04 Borders & Southern Petroleum plc Annual Report & Accounts 2014 CHAIRMAN’S  STATEMENT DESPITE MARKET UNCERTAINTY WE  REMAIN FOCUSED ON SECURING  FUNDING FOR OUR NEXT PHASE OF  APPRAISAL DRILLING. WE WILL CONTINUE TO RUN  THE BUSINESS WITH TECHNICAL  AND COMMERCIAL DISCIPLINE,  COMMITTED TO CREATING VALUE  FOR ALL OUR STAKEHOLDERS. HARRY DOBSON,  CHAIRMAN  In some cases, farm-out talks  advanced from technical to commercial  discussions. Unfortunately, these  negotiations ended before a deal could  be secured, either due to a change in  the potential partner’s strategic focus  or because terms fair for both parties  could not be agreed. A Falkland Islands drilling campaign  is currently under way but without  funding we have been unable to join  the programme. The Erik Raude  drilling rig has embarked on a six well  work programme, split between the  north and south Falkland basins. Our  aim is to secure partners as soon as  possible in the hope that we can take  advantage of the rig’s location and  negotiate a new contract at the end  of its current work schedule. If that  proves to be unachievable in the current  environment, we would seek to mobilise  another rig as soon as we have secured  funding. In essence, this latter scenario  would be similar to what we did for our  2012 programme when we negotiated  the Leiv Eiriksson drilling rig with only  two firm wells. With rig demand and  rates now much reduced, the capital  commitment is likely to be materially  lower and the number of available rigs is likely to be much higher.  It is worth noting that companies that  have entered our data room have found  the technical merits of the project very  attractive. Darwin is a gas condensate  discovery with a high liquids component  (46 to 49 degrees API). This means that  it has the condensate gravity typical of  an ultra light crude oil. Those potential  partner companies that undertook  detailed technical analysis confirmed  that, following a successful appraisal  programme, an FPSO development  would be commercially viable.  In our favour, however, is the fact that  Darwin is a very robust project due to  the competitive fiscal terms offered by  the Falkland Islands Government and  Darwin’s high quality reservoir (resulting  in a low number of required production  wells). Consequently, we believe that  the development of Darwin would prove  to be economic, even at oil prices lower  than current levels. Certainly, when we  benchmark Darwin with other offshore  development projects on a cost curve,  it is well positioned. So whilst we  recognise the challenge in achieving  a successful farm-out in the present  environment, we remain optimistic that  a project as robust as Darwin will attract  a partner. estimates (before the oil price drop) of  approximately $100 million per well. In  addition, for many potential partners,  the Falkland Islands would be a new  geography, a long way away from the  world’s current exploration hot spots. 2014 was a challenging year for the  entire oil & gas industry, not just Borders  & Southern. The oil price slid from $110  per barrel in the middle of the year to  below $50 per barrel in January 2015.  The short-term outlook for oil prices  remains uncertain, but many analysts  are predicting a medium to long-term  price of around $70 per barrel once  the current supply/demand imbalance  corrects.  As a response to this dramatic fall, oil  and gas companies have reassessed  their capital expenditure plans and  are focused on cost efficiencies.  Discretionary expenditure on  exploration and appraisal activity  has been reduced significantly and  prioritisation in the short-term is largely  focused on current work programme  commitments rather than business  development.  As the industry has cut expenditure  and the number of planned exploration  and appraisal wells has fallen, the  demand for drilling rigs has weakened.  Consequently, the day-rates for deep- water rigs have reduced by as much as  40%. The costs of other well services  have also started to fall.  Against this backdrop, Borders &  Southern has been looking to secure  partners to fund the next phase of  Darwin’s appraisal. Specific challenges  have been to find companies prepared  to commit to a multi-well deep- water programme with well-cost 