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					Operational review


                                                                                               Drilling activity early in the year concentrated
                                                                                               on the delineation of the Pliocene Mansouriya
                                                                                               Channel play and the continuation of the
                                                                                               appraisal of the South Batra Field, Miocene
                                                                                               Abu Madi play. Success on the existing South
                                                                                               Batra area was mixed but the availability of
                                                                                               large contiguous 3-D seismic data is
                                                                                               transforming interpretation of the deeper
                                                                                               Miocene plays and significant exploration
                                                                                               success has been achieved.

During the year Melrose enlarged and extended its concession acreage position in Egypt.
The El Mansoura Concession was extended, adding a further six years in two three-year exploration
periods, commencing on the expiry of the original concession term in June 2006. In addition,
the South East El Mansoura Concession was awarded with an exploration period of eight years.

2005 also saw a resumption of exploration     these shales and cementing the casing is      Madi channel system with good reservoir
drilling with a number of significant         being addressed.                              quality. The areas in between these
discoveries in the second half of the year.                                                 north-south channel sequences have been
The initial interpretation of the final       In the Pliocene play outwith the South        non-productive in the wells drilled in spite
processed 3-D seismic data over most of       Batra field area, four exploration wells      of being structurally high. While reserves
the El Mansoura Concession has                were drilled in the South Mansoura area.      attributed to these intervening highs have
confirmed further significant exploration     Three of these wells have been successfully   been excluded from this year’s reserve
potential in the area.                        completed as producers. One further           review, it is expected that the intervening
                                              Pliocene well was drilled on the Abu Arida    channels can be followed to the north and
Field appraisal and development               structure to the north of Mansouriya.         to the south. These potential field
Four wells were drilled on the Mansouriya     This well is already on production through    extensions will be tested in 2006.
trend and all four were put on production     the existing South Bilqas facilities.
after good initial flow rates on test.                                                      Further South Batra field appraisal and
There have subsequently been production       The South Batra Abu Madi appraisal            extension drilling will benefit from the
difficulties with two of the wells, with      programme produced mixed drilling results     experience gained. In total, six wells were
significant reserves remaining behind         with some valuable lessons learned            drilled over the year of which three were
casing as a result of poor cement. The        during the year. The delineation drilling     completed as Abu Madi producers and a
zone of interest is set within sensitive      programme confirmed that there are three      Pliocene interval will be tested in a fourth.
shales and the problem of drilling through    separate channel trends within the Abu        One of the wells was deepened to the Sidi

6   Melrose Resources plc 2005
                                                                                          EL MANSOURA                                         MEDITERRANEAN


                                                                                                                    SOUTH EAST EL MANSOURA

                                                                                                                                                   0         30km

Final processing of new 3-D seismic that was                                          Egypt concessions

acquired over the El Mansoura Concession has                                            Development lease
transformed the exploration effort. The West                                            Exploration lease
Khilala discovery was a direct result of this
new seismic interpretation: the well was drilled
on a strong seismic anomaly and encountered
a gross gas column of 122 ft in a high quality
Abu Madi sand. GIIP is estimated at 500 Bcf.

Salim and a pressure kick required                 expected. Subsequently, the Turbay No.1              30.2 MMcfpd plus 60 bcpd with detailed
installation of a 10,000 psi rated BOP.            was drilled to test the same Sidi Salim play         well test analysis indicating that the
The hole was open for an extended                  and the well tested at 110 bopd plus 1               structure could hold considerably more gas
period and, probably as a result of this,          MMcfpd after initially flowing only gas.             than the pre-spud volumetric GIIP of
no flow from the Sidi Salim zone was               The oil rate is expected to rise as the well         around 250 Bcf. The current 2P GIIP
achieved on test. This well did, however,          is put on production through the El Tamad            estimate is 500 Bcf but this number could
suggest the potential of the middle                facilities. A fourth well encountered a              well be increased further. It is expected
Miocene plays on the eastern side of the           residual oil column and was plugged.                 that further interpretation of the 3-D data
South Batra Field which was later                  As this play is better understood and                will highlight further large anomalies in
confirmed by the West Dikirnis discovery.          further 3-D seismic is acquired going into           this area over the coming months.
                                                   South East El Mansoura, we expect this
New discoveries                                    area to provide a number of significant oil          The West Dikirnis well, located to the east
A very significant development during the          discoveries.                                         of the South Batra Field, tested a series of
year was the discovery of oil in the                                                                    sand intervals straddling what is
Miocene Sidi Salim formation. The El               Following the acquisition of 1,700 km2 of            interpreted to be the boundary between
Tamad No.1 well successfully tested black          3-D seismic data over the western and                the Miocene Qawasim and Sidi Salim
oil and gas at a rate of 2,000 bopd plus           central areas of the Concession,                     intervals. A gross gas column of 147 ft,
1.5 MMcfpd. A follow-up well, El Tamad             exploration efforts were focussed on the             with no water contact, was encountered.
No.2, established the water contact and            area covered by this 3-D data.                       There are three separate sand intervals,
was tested at the more modest rate of                                                                   totalling 101 net ft, with the two upper
1,041 bopd and 780 Mcfpd. Following                The West Khilala and West Dikirnis wells             units interpreted as very good quality
fast track development, the two wells              were drilled on strong seismic anomalies.            Qawasim and the lower unit a poorer Sidi
were brought on production in February             The West Khilala well encountered a gross            Salim reservoir.
2006 at a combined rate of 950 bopd and            gas column of 122 ft (95 net ft) in a very
650 Mcfpd with a gradual increase to               high quality level II Abu Madi sand with no          Only the lower interval was tested
around 1,500 bopd plus 1 MMcfpd                    water contact. The well was tested at                (24 ft gross) and a stabilised flow rate of

