indicates that there
has been a small change in the profile of those holding shares in
Heritage in 2009. There has been an increase in shareholders
who classify their investment style as growth offset by declines in
hedge funds. These are shown on the following two graphs.
December 2008
8
6 7
5

Audit and audit related services: 1 Management 34%

4
Group audit of annual statements and
2 Multiple 24.9%
review of interim statements 259,744 276,900
3 Hedge Fund 17.1%
Prospectus and information circular – 97,087
3 4 Retail 9%
259,744 373,987 1
5 Growth 8%
Non-audit services:
6 Index 3.7%
Tax compliance and advisory 43,744 110,124
Transaction services1 1,274,820 537,900 7 Other 2.5%
2
8 Value 1.1%
1,318,564 648,024

1 The majority of the 2009 transaction services costs relate to an aborted acquisition
(see Operating Results section of the Financial Review, pages 30 to 32) Source: J.P. Morgan Securities Ltd. Other consists of arbitrage, corporate, emerging
markets, trading positions and custody.
Going Concern
A statement on the Directors’ position regarding the Company as a December 2009
going concern is contained in the Directors’ Report on page 64.
7 8
6
Shareholder Relations 5
The Chairman, with input from the Senior Independent Director, is
responsible for ensuring effective communication of shareholders’ 1 Management 30%1
views to the Board as a whole and will update the rest of the Board 4 2 Multiple 29.5%
accordingly. Board Members are expected to use their best
3 Hedge Fund 12.8%
endeavours to attend meetings with a broad range of shareholders 1
or otherwise keep in touch with shareholder opinion and discuss 4 Growth 10.25%
strategy and governance issues with them as time progresses. In 3 5 Retail 9%
addition, the Company employs an investor relations specialist and 6 Index 3.6%
an investor relations programme is in place for the Company to 7 Other 3.9%
2
meet major shareholders and analysts. 8 Value 0.9%

As part of the Company’s commitment to comply with the

Combined Code, General Sir Michael Wilkes was elected as the
Senior Independent Director with the chief responsibility of
maintaining sufficient contact with major shareholders to help
develop a balanced understanding of their issues and concerns. In
this role General Sir Michael Wilkes is available to shareholders who
have concerns that have not been, or cannot be resolved through
discussion with the Chairman, Chief Executive Officer or Chief
Financial Officer or where such contact is inappropriate.
54
Source: J.P. Morgan Securities Ltd. Other consists of arbitrage, corporate, emerging
markets, trading positions and custody.
1 Management decline is due to the increase in shares through the share placing in
June 2009.
At the AGM, a business presentation is provided for the benefit of
shareholders. The Chairman ensures, and will continue to ensure,
that the respective chairmen of the Remuneration, Audit,
Nomination, Reserves and CSR Committees attend the AGM to
answer questions and that the other Directors also attend.
 Overview
Remuneration Report
Remuneration Committee Chairman’s Introduction

Business Review
Corporate Governance
Dear Shareholder,

I am pleased to present Heritage’s Remuneration Report for the year ended 31 December 2009 for which we will be
seeking approval from shareholders at our AGM in June. As you will see, we have enhanced the level of disclosure
included in the Remuneration Report to reflect evolving best practice and to facilitate continued dialogue with our
shareholders.

The past year has been an exciting one for Heritage as we crystallised value with the disposal of our Omani interests
and prepare to dispose of our Ugandan interests. We also experienced continued operational success with the

Financial Statements
discovery of the Miran West Field in Kurdistan. In addition, the past year saw a number of corporate governance
developments in response to the global financial turmoil, with a particular emphasis on executive reward policies
and practice, which the Committee has considered.

Against this background, the Remuneration Committee has continued to monitor the executive reward policy first
established during 2008, and its application, to ensure that both remain appropriate. As part of this process, the
Remuneration Committee has:
>> reviewed the operation and structure of the annual bonus plan;
>> decided to enhance the level of disclosure provided in the Remuneration Report;
>> had its performance and effectiveness assessed as part of the wider Board evaluation process described in the

Heritage Oil Plc Annual Report & Accounts 2009

corporate governance section of our annual report; and
>> considered the likely behavioural impact of the remuneration policy and, in particular, the short and long-term
incentive structures, on the risk taking attitude of senior executives.

We believe that our executive reward policy remains appropriate and as a result have made no fundamental
changes, other than those described above.

As per last year’s Remuneration Report, salaries remained frozen during the year and no further awards of shares
under the Long Term Incentive Plan (“LTIP”) were made to the Executive Directors. The Terms of the LTIP were not
changed. Pension and benefit provisions also remained unchanged.

We will keep our policy under review throughout 2010 as our business evolves and new corporate governance
developments occur.

The rest of the report provides more detail on our remuneration arrangements.

John McLeod
Chairman of the Remuneration Committee
29 April 2010

55
 Remuneration Report continued
Introduction
This report has been prepared with reference to the UK Large and
Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008 (“the regulations”) and meets the relevant
requirements of the Financial Services Authority’s Listing Rules. The
report has, therefore, been divided into different parts for unaudited
and audited information.
In preparing this report, consideration has also been given to the
Combined Code and the Guidelines of the Association of British
Insurers on Executive Remuneration Policies and Practices. Advice
has been sought from Hay Group which is a founder member of the
Remuneration Consultants Group and is committed to upholding its
principles.
A resolution to approve the report will be put to shareholders at the
Annual General Meeting on 17 June 2010.
Remuneration Committee
The members of the Remuneration Committee during the year were
John McLeod (Chairman), General Sir Michael Wilkes and Salim
Macki. The Committee met once during 2009 with all members
in attendance.
All members of the Remuneration Committee are considered by the
Board to be independent as explained in the corporate governance
section of the annual report on page 50.
The Remuneration Committee’s main responsibilities are to:
>> set the remuneration policy for the Chairman, Executive Directors
and senior executives;
>> assess and determine total compensation packages available to
the Executive and Non-Executive Directors;
>> monitor the remuneration of senior management other than the
Executive Directors whose remuneration it sets;
>> determine policy and scope for pension rights and any
compensation payments and ensure compliance with the
Combined Code in this respect; and
>> make recommendations to the Board for its approval, and that of
shareholders, on the design of long-term incentive plans and
make recommendations for the grant of awards to executives
under such plans.
In setting the remuneration policy and total compensation package
levels for Executive Directors and other senior executives, the
Remuneration Committee gives consideration to remuneration
policy and levels for the wider employee population. In particular,
the Remuneration Committee considers how pay levels in the wider
employee population compare against the market and is mindful of
the pay differentials between top executives and roles at different
levels in the structure.
The Remuneration Committee has clearly defined terms of
reference which conform with the requirements of the Combined
Code and are available on the Company’s website.
Advice to the Remuneration Committee
The Chairman of the Board, Chief Executive Officer and Chief
Financial Officer provide internal support to the Remuneration
Committee and attend meetings at the Committee’s invitation
except where matters associated with their own remuneration are
being discussed.
56
In addition, the Remuneration Committee has access to external
advice as required. During the year, the Committee continued to
receive independent advice from external executive reward
consultants, the Hay Group, on matters under consideration by the
Committee. In addition, the Hay Group facilitated the Board’s
assessment process as described in the corporate governance
section of the annual report and provided updates on best market
practice. No other services were provided to the Company by the
Hay Group during the year.
Remuneration Committee Assessment
As part of the overall Board assessment process described in the
corporate governance section of the annual report, the operation,
structure and performance of the Remuneration Committee and its
members were assessed during the year. This process, which was
facilitated by the Committee’s external advisers, the Hay Group,
took into account the views of both member and non-member
Directors of the Committee.
The outcome of the review confirmed that the Remuneration
Committee discharges its responsibilities effectively.
Executive Reward Policy
During the year, the Remuneration Committee has continued to
monitor the executive reward policy and principles which were put
in place in 2008 to ensure that they remain appropriate. These
broad principles, which the Remuneration Committee believes
remain appropriate in the current climate, are designed to ensure
that the Company:
>> has an executive reward framework to help drive future value
growth;
>> retains and, when necessary, recruits management talent of the
required ability and experience;
>> provides overall levels of reward that are appropriate for the
Company given its Premium Listing in London, international
operations and the global nature of the oil and gas industry;
>> follows, insofar as possible, both UK as well as Canadian
standards of corporate governance in so far as that such
standards support and enhance the Company’s ability to
generate value for shareholders; and
>> maintains a balance between fixed (base package and benefits)
and variable reward (short and long-term incentives) that is
appropriate and motivates the right behaviours (see chart on
page 57).
It remains the Remuneration Committee’s opinion that, in light of the
areas where the Company operates, the relatively small number of
Executive Directors at the Company and the roles conducted by the
Executive Directors that an upper quartile level of total reward is
appropriate. However, upper quartile levels of reward are only
available (mainly through participation in the LTIP) for truly
exceptional levels of performance.
Overall levels of reward are benchmarked against three relevant
comparator groups:
>> UK Oil & Gas companies (excluding those significantly larger than
the Company);
>> an international comparator group comprising companies of a
similar size and scale to Heritage; and
>> the FTSE 250.
Within this overall reward policy, the manner in which each
component of executive reward is aligned to the overall business
strategy is shown in the following table.
 Overview
Component Base Package
of Executive Policy for Alignment to The table below shows the annual base packages of the Executive

Business Review
Reward Executive Directors Corporate Strategy Directors during 2009. Following the introduction of the LTIP in
2008, the Remuneration Committee implemented a two year base
Base Package –– Typically reviewed –– Market competitive
package freeze for the Executive Directors and, therefore, salaries
annually pay levels enable us
did not increase in 2009.
–– Two year freeze to recruit and retain
implemented in 2008 the best available Name 2009 Base Package
–– Benchmarked against talent for Heritage
Anthony Buckingham £675,000
UK & International
Paul Atherton £500,000
Oil & Gas companies
and the FTSE 250
The Remuneration Committee reviewed the salaries of the
Annual Bonus –– Maximum of 300% of –– Promotes a high-

Corporate Governance
Executive Directors during 2010 and a 5% increase was granted
base package performance culture
effective 1 April 2010.
–– Based on corporate –– Ensures that the
targets (no individual Executive Directors
Annual Bonus
element) are focused on the
The annual bonus, payable wholly in cash, has a maximum limit of
goals of the
300% of base package and is payable to Executive Directors solely
Company
for the achievement of corporate targets. There are no individual
Long-term –– One-off award –– Aligns our Executive targets for Executive Directors. At other levels in the Company,
Incentive covering a three year Directors with our targets which relate to performance in an individual’s geographical
period of annual shareholders area of operation or function are utilised but, for any bonus to be
grants –– Absolute growth paid out at all, a minimum level of Company performance must

Financial Statements
–– Three year requirement be achieved.
performance period ensures rewards are
–– Relative Total only available if the The Remuneration Committee recommends the level of annual
Shareholder Return share price bonuses paid to the Executive Directors. The level of annual
(“TSR”) performance increases bonuses is based on corporate targets. Based upon the
targets underpinned –– Upper quartile achievements of the Company during the year, including the
by requirement for rewards are successful drilling campaigns in Uganda and Kurdistan, increase in
20% share price available only for the share price, sale of the Omani assets and potential sale of the
growth exceptional levels of Ugandan interests, the bonus awards for the Executive Directors in
–– None of the awards performance 2009 is 150% of base package, reflecting another year of excellent

Heritage Oil Plc Annual Report & Accounts 2009

vest unless TSR performance.
performance is close
to the upper quartile During the year the Company achieved its targets. Consequently it
Pension –– Allowance of 10% of –– Below market lower has been agreed that a payment of 150% of base package will be
base package quartile and in line paid to the Executive Directors.
with our
performance-driven Long-term Incentives
culture 2008 Long Term Incentive Plan
The LTIP was approved by shareholders in June 2008. The main
Balance Between Fixed and Performance-Related Reward features of the awards to Executive Directors are:
The charts below show the balance between fixed (base package >> one-off awards of performance shares reflecting the equivalent of
and benefits) and variable (bonus and long-term incentives) three years of award;
elements of reward for each of the Executive Directors. >> a face value of 1,200% of base package for the Chief Executive
Officer and 800% of base package for the Chief Financial Officer,
Components of Executive Directors’ Reward reflecting the equivalent of annual awards for three years;
>> the performance conditions, measured over the three year period
starting with the date of the award, are relative TSR versus a group
CEO 28% 72% of international oil companies and a requirement for the share price
to increase by at least 20% between the date of the award and the
CFO 34% 66% end of the vesting period;
>> none of the awards will vest unless comparative TSR performance
Fixed Reward Variable Reward is close to the upper quartile level of the comparator group; and
>> there is an additional holding period of one year following the
vesting of the awards.
Fixed Reward includes base package and value of benefits
(including pension).

Variable Reward includes 2009 bonus and the annualised fair value
of long-term incentive awards (apportioned over the life of the LTIP).

57
 Remuneration Report continued

Awards vest according to the following schedule: The comparator group companies were selected on the basis of
their size and scale of operations, market capitalisation and
Proportion of Award Vesting geographic spread. The original comparator group comprised the
Typical UK following companies:
TSR Performance vs. comparator group of 18 companies Heritage practice

3rd place (the Upper Decile) and above 100% 100% Aminex plc Imperial Energy plc Premier Oil plc
4th place 80% 100% Bowleven plc JKX Oil and Gas plc SOCO International plc
5th place (the Upper Quartile) 50% 100% Dana Petroleum plc Mariner Energy Inc. Stone Energy Corp.
6th place 30% 85% Dominion Resources McMoran Exploration Swift Energy Co.
7th place 0% 70% Inc. Co.
8th place 0% 55% Gulf Keystone Melrose Resources Tullow Oil plc
9th place 0% 40% Petroleum Ltd. plc
10th place (the Median) 0% 25% Hunting plc Oilexco Inc. Venture Production plc
Below 10th place 0% 0%
It is not planned to make any further awards to existing members of
Long-term incentive award levels have been set with reference to
the LTIP scheme before 2011, although awards may be made to
the upper quartile of the Company’s comparator groups. However,
new senior members of staff between 2009 and 2011.
the vesting schedule is designed to only deliver the whole value of
the award for truly exceptional performance, at a standard higher
2008 Replacement Share Option Scheme
than that which is normal for the UK. The additional performance
Heritage Oil Corporation (“HOC”) implemented The Heritage Oil
condition, requiring the share price to increase by 20% or more, is
Corporation Plan (“the Original Plan”) following approval by its
also above and beyond what is common in both the UK
shareholders in 2004 and granted options under the Original Plan to
and Canada.
its Executive and Non-Executive Directors and other employees
and consultants at that time. The grant of options included all the
In the light of the performance conditions described above, the
then current Executive and Non-Executive Board members and so
Remuneration Committee believes that the award levels, which
excluded General Sir Michael Wilkes and Salim Macki. As a result of
reflect the equivalent of annual awards for three years, are
the Group reorganisation and subsequent listing on the Main
appropriate for the Executive Directors because:
Market of the LSE, all the Board members were entitled to retain
>> a one-off award provides better alignment of the Executive
their options under the Original Plan and exchange them for options
Directors with current and potential shareholders following the
to acquire ten Ordinary Shares of the Company for every one
Company’s reorganisation and listing on the Main Market of the
Common Share they held under option. The Original Plan was then
LSE than would annual rolling awards;
cancelled and on 18 March 2008, the Company adopted The
>> a one-off award encourages sustained performance over the first
Heritage Oil Limited 2008 Replacement Share Option Scheme
three key years following the Company’s listing in London. Annual
(“Replacement Scheme”) which is substantially in the same form as
awards can have the effect of encouraging “staggered” or
the Original Plan. The purpose of the Replacement Scheme is to
“delayed” performance, e.g. not maximising investments and
act as a replacement to the Original Plan and to honour the options
performance as soon as possible in any given year so as to
granted under it by granting holders the option to purchase
ensure that new awards benefit from any uplift such investments
Ordinary Shares. The Replacement Scheme is administered by the
and performance will create. The Remuneration Committee
Board and no further options will be granted under it.
believes that it is in the best interest of shareholders for maximum
value to be accrued as soon as possible;
The maximum number of Ordinary Shares which may be issued under
>> a one-off award covering three years of annual grant provides a
the Replacement Scheme was 24,545,340, being the equivalent
greater retentive effect than annual grants and ensures continuity
number of shares required to replace the options granted under the
in management following the Company’s listing in London; and
Original Plan that were still in existence prior to their cancellation.
>> whilst the Remuneration Committee is keen to move to UK
standard annual grant patterns as soon as practicable, provided
All options under the Replacement Scheme have now vested and
to do so is in the best interests of shareholders, providing a
the Company will not grant any further options under this scheme.
one-off award equivalent to three years of annual awards
counterbalances the Remuneration Committee’s decision to
Pensions
remove annual vesting for long-term incentives, replacing it
Executive Directors receive pension contributions of an annual
with a three year vesting period and an additional one year
amount equal to 10% of their base package into a personal pension
holding period.
scheme nominated by the executive.

