Prospectus re Admission to the Official List - Heritage Oil

On 2 October 2007, the Group executed a PSC with the KRG over the Miran Block in the southern part ofthe KRI and a separate strategic agreement under which the Group will be a 50/50 partner with the KRGin designing and building a 20,000 bopd oil refinery in the vicinity of the licence area. Under the terms ofthe agreement, Heritage Middle East, a wholly-owned subsidiary of the Group, was appointed operator.On 16 November 2007, the Group was awarded an onshore exploration licence in Pakistan, with a grossarea of 2,258 square km. The Group holds a 60 per cent. participating interest in the Sanjawi Block(No. 3068-2) in Zone II (Baluchistan) and was appointed as operator.On 17 November 2007, the Group farmed-in to two onshore exploration licences in Mali, in North-WestAfrica, with a gross area of over 72,000 square km. The Group has been appointed as operator. Whollyownedsubsidiaries of the Group have the right to acquire a 75 per cent. working interest in Block 7 andBlock 11 from Mali Oil Developments SARL, a wholly-owned subsidiary of the public company CentricEnergy Corporation.On 14 December 2007, the Group executed a PSC with the Maltese Government for Areas 2 and 7 in thesoutheastern offshore region of Malta. Under the terms of the agreement, Heritage Oil InternationalMalta Limited, a wholly-owned subsidiary of the Group, will serve as operator with a 100 per cent. interest.The Group has financed the above acquisitions and work programmes during the period under reviewthrough the disposal of its interests in the Congo and two rounds of convertible bond issues and an equityfinancing.On 16 February 2007, HOC raised $165 million by completing the private placement of convertible bonds.HOC issued 1,650 unsecured convertible bonds, at par value of $100,000, which have a term of five yearsand one day and an annual coupon of 8 per cent. The bonds are convertible into HOC Common Shares ata price of $47 per share. HOC had the right to redeem, in whole or part, the bonds for cash at any time onor before 16 February 2008, at 150 per cent. of par value, although this right was not exercised. Proceedswere partly used to finance the redemption of the outstanding $55 million of convertible bonds at apremium of 150 per cent. On 17 January 2007, HOC gave notice that it had exercised its option to redeemthe 550 outstanding unsecured convertible bonds at 150 per cent. of par value for total proceeds of$82.5 million plus accrued interest, which was paid on 28 March 2007.On 14 November 2007, HOC completed an equity financing, raising gross proceeds of Cdn $181.5 millionfrom the issue of 3 million HOC Common Shares by way of a private placement with institutionalinvestors.3. KEY FACTORS AFFECTING THE GROUP’S RESULTS OF OPERATIONS AND FINANCIALCONDITIONThe key factors affecting the Group’s results of operations and financial condition during the periodsunder review and that the Group expects will continue to have a significant effect on its results ofoperations and financial condition in the future, include amongst others, the following: Exploration and development expenditure and success rates; Factors associated with operating in developing countries, political and regulatory instability; Oil and gas sales volumes and prices; and Reliance on key employees.Exploration and development expenditure and success ratesOil and gas exploration involves a high degree of risk and there is no assurance that expenditures made onfuture exploration by the Group will result in new discoveries of oil or gas in commercial quantities orat all.The principal expenditures related to the Group’s exploration work programmes are the acquisition ofseismic data and the drilling of wells. When entering a new geological province and when drilling a newexploration prospect, the Group assesses the exploration risk involved and offsets that risk against thepotential monetary gain in the event of success. The Group also reduces the potential risk by undertakingthorough exploration work as well as, in certain instances, exploring in known hydrocarbon provinces.139