                                                                                                                            Melrose Resources plc 2005   7
Operational review


                                                                                                The processed data from the final tranche of the
                                                                                                3-D seismic survey, on the El Mansoura Concession
                                                                                                in the area to the east of the Dikirnis well, should
                                                                                                become available by mid-2006 and further large
                                                                                                prospects are expected to be identified in this
                                                                                                eastern area of the Concession. The seismic crew
                                                                                                was released for six months in March but returned
                                                                                                in September to complete the acquisition of 3-D
                                                                                                seismic over the eastern part of the Concession
                                                                                                and the crew has now moved from El Mansoura
                                                                                                down to South East El Mansoura.

21.7 MMcfpd and 894 bcpd was achieved,       the obvious potential of this area can only     northern half of the Concession and it was
proving much better quality reservoir than   be hinted at using the current data set and     decided to complete the seismic acquisition
indicated by the logs. The well will be      extrapolation of the El Mansoura 3-D data.      over the other two Concessions before
brought on to production from this Sidi      Exploration potential has been identified in    moving the crew to Qantara.
Salim interval and the other sands will be   the Pliocene, Abu Madi and Sidi Salim
tested in the proposed appraisal/            plays extending down from El Mansoura.          Regional evaluation work suggests that
development wells. Because the main          In addition, further potential is seen in the   the northern area of the Qantara
reservoir intervals have not yet been        Oligocene and Cretaceous levels with the        Concession should be more prospective
tested, a volumetric GIIP of 206 Bcfe has    area being thought to be generally more         than the south and further work on the
been calculated giving a conservative        oil prone.                                      old 2-D seismic indicates a large shallow
figure for 2P reserves of 165 Bcfe. Here                                                     Pliocene structure as well as deeper
also, analogous seismic anomalies are        The first well to be drilled on the             Miocene structures with significant
being seen in the area around the West       Concession, Al Rawda, targeted the same         potential.
Dikirnis structure.                          Sidi Salim interval encountered in the
                                             Turbay well. Gas and condensate have            The deeper Miocene and Oligocene
South East El Mansoura Concession            been encountered in this small fault block      reservoirs are expected to be better quality
The South East El Mansoura Concession        suggesting that black oil, with a gas cap, is   north of the major east-west hinge zone
which is located immediately to the south    more likely to have been trapped in some        that runs through the Concession.
of the El Mansoura Concession, covers an     of the bigger structures. The 3-D seismic,      Following the planned 3-D acquisition in
area of 3,730 km2. The north-west corner     currently being acquired, will allow more       mid-year a well will be drilled in early
of the Concession, where it borders on the   effective interpretation of this play.          2007. The key goal in Qantara will be to
El Mansoura Concession, is believed to                                                       identify and drill a section of good
have most potential.                         Qantara Concession                              Qantara sand reservoir on the new seismic
                                             There has only been minor activity on the       and then use this example seismic
There is only a small amount of existing     Qantara Concession in 2005. Further 3-D         response to re-evaluate the old 3-D seismic
2-D seismic, mainly in the northwest, and    seismic coverage is required over the           in the southern area.