Other Benefits
The Company’s policy is to provide Executive Directors with private
medical insurance, life insurance and school fees for dependents
but no other benefits in kind which would be typical in the UK. In
addition, both Executive Directors are entitled to allowances of
£100,000 (Anthony Buckingham) and £77,500 (Paul Atherton) to
cover their living expenses.

58

Shareholding Guidelines
At present the Committee has not established formal Executive
Director shareholding guidelines as, in the opinion of the
Committee, these would be superfluous at this time. The Executive
Directors hold a substantial number of shares in the Company and
have interests in shares under various share incentive arrangements
as shown in the table below:
Anthony Buckingham Paul Atherton
Shares held 84,540,340 1,140,000
Shares vested under the 2008
Replacement Scheme yet to be exercised 10,129,510 2,875,000
Interest in shares under the 2008 LTIP 2,347,826 1,159,420
Total 97,017,676 5,174,420
Notional value of shares at year end, £1 422,997,067 22,560,471
Total value as a multiple of base package 626 times 45 times
1 The full vesting of 2008 LTIP and share options is assumed. Cost of exercise is
£14,520,199 for Anthony Buckingham and £3,433,750 for Paul Atherton.
Service Agreements
The Executive Directors’ service agreements with the Company are
for no fixed term. In normal circumstances, the agreements may be
terminated by the Company giving no less than 24 months notice
and the Director giving six months’ notice. These arrangements
were in place during their time as Executive Directors of HOC and
were inherited by the Company. The Board feels that these notice
periods were appropriate to recruit and retain the Executive
Directors. The Board recognises that these arrangements are not in
line with current UK market practice. The Company has discussed
the Executive Director employment contracts with external advisers
and internally within the Remuneration Committee. After taking
these views into consideration, the Company has decided, for
commercial reasons, to retain the existing Executive Director notice
period structure because of their importance to the business at this
stage in its development. We believe that this policy protects the
interests of our shareholders.
Executive Director Date of Unexpired Notice Period Notice Period
Contract Term by Company by Director
Anthony 28 March Rolling 24 months 6 months
Buckingham 2008 Contract
Paul Atherton 28 March Rolling 24 months 6 months
2008 Contract
In the event of a change of control of the Company, if the Executive
Directors resign or the Company terminates their appointment
within 24 months of such an event, they will each be entitled to an
immediate payment in lieu of notice of a sum equivalent to three
times their annual base package. In addition, they will be entitled to
a payment of Cdn$75,000 in the event they are asked to resign
from the Board of HOC in any event other than as a result of a
change of control. The Company also may terminate the
agreements and make payments in lieu of notice.
Currently the Executive Directors’ service contracts do not provide
for mitigation in the event of early termination. The Executive
Directors do not have service contracts with any Group subsidiary.
Overview
Non-Executive Directors
The Non-Executive Directors do not have service contracts but their
Business Review
terms are set out in a letter of appointment. Their terms of
appointment may be terminated by each party giving three months
notice in writing. Michael Hibberd and Gregory Turnbull will be
entitled to a change of control bonus of Cdn$75,000 plus a pro-rata
amount of their previous year’s bonus multiplied by a share price
performance factor in the event that HOC changes control.
The remuneration of Non-Executive Directors is a matter for the
Chairman and the Executive members of the Board. The
Company’s policy is to set levels for Non-Executive Directors’
Corporate Governance
remuneration so as to ensure that they are sufficient to attract,
retain and motivate high quality directors.
Non-Executive Directors’ annual basic fee levels for 2009 and 2010
are set out below. Actual fees paid for the year ended 31 December
2009 are shown in the Directors’ Emoluments table on page 60.
2010 2009
Michael Hibberd £120,000 £80,000
Salim Macki £80,000 £80,000
General Sir Michael Wilkes £80,000 £80,000
Financial Statements
Gregory Turnbull £80,000 £50,000
John McLeod £80,000 £50,000
Additional fee for each day worked
in excess of the agreed 20 days per annum1 £2,000 £2,000
1 In 2009 each Non-Executive Director received further fees in respect of an additional
ten days worked due to the aborted transaction.
With the exception of General Sir Michael Wilkes and Salim Macki,
all of the Non-Executive Directors will be entitled to a payment of
Cdn$75,000 in the event they are asked to resign from the Board of
Heritage Oil Plc Annual Report & Accounts 2009
HOC in any event other than as a result of a change of control.
General Sir Michael Wilkes received a payment of £50,000 on
joining the Board of the Company. No other Director received this
form of payment on joining the Board of the Company.
During 2009, Michael Hibberd, Gregory Turnbull and John McLeod
received fees of Cdn$22,500 per annum from HOC for acting as
Directors of that company. From 2010, the annual fees paid by
Heritage Oil Plc are reduced by the monthly fees paid by HOC.
Terms of appointment and re-appointment are set out below:
Subsequent
Date of Notice Initial Term of term of
Non-Executive Director Contract Period Appointment appointment
Michael Hibberd 28 March 2008 3 months 2010 AGM 3 years
Gregory Turnbull 28 March 2008 3 months 2009 AGM 3 years
John McLeod 28 March 2008 3 months 2009 AGM 3 years
General Sir
Michael Wilkes 28 March 2008 3 months 2011 AGM 3 years
Salim Macki 12 August 2008 3 months 2009 AGM 3 years
Non-Executive Directors do not participate in the Company’s
pension arrangements. Although they have previously received
grants of options, they will not receive any further grants or
participate in any other long-term incentive arrangements.
59
 Remuneration Report continued

Performance Graph
The following graph shows the Company’s TSR since trading of the Company’s shares began on the LSE on 31 March 2008 against the FTSE
250 Index. The Remuneration Committee has selected the FTSE 250 Index as it represents a broad equity market index of which the Company
forms a part of and therefore provides a good indication of the Company’s general performance.
250
—— Heritage Oil —— FTSE 250

200

150

100

50

0
31/03/2008 31/03/2009 31/12/2009

Directors’ Emoluments for the year ended 31 December 2009

Annual 2009 2009 20082 2008

Base Package/Fees Benefits1 Bonus Total Pensions Total Pensions
£000 £000 £000 £000 £000 £000 £000

Executive Directors        
Anthony Buckingham 675.0 141.3 1,012.5 1,828.8 67.5 1,109.8 50.6
Paul Atherton 500.0 152.7 750.0 1,402.7 50.0 877.4 37.5
Non-Executive Directors
Michael Hibberd3 112.6 – – 112.6 – 94.9 –
Gregory Turnbull3 82.6 – – 82.6 – 66.4 –
John McLeod3, 4 82.6 – – 82.6 – 67.4 –
General Sir Michael Wilkes 100.0 – – 100.0 – 116.7 –
Salim Macki 100.0 – – 100.0 – 31.8 –
Total 1,652.8 294.0 1,762.5 3,709.3 117.5 2,364.4 88.1

1 Shows the taxable value of benefits, comprising private medical insurance, life insurance and school fees. The figures also include living allowances of £100,000 (Anthony
Buckingham) and £77,500 (Paul Atherton) but exclude pension contributions.
2 The Directors became entitled to emoluments payable by the Company from 28 March 2008. Prior to this date, the Directors were only entitled to emoluments payable by HOC
which was then the parent company of the Group.
3 During 2009 Michael Hibberd, Gregory Turnbull and John McLeod also received fees of Cdn$22,500 paid by HOC as Directors of that company. These fees have been included
in the above table.
4 The Non-Executive Directors charged an additional ten days time in 2009 for additional work incurred in connection with an aborted transaction.

60
 Overview
Performance Shares
Conditional awards of performance shares were granted to Executive Directors on 19 June 2008 under the LTIP, subsequent to the Plan’s

Business Review
approval at the Company’s AGM that year, as shown below.

Executive Directors’ Interests in Performance Shares

As at 31 December 2009
Earliest Share price
Number of vesting at date
Director shares date of grant

Anthony Buckingham 2,347,826 18 June 2011 345p

Paul Atherton 1,159,420 18 June 2011 345p

Corporate Governance
The table below sets out the direct and indirect interests of the Directors in the share capital of the Company as at 29 April 2010:

Percentage of
Number of Voting Share
Director Ordinary Shares1 Capital

Michael Hibberd 125,000 0.04%

Anthony Buckingham2 84,540,340 29.4%
Paul Atherton 1,140,000 0.4%
Gregory Turnbull 350,070 0.12%
John McLeod 20,000 0.01%
General Sir Michael Wilkes 0 0%

Financial Statements
Salim Macki 138,752 0.05%

1 Includes Exchangeable Shares.

2 Anthony Buckingham’s Ordinary Shares include the Ordinary Shares held by Albion as at the date of this document, a company owned and controlled by Anthony Buckingham.

Directors’ Interests in Share Options held under the Replacement Scheme

As at 31 December 2009

 At December Options  At December

Director At Date of Grant 2008 Exercised 2009 Exercise Prices Vesting Periods Expiry Date

Michael Hibberd 150,000 150,000 150,000 £0.81 23 Jun 06–23 Jun 08 23 Jun 11

Heritage Oil Plc Annual Report & Accounts 2009

750,000 750,000 750,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 11
250,000 250,000 250,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12
Anthony Buckingham 500,000 500,000 500,000 £0.48 30 May 05–30 May 07 30 May 10
9,129,510 9,129,510 9,129,510 £1.43 14 Dec 06–14 Dec 08 14 Dec 11
500,000 500,000 500,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12
Paul Atherton 1,250,000 1,250,000 1,250,000 £0.48 20 May 05–20 May 07 20 May 10
1,125,000 1,125,000 1,125,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 11
500,000 500,000 500,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12
Gregory Turnbull 150,000 150,000 150,000 £0.48 20 May 05–20 May 07 20 May 10
300,000 300,000 300,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 11
150,000 150,000 150,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12
John McLeod 100,000 – – £0.48 20 May 05–20 May 07 20 May 10
300,000 300,000 50,000 250,000 £1.43 14 Dec 06–14 Dec 08 14 Dec 11
  150,000 150,000 150,000 £2.45 21 Dec 07–21 Dec 09 21 Dec 12

Note: The final exercise prices were converted into pounds sterling on the Company’s reorganisation and listing on the Main Market of the LSE using the exchange rate in effect on
that date.

No options were granted or lapsed during the year, but 50,000 options were exercised at a price of £1.43 per Ordinary Share.

The closing share price on 31 December 2009 was £4.36. During the year the highest closing share price was £6.03 and the lowest was
£1.62.

This report was approved by the Board on 29 April 2010 and signed on its behalf by:

John McLeod
Chairman of the Remuneration Committee
29 April 2010
61
 Directors’ Report
The Directors of the Company submit their report together with the
consolidated audited financial statements for the year ended
31 December 2009 for the Company and the Group.
The Company was incorporated as Heritage Oil Limited on
6 February 2008 in Jersey under the Companies (Jersey) Law 1991,
as amended (the “Jersey Companies Law”) to become the ultimate
holding company of the Group. Heritage Oil Limited changed its
name to Heritage Oil Plc on 18 June 2009. HOC is a wholly owned
subsidiary of the Company.
The Company has had a Premium Listing on the Main Market of the
LSE since March 2008. The Group has two share classes traded;
Ordinary Shares issued by the Company which trade on the Main
Market of the LSE and Exchangeable Shares issued by HOC which
trade both on the Main Market of the LSE and on the TSX. The
Company is a member of the FTSE 250 Index.
Principal Activities
The Group is an independent, international oil and gas exploration,
development and production company with a focus on Africa, the
Middle East and Russia. It has exploration projects in Kurdistan, the
DRC, Malta, Pakistan, Tanzania and Mali, and a producing property
in Russia. The Group operates through a number of subsidiaries
which are set out on page 76.
Business Review
The Business Review includes the financial performance during the
financial year, future developments, performance of the Group and
principal risks and uncertainties. A review of the business is
incorporated by reference, forming part of this Directors’ Report,
and further information can be found in the pages below:
>> Chairman’s Statement on pages 8 to 9;
>> The Chief Executive’s Statement on pages 12 to 13;
>> Operations Review on pages 18 to 29;
>> Financial Review on pages 30 to 37; and
>> Corporate Social Responsibility Review on pages 38 to 43.
The cautionary statement concerning “forward-looking statements”
on page 33 of this Annual Report forms part of this Annual Report
and is incorporated by reference into the Business Review.
In addition, the Company has published a separate CSR report to
be sent to shareholders with this Annual Report.
Key Performance Indicators
Heritage uses a number of financial and operating Key
Performance Indicators (“KPIs”) against which it monitors
performance. These KPIs will continue to be developed as the
Company’s operations evolve.
2009 2008
LTIFR1 0.00 0.03
Staff turnover 3% 3%
Production from continuing operations2 -13% +80%
Reserves and Resources additions3 +103% +272%
Average realised price -35% +5%
1 Lost Time Injury Frequency Rate per 10,000 hours worked.
2 Excludes production from Block 8, Oman which was sold in April 2009.
3 Management estimates.
62
Corporate Governance Statement
In accordance with the Financial Services Authority’s Disclosure
and Transparency Rules (“DTR”) 7.2.1, the disclosures required by
DTR 7.2.2R to DTR 7.2.7 may be found in the Corporate
Governance Report on pages 48 to 54.
Results and Dividends
The Group’s financial statements for the year ended 31 December
2009 are set out on pages 68 to 98.
The proposed disposal of the Ugandan interests is expected to
complete within the first half of 2010. After completion of the
transaction, Heritage will have the financial flexibility to consider
various options to create further shareholder value and will also
consider returning a portion of the transaction proceeds to
shareholders via a special dividend, which could be in the range of
£0.75 to £1.00 per share. The Company has not declared or paid
any other dividends since incorporation and the Company does not
have any current intentions to pay further dividends in the
foreseeable future. Future payments of dividends are expected to
depend on the earnings and financial condition of the Company and
such other factors as the Board of Directors of the Company
consider appropriate.
Directors
The Directors of the Company as at 31 December 2009 are listed
below. They all served as Directors throughout 2009 and up to the
date of signing the financial statements.
 Appointment Dates
Michael Hibberd (Chairman) 18 March 2008
Anthony Buckingham (Chief Executive Officer) 25 February 2008
Paul Atherton (Chief Financial Officer) 6 February 2008
Gregory Turnbull 18 March 2008
Salim Macki 12 August 2008
John McLeod 18 March 2008
General Sir Michael Wilkes 18 March 2008
Biographical details of all Directors can be found on page 47.
With the exception of General Sir Michael Wilkes and Salim Macki, all
the Directors were previously, and continue to be, Directors of HOC.
Directors’ Election and Rotation
With regard to retirement and re-election of Directors, the Company
is governed by its Articles of Association (the “Articles”), the
Combined Code and the Jersey Companies Law. Directors have
the power to appoint a Director during the year but any person so
appointed must stand for election at the next AGM. It is the
Company’s policy that all Directors should retire and stand for
re-election at least once every three years. A retiring Director is
eligible to stand for re-election.
In accordance with the above provisions, Michael Hibberd and
Paul Atherton will retire and, being eligible, offer themselves for
re-election at the next AGM.
Powers of the Directors
Subject to the Company’s Articles, relevant statutory law and any
direction that may be given by the Company in general meeting, the
business of the Company is managed by the Directors who may
exercise all powers of the Company.

