Prospectus re Admission to the Official List - Heritage Oil

5.7 Exploration ExpenditureExploration expenditure increased from $3,373,024 in the nine-month period ended 30 September 2006 to$4,937,595 in the same period in 2007. This increase in costs reflected the increased activity of the Groupand costs incurred in new territories prior to a licence being awarded. Exploration expenditure innine-month period ended 30 September 2006 principally related to costs in the KRI, whilst in the sameperiod in 2007 related mainly to the KRI and potential new ventures in Russia.5.8 Impairment of property, plant and equipmentThe carrying value of the drilling rig was written down to its estimated fair value. This resulted in animpairment write-down of $1,799,762 recognised in the income statement during the nine-month periodended 30 September 2007.5.9 Gain on Disposal of SubsidiariesThe Group recognised a gain on disposal of its subsidiaries of $1,077,132 in the first quarter of 2007. On9 March 2007, the Group disposed of its 65 per cent. equity interests in Pipelay and Naturalay Technologiesfor consideration of 605,000 common shares in SeaDragon. The fair value of the common sharesconsideration received of $2,420,000, which was based on the most recent private placement to arms-lengthparties, resulted in a gain on the disposal of $1,077,132.5.10 Finance Income (Costs)In the nine-month period ended 30 September 2007, interest income of $1,243,305 was $257,952 higherthan in the same period in the previous year as a result of both average higher cash balances and higheraverage interest rates. Cash and cash equivalents are typically held in interest-bearing treasury accounts.Invested cash generating this income was raised by the issue of the $60 million and $165 million unsecured,convertible bonds in March 2006 and February 2007, respectively.Other finance costs increased by $3,786,406 from $3,266,497 in the nine-month period ended30 September 2006, to $7,052,903 in the same period of 2007, as a result of the issuance of $60 millionunsecured convertible bonds in March 2006 and $165 million unsecured convertible bonds inFebruary 2007, which lead to higher interest and accretion expenses that are expensed to finance costs.On 17 January 2007, the Group gave notice that it had exercised its option to redeem the 550 outstandingunsecured convertible bonds at 150 per cent. of par value for total proceeds of $82.5 million plus accruedinterest which was paid on 28 March 2007. This resulted in the recognition of a loss of $7,155,622 on theredemption, net of transaction costs, on the recorded liability and derivative liability in the nine-monthperiod ended 30 September 2007.Convertible bonds were separated into liability and derivative liability components (being the bondholders’conversion option) and each component is recognised separately. The change in the fair value of theconvertible bonds conversion options which is primarily due to the increase in share price, resulted in a lossof $5,483,503 in the nine-month period ended 30 September 2006 and a loss of $17,350,077 in the ninemonthperiod ended 30 September 2007.In the nine-month period ended 30 September 2007, the Group recognised an unrealised gain in the fairvalue of investment in warrants of $63,351. This relates to the Group’s holding of 1,500,000 warrants inAfren received as partial consideration from the sale of Heritage Congo in 2006.144