8   Melrose Resources plc 2005

                                                                                                             MARITIME                        CORSICA

                                                                                  MEDITERRANEAN SEA
France                                                                                                                                  SARDINIA
                                                                                                              0       100km

                                                Evaluation of the prospectivity of the Rhône
                                                Maritime Concession is ongoing with a view
                                                to farming out an interest in this concession.
                                                The 2-D seismic lines have been reprocessed
                                                and the acquisition of 3-D seismic is being
                                                considered to further evaluate the two large
                                                structures that have been identified.

The Rhône Maritime Concession is located in the Provençal Basin in the French Mediterranean.
The basin, which is in a deepwater setting of up to 2,600 m and includes the Rhône deep-sea fan,
is completely unexplored, but some very large structures have been mapped on the existing dataset.

Two major play fairways, divided by a thick     Evaluation of the prospectivity in the           3-D thermal modelling study has been
Messinian salt sequence, have been              Concession is ongoing. The 2-D seismic           undertaken to reconstruct the history of
identified from excellent 2-D seismic           lines have been reprocessed to remove            hydrocarbon maturation, expulsion and
acquired in 2001. The post-salt Pliocene        artefacts caused by the variation in             migration in the area. On the back of
deposits have undergone significant             thickness in the salt layer and thereby          these very positive indicators, Melrose will
structuration due to distortion in the          improve data quality in the pre-salt             seek to farm-out an interest in the
underlying Messinian salt, resulting in large   Miocene interval.                                Concession prior to committing to the 3-D
closures that could accommodate sizeable                                                         seismic acquisition programme and with
hydrocarbon accumulations of up to tens         The seismic data has been interpreted to         the intention of drilling a well in 2007.
of Tcf of gas or a billion barrels of oil.      provide a global image of the area and to
Abundant AVO anomalies, suggesting the          identify good leads in the pre-salt and
presence of hydrocarbons, have been             post-salt layers. A 3-D seismic campaign is
identified in the seismic dataset and the       being considered for the second half of
combination of very large structures and        2006 over a 2,000 km2 area in order to
hydrocarbon indicators is very promising.       evaluate two leads in the Miocene and the
                                                Pliocene intervals.
The second play fairway lies in the pre-salt
turbiditic Miocene deposits and has             A review of the regional literature
distinct seismic reflection characteristics     published on the western Mediterranean
that could also indicate the presence of        has demonstrated potential source rocks
hydrocarbons.                                   in the Oligocene and the Messinian and a

                                                                                                                      Melrose Resources plc 2005   9
Operational review


                                                                                                      The Galata compression project was tendered to
                                                                                                      outside contractors, but ultimately internal project
                                                                                                      management resources were utilized.
                                                                                                      The compression unit was purchased in California,
                                                                                                      ancillary equipment was sourced in Europe and
                                                                                                      the piping was undertaken locally. The project
                                                                                                      was completed at a cost of $7 million, saving over
                                                                                                      $5 million on the original tenders. The project
                                                                                                      was completed in 12 months, without
                                                                                                      incident and without disruption to gas sales.

During the year, the Galata gas field performed well and the first stage of compression was successfully
installed at the onshore production facilities. Two exploration wells were drilled in the shallow waters
of Block Kaliakra 99. While the results were not commercial discoveries, residual oil and gas were
encountered in the target formations, further confirming the hydrocarbon potential of the area.

The Group’s exploration priorities in Bulgaria   production performance, proved reserves          Interpretation of the 3-D seismic has been
are currently being formulated in the light      recoverable over field life have increased       essential in assisting in the evaluation of
of this new well data and a better               from 65 to 75 Bcf, while total proved plus       the prospectivity of the area as it has
understanding of the geology of the area.        probable reserves were revised downwards         allowed an enhanced understanding of
An exploration drilling programme using a        slightly from 90 to 85 Bcf.                      the geological setting and petroleum
semi-submersible rig is scheduled to                                                              trapping mechanisms.
commence in the fourth quarter of 2006.          The compressor has run on demand since it
                                                 was commissioned and has allowed                 The southern area of Block Kaliakra 99 is
Galata Gas Field                                 monthly nominations for both January and         still considered to be very prospective.
Production from the Galata field during          February 2006 despite local temperatures         During the year Melrose undertook a field
2005 totalled 18.5 Bcf, meeting 16% of           falling as low as -21° C. The compressor         trip to the onshore area in conjunction with
Bulgaria’s domestic gas consumption during       turbine is fitted with SoLoNox technology        the Universities of Sofia and Edinburgh to
the year. Contract sales volumes in place        to ensure that the exhaust gases meet            evaluate the onshore outcrop of reservoir
for 2006 are for a similar production level.     stringent environmental emission limits.         formations. All data gathered during drilling
                                                 In order to maximise field recovery a second     and the field trip is now being evaluated
An appraisal well drilled in the Galata East     compressor will be installed during 2007.        and will be incorporated into future seismic
fault block in 2005 enhanced                                                                      mapping and prospect evaluation.
understanding of, and confidence in, the         Block Kaliakra 99
deliverability of the reservoir. Analysis of     Block Kaliakra 99 covers an area of 2,601        The northern area of Block Kaliakra 99 is
the results showed that there is connection      km2 in water depths mostly less than             geologically different from the southern
across the fault and it is, therefore,           500 m. In 2004 Melrose acquired 600 km       2
                                                                                                  area and to date has been evaluated with
expected that the reserves can be produced       of 3-D seismic in the southern area of the       2-D seismic only. A 3-D survey to cover the
from the present wells and process facilities.   block and in 2005 the final processed            current leads and prospects is being
In the light of the well result and              seismic from this survey was received.           considered. The plays here are both