Directors’ Indemnity Provisions
Under the Company’s Articles, Directors are indemnified out of the
assets of the Company against any loss or liability incurred by
reasons of having been a Director of the Company.
Share Capital
Capital Structure
The Company has two classes of shares, namely the Ordinary
Shares and the special voting share (the “Special Voting Share”).
The Ordinary Shares and the Special Voting Share carry no right to
fixed income. The Ordinary Shares have a right to one vote for every
share at general meetings whilst the holders of Exchangeable
Shares have rights through the Special Voting Share held by the
trustee of the Voting and Exchange Trust to one vote at general
meetings for every Exchangeable Share on the same basis as if
they had exchanged them for Ordinary Shares. For clarity, the
Voting and Exchange Trust is a Canadian Trust that holds the
Special Voting Share for the benefit of the registered holders of the
Exchangeable Shares pursuant to the terms of a Voting and
Exchange Trust Agreement dated 27 February 2008 as amended
24 April 2008.
Details of how to vote and deadlines for exercising voting rights are
set out in the Notice of AGM.
Subject to the Articles, any member may transfer certificated shares
by an instrument of transfer in writing in any usual form or in any
other form acceptable to the Directors. Directors may refuse to
register any transfer of certificated shares which are not fully paid or
where the register of transfer is not in the acceptable form.
The issued share capital of the Company and total voting rights of
the Company as at 29 April 2010 are as follows:
>> 284,842,830 Ordinary Shares of the Company are issued and
outstanding, which constitutes 98.9% of the total voting rights of
the Company; and
>> 3,024,108 Exchangeable Shares of HOC each carrying one voting
right in the Company, are issued and outstanding, which
constitutes 1.1% of the total voting rights of the Company.
The Executive Directors’ interests in the Ordinary Shares,
Exchangeable Shares, options granted under the employee share
scheme and interests in the LTIP are set out in the Directors’
Remuneration Report on page 59.
Repurchase of Shares
As approved at the General Meeting held on 25 January 2010, the
Company may make market purchases of its own shares. Any
shares which have been so purchased may be held as treasury
shares or cancelled immediately upon completion of the purchase.
The Company did not purchase any of its own shares during 2009
or in 2010 up to 29 April 2010, being the date of this report.
Major Shareholders
In accordance with DTR 5, the shareholders listed on the following
table have notified the Company of their interests in the Ordinary
Shares of the Company as at 29 April 2010:
Overview
Ordinary
Name Shares held % Held1
Business Review
Albion Energy Limited2 84,540,340 29.4
Capital Research and Management
Company 31,920,045 11.1
Lansdowne Partners Limited 28,776,161 10.0
Harrier Holdings Ltd re LCAM 9,903,861 3.44
1 Includes voting rights attaching to the Special Voting Share as well as the
Ordinary Shares.
2 Number of Ordinary Shares held by both Albion Energy Limited and 
Anthony Buckingham.
Corporate Governance
Albion and Anthony Buckingham entered into the Relationship
Agreement as part of the listing on the Main Market of the LSE.
The purpose of the Relationship Agreement is to ensure that
transactions and relationships between the Group, Albion and
Anthony Buckingham are at arm’s length and on normal
commercial terms.
Annual General Meeting
The AGM will be held at 22 Grenville Street, St Helier, JE4 8PX,
Jersey, Channel Islands on 17 June 2010. Formal notice of the
Financial Statements
AGM including details of special business will be set out in the
Notice of AGM and will be available on the Company’s website
at www.heritageoilplc.com.
Registrar
The Company’s share registrar is Computershare Investor Services
(Channel Islands) Limited of Ordnance House, 31 Pier Road,
St Helier, JE4 8PW, Jersey, Channel Islands.
Creditors’ Payment Policy
Heritage Oil Plc Annual Report & Accounts 2009
It is the Company and Group’s policy to settle all debts with
creditors on a timely basis and in accordance with the terms of
credit agreed with each supplier. Average creditor payment days for
the period under review were approximately 45 days.
Employees
The Company is committed to equal opportunity in recruitment,
promotion and employment. During 2009, the average number of
employees for the Group (including full-time contractors,
consultants and Directors) based in the following locations was:
Jersey 3
Canada 5
Russia 40
Europe 27
Uganda 48
Kurdistan 23
Tanzania 10
South Africa 8
Total 164
Political and Charitable Donations
The Company made charitable, social and community-related
donations during the year totalling $334,526 (2008 – $355,997).
The Group has undertaken a wide range of community schemes,
including public health, education, environment, public facility and
community relations based programmes further details of which
can be found on pages 38 to 43 and also in the separate CSR
63
 Directors’ Report continued
report accompanying this Annual Report. In line with Group policy,
no political donations were made during 2009.
Change of Control Agreements
The Company confirms that there are no significant agreements
to which it is party that would take effect, alter or terminate upon
a change of control following a takeover bid except those
disclosed below:
>> the Executive Directors’ service contracts contain certain
provisions in relation to change of control as disclosed in the
Remuneration Report;
>> the LTIP rules contain a provision whereby in the event of a
change of control all awards will vest in their entirety subject to
the achievement or otherwise of the performance conditions;
>> on 16 February 2007, HOC issued 1,650 $100,000 convertible
bonds at par to raise $165,000,000 by way of a private
placement. Issue costs amounted to $6,979,268 resulting in net
proceeds of $158,020,732. The bonds at par have a maturity of
five years and one day and an annual coupon of 8.00%. The
bondholders had the right to convert the bonds into Ordinary
Shares at a price of $4.70 per share. As at 29 April 2010,
$37,900,000 of bonds have converted, leaving 1,271 $100,000
convertible bonds outstanding; and
>> bondholders have a put option requiring the Company to redeem
the bonds at par, plus accrued interest, in the event of a change
of control of the Company, together with an additional cash
payment of up to $19,700 on each $100,000 bond. The amount
of additional payment depends upon the date of redemption and
market value of the Company’s Ordinary Shares at the date of
any change of control event.
Important Events Subsequent to the Year End
Events since the balance sheet date are summarised in note 25 to
the financial statements on page 98.
Audit and Auditors
Directors who held office at the date of approval of this Directors’
Report confirm that, so far as they are each aware, there is no
relevant audit information of which the Company’s Auditors are
unaware; and each Director has taken all the steps that they ought
to have taken as a Director to make themselves aware of any
relevant audit information and to establish that the Company’s
Auditors are aware of that information.
Having reviewed the independence and effectiveness of the
Auditors, the Audit Committee has recommended to the Board that
the existing Auditors, KPMG Audit Plc be reappointed. KPMG Audit
Plc has expressed their willingness to continue as Auditors. An
ordinary resolution to reappoint KPMG Audit Plc as auditors of the
Company and authorising the Directors to set their remuneration
will be proposed at the forthcoming AGM.
Financial Risks and Financial Instruments
Information on financial risk management, including credit and
liquidity risks and information about financial instruments is set out
in the financial review on pages 34 to 36 and the notes to the
financial statements on pages 83 to 84 respectively.
Going Concern
After making due enquiries, the Directors have made an informed
judgement at the time of approving the Financial Statements, that
there is a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable
future. In making this assessment they have considered the Company
64
and Group budgets, the cash flow forecasts and reviewed the
availability of banking facilities. For this reason, the Directors continue
to adopt the going concern basis in preparing the Financial
Statements.
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and
the financial statements for the Group in accordance with
applicable Jersey law and regulations.
Company law requires the Directors to prepare Group financial
statements for each financial year. Under that law they are required
to prepare the Group financial statements in accordance with
International Financial Reporting Standards (“IFRS”) as adopted by
the European Union (“EU”) and applicable law.
The Group financial statements are required by law and IFRS as
adopted by the EU to present fairly the financial position of the
Group and the performance for that period.
In preparing the financial statements the Directors are required to:
>> select suitable accounting policies and then apply
them consistently;
>> present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
>> provide additional disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance;
>> state whether they have been prepared in accordance with IFRS
as adopted by the EU; and
>> prepare the financial statements on a going concern basis unless,
having assessed the ability of the Company to continue as a
going concern, it is inappropriate to presume the Company will
continue in business.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Group and enable them to ensure that its
financial statements comply with the Companies (Jersey) Law 1991.
They have general responsibility for taking such steps as are
reasonably open to them for safeguarding the assets of the Group
and to prevent and detect fraud and other irregularities.
Under applicable law, regulations and listing rule requirements, the
Directors are also responsible for the preparation of a Directors’
Report, Remuneration Report and Corporate Governance Statement.
The Directors are responsible for the maintenance and integrity of
the statutory and audited information on the Company’s website.
Jersey legislation and United Kingdom regulation, governing the
preparation and dissemination of financial statements, may differ
from requirements in other jurisdictions.
Approved by the Board on 29 April 2010
Anthony Buckingham
Chief Executive Officer
29 April 2010
 Overview
Responsibility Statement of the Directors

We confirm on behalf of the Board that to the best of our

knowledge:

Business Review
(a) the financial statements prepared in accordance with the
applicable accounting standards give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation
taken as a whole; and

(b) the management report (which is incorporated within the

Chairman’s statement, Chief Executive’s Review, Operations
Review, Financial Review and CSR report on pages 8 to 43)
includes a fair review of the development and performance of the

Corporate Governance
business, the position of the issuer and the undertakings
included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face.

For and on behalf of the Board

Michael J. Hibberd Paul Atherton

Financial Statements
Chairman Chief Financial Officer
29 April 2010 29 April 2010

Heritage Oil Plc Annual Report & Accounts 2009

65
 FINANCIAL
STATEMENTS
68 Independent Auditors’ Report to
the Members of Heritage Oil Plc
70 Consolidated Income Statement
71 Consolidated Statement of
Comprehensive Income
72 Consolidated Balance Sheet
73 Consolidated Statement of
Changes in Equity – 2009
74 Consolidated Statement of
Changes in Equity – 2008
75 Consolidated Cash Flow Statement
76 Notes to Consolidated Financial
Statements

Drilling rig at Miran West-1, Kurdistan

66
Overview Business Review Corporate Governance Financial Statements
Heritage Oil Plc Annual Report & Accounts 2009

67
 Independent Auditors’ Report to the Members of Heritage Oil Plc

We have audited the Group financial statements of Heritage Oil Plc for the year ended 31 December 2009 which comprise the
consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of
changes in equity, consolidated cash flow statement 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 Article 110 of the Companies (Jersey) Law 1991, and
in respect of reporting on the Corporate Governance Report, on terms that have been agreed. 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, in respect of
reporting on the Corporate Governance Report, those matters that we have agreed to state to them in our 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 auditors

As described in the Statement of Directors’ Responsibilities on page 64, the Company’s Directors are responsible for preparation of the
financial statements in accordance with applicable law and International Financial Reporting Standards (“IFRS”) as adopted by the
European Union.

Our responsibility is to audit the financial statements in accordance with the 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 and are properly prepared in accordance with
the Companies (Jersey) Law 1991. We also report to you if, in our opinion, the Company has not kept proper accounting records or if we
have not received all the information and explanations we require for our audit.

In addition to our audit of the financial statements, the Directors have engaged us to review their Corporate Governance Statement as if the
Company were required to comply with the Listing Rules of the Financial Services Authority applicable to companies incorporated in the
UK in relation to those matters. We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine
provisions of the Combined Code on Corporate Governance published in 2008 specified for our review by those rules, and we report if it
does not. We are not required by the terms of our engagement to consider whether the Board’s statements on internal control cover all
risks and controls, or to form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control
procedures.

We read the Directors’ Report and other information accompanying the financial statements and consider the implications for our report if
we become aware of any apparent misstatements within it.

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 judgements made by the Directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed.

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.

Opinion
In our opinion:
>> the Group financial statements give a true and fair view, in accordance with International Financial Reporting Standards as adopted by
the European Union, of the state of the Group’s affairs as at 31 December 2009 and of its loss for the year then ended; and
>> the financial statements have been properly prepared in accordance with the Companies (Jersey) Law 1991.

68
 Overview
Matters on which we are required to report by exception under the terms of our engagement
We have nothing to report in respect of the following:

Business Review
In addition to our audit of the financial statements, the Directors have engaged us to review their Corporate Governance Statement as if the
Company were required to comply with the Listing Rules applicable to companies incorporated in the UK in relation to those matters.
Under the terms of our engagement we are required to review:
>> the Directors’ statement, set out on page 64, in relation to going concern; and
>> the part of the Corporate Governance Statement on pages 48 to 54 relating to the Company’s compliance with the nine provisions of the
Combined Code on Corporate Governance published in 2008 specified for our review.

Jimmy Daboo
for and on behalf of KPMG Audit Plc

Corporate Governance
Chartered Accountants

29 April 2010

Financial Statements
Heritage Oil Plc Annual Report & Accounts 2009

69
 Consolidated Income Statement
Years ended 31 December 2009 and 2008

Restated1
2009 2008
$ $

Revenue

Petroleum 2,704,987 3,836,991

Expenses
Petroleum operating (1,492,597) (1,652,766)
Production tax (1,304,255) (2,618,806)
General and administrative (18,676,326) (21,032,142)
Corporate reorganisation and subsequent listing costs – (9,654,622)
Aborted acquisition expenses (7,142,335) –
Depletion, depreciation and amortisation (1,710,123) (2,085,481)
Exploration expenditures (note 2f) (201,571) (786,398)
Impairment of property, plant and equipment (note 11) (2,933,374) (749,955)
Operating loss (30,755,594) (34,743,179)
Finance income (costs)
Interest income 563,633 3,954,749
Gain on derivative financial liability relating to convertible bonds (note 2b) – 6,098,240
Other finance costs (note 7) (4,329,065) (11,257,187)
Impairment of investment in unlisted securities (note 12) (2,352,825) –
Foreign exchange losses (1,009,783) (5,648,179)
Unrealised gain/(loss) on other financial assets (note 12) 1,046,724 (1,713,700)
(6,081,316) (8,566,077)
Loss from continuing operations (36,836,910) (43,309,256)
Loss on disposal of discontinued operations (note 6) (2,509,977) –
Loss from discontinued operations (note 6) – (2,850,270)
Loss from discontinued operations (2,509,977) (2,850,270)
Net loss for the year attributable to owners of the Company (39,346,887) (46,159,526)

1 See change in accounting policies (note 2b) and discontinued operations (note 6).

The notes are an integral part of these consolidated financial statements.

70
 Overview
Consolidated Statement of Comprehensive Income
Years ended 31 December 2009 and 2008

Restated1
2009 2008
$ $

Business Review
Loss for the year (39,346,887) (46,159,526)
Other comprehensive loss
Exchange differences on translation of foreign operations (note 19) (594,962) (651,365)
Cumulative gains on available for sale investments transferred to income statement on impairment
of investments (168,000) –
Other comprehensive loss, net of income tax (762,962) (651,365)
Total comprehensive loss for the year (40,109,849) (46,810,891)
Attributable to:
Owners of the Company (40,109,849) (46,810,891)

Corporate Governance
Net loss per share from continuing operations
Basic and diluted (0.13) (0.17)
Net loss per share from discontinued operations
Basic and diluted (0.01) (0.01)
Net loss per share
Basic and diluted (0.14) (0.18)

The total comprehensive loss for the year of $40,109,849 (2008 – $46,810,891) includes a loss of $2,509,977 (2008 – $2,850,270) from
discontinued operations (note 6).

Financial Statements
1 See change in accounting policies (note 2b) and discontinued operations (note 6).

The notes are an integral part of these consolidated financial statements.

Heritage Oil Plc Annual Report & Accounts 2009

71
 Consolidated Balance Sheet
As at 31 December 2009 and 2008

Restated1
2009 2008
$ $

ASSETS
Non-current assets
Intangible exploration assets (note 10) 121,278,468 211,346,037
Property, plant and equipment (note 11) 59,297,735 88,039,218
Other financial assets (note 12) 1,154,225 3,330,501
181,730,428 302,715,756
Current assets
Inventories 12,969 395,109
Prepaid expenses 568,166 664,759
Assets of a disposal group classified as held for sale (note 6) 163,414,518 –
Trade and other receivables (note 13) 2,203,707 6,901,511
Cash and cash equivalents (note 14) 208,094,355 90,620,385
374,293,715 98,581,764
556,024,143 401,297,520
LIABILITIES
Current liabilities
Liabilities of a disposal group classified as held for sale (note 6) 12,558,727 –
Trade and other payables (note 15) 23,278,030 54,751,768
Borrowings (note 16) 615,892 595,418
36,452,649 55,347,186
Non-current liabilities
Borrowings (note 16) 129,553,752 155,609,982
Provisions (note 17) 355,073 719,808
129,908,825 156,329,790
166,361,474 211,676,976
Net Assets 389,662,669 189,620,544
SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
Share capital (note 18) 460,279,555 218,283,881
Reserves 82,546,697 85,153,359
Retained deficit (153,163,583) (113,816,696)
389,662,669 189,620,544

1 See change in accounting policies (note 2b).

The notes are an integral part of these consolidated financial statements.

72
 Overview
Consolidated Statement of Changes in Equity
Year ended 31 December 2009

Available-
Foreign for-sale
currency investments Share-based Equity portion

Business Review
translation revaluation payments Retained of convertible
Share Capital reserve reserve reserve deficit debt Total equity
$ $ $ $ $ $ $

Balance at 1 January 2009

(as restated1) 218,283,881 (220,784) 168,000 54,564,393 (113,816,696) 30,641,750 189,620,544
Total comprehensive
income for the year
Loss for the year – – – – (39,346,887) – (39,346,887)
Other comprehensive loss
Exchange differences on
translation of foreign operations – (594,962) – – – – (594,962)

Corporate Governance
Cumulative gains on available
for sale investments transferred
to income statement on
impairment of investments – – (168,000) – – – (168,000)
Total other comprehensive
loss – (594,962) (168,000) – – – (762,962)
Total comprehensive loss
for the year – (594,962) (168,000) – (39,346,887) – (40,109,849)
Transactions with owners,
recorded directly in equity

Financial Statements
Contributions by and
distributions to owners
Issue of shares, net 205,028,335 – – – – – 205,028,335
Issue of shares on conversion
of bonds 34,199,616 – – – – (5,992,595) 28,207,021
Share-based payment
transactions and exercise of
share options (note 18) 2,767,723 – – 4,148,895 – – 6,916,618
Total transactions with
owners 241,995,674 – – 4,148,895 – (5,992,595) 240,151,974

Heritage Oil Plc Annual Report & Accounts 2009

Balance at 31 December
2009 460,279,555 (815,746) – 58,713,288 (153,163,583) 24,649,155 389,662,669

1 See change in accounting policies (note 2b) and discontinued operations (note 6). As at 31 December 2008, the equity portion of convertible debt was previously stated as nil
and retained deficit was previously stated at $108,960,421.

