Prospectus re Admission to the Official List - Heritage Oil

In 2005, the Group capitalised $1,332,363 (2004—$441,075) of general and administrative costs relating toexploration and development activities.7.8 Finance CostsInterest on the loan used to re-finance the purchase of the technical services office in London totalled$491,824 in 2005. This loan was obtained in January 2005. There was no interest charge in 2004 as HOCwas debt free throughout that year.7.9 Foreign Exchange LossesThere was a foreign exchange loss of $1,240,529 in 2005, primarily as a result of the relative weakening ofthe Euro against the U.S. dollar. A $14 million note receivable (denominated in Euros) was repaid duringthe first quarter of 2005 and the funds were retained in Euro-denominated treasury deposits for part ofthis period.7.10 Depletion, Depreciation and AccretionDepletion, depreciation and accretion expenses increased by $1,002,365 to $1,636,008 in 2005. This wasprimarily as a result of a decrease in the level of proved reserves in the Kouakouala field in the Congo as at31 December 2005, which impacted on the depletion, depreciation and accretion expense in the fourthquarter of the year.The depletion calculation included future costs required to develop reserves in the amount of $625,000 in2005 compared to $3 million in 2004.7.11 Impairment of Unproved Petroleum and Natural Gas InterestsThere was an impairment of unproved interests of $724,915 (Nigeria and Turkmenistan) in 2005 and$934,771 in 2004.7.12 Gain on Sale of Property and EquipmentOn 9 June 2004, the Group sold a call option to Maurel et Prom for proceeds of $1.2 million entitling thepurchaser to acquire the Group’s overriding royalty interest in the Congo by 30 July 2004 for cash proceedsof $16.4 million, a loan note receivable equivalent to $14 million (denominated in Euros of approximatelyA11.6 million) due on 31 December 2005 bearing interest at Euribor plus 2.65 per cent. per annum,together with contingent consideration of up to A8.3 million, payable on the sale of all or a portion of itsinterest in the M’Boundi field or Kouilou permit before 31 December 2005. Concurrent with the exerciseof the option, the Group was required to acquire a 7 per cent. working interest in the Noumbi permit in theCongo from the purchaser for a cash consideration of $7 million.On 30 June 2004, Maurel et Prom exercised the option, resulting in a gain on sale of $26,269,113(Cdn$35,339,838). The net cash consideration of $9.4 million was received in July 2004. The gain on thesale of the Kouilou overriding royalty was calculated after taking into account all relevant costs. The sale ofthe overriding royalty would have changed the rate of depletion and depreciation for the Congo by morethan 20 per cent. Accordingly, the capitalised cost pools and project values of the other projects from thiscountry were taken into account when calculating the gain on sale of $26,269,113.7.13 Net Earnings (Loss) for the YearThere was a net loss of $3,799,813 in 2005, compared to net earnings of $28,364,368 in 2004. Net earningsin 2004 were $2,095,255 before taking into account the one-off gain on the sale of property of $26,269,113.If foreign exchange gains and losses and write-downs of petroleum and natural gas interests were excluded,the loss in 2005 would have been $1,834,369, compared to earnings of $1,542,000 in the previous year.Net losses per HOC Common Share were $0.18 in 2005, compared to earnings per HOC Common Shareof $1.33 (basic) and $1.31 (diluted) in 2004.154