10   Melrose Resources plc 2005



                                                                                                                                                     BLACK SEA


                                                                                                                                                      0              50km

At the end of 2005 two exploration wells,                                                Bulgaria concessions
Samotino Nos.1 and 2, were drilled in the                                                   Gas field
southern area of the block targeting stratigraphic                                          Prospects and leads
plays. Both wells encountered hydrocarbon shows
in good potential reservoir sand sections, although
they were not considered commercial and
subsequently plugged and abandoned.

structural and stratigraphic. The area lies           will be considered for later in the year.            close to many of the recognised prospects.
directly adjacent to the onshore 150 MMbbl                                                                 This strongly suggests that generation and
Tulenovo oil field and the current                    Blocks Emine and Rezovska                            migration of hydrocarbons has taken place
understanding suggests that the northern              Block Emine is located directly south of             in the basin and therefore increases the
area of Block Kaliakra 99 lies on the most            Block Kaliakra 99 and extends to the                 likelihood that traps have been charged
likely migration pathway for oil to this field.       southern Bulgarian border, covering an area          with hydrocarbons. Further evidence for the
                                                      of 4,495 km2. Block Rezovska covers 574              presence of hydrocarbons has come from
Current plans for 2006 are to drill two or            km and is located at the south-eastern
                                                                                                           seismic interpretation where bright
three wells in the deeper water of Block              corner of Emine. Water depths within the             amplitude anomalies have been identified
Kaliakra 99 and the adjacent Blocks Emine             two blocks range from less than 20 m to              at the crests of many structural closures.
and Rezovska. A semi-submersible rig,                 just over 750 m. Applications for licence            AVO modelling of seismic data is being
the Atwood “Southern Cross”, has been                 extensions to both blocks are currently              carried out to try and determine whether or
chartered to drill these wells (with two              being considered by the Ministry of Energy.          not these anomalies are direct indicators of
further optional wells). In addition, further                                                              trapped hydrocarbons.
wells in the shallow shelf area are being             Original and re-processed 2-D seismic data
considered. Evaluation and prospect risking           exists across both Concessions and one               The planned exploration programme in
will be completed by mid-year when final              well was drilled in 1994 in the north-eastern        Blocks Emine and Rezovska includes the
well locations will be selected. Several of           corner of Block Emine. The well encountered          acquisition of 3-D seismic data and a sea
the play types identified on the 3-D seismic          gas shows but was never properly                     floor coring programme. Both surveys will
have never been tested and the acreage                completed. Over the last year a technical            help reduce the exploration risk in the
remains very prospective.                             analysis of all of the available data has            blocks; the former with improved
                                                      outlined considerable prospectivity in the           subsurface definition and the latter with
Block Galata                                          two blocks with both structural and                  geochemical sampling for micro-seepage of
The area covered by the former Block 91-III,          stratigraphic plays being recognised.                migrating hydrocarbons. A large structural
which was relinquished at the end of 2004,                                                                 feature, the Ropotamo prospect, in Block
was reapplied for during 2005 as Block                Most of the prospects exist due to                   Rezovska is a possible target for the 2006
Galata. It is hoped that a decision on the            structures formed by compression of the              drilling campaign. Interpretation of this
award of this Block will be announced by              rocks in this region of the Black Sea.               prospect, which could contain reserves of
the Ministry of Energy before mid-year.               Encouraging results from satellite imagery           up to 765 Bcf of gas or 330 MMbbl of oil,
If Melrose is successful in its application           have identified possible sea-floor oil seeps         is being finalised and will determine if the
then a drilling programme on the Block                near the northern border of Rezovska                 prospect is ready for drilling.