The notes are an integral part of these consolidated financial statements.

73
 Consolidated Statement of Changes in Equity
Year ended 31 December 2008

Available-
Foreign for-sale
currency investments Share-based Equity portion
translation revaluation payments Retained of convertible
Share Capital reserve reserve reserve deficit debt Total equity
$ $ $ $ $ $ $

Balance at 1 January 2008 217,672,243 430,580 168,000 42,579,779 (67,657,170) – 193,193,432

Total comprehensive
income for the year
Loss for the year – – – – (46,159,526) – (46,159,526)
Other comprehensive loss
Exchange differences on
translation of foreign operations – (651,364) – – – – (651,364)
Net change in fair value of
available for sale financial assets – – – – – – –
Total other comprehensive
loss – (651,364) – – – – (651,364)
Total comprehensive loss
for the year – (651,364) – – (46,159,526) – (46,810,890)
Transactions with owners,
recorded directly in equity
Contributions by and
distributions to owners
Issue of shares, net 83 – – – – – 83
Share-based payment
transactions and exercise
of share options (note 18) 611,555 – – 11,984,614 – – 12,596,169
Recognition of equity portion
of convertible bonds – – – – – 30,641,750 30,641,750
Total transactions with
owners 611,638 – – 11,984,614 – 30,641,750 43,238,002
Balance at 31 December
2008 (as restated1) 218,283,881 (220,784) 168,000 54,564,393 (113,816,696) 30,641,750 189,620,544

1 See change in accounting policies (note 2b) and discontinued operations (note 6). As at 31 December 2008, the equity portion of convertible debt was previously stated as nil
and retained deficit was previously stated at $108,960,421.

The notes are an integral part of these consolidated financial statements.

74
 Overview
Consolidated Cash Flow Statement
Years ended 31 December 2009 and 2008

Restated1
2009 2008

Business Review
$ $

Cash Provided by (used in) Operating Activities

Net loss from continuing operations for the year (36,836,910) (43,309,256)
Items not affecting cash
  Depletion, depreciation and amortisation 1,710,123 2,085,481
  Finance costs – accretion expenses 4,163,407 4,183,874
  Foreign exchange (gains)/losses (1,333,051) 320,580
  Share‑based compensation 3,206,848 7,595,542
  Gains on derivative financial liability – (6,098,240)
  Gain on other financial assets (1,046,724) 1,713,700

Corporate Governance
  Impairment of property, plant and equipment 2,933,374 749,955
  Impairment of investment in unlisted securities 2,352,825 –
  (Increase)/decrease in trade and other receivables (333,817) 1,003,352
  (Increase)/decrease in prepaid expenses 96,593 (217,488)
  (Increase)/decrease in inventory 316,858 (330,283)
  Increase/(decrease) in trade and other payables 4,092,413 (1,432,138)
  Continuing operations (20,678,061) (33,734,921)
  Discontinued operations – 928,722
(20,678,061) (32,806,199)
Investing

Financial Statements
Exercise of third party back-in rights for Miran (note 10) 6,737,635 –
Property, plant and equipment expenditures (3,889,675) (14,588,292)
Intangible exploration expenditures (49,642,876) (40,403,265)
(46,794,916) (54,991,557)
Discontinued operations
Net consideration on disposal 28,198,780 –
Property, plant and equipment expenditures and intangible exploration expenditures (50,613,067) (48,227,622)
(69,209,203) (103,219,179)
Financing

Heritage Oil Plc Annual Report & Accounts 2009

Shares issued for cash 216,848,944 83
Shares issued for cash, proceeds from exercise of options 1,647,110 361,454
Shares issue costs (11,820,609) –
Repayment of long-term debt (604,483) (616,118)
206,070,962 (254,581)
Increase/(decrease) in cash and cash equivalents 116,183,698 (136,279,959)
Cash and cash equivalents – beginning of year 90,620,385 230,089,323
Foreign exchange gain/(loss) on cash held in foreign currency 1,290,272 (3,188,979)
Cash and cash equivalents – end of year 208,094,355 90,620,385
Non-Cash Investing and Financing Activities (note 24)
Supplementary information
The following have been included within cash flows for the year under operating and investing activities
  Interest received 593,244 3,152,480
  Interest paid 11,737,678 6,876,764
  Corporate reorganisation and subsequent listing costs – 9,654,622
  Aborted acquisition expenses 6,342,335 –

1 See change in accounting policies (note 2b) and discontinued operations (note 6).

The notes are an integral part of these consolidated financial statements.

75
 Notes to Consolidated Financial Statements

1 Reporting Entity
Heritage Oil Plc (the “Company”) was incorporated under the Companies (Jersey) Law 1991 (as amended) on 6 February 2008 as Heritage
Oil Limited. The Company changed its name to Heritage Oil Plc on 18 June 2009. Its primary business activity is the exploration,
development and production of petroleum and natural gas in Africa, the Middle East and Russia. The Company was established in order to
implement a corporate reorganisation of Heritage Oil Corporation (“HOC”, the “Corporation”).

These consolidated financial statements include the results of the Company and all subsidiaries over which the Company exercises control.
The Company together with its subsidiaries are referred to as the Group. The key subsidiaries consolidated within these financial
statements include inter alia Heritage Oil Corporation, Heritage Oil & Gas Limited, Eagle Energy (Oman) Limited (disposed in 2009 (note 6)),
Heritage Oil and Gas (U) Limited, Heritage Energy Middle East Limited, Heritage DRC Limited, Coatbridge Estates Limited,
ChumpassNefteDobycha, Neftyanaya Geologicheskaya Kompaniya, Heritage Oil & Gas (Austria) GesmbH, Heritage Mali Block 7 Limited,
Heritage Mali Block 11 Limited, Heritage Energy Holding GesmbH, Heritage Oil & Gas (Gibraltar) Limited, TISE‑Heritage Neftegaz, Begal Air
Limited, Heritage International Holding GesmbH, Heritage Oil & Gas Holdings Limited, Eagle Drill Limited, Heritage Oil (Barbados) Limited,
Heritage Oil & Gas (Switzerland) SA, Heritage Oil International Malta Limited, 1381890 Alberta ULC, Heritage Oil Cooperatief U.A., Heritage
Oil Holdings Limited, Heritage International VOF, Heritage (International) Holding (Gibraltar) Limited, Heritage Tanzania Kimbiji-Latham
Limited, Heritage Tanzania Kisangire Limited and Heritage Oil Tanzania Limited.

The financial statements were approved by the Board and authorised for issuance on 29 April 2010.

2 Significant Accounting Policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies
have been consistently applied to all the years presented, unless otherwise stated.

a) Basis of Preparation
The consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU.

The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain
financial assets and liabilities at fair value.

The Company’s consolidated financial statements are presented in US dollars, which is the Company’s functional and presentation currency.

The Group had available cash of $208 million at 31 December 2009. Based on its current plans and knowledge, its projected capital
expenditure and operating cash requirements, the Group has sufficient cash to finance its operations for more than 12 months from the
date of this report. As for most oil and gas exploration companies, Heritage raises financing for its activities from time to time using a
variety of sources. Sources of funding for future exploration and development programmes will be derived from inter alia disposal proceeds
from the sale of assets, such as the sale of the Company’s holdings in Oman in 2009 and the proposed disposal of its 50% interests in
Blocks 1 and 3A, Uganda (note 6), using its existing treasury resources, new credit facilities, reinvesting its funds from operations, farm-
outs and, when considered appropriate, issuing debt and additional equity. Accordingly, the Group has a number of different sources of
finance available and the Directors are confident that additional finance will be raised as and when needed.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational
existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the
Operations Review of the Annual Report on pages 18 to 29. The financial position of the Group, its cash flows and liquidity position are
described in the Financial Review on pages 30 to 37. In addition, note 3 to the financial statements includes the Group’s policies and
processes for managing its capital; its financial risk management; and its exposure to foreign exchange risk, commodity price risk, credit
risk and liquidity risk.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree
of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are
disclosed in note 4.

b) Change in Accounting Policies

(i) Presentation of Financial Statements
In 2009, the Group has applied IAS 1 Presentation of Financial Statements (revised 2007) which has introduced a number of terminology
changes and has resulted in a number of changes in presentation and disclosure. The revised standard has had no impact on the reported
results or financial position of the Group.

76
 Overview
2 Significant Accounting Policies continued
(ii) Determination and Presentation of Operating Segments (Also see note 2d)

Business Review
As of January 2009, the Group determines and presents operating segments based on the information that internally is provided to the
Chief Executive Officer (“CEO”), who is the Group’s chief operating decision maker. This change in accounting policy is due to the adoption
of IFRS 8 Operating Segments. Previously operating segments were determined and presented in accordance with IAS 14 Segment
Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur
expenses, including revenues and expenses that relate to transactions with any of the Group’s other components.

An operating segment’s operating results, for which discrete financial information is available, are reviewed regularly by the CEO and Chief
Financial Officer (“CFO”) to make decisions about resources to be allocated to the segment and assess its performance.

Corporate Governance
Segment results that are reported to the CEO and CFO include items directly attributable to a segment as well as those that can be
allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, corporate offices expenses and liabilities.

Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets
other than goodwill.

(iii) Borrowings
In 2009, the Company changed its accounting policy in relation to the recognition of equity or financial liabilities arising from the issue of
convertible bonds. Previously the Company made the assessment of whether the conversion feature is a derivative liability or an equity
instrument on initial recognition only and did not revisit that assessment, absent any actual change in the contractual terms. It is now the

Financial Statements
Company’s policy to reassess the classification during the life of the convertible bond and reclassify between liabilities and equity when
appropriate. In particular, the Company now adopts a policy of reassessing the initial classification when there has been a change in the
effective terms of the contract. It was the existence of the Company call option that resulted in derivative treatment for the conversion
option in the convertible bond issued on 16 February 2007. Following the expiry of that option the Company has under this new policy
reclassified the conversion option as an equity instrument from that date. The Company believes this new policy provides reliable and more
relevant information as it bases the classification of such instruments on the terms that are currently operative.

In accordance with the requirements of IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) the change has been
made retrospectively and the comparatives have been restated accordingly.

Heritage Oil Plc Annual Report & Accounts 2009

As a result, the loss for continuing operations for the year ended 31 December 2008 has been restated to increase the previously reported
net loss attributable to owners of the Company by $4.9 million to $46.2 million. These adjustments have been taken up in finance income
(costs). In addition, non-current derivative financial liabilities were reduced by $25.8 million to nil at 31 December 2008 and the fair value of
the conversion feature as at 16 February 2008 of $30.6 million was transferred to equity through the Statement of Changes in Equity. If the
accounting policy had not changed then an additional loss of $63.5 million would have been recognised in the income statement for the year
ended 31 December 2009 and a non-current derivative financial liability of $89.2 million would have been recognised in the balance sheet at
31 December 2009. The change in accounting policy had no impact on the cash flow statement. No consolidated balance sheet as at
1 January 2008 has been presented because the change in accounting policy had no impact at that date.

c) Consolidation
The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 31 December 2009 and
2008 and the results of all subsidiaries for the years then ended.

Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating
policies, so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. The
existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the
Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They
are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is
measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus
costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of
the cost of acquisition over the fair value of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent
liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired,
the difference is recognised immediately in the income statement.

Inter‑company transactions, balances and unrealised gains on transactions between Group entities (the Company and its subsidiaries) are
eliminated. For the purposes of consolidation, the accounting policies of subsidiaries have been changed where necessary to ensure
consistency with the policies adopted by the Company.

77
 Notes to Consolidated Financial Statements continued

2 Significant Accounting Policies continued

d) Segment Reporting
As of January 2009, the Group determines and presents operating segments based on the information that internally is provided to the
CEO, who is the Group’s chief operating decision maker. This change in accounting policy is due to the adoption of IFRS 8 Operating
Segments. Previously operating segments were determined and presented in accordance with IAS 14 Segment Reporting. The new
accounting policy in respect of segment operating disclosures is presented as follows.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur
expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s
operating results are reviewed regularly by the CEO and CFO to make decisions about resources to be allocated to the segment and
assess its performance, and for which discrete financial information is available.

Segment results that are reported to the CEO and CFO include items directly attributable to a segment as well as those that can be
allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, corporate offices expenses and liabilities.

Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets
other than goodwill.

e) Joint Arrangements
The majority of exploration, development and production activities are conducted jointly with others under contractual arrangement and,
accordingly, the Group only reflects its proportionate interest in such assets, liabilities, revenues and expenses.

f) Exploration and Evaluation Expenditures

The Group applies a modified full cost method of accounting for exploration and evaluation (“E&E”) costs, having regard to the
requirements of IFRS 6 “Exploration for and Evaluation of Mineral Resources”. Under the modified full cost method of accounting, costs of
exploring for and evaluating oil and gas properties are capitalised on a licence or prospect basis and the resulting assets are tested for
impairment by reference to appropriate cost pools. Such cost pools are based on geographic areas and are not larger than a segment.
The Group had eight cost pools in 2009, (2008 – nine cost pools, including Oman) Uganda, Kurdistan, Russia, DRC, Pakistan, Malta,
Mali and Tanzania.

E&E costs related to each licence/prospect are initially capitalised within “Intangible exploration assets”. Such E&E costs may include costs
of licence acquisition, technical services and studies, seismic acquisition, exploration drilling and testing, the projected costs of retiring the
assets (if any) and directly attributable general and administrative expenses, but do not include costs incurred prior to having obtained the
legal rights to explore an area, which are expensed directly to the income statement as they are incurred.

Where the Company farms-in to licences and incurs costs in excess of its own share of licence costs as consideration, these costs are
capitalised as its own share.

Tangible assets acquired for use in E&E activities are classified as property, plant and equipment; however, to the extent that such a
tangible asset is consumed in developing an intangible E&E asset, the amount reflecting that consumption is recorded as part of the cost
of the intangible asset.

Intangible E&E assets related to each exploration licence/prospect are not depreciated and are carried forward until the existence
(or otherwise) of commercial reserves has been determined. The Group’s definition of commercial reserves for such purpose is proved and
probable reserves on an entitlement basis.

Proved and probable reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical
and engineering data demonstrate with a specified degree of certainty (see below) to be recoverable in future years from known reservoirs
and which are considered commercially producible. There should be a 50% statistical probability that the actual quantity of recoverable
reserves will be more than the amount estimated as proved and probable and a 50% statistical probability that it will be less. The
equivalent statistical probabilities for the proven component of proved and probable reserves are 90% and 10%, respectively.

Such reserves may be considered commercially producible if management has the intention of developing and producing them and such
intention is based upon:
>> a reasonable assessment of the future economics of such production;
>> a reasonable expectation that there is a market for all or substantially all the expected hydrocarbon production; and
>> evidence that the necessary production, transmission and transportation facilities are available or can be made available.

Furthermore:
(i) Reserves may only be considered proved and probable if producibility is supported by either actual production or a conclusive
formation test. The area of reservoir considered proved includes (a) that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any, or both, and (b) the immediately adjoining portions not yet drilled, but which can be reasonably judged as
economically productive on the basis of available geophysical, geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.

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 Overview
2 Significant Accounting Policies continued
(ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are only

Business Review
included in the proved and probable classification when successful testing by a pilot project, the operation of an installed programme in
the reservoir, or other reasonable evidence (such as, experience of the same techniques on similar reservoirs or reservoir simulation
studies) provides support for the engineering analysis on which the project or programme was based.

If commercial reserves have been discovered, the related E&E assets are assessed for impairment on a cost pool basis as set out below
and any impairment loss is recognised in the income statement. The carrying value, after any impairment loss, of the relevant E&E assets is
then reclassified as development and production assets within property, plant and equipment.

E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable
amount. Such indicators include the point at which a determination is made as to whether or not commercial reserves exist. Where the

Corporate Governance
E&E assets concerned fall within the scope of an established full cost pool, the E&E assets are tested for impairment together with all
development and production assets associated with that cost pool, as a single cash generating unit. The aggregate carrying value is
compared against the expected recoverable amount of the pool, generally by reference to the present value of the future net cash flows
expected to be derived from production of commercial reserves. Where the E&E assets to be tested fall outside the scope of any
established cost pool, there will generally be no commercial reserves and the E&E assets concerned will be written off in full.

g) Property, Plant and Equipment

i) Development and Production Assets
The Group had one interest at the development and production stage during the years covered by these financial statements; Russia.
(2008 – Russia and Oman which was disposed in 2009 (note 6)).

Financial Statements
Development and production assets are accumulated on a field-by-field basis and represent the cost of developing the commercial
reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves
transferred from intangible E&E assets as outlined above, the projected cost of retiring the assets and directly attributable general and
administrative expenses.

The net book values of producing assets are depleted on a field-by-field basis using the unit of production method by reference to the ratio
of production in the year to the related proved plus probable reserves of the field, taking into account estimated future development
expenditures necessary to bring those reserves into production.

An impairment test is performed whenever events and circumstances arising during the development or production phase indicate that the

Heritage Oil Plc Annual Report & Accounts 2009

carrying value of a development or production asset may exceed its recoverable amount. The aggregate carrying value is compared against the
expected recoverable amount of the cash generating unit, generally by reference to the present value of the future net cash flows expected to be
derived from the production of commercial reserves. The cash generating unit applied for impairment test purposes is generally the field, except
that a number of field interests may be grouped as a single cash generating unit where the cash flows generated by the fields are interdependent.

ii) Other Assets

Other property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. The assets’ useful lives and
residual values are assessed on an annual basis. Furniture and fittings are depreciated using the reducing balance method at 20% per year.

Land is not subject to depreciation.

The corporate jet is depreciated over its expected useful life of 69 months. Depreciation is charged so as to write-off the cost, less
estimated residual value of the corporate jet on a straight-line basis.

Corporate capital assets are depreciated on a straight-line basis over their estimated useful lives. The building is depreciated on a straight-
line basis over 40 years with nil residual value. The land is not depreciated.

h) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits held at call with banks and other short-term highly liquid investments with
original maturities of three months or less. Cash and cash equivalents are stated at amortised cost using the effective interest rate method.

i) Trade and Other Receivables

Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest
method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that
the Group will not be able to collect all amounts due according to the original terms of the receivables.

j) Inventories
Inventories consist of petroleum, condensate, liquid petroleum gas and materials that are recorded at the lower of weighted average cost
and net realisable value. Cost comprises direct materials, direct labour, depletion and those overheads that have been incurred in bringing
the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business,
less applicable variable selling expenses. Provision is made for obsolete, slow-moving or defective items where appropriate.

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2 Significant Accounting Policies continued

k) Investments
The Group classifies its investments in the following categories: financial assets at fair value through the income statement, and available-
for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the
classification of its investments at initial recognition. During the years covered by these financial statements the Group did not have any
investments classified as “loans and receivables” or “held to maturity investments”.

i) Financial Assets at Fair Value Through the Income Statement

Financial assets held for trading are carried at fair value with changes in fair value recognised in the income statement. A financial asset is
classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are classified as held for trading
unless they are designated as hedges.

Gains or losses arising from changes in the fair value of the “financial assets at fair value through the income statement” category are
presented in the income statement within “Unrealised gain/(loss) on other financial assets” in the year in which they arise.

ii) Available-for-Sale Financial Assets

Available-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this
category or not classified. They are included in non-current assets unless management intends to dispose of the investment within
12 months of the balance sheet date.

Changes in the fair value of monetary securities classified as available-for-sale (other than impairment losses and foreign exchange gains
and losses which are recognised in the income statement) are recognised in equity. Upon sale of a security classified as available-for-sale,
the cumulative gain or loss previously recognised in equity is recognised in the income statement.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets
is impaired. Measurement is assessed by reference to the fair value of the financial asset or group of financial assets.

l) Non‑Current Assets Held for Sale and Discontinued Operations

Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of their carrying amount and fair value
less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use.

Non-current assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for
sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognised.

Non-current assets classified as held for sale and the assets of a disposal group classified as assets held for sale are presented separately,
as current assets, from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented
separately, as current liabilities, from other liabilities in the balance sheet.

A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of
operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a
discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an
operation is classified as a discontinued operation, from the comparative income statement is re-presented as if the operation had been
discontinued from the start of the comparative period.

m) Trade and Other Payables

These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid.

n) Borrowings
Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised
cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement
over the period of the borrowings using the effective interest method.

Convertible bonds are separated into liability and derivative liability components (being the bondholders’ conversion option) and each
component is recognised separately. On initial recognition, the fair value of the liability component of a convertible bond is determined
using a market interest rate for an equivalent non convertible bond. This amount is recorded as a liability on an amortised cost basis using
the effective interest method until extinguished on conversion or maturity of the bonds. The Company reassesses the classification during
the life of the convertible bond and reclassifies between liabilities and equity when appropriate (note 2b(iii)).

Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The
difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the
consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in finance income or costs.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least
12 months after the balance sheet date.

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 Overview
2 Significant Accounting Policies continued
o) Borrowing Costs

Business Review
Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete
and prepare the asset for its intended use or sale. Other borrowing costs are expensed.

The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to
the Group’s outstanding borrowings during the year. For the year ended 31 December 2009, this was 12.10% (31 December 2008 – 12.01%).

p) Provisions
Asset Retirement Obligations
Provision is made for the estimated cost of any asset retirement obligations when the Group has a present legal or constructive obligation
as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been

Corporate Governance
reliably estimated. Provisions are not recognised for future operating losses. Asset retirement obligation expense is capitalised in the
relevant asset category unless it arises from the normal course of production activities.

Provisions are measured at the present value of management’s best estimate of expenditure required to settle the present obligation at the
balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money
and the risks specific to the liability.

Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each year to reflect the
passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage
of time is recognised as finance costs whereas changes in the estimated future cash flows are added to or deducted from the related asset
in the current period.

Financial Statements
q) Revenue Recognition
Revenue from the sale of petroleum and natural gas is recognised at the fair value received or receivable and is recorded when the
significant risks and rewards of ownership of the product are transferred to the buyer. For sales of oil and gas this is usually when legal title
passes to the external party which occurs on shipment of oil and gas to the buyer. Interest income is recognised on a time proportion basis
using the effective interest method.

r) Income Taxes
Current income tax is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it
excludes items that are never taxable or deductible. The Group’s current tax assets and liabilities are calculated using tax rates that have

Heritage Oil Plc Annual Report & Accounts 2009

been enacted or substantively enacted by the balance sheet date.

Deferred income tax is provided in full, using the balance sheet method, on temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates
(and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred
income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable
amounts will be available to utilise those temporary differences and losses.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the
deferred tax balances relate to the same taxation authority.

s) Foreign Currency Translation

Items included in the financial statements of each of the Company’s consolidated subsidiaries are measured using the currency of the
primary economic environment in which the subsidiary operates (“the functional currency”). The Company’s consolidated financial
statements are presented in US dollars, which is the Company’s functional and presentation currency.

Foreign currency transactions are translated into the respective functional currencies of Group entities using the exchange rates prevailing at
the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation
at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

The results and financial position of all the Company’s consolidated subsidiaries (none of which has a functional currency that is the
currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the
presentation currency as follows:
i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
ii) income and expenses for each year are translated at average exchange rates (unless this is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the
transactions); and
iii) all resulting exchange differences are recognised as either income or expense in a separate component of equity.

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 Notes to Consolidated Financial Statements continued

2 Significant Accounting Policies continued

Foreign currency loans and overdrafts are designated as, and are considered to be, hedges of the exchange rate exposure inherent in
foreign currency net investments and, to the extent that the hedge is effective, exchange differences giving rise to changes in the carrying
value of foreign currency loans are also recognised as income or expense directly in equity. All other exchange differences giving rise to
changes in the carrying value of foreign currency loans and overdrafts are recognised in the income statement.

When a foreign operation is sold, a proportionate share of the cumulative exchange differences previously recognised in equity are
recognised in the income statement, as part of the gain or loss on sale where applicable.

t) Share‑Based Compensation Plans

The Group applies the fair value method of accounting to all equity‑classified share‑based compensation arrangements for both
employees and non-employees. Compensation costs of equity‑classified awards to employees are measured at fair value of the awards at
the time when the services are rendered at the grant date and recognised over the periods during which the employees become
unconditionally entitled to the options. The compensation cost is charged to the income statement with a corresponding increase in equity.
The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.

The compensation cost of equity‑classified awards to non-employees is initially measured at fair value of the awards at the time when the
services are rendered, and periodically remeasured to fair value until the non-employees’ performance is complete, and recognised over
the periods during which the employees become unconditionally entitled to the options. The compensation cost is charged to income with
a corresponding increase to share-based payment reserve.

Upon the exercise of the award, consideration received is recognised in equity (notes 18 and 19).

u) Share Capital
Ordinary and Exchangeable Shares are classified as share capital. Incremental costs directly attributable to the issue of new shares or
options are shown in equity as a deduction, net of tax, from the proceeds.

If the Company reacquires its own equity instruments the cost is deducted from equity and the associated shares are cancelled.

v) Earnings per Share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of
Ordinary Shares outstanding during the financial period. The rights of different classes of shares are the same and therefore economically
equivalent. As such, Ordinary and Exchangeable Shares are treated as one class of shares for the earnings per share calculation.

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income
tax effect of interest and other financing costs associated with dilutive potential Ordinary Shares and the weighted average number of
shares assumed to have been issued for no consideration in relation to dilutive potential Ordinary Shares.

The if-converted method used in the calculation of diluted earnings per share assumes the conversion of convertible securities at the later
of the beginning of the reported period or issuance date, if dilutive.

w) New Accounting Standards and Interpretations

Certain new accounting standards and interpretations have been published that are not mandatory for the year ended 31 December 2009.
The Company’s assessment of the impact of these new standards and interpretations which have not been adopted is set out below.
i) IFRS 9 Financial Instruments: effective for accounting periods commencing 1 January 2013. Not yet endorsed for use in the EU. The
expected impact is still being assessed by management, but is expected to only impact disclosures of the Group.
ii) IFRS 5 (Amendment), Non-current Assets Held for Sale and Discounted Operations: requires that assets and liabilities of a subsidiary
should be classified as held for sale if the Parent is committed to making a plan involving loss of control of the subsidiary, regardless of
whether the entity will retain a non-controlling interest after the sale. Effective for accounting periods commencing on or after 1 January
2010. It has not yet been endorsed for use in the EU. The expected impact is still being assessed by management, but is expected to
only impact disclosures of the Group.
iii) IAS 17 (Amendment), Leases: amended to require classification of land and buildings leases based on an assessment of transfer of risks
and rewards. Effective for accounting periods commencing on or after 1 January 2010. It has not yet been endorsed for use in the EU.
The expected impact is still being assessed by management, but is expected to only impact disclosures of the Group.
iv) IAS 1 (Amendment), Presentation of Financial Statements: amended to confirm that the classification of a convertible instrument is not
affected by terms that allow its settlement, at any time, by the issuance of equity instruments at the option of the counterparty. Effective
for accounting periods commencing on or after 1 January 2010. The expected impact is still being assessed by management, but is
expected to only impact disclosures of the Group.

The following amendments are assessed not to have any impact on the Company’s financial statements:
i) IFRS 3 (2008) Business Combinations: effective for accounting periods commencing on or after 1 July 2009.
ii) IAS 27 (Amendment), Consolidated and Separate Financial Statements: effective for accounting periods commencing on or after 1 July 2009.
iii) IFRS 1 (Revised), First time Adoption of International Financial Reporting Standards.

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 Overview
2 Significant Accounting Policies continued
iv) IAS 39 (Amendment) Financial Instruments: Recognition and Measurement – Eligible Hedged Items provides clarification where

Business Review
differences in practice exists on the designation of inflation as a hedged risk and the treatment of “one-sided” risks on hedged items.
Effective for accounting periods commencing on or after 1 July 2009.
v) IFRS 2 (Amendment) Share Based Payments: amended to require subsidiary who receives employee services when another group
entity or shareholder grants a cash-settled share-based payment to recognise that transaction in its own accounts. Effective for
accounting periods commencing on or after 1 January 2010. Not yet endorsed for use in the EU.
vi) IAS 36 (Amendment), Impairment of Assets: amended to clarify that for the purposes of impairment testing, goodwill is allocated to
operating segments as defined in paragraph 5 of IFRS 8 Operating Segments, i.e. before aggregation. Effective for accounting periods
commencing on or after 1 January 2010. Not yet endorsed for use in the EU. The expected impact is still being assessed by
management, but is expected to only impact the disclosures of the Group.

Corporate Governance
The Directors do not anticipate that the adoption of these amendments will have a material impact on the Group’s financial statements in
the period of initial application.

3 Risk Management
The Group’s activities expose it to a variety of financial risks that arise as a result of its exploration, development, production, and financing
activities. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise
potential adverse effects on the Group’s financial performance.

a) Financial Risk Management

i) Foreign Exchange Risk
Foreign exchange risk arises when transactions and recognised assets and liabilities of the Group entity concerned are denominated in a

Financial Statements
currency that is not the Company’s functional currency. The Group operates internationally and is exposed to foreign exchange risk arising
from currency exposures to the US dollar.

There are no forward exchange rate contracts in place at, or subsequent to, 31 December 2009.

At 31 December 2009, if the Canadian dollar had strengthened/weakened by 10% against the US dollar with all other variables held
constant, the loss for the year would have been $535,558 (31 December 2008 – $122,403) higher/(lower), mainly as a result of foreign
exchange gains/losses on translation of Canadian dollar‑denominated general and administrative expenses and cash in bank.

At 31 December 2009, if the Russian rouble had strengthened/weakened by 10% against the US dollar with all other variables held

Heritage Oil Plc Annual Report & Accounts 2009

constant, the loss for the year would have been $(556,600) (31 December 2008 – $(513,633)) higher/(lower), mainly as a result of foreign
exchange gains/losses on translation of Russian rouble‑denominated cash in bank and monetary assets and liabilities.

At 31 December 2009, if the GB pound sterling had strengthened/weakened by 10% against the US dollar with all other variables held constant,
the loss for the year would have been $2,309,160 (31 December 2008 – $605,907) higher/(lower), mainly as a result of GB pound sterling‑
denominated general and administrative expenses and foreign exchange gains/losses on translation of GB pound sterling‑denominated
long‑term loan.

At 31 December 2009, if the Swiss franc had strengthened/weakened by 10% against the US dollar with all other variables held constant,
the loss for the year would have been $(300,238) (31 December 2008 – $(299,806)) higher/(lower), mainly as a result of foreign exchange
gains/losses on translation of Swiss franc‑denominated cash at bank.

ii) Commodity Price Risk

The Company is exposed to commodity price risk to the extent that it sells its entitlement to petroleum, condensate and liquid petroleum
gas production on a floating price basis. The Company may consider partly mitigating this risk in the future.

The table below summarises the impact of increases/decreases of the relevant oil/condensate/LPG benchmark on the Company’s loss for
the year. The analysis is based on the assumption that commodity prices had increased/decreased by 5% with all other variables
held constant:

Year ended 31 December

2009 2008
$ $

Brent light crude 70,037 191,850

70,037 191,850

The loss for the year would increase/decrease as a result of commodity revenues received.

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 Notes to Consolidated Financial Statements continued

3 Risk Management continued

iii) Interest Rate Risk
The Group had fixed rate long‑term debt and fixed rate convertible bonds in the years under review, therefore, it was not exposed to
interest rate risk with respect to these fixed rate borrowings. In October 2007, a wholly owned subsidiary of the Company received a
long-term loan of $9,450,000 with a variable rate of LIBOR plus 1.6% (note 16). An increase/(decrease) of LIBOR by 1% would result in an
increase/(decrease) of the Company’s loss for the year by $85,246 (31 December 2008 – $73,375).

iv) Credit Risk

All of the Company’s production from continuing operations was derived from Russia. In 2008 and 2009 sales were to a maximum of
six customers.

Trade debtors of the Company are subject to internal credit review to minimise the risk of non-payment. The Company does not anticipate
any default as it transacts with creditworthy counterparties. No credit limits were exceeded during the reporting years and management
does not expect any losses from non-performance by these counterparties.

The Company is also exposed to credit risk in relation to regular joint venture billings which are typically outstanding for one month and in
relation to its cash balances held with the reputable banks.

v) Liquidity Risk
Liquidity risk is the risk that the Group will not have sufficient funds to meet liabilities. Cash forecasts identifying liquidity requirements of the
Group are produced quarterly. These are reviewed regularly to ensure sufficient funds exist to finance the Company’s current operational
and investment cash flow requirements.

Management monitors rolling forecasts of the Company’s cash position on the basis of expected cash flow.

The Group had available cash of $208 million at 31 December 2009. Based on its current plans and knowledge, its projected capital
expenditure and operating cash requirements, the Group has sufficient cash to finance its operations for more than 12 months from the
date of this report.

The Company’s financial liabilities consist of trade and other payables and borrowings. Trade and other payables are due within 12 months,
and borrowings fall due as outlined in notes 15 and 16.

b) Capital Risk Management

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to
provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

The Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is
calculated as total borrowings (including “borrowings”, “trade and other payables”, “liabilities of a disposal group classified as held for sale”
and “provisions” as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as “equity” as
shown in the consolidated balance sheet plus net debt.

As at 31 December
2009 2008
$ $

Total borrowings 166,361,474 211,676,976

Less cash and cash equivalents (note 14) (208,094,355) (90,620,385)
Net (cash) debt (41,732,881) 121,056,591
Total equity 389,662,669 189,620,544
Total capital 389,662,669 310,677,135
Gearing ratio 0% 39%

This decrease in the gearing ratio during 2009 resulted primarily from an equity financing raised in 2009 (note 18).