                                                                                                                                   Melrose Resources plc 2005   11
Operational review


                                                                                                 The Group’s interests in the USA comprise
                                                                                                 approximately 25,000 gross acres, concentrated
                                                                                                 in the Permian Basin in New Mexico and Texas.
                                                                                                 Melrose is the operator of the majority of these
                                                                                                 properties. The properties are characterised by
                                                                                                 shallow oil production with substantial, low-risk
                                                                                                 enhanced recovery upside through infill drilling
                                                                                                 and water injection.

The emphasis during 2005 was on preparing the Group’s three principal fields for widespread
water injection after successful implementation of pilot water injection programmes. In 2005,
13 new wells were drilled and a further 6 wells have been drilled in the first three months of 2006.

Average daily production increased by        Jalmat field                                     converted to water injection during 2005.
15% compared to 2004, but                    In the Jalmat field, the work programme          There are now 21 active water injection
development activity during 2005 was         for 2005 involved completing the infill well     wells in the Jalmat field and up to 20 are
frustrated to some extent by escalating      pattern for a “five spot” injection              planned to be activated in 2006.
drilling and service costs and, more         configuration, building new injection
significantly, by the tight market for       facilities and laying flowlines, so that water   The construction of a second water
drilling and completion rigs and for other   injection rates can be increased in 2006.        injection facility and tank battery on the
field services. Average production rates     In total, 13 new producing wells were            Cone Jalmat Unit is underway and the
were also affected by the inevitable         successfully drilled and completed during        drilling of two water-source wells is
disruption to production when                2005, with a further 5 wells awaiting            scheduled for 2006. Average daily
waterflood projects were implemented.        completion at the year-end.                      production from the Jalmat field increased
                                                                                              by 34% from 342 boepd in 2004 to 457
Capital expenditure in 2005 of $14.2         Despite good initial flow rates on these         boepd in 2005.
million comprised $8.0 million on new        infill wells, the depleted reservoir pressures
wells, $4.1 million on waterflood            experienced on a number of the wells has         Artesia field
implementation and $2.1 million on           emphasised the need for the water injection      Work on the secondary recovery project on
workovers and recompletions. Daily           programme in order to re-pressurise the          the Artesia Unit continued with the
production of 2,500-3,000 boepd remains      reservoir and to maximise ultimate oil           workover of 17 existing wells to enable
the short to medium term target for          recoveries. Two new water injection wells        water injection to commence in the north
these assets.                                were drilled and a further 7 wells were          west and south west areas of the Unit.

12   Melrose Resources plc 2005
                                                                                                                                     Jalmat Field,
                                                                                                         NEW MEXICO                  Lea County

                                                                                                         Artesia Field,
                                                                                                         Eddy County
                                                                                                                                 Fort Worth Basin

                                                                                                                             Turner Gregory Field,
                                                                                                                             Mitchell County


In 2005, 13 new wells were drilled in the USA and
capital expenditure amounted to $14.2 million.
The capital expenditure budget for 2006 is
significantly higher at $20.7 million, with the focus
remaining on implementation of the secondary
recovery projects.

These injection patterns are expected to be             over the next three years is expected to
activated during the first half of 2006.                increase production significantly.

There are in excess of 30 drilling locations            Other interests
to be drilled on the Unit over the next two             Average daily production from the Group’s
years as part of this enhanced recovery                 other interests in the USA during 2005
project and the drilling rig is scheduled to            was unchanged at 152 boepd. The Group
move to this Unit in April 2006. Average                is now receiving royalties from its interests
daily production from the Group’s interests             in the Barnet Shale gas play in Texas, but it
in the Artesia field increased by 10%                   has not yet exercised its right to participate
during 2005 to 214 boepd.                               in any wells on a working interest basis.

Turner Gregory Unit
The Turner Gregory Unit is on trend with
two large secondary recovery projects to
the north east and south west. A line-drive
water injection programme was initiated
on this Unit during 2005, with 3 wells
being converted to water injection.
Average daily production declined by 4%
during 2005 to 102 boepd, but since the
year-end 10 shut-in wells have been put
back onto production and current
production is in excess of 130 boepd.
Full implementation of this waterflood

                                                                                                                          Melrose Resources plc 2005   13

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