4 Critical Accounting Estimates, Assumptions and Judgements

In the process of applying the Company’s accounting policies, which are described in note 2, management makes estimates and
assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The
estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are discussed below:

a) Recoverability of Exploration and Evaluation Costs

Under the modified full cost method of accounting for E&E costs, certain costs are capitalised as intangible assets by reference to
appropriate cost pools, and are assessed for impairment when circumstances suggest that the carrying amount may exceed its
recoverable value.

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 Overview
4 Critical Accounting Estimates, Assumptions and Judgements continued
Such circumstances include, but are not limited to:

Business Review
i) the period for which the entity has the right to explore in the specific area has expired during the period, or will expire in the near future,
and is not expected to be renewed;
ii) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted
nor planned;
iii) exploration for, and evaluation, of mineral resources in the specific area have not led to the discovery of commercially viable quantities
of mineral resources and the entity has decided to discontinue such activities in the specific area; and
iv) sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the
exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

This assessment involves judgement as to (i) the likely future commerciality of the asset and when such commerciality should be

Corporate Governance
determined, and (ii) future revenues and costs pertaining to any wider cost pool with which the asset in question is associated, and (iii) the
discount rate to be applied to such revenues and costs for the purpose of deriving a recoverable value. Note 10 discloses the carrying
amounts of the Group’s E&E assets. Consequently, major uncertainties affect the recoverability of these costs which is dependent on the
Group achieving commercial production or the sale of the assets. Note 23 discloses contingencies relating to title risks. The Company
assessed whether these risks are contingencies or indicators of impairment and concluded that they are contingencies.

b) Reserve Estimates
Estimates of recoverable quantities of proved and probable reserves include assumptions regarding commodity prices, exchange rates,
discount rates, production and transportation costs for future cash flows. It also requires interpretation of complex and difficult geological
and geophysical models in order to make an assessment of the size, shape, depth, and quality of reservoirs and their anticipated
recoveries. The economic, geological and technical factors used to estimate reserves may change from period to period. Changes in

Financial Statements
reported reserves can impact asset carrying values and the asset retirement obligation due to changes in expected future cash flows.
Reserves are integral to the amount of depletion charged to the income statement and the calculation of inventory.

The level of estimated commercial reserves is also a key determinant in assessing whether the carrying value of any of the Group’s
development and production assets has been impaired.

c) Fair Value of Financial Instruments

The Group’s accounting policies and disclosures require the determination of the fair value of financial instruments. Fair values have been
determined for measurement and/or disclosure purposes based on the following methods:

Heritage Oil Plc Annual Report & Accounts 2009

i) Non‑Derivative Financial Instruments
These comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings
and trade and other payables. Non‑derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value
through the income statement, any directly attributable transaction costs.

Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the applicable market rate of
interest at the reporting date.

ii) Derivatives
Derivatives are recognised initially at fair value; attributable transaction costs are recognised in the income statement when incurred.
Subsequent to initial recognition, derivatives are measured at fair value. Embedded derivatives are separated from the host contract and
accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related,
a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined
instrument is not measured at fair value through the income statement.

The fair value of derivative financial instruments is based on their listed market prices, if available. If a listed market price is not available,
then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the
residual maturity of the contract using a risk‑free interest rate (based on Government bonds).

5 Segment Information
The Group has a single class of business which is international exploration, development and production of petroleum oil and natural gas.
The geographical areas are defined by the Company as operating segments in accordance with IFRS 8 Operating Segments. The Group
operates in a number of geographical areas based on location of operations and assets, being Russia, Uganda (discontinued), DRC,
Kurdistan, Pakistan, Tanzania, Malta, Mali and Oman (discontinued). The Group’s reporting segments comprise each separate
geographical area in which it operates.

85
 Notes to Consolidated Financial Statements continued

5 Segment Information continued

Year ended 31 December 2009
Depreciation,
External Segment Total Total Capital depletion and
revenue result assets liabilities additions amortisation
$ $ $ $ $ $

Russia 2,704,987 (1,776,429) 48,958,518 572,081 3,264,979 761,911

DRC – – 1,687,617 – 80,852 –
Kurdistan – (6,828) 80,611,911 6,660,587 37,119,614 –
Pakistan – – 1,734,090 – 52,670 –
Tanzania – – 20,402,386 198,658 6,904,501 –
Mali – – 2,018,449 – 768,851 –
Malta – – 11,111,097 44,105 2,457,548 –
Uganda – discontinued operations – (1,811,214) 163,414,518 12,558,727 28,486,513 –
Oman – discontinued operations – (698,763) – – 500,000 –
Total for reportable segments 2,704,987 (4,293,234) 329,938,586 20,034,158 79,635,528 761,911
Corporate – (35,053,653) 226,085,557 146,327,316 631,740 948,212
Elimination of discontinued operations – 2,509,977 (163,414,518) (12,558,727) (28,986,513) –
Total from continuing operations 2,704,987 (36,836,910) 392,609,625 153,802,747 51,280,755 1,710,123

Year ended 31 December 2008 (Restated1)

Depreciation,
External Segment Total Total Capital depletion and
revenue result assets liabilities additions amortisation
$ $ $ $ $ $

Russia 3,836,991 (7,643,812) 48,123,180 446,935 9,550,153 1,070,410

DRC – – 1,606,765 – 760,545 –
Kurdistan – – 43,774,646 6,467,567 41,781,416 –
Pakistan – – 1,560,330 – 607,924 –
Tanzania – (204,515) 13,785,019 659,604 13,129,738 –
Mali – – 1,682,381 – 1,012,320 –
Malta – (14,831) 8,685,637 3,469 2,052,831 –
Uganda – discontinued operations – – 154,684,138 30,485,069 55,791,804 –
Oman – discontinued operations 1,258,817 (2,850,270) 28,065,282 3,279,402 17,983,358 264,003
Total for reportable segments 5,095,808 (10,713,428) 301,967,378 41,342,046 142,670,089 1,334,413
Corporate – (35,446,098) 99,330,143 170,334,930 870,924 1,015,071
Elimination of discontinued operations (1,258,817) 2,850,270 (182,749,420) (33,764,471) (73,775,162) (264,003)
Total from continuing operations 3,836,991 (43,309,256) 218,548,101 177,912,505 69,765,851 2,085,481

1 See change in accounting policies (note 2b) and discontinued operations (note 6). The loss for continuing operations for the year ended 31 December 2008 has been restated to
increase the previously reported net loss attributable to owners of the Company by $4.9 million to $46.2 million. Oman and Uganda were classified as discontinued operations
(note 6). Corporate activities include the financing activities of the Group and is not an operating segment.

There have been no changes to the basis of segmentation or the measurement basis for the segment result since 31 December 2008.

6 Discontinued Operations
Uganda
On 18 December 2009, Heritage announced that the Company, and its subsidiary Heritage Oil & Gas Limited, had entered into a SPA, with
Eni for the sale of its 50% interests in Blocks 1 and 3A in Uganda. On 17 January 2010, Tullow Uganda Limited exercised its right to
pre-empt the sale of the Disposed Assets to Eni on the same terms and conditions as agreed in the SPA entered into between Heritage and
Eni. The transaction was overwhelmingly approved by shareholders at the General Meeting on 25 January 2010.

In April 2010, Heritage announced that it had received a letter from the Ugandan Government stating that it supports Heritage’s sale and
transfer of its Ugandan interests and that it will conclude its review of the transaction within eight weeks. Following this, Heritage expects to
receive formal consent and to close the transaction shortly thereafter.

The results of the Uganda operations have been classified as discontinued operations. The segment was not classified as held for sale or
discontinued operations at 31 December 2008 and the comparative income statement has been restated to show the discontinued
operations separately from continuing operations.

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 Overview
6 Discontinued Operations continued
Expenses incurred by the Company as at 31 December 2009 in respect of this disposal are included within loss on disposal of

Business Review
discontinued operations as follows:
Year ended 31 December
2009 2008
$ $

Loss on disposal of discontinued operations (1,811,214) –

(1,811,214) –

The following table provides additional information with respect to the assets held for sale in the balance sheet at 31 December 2009.
31 December
2009
$

Corporate Governance
Assets
Non-current assets
Intangible exploration assets 158,518,547
158,518,547
Current assets
Accounts receivable 4,895,971
4,895,971
Total Assets 163,414,518

Financial Statements
Current liabilities
Trade and other payables 12,301,188
12,301,188
Current liabilities
Provisions 257,539
257,539
Total Liabilities 12,558,727
Net assets 150,855,791

Heritage Oil Plc Annual Report & Accounts 2009

Oman
On 7 April 2009, the Company completed the sale of Eagle Energy, a wholly owned subsidiary of Heritage, to RAK Petroleum Oman
Limited for $28 million, plus a working capital adjustment of $0.4 million. Eagle Energy held a 10% interest in Block 8, Oman. The segment
was not classified as held for sale or discontinued operations at 31 December 2008 and the comparative income statement has been
restated to show the discontinued operations separately from continuing operations.

The effective date of the transaction is 1 January 2009. The cash consideration of $28 million and a working capital adjustment of
$0.4 million have been received. The Company acquired Eagle Energy, which had a 10% interest in Block 8 offshore Oman, in 1996.
Block 8 contains the Bukha field which has been producing since 1994 and the West Bukha field which commenced production in
February 2009.

The results of operations of Eagle Energy have been classified as losses from discontinued operations. The following table provides
additional information with respect to the amounts included in loss from discontinued operations.

Year ended
31 December
2008
$

Revenue
Petroleum and natural gas 1,258,817
Expenses
Petroleum and natural gas operating (598,006)
Depletion, depreciation and amortisation (264,003)
Impairment (3,247,078)
(4,109,087)
(2,850,270)

87
 Notes to Consolidated Financial Statements continued

6 Discontinued Operations continued

The following table provides additional information with respect to the net assets sold as at 7 April 2009.
7 April 2009
$

Assets
Non-current assets
Intangible exploration assets 1,051,083
Property, plant and equipment 27,448,917
28,500,000
Current assets
Accounts receivable 246,783
Inventories 65,282
312,065
Net assets 28,812,065

The loss on disposal of discontinued operations has been derived as follows:

7 April 2009
$

Consideration received
  Sales proceeds 28,000,000
  Working capital adjustments 390,242
Total disposal consideration 28,390,242
Less:
  Carrying amount of net assets sold (28,812,065)
  Other expenses (276,940)
Loss on disposal of discontinued operations (698,763)

7 Other Finance Costs

Year ended 31 December
2009 2008
$ $

Interest on long-term debt 656,076 963,965

Interest on convertible bonds 11,023,123 12,640,000
Accretion of convertible debt 4,111,197 4,161,215
Accretion of asset retirement obligation 52,210 22,659
15,842,606 17,787,839
Amount capitalised (11,513,541) (6,530,652)
Finance costs expensed 4,329,065 11,257,187

Finance costs are capitalised in various balance sheet categories.

8 Income Tax Expense

The Group is subject to income taxes in certain territories in which it owns licences. All of the Group’s operating activities are outside of
Jersey. In Oman, the tax rate applicable to the Group’s operations is considered to be nil as in this jurisdiction the Group is subject to a
production sharing agreement.

The Group has available tax deductions of $23,856,528 (31 December 2008 – $31,438,808) and tax losses of $125,768,090
(31 December 2008 – $93,531,776), of which $80,639,778 expires from 2010 to 2029, and the remaining $45,128,312 (31 December 2008
– $42,615,907) does not have an expiry period. No deferred tax assets have been recognised for the benefit of tax deductions and
tax losses because realisation of the deferred tax assets in the foreseeable future is not sufficiently likely.

88
 Overview
8 Income Tax Expense continued
Factors affecting current tax charge for the year:

Business Review
Year ended 31 December
Restated1
2009 2008
$ $

Net loss before tax (39,346,887) (46,159,526)

Standard tax rate 0% 0%
Tax on loss at standard rate – –
Effect of higher tax rates in foreign jurisdiction (5,912,041) (5,436,526)
Effective weighted average tax rate 15.03% 11.78%
Change in statutory tax rate 603,989 626,190
Expenses not deductible for tax purposes 1,489,022 117,112

Corporate Governance
Foreign exchange (losses)/gains (685,867) 2,055,325
Effect of tax losses not recognised 4,504,897 2,637,899
Current tax charge – –

2009 2008
$ $

The balance comprises temporary differences attributable to:

   Available tax losses and deductions 31,154,451 26,649,554
Deferred tax asset (unrecognised) 31,154,451 26,649,554

Financial Statements
1 See change in accounting policies (note 2b)

9 Staff Costs
The average number of employees (including Directors) and consultants employed/contracted by the Group during the year, analysed by
category, was:
Year ended 31 December
2009 2008

Jersey 3 2
Canada 5 5
Russia 40 40

Heritage Oil Plc Annual Report & Accounts 2009

Europe 27 27
Uganda 48 28
Kurdistan 23 14
Tanzania 10 10
South Africa 8 6
Total 164 132

The aggregate payroll expenses of those employees (including Executive Directors) and consultants was as follows:

Year ended 31 December

2009 2008
$ $

Salaries and other short‑term benefits 19,759,339 15,573,451

Share‑based compensation 5,269,508 12,080,813
Total employee remuneration 25,028,847 27,654,264
Capitalised portion of total remuneration 10,751,590 11,435,283

Key management compensation was:

Year ended 31 December
2009 2008
$ $

Salaries and other short‑term benefits 6,350,221 4,448,302

Share‑based compensation 3,354,833 7,498,703
9,705,054 11,947,005

89
 Notes to Consolidated Financial Statements continued

10 Intangible Exploration Assets

31 December
2009 2008
$ $

At 1 January 211,346,037 102,862,754

Effect of movement in exchange rates (130,853) (1,448,654)
Exercise of third party back-in rights for Miran (6,737,635) –
Additions 76,370,549 115,136,798
Assets transferred to property, plant and equipment (note 11) – (5,204,861)
Disposal of Oman assets (1,051,083) –
Transfer of assets held for sale (Uganda (note 6)) (158,518,547) –
At 31 December 121,278,468 211,346,037

No assets have been pledged as security. No exploration asset has been subject to impairment.

The balances at the end of the years are as follows:

31 December
2009 2008
$ $

Russia 11,234,809 11,365,662

Oman – 551,083
Uganda – 130,032,034
DRC 1,587,616 1,506,765
Kurdistan 73,786,329 43,404,350
Pakistan 1,613,000 1,560,330
Malta 11,028,152 8,570,610
Mali 1,994,317 1,225,465
Tanzania 20,034,245 13,129,738
Balance – end of year 121,278,468 211,346,037

In many of the countries in which the Group operates, land title systems are not developed to the extent found in many industrial countries
and there may be no concept of registered title. The risk of title disputes associated with Kurdistan, DRC and Malta is described in note 23.

Exercise of Third Party Back-in Rights

In April 2009, in accordance with the option outlined in the PSC in Kurdistan, the KRG nominated a third party participant in the Miran
Block. The Company remains the operator with a 75% working interest in the Miran Block and has received the pro-rata share of 25% of
all past work programme expenditures and the third party will be responsible for paying its share of future costs. The transaction was
completed upon the receipt of approximately $6.7 million in costs incurred by the Group to 31 January 2009. No gain/loss resulted from
this transaction and intangible exploration assets reduced by $6.7 million. The KRG and the Group have agreed to replace the agreement
under which they had agreed in principle (subject to certain conditions which had not been satisfied) to jointly develop a refinery with an
agreement under which the Group has agreed to make payments of up to $35 million from future oil and gas sales from the licence.

90
 Overview
11 Property, Plant and Equipment
Petroleum & natural Drilling and barge

Business Review
gas interests equipment Land & buildings Other Total
$ $ $ $ $

Cost
At 1 January 2008 42,056,745 3,544,969 11,984,701 14,452,933 72,039,348
Additions 27,533,291 – – 870,924 28,404,215
Assets transferred from intangible exploration 5,204,861 – – – 5,204,861
Effect of movements in exchange rates (3,426,524) – – – (3,426,524)
At 31 December 2008 71,368,373 3,544, 969 11,984,701 15,323,857 102,221,900
Additions 3,264,979 – – 631,740 3,896,719
Disposals (31,092,333) – – – (31,092,333)
Effect of movements in exchange rates (545,788) – – – (545,788)

Corporate Governance
At 31 December 2009 42,995,231 3,544, 969 11,984,701 15,955,597 74,480,498
Depletion, depreciation, amortisation and
impairment losses
At 1 January 2008 (3,981,438) (2,147,503) (452,329) (1,232,160) (7,813,430)
Charge for the year (1,290,992) – (139,178) (942,049) (2,372,219)
Impairment losses (3,247,078) (749,955) – – (3,997,033)
At 31 December 2008 (8,519,508) (2,897,458) (591,507) (2,174,209) (14,182,682)
Charge for the year (761,911) – (139,178) (809,034) (1,710,123)
Impairment losses – – – (2,933,374) (2,933,374)
Disposals 3,643,416 – – – 3,643,416

Financial Statements
At 31 December 2009 (5,638,003) (2,897,458) (730,685) (5,916,617) (15,182,763)
Net book value:
At 31 December 2008 62,848,865 647,511 11,393,194 13,149,648 88,039,218
At 31 December 2009 37,357,228 647,511 11,254,016 10,038,980 59,297,735

The corporate office which represents the land and building category and the corporate jet serve as security for long-term loans (note 16).

The carrying value of the corporate jet was written down to $8,064,350 because of reduction of fair value of the corporate jet due to
unfavourable economic conditions. This resulted in an impairment write‑down of $2,933,374 recognised in the income statement during

Heritage Oil Plc Annual Report & Accounts 2009

the year ended 31 December 2009. An impairment loss of $749,955 was incurred in 2008, which related to the write-down of a drilling rig.

The carrying value of the petroleum and natural gas interest in Oman was written down to its fair value, resulting in an impairment write-
down of $3,247,078 in 2008 due to a decline in oil and gas prices.

12 Other Financial Assets

31 December
2009 2008
$ $

Investment in warrants 1,154,225 107,501

Investment in unlisted securities – 3,223,000
1,154,225 3,330,501

The investment in Afren Plc warrants is classified as held for trading. The investment in unlisted securities represents common shares in a
private company, SeaDragon, which is classified as available-for-sale. The estimate of the fair value of the warrants is determined using the
Black-Scholes model and relevant market inputs.

The Company owns 805,832 of the unlisted shares of SeaDragon, approximately 15% of the shares outstanding. At 31 December 2008,
these shares were carried at a value of $4 per share, which were valued based on the most recent private placement of SeaDragon on 26
October 2006.

At 30 June 2009, the carrying value of the investments in the shares of SeaDragon was written down to nil following the completion of a
financial reorganisation by SeaDragon and the Company does not expect that the cost of the investment will be recoverable in the near
future. This resulted in an impairment write-down of $2,352,825 (2008 – nil).

91
 Notes to Consolidated Financial Statements continued

13 Trade and Other Receivables

31 December
2009 2008
$ $

Trade receivables 404 3,087

Other receivables 2,203,303 6,898,424
2,203,707 6,901,511

Trade receivables are due within 30 days from the invoice date. Joint ventures billings are typically paid within 30 days from the invoice
date. No interest is charged on the receivables. The carrying amount of trade and other receivables approximates to their fair value.

The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable.

As of 31 December 2009, trade and other receivables of $2,203,707 (31 December 2008 – $6,901,511) were neither past due nor impaired.
Trade and receivables relate to a number of independent customers and joint ventures partners for whom there is no recent history of
default. The ageing analysis of these trade and other receivables is as follows:
31 December
2009 2008
$ $

Up to 3 months 1,799,488 5,978,468

3 to 6 months 133,077 704,588
6 to 12 months 271,142 218,455
2,203,707 6,901,511

Trade and other receivables analysed by category are as follows:

31 December
2009 2008
$ $

US dollars 1,816,056 6,185,267

Russian roubles 48,898 567,052
Swiss francs 63,090 109,968
Canadian dollars 213,513 5,073
GB pounds sterling – 9,987
Euros 62,150 24,164
2,203,707 6,901,511

14 Cash and Cash Equivalents

31 December
2009 2008
$ $

Cash at bank and in hand 208,094,355 90,620,385

Cash at bank and in hand includes cash held in interest-bearing accounts.

15 Trade and Other Payables Due within One Year

31 December
2009 2008
$ $

Trade payables 11,329,632 45,714,400

Other payables and accrued liabilities 11,948,398 9,037,368
23,278,030 54,751,768

Trade and other payables and accrued liabilities comprise current amounts outstanding for trade purchases and ongoing costs. The
carrying amount of trade and other payables approximates to their fair value.

92
 Overview
16 Borrowings
31 December

Business Review
2009 2008
$ $

Non-current borrowings
Convertible bonds – unsecured 115,276,942 141,319,489
Non-current portion of long-term debt 14,276,810 14,290,493
129,553,752 155,609,982
Long-term debt-secured
Current 615,892 595,418
Non-current 14,276,810 14,290,493
14,892,702 14,885,911

Corporate Governance
2007 Convertible Bonds
On 16 February 2007, the Company raised $165,000,000 by completing the private placement of convertible bonds. Issue costs amounted
to $6,979,268 resulting in net proceeds of $158,020,732. The Company issued 1,650, $100,000 unsecured convertible bonds at par, which
have a maturity of five years and one day and an annual coupon of 8% payable semi-annually on 17 August and 17 February of each year.
Bondholders have the right to convert the bonds into Ordinary Shares at a price of $4.70 per share at any time. The number of Ordinary
Shares receivable on conversion of the bonds is fixed. The Company had the right to redeem, in whole or part, the bonds for cash at any
time on or before 16 February 2008, at 150% of par value. This right was not exercised.

The fair value of the host liability component of the bonds (net of issue costs) was estimated at $140,154,215 on 16 February 2007. The

Financial Statements
difference between the $165,000,000 due on maturity and the initial liability component is accreted using the effective interest rate method
and is recorded as finance costs. As the Company call option meant that conversion feature could be settled in cash in accordance with
IAS 32 the conversion was treated as a derivative liability. The fair value of this derivative liability (estimated using the Black-Scholes option
pricing model) was $17,866,517 at 16 February 2007 and subsequent gains and losses have been recorded in finance income and costs
up to the expiry of the Company call option on 17 February 2008. As a result of the expiry of this option, and hence the cash settlement
feature, the Company has reassessed the classification of the conversion option and determined that it qualifies to be treated as equity
under IAS 32, being an option to convert a fixed amount of cash for a fixed number of shares. Therefore, the fair value of the conversion
option was reclassified to equity at that date.

Bondholders have a put option requiring the Company to redeem the bonds at par, plus accrued interest, in the event of a change of
control of the Company or revocation or surrender of the Zapadno Chumpasskoye licence in Russia (the “contingent put option”). In the

Heritage Oil Plc Annual Report & Accounts 2009

event of a change of control and redemption of the bonds or exercise of the conversion rights, a cash payment of up to $19,700 on each
$100,000 bond will be made to a bondholder, the amount of which depends upon the date of redemption and market value of shares at
the date of any change of control event. The contingent put option has been valued separately.

The fair value of the contingent put option has been estimated de minimis by the Company at 31 December 2009 (31 December 2008
– de minimis).

During 2009, bondholders with $30.9 million of bonds gave notices of the exercise of 309 bonds. These bondholders received 6,574,456
Ordinary Shares (note 18). As a result of this conversion, $28,207,021 was transferred to share capital from convertible bonds and accrued
liabilities and $5,992,595 was transferred from the equity portion of convertible debt to share capital.

On 18 December 2009, the Company announced it had entered into a SPA for the sale of its 50% interests in Blocks 1 and 3A in Uganda
(note 6). The Company also announced that it would consider returning a portion of the disposal proceeds to shareholders through a
special dividend on completion of the proposed transaction. Under the terms and conditions of the bonds, the Company was restricted
from making or declaring a dividend or making any other distributions to its shareholders which constitutes on a consolidated basis more
than 30% of its earnings for the immediately preceding financial year.

In December 2009, the Company approached bondholders with the proposal to agree to remove this restriction and to make some other
changes in the terms and condition of the bonds. In consideration the Company proposed to pay to those bondholders who vote on the
proposal the sum of $2,000.00 per $100,000 of bonds held by such bondholders. The majority of bondholders voted in favour of this
proposal at a meeting on 31 December 2009 and the restriction of making or declaring a dividend or making any other distributions to
shareholders has been removed. On 15 January 2010, the Company paid $2,378,000 to the bondholders who voted. In accordance with
IAS 39, this amendment to the terms and conditions of the bonds does not constitute a redemption and therefore this amount was offset
against the convertible bonds liability and will be recognised in the income statement over the period of the borrowings using the effective
interest method.

93
 Notes to Consolidated Financial Statements continued

16 Borrowings continued
Long-Term Debt
In January 2005, a wholly owned subsidiary of the Company received a sterling denominated loan of £4.5 million to refinance the
acquisition of a corporate office. Interest on the loan was fixed at 6.515% for the first five years and is then variable at a rate of Bank of
Scotland base rate plus 1.4%. The loan, which is secured on the property, is scheduled to be repaid by 240 instalments of capital and
interest at monthly intervals, subject to a residual debt at the end of the term of the loan of $3.5 million (£1,860,000). The principal balance
outstanding as at 31 December 2009 was $6,573,584 (£4.1million) (31 December 2008 – $6,155,882 (£4.2 million)).

In October 2007, a wholly owned subsidiary of the Company received a loan of $9,450,000 to refinance the acquisition of the corporate jet.
Interest on the loan is variable at a rate of LIBOR plus 1.6% The loan, which is secured on the corporate jet, is scheduled to be repaid by
19 consecutive quarterly instalments of principal. Each instalment equals to $117,500 with the final instalment being $7,217,500. The
Corporation provided a corporate guarantee to the lender. The additional security of $2,454,000 was paid to the bank on 19 January 2010
to maintain the loan to value ratio specified in the loan agreement.

Fair Values
At 31 December 2009, the fair values of borrowings are approximately $115.3 million (31 December 2008 – $141.3 million) for the
convertible bonds, $89.2 million (31 December 2008 – $25.8 million) for the equity/convertible element of the convertible bonds and
$14.9 million (31 December 2008 – $14.9 million) for the long-term debt.

17 Provisions
The Group’s asset retirement obligation results from net ownership interests in petroleum and natural gas assets including well sites and
gathering systems. The Group estimates the total undiscounted inflation‑adjusted amount of cash flows required to settle its asset
retirement obligation to be approximately $1,331,359, which is expected to be incurred in the period between 2012 and 2024. A cost pool
specific discount rate, related to the liability, of 9% was used to calculate the fair value of the asset retirement obligation in Uganda and
Russia (2008 – 9%) and 10% was used in Kurdistan in 2008 (2008 – 10%).

A reconciliation of the asset retirement obligation is provided below:

31 December
2009 2008
$ $

At 1 January 719,808 170,899

Additions 117,250 526,250
Settlement (239,067) –
Revision (due to farm-in, Kurdistan) (37,589) –
Accretion expense (note 7) 52,210 22,659
Transferred to disposal group held for sale (note 6) (257,539) –
At 31 December 355,073 719,808

18 Share Capital
The Company was incorporated under the Companies (Jersey) Law 1991 (as amended) on 6 February 2008. The Company’s authorised
share capital is an unlimited number of Ordinary Shares without par value. At incorporation, there was one Ordinary Share issued at $42.
On 22 February 2008, a second Ordinary Share was issued at $41.

As part of the Reorganisation described in 2008 Annual Report, the Corporation split its stock such that each existing Common Share of
the Corporation was exchanged for either ten Ordinary Shares or ten Exchangeable Shares. The Corporation was a US dollar functional
currency entity as is the Company and therefore the balance of Share Capital was carried forward at its historical amount into the financial
statements of the Company. The rights of different classes of shares are the same and therefore economically equivalent. As such,
Ordinary and Exchangeable Shares were treated as one class of shares for loss per share calculation.

Information about movements in share capital issued before the Reorganisation is presented in the table overleaf on the after split basis,
i.e. taking into account, the one for ten split.

94
 Overview
18 Share Capital continued
Ordinary Shares

Business Review
Year ended Year ended
31 December 2009 31 December 2008
Number Amount Number Amount
$ $

At 1 January 251,858,374 215,509,055 254,877,480 217,672,243

Issue of shares 25,400,000 205,028,335 2 83
Exchange of Common Shares for Exchangeable Shares – – (4,431,120) (3,784,296)
Exchange of Exchangeable Shares for Ordinary Shares 225,000 192,150 1,182,012 1,009,470
Issued on exercise of share options (note 21) 785,000 2,767,723 230,000 611,555
Issued on conversion of bonds 6,574,456 34,199,616 – –
At 31 December 284,842,830 457,696,879 251,858,374 215,509,055

Corporate Governance
Special Voting Share
Year ended Year ended
31 December 2009 31 December 2008
Number Amount Number Amount
$ $

At 1 January 1 – – –
Issued during the year – – 1 –
At 31 December 1 – 1 –

Financial Statements
Exchangeable Shares of Heritage Oil Corporation Each Carrying One Voting Right in the Company

Year ended Year ended

31 December 2009 31 December 2008
Number Amount Number Amount
$ $

At 1 January 3,249,108 2,774,826 – –

Exchange of Common Shares for Exchangeable Shares – – 4,431,120 3,784,296
Exchange of Exchangeable Shares for Ordinary Shares (225,000) (192,150) (1,182,012) (1,009,470)
At 31 December 3,024,108 2,582,676 3,249,108 2,774,826
Balance of Ordinary Shares of the Company and Exchangeable Shares of

Heritage Oil Plc Annual Report & Accounts 2009

HOC – at 31 December 287,866,938 460,279,555 255,107,482 218,283,881

On 18 June 2009, the Company completed the placing of 25,400,000 new Ordinary Shares at a price of £5.20 per share for gross
proceeds of $216,848,944 (£132,080,000) to the Company. Share issue costs were $11,820,609 (£7,157,379).

19 Reserves
A) Available-For-Sale Investments Revaluation Reserve
Changes in the fair value and exchange differences arising on translation of available-for-sale investments such as equities, classified as
available-for-sale financial assets, are taken to the available-for-sale investments revaluation reserve (note 2k). Amounts are recognised in
the income statement when the associated assets are sold or impaired.

B) Foreign Currency Translation Reserve

Exchange differences arising on translation of a foreign controlled entity are included in the foreign currency translation reserve (note 2s).
The reserve will be recognised in the income statement when the net investment is disposed.

C) Share‑Based Payments Reserve

The share‑based payments reserve (note 2t), is used to recognise the fair value of options and LTIP awards issued, but not exercised,
to employees.

D) Equity Portion of Convertible Debt

The fair value of the conversion feature of the convertible bonds is classified as equity portion of convertible debt (note 2b(iii)) which is
included in the reserves in the balance sheet.

95
 Notes to Consolidated Financial Statements continued

20 Loss Per Share

The following table summarises the weighted average Ordinary and Exchangeable Shares used in calculating net earnings per share:

Year ended 31 December

2009 2008

Weighted average Ordinary and Exchangeable Shares

Basic 273,117,649 254,969,021
Diluted 289,643,434 256,257,622

The weighted average number of shares has been adjusted to reflect the effective one for 10 share split that took place as part of the
corporate reorganisation described in note 18. The reconciling item between basic and diluted weighted average number of Ordinary
Shares is the dilutive effect of share options and LTIP awards. A total of nil options (31 December 2008 – 22,232,010), nil shares relating to
the LTIP (31 December 2008 – 4,926,429) and 27,042,553 of shares relating to the convertible bonds (31 December 2008 – 33,617,020)
were excluded from the above calculation, as they were anti-dilutive. However, since the Company has made a loss in each year for the
purposes of calculating diluted loss per share, all potential Ordinary Shares have been treated as anti-dilutive.

21 Share‑Based Payments
Share Options
The Company had a share option plan whereby certain directors, officers, employees and consultants of the Group have been granted
options to purchase Ordinary Shares. Under the terms of the plan, options granted normally vest one third immediately and one third in
each of the years following the date granted and have a life of five years.

Ordinary Share options outstanding and exercisable:

Year ended 31 December 2009 Year ended 31 December 2008
Average Average
Number exercise price Number exercise price
of options £ of options £

At 1 January 24,382,010 1.51 24,612,010 1.51

Exercised (note 18) (785,000) 1.29 (230,000) 0.89
Balance – end of year 23,597,010 1.52 24,382,010 1.51
Exercisable – at 31 December 23,597,010 1.52 23,040,343 1.45

Number of options
Remaining
Exercise price Outstanding Exercisable life (years)

£0.48 2,000,000 2,000,000 0.39

£0.81 150,000 150,000 1.48
£1.08 – £1.43 17,447,010 17,447,010 1.95
£2.45 – £2.51 4,000,000 4,000,000 2.93
23,597,010 23,597,010 1.98

Long Term Incentive Plan

On 19 June 2008, shareholders at the AGM of the Company approved the 2008 LTIP. Under the terms of the plan, the LTIP awards will be
in the form of full-value shares (Performance Shares), subject to performance and time-vesting conditions. Eligible employees will normally
be considered by the Remuneration Committee for an award once each year. Awards made to the Executive Directors of the Company
under the LTIP are called First Awards. Participants in the First Award, however, will not be entitled to any further awards until the 2011
financial year. Awards will normally be made during the period of 42 days following the announcement of year end or half-year financial
results. Exceptionally, the First Awards under the plan on 19 June 2008, were permitted to be made within 42 days following approval of
the LTIP at the June 2008 AGM.

The plan is intended to apply to Executive Directors and other employees in senior management or leadership roles. By exception, other
higher performing and high potential employees may be considered for awards. Participants in the LTIP will not be entitled to any further
awards under the 2008 Scheme.

The vesting of shares under award are subject to performance conditions agreed by the Remuneration Committee when the award is
made. For the First Awards made in 2008 the performance conditions are the relative TSR (capital gain plus dividends) performance of
the Company versus that of a comparator group of international oil companies and a requirement for the share price of the Company to
have increased by 20% over the vesting period of three years. Furthermore is an additional holding period of one year following the
awards vesting.

96
 Overview
21 Share‑Based Payments continued
The Remuneration Committee, in consultation with executive reward consultants, approved grants of shares to Executive Directors, senior

Business Review
management and other employees in leadership roles under the LTIP. The maximum annual, individual award for participants who are not
Executive Directors is 250% of base package (expressed as the “face value” of the shares). The First Award to Executive Directors is
1,200% of base package for the CEO and 800% of base package for the CFO.

The First Awards vest after three years provided that the performance conditions are met. The awards granted to senior management and
other employees in leadership roles are in three tranches that vest after three, four and five years respectively, provided that the
performance condition is met at that time.

The awards will vest in line with the following schedule:

Senior management

Corporate Governance
and other employees
in leadership
First Awards role awards
TSR Performance vs Comparator Group of 18 Companies proportion vesting proportion vesting

3rd place and above 100% of the award 100% of the award
4th place 80% 100%
5th place 50% 100%
6th place 30% 100%
7th place and below 0% 100%
9th place (median) 0% 100%
10th place and below 0% 0%

Financial Statements
TSR is measured in comparison to a peer group of 18 oil companies selected based on one of or a combination of size (market
capitalisation, revenue, turnover, cash expenditure or a combination thereof), area of operations and country of domicile. The TSR
measurement is conducted by independent consultants in discussion with the Remuneration Committee.

Since there are market-related conditions the awards of the shares under LTIP were fair valued using the Monte Carlo model which takes
into account the market-based performance conditions which effectively estimate the number of shares expected to vest. No subsequent
adjustment is made to the fair value charge for shares that do not vest in the event that these performance conditions are not met.
Adjustments are, however, made for leavers. The fair value of the awards is recognised as an employee expense with the corresponding
increase in equity. The total amount to be expensed is spread over the vesting period during which the employees become unconditionally

Heritage Oil Plc Annual Report & Accounts 2009

entitled to the shares and options.

The table below summarises the main assumptions used to fair value the awards made under the above LTIP and the fair values of the
shares granted.

First Awards
Award date 19 June 2008 19 June 2008 19 June 2008 19 June 2008

Vesting period 3 3 4 5
Exercise price nil nil nil nil
Share price at date of grant £3.45 £3.45 £3.45 £3.45
Expected volatility 40% 40% 40% 40%
Expected dividend yield 0% 0% 0% 0%
Fair value as at grant date £1.55 £2.49 £2.61 £2.70
Number of shares granted 3,507,246 473,061 473,061 473,061

The share-based payment recognised with respect to share options and LTIP awards previously granted, in the year ended 31 December
2009 was $5,269,508 out of which $2,062,661 was capitalised.

22 Related Party Transactions

During the year ended 31 December 2009, the Company incurred transportation costs of $269,522 (31 December 2008 – $134,978) with
respect to the services provided by a company indirectly owned by Mr. Anthony Buckingham, CEO and a Director of the Company.

97
 Notes to Consolidated Financial Statements continued

23 Commitments and Contingencies

Heritage’s net share of outstanding contractual commitments at 31 December 2009 was estimated at:

Less than After

Total 1 year 1–3 years 4–5 years 5 years
$’000 $’000 $’000 $’000 $’000

Long‑term debt, including interest 17,160 1,005 9,073 616 6,466

Convertible bonds, including interest 156,849 13,957 142,892 – –
174,009 14,962 151,965 616 6,466
Effect of interest (31,826) (14,306) (16,442) (219) (859)
Total repayments of borrowings 142,183 656 135,523 397 5,607
Operating leases 7,623 417 635 635 5,936
Work programme obligations1,2 118,216 60,182 36,634 21,400 –
Total contractual obligations 125,839 60,599 37,269 22,035 5,936

1 Work programme obligation includes minimum required financial commitments for the Group to fulfil the requirements of licences and production sharing contracts.
2 In April 2009, in accordance with the option outlined in the PSC in Kurdistan, the KRG nominated a third party participant in the Miran Block. The Company remains the operator
with a 75% working interest in the Miran Block and has received the pro-rata share of 25% of all past work programme expenditures and the third party will be responsible for
paying its share of future costs. The KRG and the Group have agreed to replace the agreement under which they had agreed in principle (subject to certain conditions which
had not been satisfied) to jointly develop a refinery with an agreement under which the Group has agreed to make payments of up to $35 million from future oil and gas sales
from the licence.

The Company may have a potential residual obligation to satisfy any shortfall in officers’ and former officers’ secured real estate borrowings
in the event of default, a shortfall on the proceeds from the disposal of the properties and the individuals being unable to repay the balance.
The value of the residual obligation was estimated as insignificant.

In many of the countries in which the Group operates, land title systems are not developed to the extent found in many industrial countries
and there may be no concept of registered title. Although the Group believes that it has title to its oil and gas properties, it cannot control or
completely protect itself against the risk of title disputes or challenges. There can be no assurance that claims or challenges by third parties
against the Group’s properties will not be asserted at a future date.

The Group received a letter from the Iraq Ministry of Oil dated 17 December 2007 stating that the PSC signed with the KRG without the
prior approval of the Iraqi Government is considered to be void by the Iraqi Government as they have stated it violates the “prevailing Iraqi
law”. The Directors believe that the PSC is valid and effective pursuant to the applicable laws.

In addition, the DRC work programme pursuant to the PSC cannot be commenced prior to the grant of a Presidential Decree from the
DRC Government. There can be no assurance that final approval or ratification will ever be received in respect of the PSC or that the
pre‑agreed fiscal terms will not be re‑negotiated at a later date by the DRC Government. The Directors are confident that the title will
be confirmed.

Furthermore, the Group received a letter from the chairman of the Management Committee of the National Oil Company of Libya dated
28 February 2008 stating that the Block 7 licence area in Malta lies within the Libyan continental shelf and a portion of this area has already
been licenced to Sirte Oil Company. This letter also demands that the Group refrain from any activities over, or concerning, the Block 7
licence area and asserts the Libyan Government’s right to invoke Libyan and international law to protect its rights in the Block 7 licence
area. The Directors believe that the Libyan Government’s claims are unfounded.

24 Non-cash Investing and Financing Activities Supplementary Information

Year ended 31 December
2009 2008
$ $

Capitalised portion of share‑based compensation (2,062,661) (4,639,169)

Non-cash property, plant and equipment additions relating to the capitalised
  portion of share‑based compensation 2,062,661 4,639,169

25 Subsequent Events
On 18 December 2009, Heritage announced that the Company, and its subsidiary Heritage Oil & Gas Limited, had entered into a SPA, with
Eni for the sale of its 50% interests in Blocks 1 and 3A in Uganda. On 17 January 2010, Tullow Uganda Limited exercised its right to
pre-empt the sale of the Disposed Assets to Eni on the same terms and conditions as agreed in the SPA entered into between Heritage
and Eni. The transaction was overwhelmingly approved by shareholders at the General Meeting on 25 January 2010.

In April 2010, Heritage announced that it had received a letter from the Ugandan Government stating that it supports Heritage’s sale and
transfer of its Ugandan interests and that it will conclude its review of the transaction within eight weeks. Following this, Heritage expects to
receive formal consent and to close the transaction shortly thereafter.

98
 Overview
Glossary of Terms and Definitions

$ US dollars unless otherwise stated

Business Review
Afren Afren plc

AGM Annual General Meeting

Albion Albion Energy Limited

API a specific gravity scale developed by the American Petroleum Institute for measuring the
relative density of various petroleum liquids, expressed in degrees

Articles Articles of Association

Corporate Governance
bbl/bbls barrel/barrels

bbls/d or bopd barrels per day or barrels of oil per day

bcf billion cubic feet

boe barrels of oil equivalent1

boe/d or boepd barrels of oil equivalent per day

Centric Energy Centric Energy Corporation

Financial Statements
Combined Code Combined Code of Corporate Governance published in 2008

Company Heritage Oil Plc

condensate low density, high API hydrocarbon liquids that are present in natural gas fields where it
condensates out of the raw gas if the temperature is reduced to below the hydrocarbon dew
point temperature of the raw gas

Contingent Resources those quantities of petroleum estimated, as of a given date, to be potentially recoverable from

Heritage Oil Plc Annual Report & Accounts 2009

known accumulations by application of development projects but which are not currently
considered to be commercially recoverable due to one or more contingencies

CSR Corporate Social Responsibility

Dominion Dominion Oil and Gas Limited

DRC The Democratic Republic of Congo

DTR Financial Services Authority’s Disclosure and Transparency Rules

Eagle Energy Eagle Energy (Oman) Limited

EMV Expected Mean Value

Eni Eni International B.V.

ENPV Expected Net Present Value

ESP Electric submersible pump

EU European Union

FEED Front End Engineering and Design

Genel Genel Enerji A.S.

Genel Energy Genel Energy International Limited

1 boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead.

99
 Glossary of Terms and Definitions continued

Gj gigajoules

GPos Geological Probability of Success

Group, Heritage the Company and all of its subsidiaries

HOC or Corporation Heritage Oil Corporation, incorporated in Canada and a wholly owned subsidiary of the
Company

IFRS International Financial Reporting Standards

ILO International Labour Organisation

Jersey Companies Law Companies (Jersey) Law 1991

KRG Kurdistan Regional Government

KPI Key Performance Indicators

Kurdistan Kurdistan

Lead potential drilling target that is less well defined than a prospect and requires further data
before being considered a prospect for drilling

LOI Letter of Intent

LPG liquid petroleum gas

LSE London Stock Exchange

LTIFR Lost Time Injury Frequency Rate per 10,000 hours worked

LTIP Long Term Incentive Plan

m metres

m3 cubic metres

mbbls thousand barrels

mmbbls million barrels

mboe thousands of barrels of oil equivalent

mmboe millions of barrels of oil equivalent

mcf thousand cubic feet

mcf/d thousand cubic feet per day

mmbtu million british thermal units

mmcf million cubic feet

mmcf/d million cubic feet per day

mmstb million stock tank barrels

N/A not applicable

NGLs natural gas liquids

P10 10% certainty

P50 50% certainty

100
 Overview
P90 90% certainty

Business Review
Petrodel Petrodel Resources Limited

Petroleum any mineral, oil or relative hydrocarbon (including condensate and natural gas liquids) and
natural gas existing in its natural condition in strata (but not including coal or bituminous
shale or other stratified deposits from which oil can be extracted by destructive distillation)

Possible Reserves those additional reserves which analysis and geoscience and engineering data suggest are
less likely to be recovered than Probable Reserves. The total quantities ultimately recovered
from the project have a low probability to exceed the sum of Proved plus Probable plus
Possible Reserves

Corporate Governance
Probable Reserves those additional reserves that are less likely to be recovered than Proved Reserves but more
certain to be recovered than Possible Reserves. It is equally likely that actual remaining
quantities recovered will be greater than or less than the sum of the estimated Proved plus
Probable Reserves

Prospect potential drilling target that is well defined, usually by seismic data

Prospective Resources those quantities of petroleum which are estimated, as of a given date, to be potentially
recoverable from undiscovered accumulations

Financial Statements
Proved Reserves those quantities of petroleum, which by analysis and geoscience, can be estimated with
reasonable certainty to be commercially recoverable. It is likely that the actual remaining
quantities recovered will exceed the estimated Proved Reserves

PSA or PSC production sharing agreement or production sharing contract

Regulations UK Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008

Replacement Scheme The Heritage Oil Limited 2008 Replacement Share Option Scheme

Heritage Oil Plc Annual Report & Accounts 2009

RPS RPS Energy

SeaDragon SeaDragon Offshore Limited

SPA Sale and Purchase Agreement

TSX Toronto Stock Exchange

TSR Total Shareholder Return

Tullow Tullow Oil plc

WTI West Texas Intermediate

Conversion Table
The following table sets forth standard conversions from Standard Imperial Units to the International System of Units (or metric units).
 
To Convert From  To  Multiply By

boe Mcf 6
mcf Cubic metres 28.174
Cubic metres Cubic feet 35.494
bbls Cubic metres 0.159
Cubic metres bbls oil 6.290
Feet Metres 0.305
Metres Feet 3.281
Miles Kilometres 1.609
Kilometres Miles 0.621
Acres Hectares 0.405

101
 List of Advisers

Company Secretary Woodbourne Secretaries (Jersey) Limited

Ordnance House
31 Pier Road
St Helier JE4 8PW Jersey
Channel Islands

Registered Office of the Company Ordnance House

31 Pier Road
St Helier JE4 8PW Jersey
Channel Islands

Head Office and Directors’ Fourth Floor

Business Address Windward House
Route de la Liberation
St Helier JE2 3BQ Jersey
Channel Islands

UK Office of the Company 34 Park Street

London W1K 2JD
United Kingdom

Broker and Financial Advisers J.P. Morgan Securities Limited

125 London Wall
London EC2Y 5AJ
United Kingdom

English Legal Advisers to the Company McCarthy Tétrault

Registered Foreign Lawyers & Solicitors
2nd Floor
5 Old Bailey
London EC4M 7BA
United Kingdom

Jersey Legal Advisers to the Company Mourant du Feu & Jeune

22 Grenville Street
St Helier JE4 8PX Jersey
Channel Islands

Canadian Legal Advisers to the Company McCarthy Tétrault LLP

Suite 3300
421-7th Avenue SW
Calgary Alberta
T2P 4K9
Canada

Auditors of the Company KPMG Audit Plc

8 Salisbury Square
London EC4Y 8BB
United Kingdom

Registrars of the Company Computershare Investor Services

(Jersey) Limited
Ordnance House
31 Pier Road
St Helier JE4 8PW Jersey
Channel Islands

Principal Bankers of the Company Standard Bank (Europe)

Bank of Scotland (Europe)
Barclays Bank
Investec

102
 Overview
Independent Petroleum Engineering RPS Energy
Consultants to the Company 309 Reading Road

Business Review
Henley-on-Thames
Oxfordshire RG9 1EL
United Kingdom

Press Agents Pelham Bell Pottinger

6th Floor
Holborn Gate
330 High Holborn
London WC1V 7QD
United Kingdom

Corporate Governance
Financial Statements
Heritage Oil Plc Annual Report & Accounts 2009

103
 Financial Calendar

Group results for the year to 31 December are announced in March/April. The Annual General Meeting is held during the second quarter.
Half year results to 30 June are announced in August. Additionally, the Group will issue an Interim Management Statement between
ten weeks after the beginning and six weeks before the end of each half year period.

Website
www.heritageoilplc.com

104
Overview
01 Highlights
04 Company Overview
08 Chairman’s Statement

Heritage Oil Plc is an independent oil

Business Review and gas exploration and production
company with a Premium Listing on the
12 Chief Executive’s
Statement
14 Chief Executive’s Q&A
16 Strategy
17 Reserves and Resources
18 Operations Review
London Stock Exchange (“LSE”) (symbol
20 Kurdistan
22 Malta
HOIL). The Company is a member of
23 Pakistan
24 Democratic Republic
of Congo
the FTSE 250 Index. The Company
25 Tanzania
26 Mali has Exchangeable Shares listed on
the Toronto Stock Exchange (“TSX”)
27 Russia
28 Uganda
30 Financial Review
34 Principal Risks
38 Corporate Social
Responsibility
(symbol HOC) and the LSE (symbol
HOX). The Company has core activity
areas focused on Africa, the Middle
East and Russia.
Corporate Governance
46 Board of Directors
48 Corporate Governance
Report
55 Remuneration Report
62 Directors’ Report
65 Responsibility Statement
of the Directors

Financial Statements
68 Independent Auditors’
Report to the Members
of Heritage Oil Plc
70 Consolidated Income
Statement
71 Consolidated Statement
of Comprehensive
Income
72 Consolidated Balance
Sheet
73 Consolidated Statement
of Changes in Equity
75 Consolidated Cash Flow
Statement
76 Notes to Consolidated
Financial Statements

Other
99 Glossary of Terms and
Definitions
102 List of Advisers Front cover picture designed by Hawnaz Wahab, 5th Grade, Halgurd School, Kurdistan
104 Financial Calendar (for more information see page 43).
 Heritage Oil Plc Annual Report & Accounts 2009

Head Office and

Directors’ Business Address: Heritage Oil Plc
Fourth Floor, Windward House
La Route de la Liberation Annual Report & Accounts 2009
JE2 3BQ Jersey
Channel Islands

Tel +44 1534 835 400

Fax +44 1534 835 412
SECURING OUR FUTURE
www.heritageoilplc.com