Dragon Oil announces 37% Increase in Gross Production

Highlights

Operations and Production

- 37% increase in 1H/08 gross production over 1H/07 with an average rate of 38,482 barrels of oil per day ("bopd") compared to 28,321 bopd in 1H/07
- Peak production rate of 43,227 bopd achieved on 1st June 2008
- $170m, 15 month contract awarded for a new 30-inch, 39.4 km trunkline
- 4 development wells completed in 1H/08
- Dzheitune (Lam) 22/128 well completed in July 2008 with an initial combined production from the two strings of 2,600 bopd
- Cash of $654m as at 30 June 2008

Strategy and Outlook

- Progress the infrastructure investment plan including facility planning for gas utilisation and commercialisation
- Pursue value-adding acquisitions, further diversifying Dragon Oil's portfolio
- Geophysical and geological studies ongoing in Dragon Oil's non-operated blocks in Yemen

Hussain M. Sultan, Executive Chairman, commented:

"Dragon Oil has delivered another strong performance over the last six months and we are confident of achieving our drilling and production targets for 2008. We see progress on both the drilling programme and the infrastructure investment plan which are key to delivering increasing oil production and monetising the gas resource in the Cheleken Contract Area. In addition, we are continuing to seek acquisitions that would increase the diversity of Dragon Oil's portfolio. The Company is wholly committed to achieving long-term growth and profitability for all its stakeholders."

Trading and Operational update:

Production and marketing
The 1H/08 gross field production from the Cheleken Contract Area was an average of 38,482 bopd, a 37% increase over the 1H/07 production average of 28,321 bopd. Of this, Dragon Oil's entitlement was 20,850 bopd (1H/07: 21,062 bopd). Dragon Oil's entitlement barrels are dependent amongst other factors on operating and development expenditures and realized crude oil prices. As a result of the fiscal terms of the Production Sharing Agreement, Dragon Oil's entitlement barrels in the current period was 54% (1H/07: 74%) of the gross field production.

Dragon Oil sold 3.5 million barrels of oil in 1H/08 (1H/07: 3.5 million barrels) and held low crude oil inventory at period end having resolved logistical constraints. The average realized price in 1H/08 was approximately US$108 per barrel (1H/07: $61 per barrel).

Dragon Oil hedged 3.8 million barrels comprising a proportion of the total 2008 production using zero cost collars, with oil price floors at $45 per barrel and a ceiling price averaging $102 per barrel. These derivative instruments produced an opportunity loss of approximately $91m comprising of settlement obligations for 1H/08 and mark to market for the balance quantities, resulting from the exceptionally high crude oil prices. The Company continues to review its hedging strategy in light of market conditions. No hedges have been undertaken for the period beyond December 2008.

The Company continues to market approximately 80% of its crude oil through Neka in Iran as it is stable and continues to offer Dragon Oil the highest netback on its crude. In addition, the Company markets the balance of its crude through Baku, Azerbaijan in order to maintain a good level of marketing flexibility. Dragon Oil has arrangements in place to export its entire crude oil entitlement to Baku immediately should the need arise.

Drilling

Four development wells were completed during 1H/08, two from Dzheitune (LAM) 22 platform (L22/124 and L22/126) and two from the new Dzheitune (Lam) A Platform (LA/125 and LA/127).

The CIS 1 platform-based rig completed the Dzheitune (Lam) 22/128 well on 12th July 2008 with an initial combined production from the two strings of 2,600 bopd with optimisation of the well to follow. The CIS 1 Rig is now preparing to drill development well Dzheitune (Lam) L22/130, which has a target depth of 3,840 metres and is expected to come on production in October 2008.

The Iran Khazar jack-up drilling rig is now drilling development well Dzheitune (Lam) A/129 which has a target depth of 4,212 metres and is scheduled for completion in August 2008.

In addition, the Company is continuing to refurbish its own platform-based Rig 40 for commencement of drilling operations from the refurbished Dzheitune (Lam) 13 Platform from Q4/08.

Yemen

Geological and geophysical evaluations are currently underway on all three blocks (R2, 49 and 35) in our non-operated acreage in Yemen. Drilling will commence on additional prospects in Block 35 in 2009.

Capital Expenditure Programme
Dragon Oil recently awarded a $170m, 15 month contract for the engineering, procurement and installation of a new 30-inch, 39.4 km trunkline, which will transport all the oil and gas produced to the Company's processing facility.

Dragon Oil continues to make progress with its other major infrastructure development projects including the construction of additional wellhead platforms and refurbishment of the crude oil export jetty.

The Company is tendering for the Front End Engineering Design for the gas monetisation project and for phase 2 of the NPF which will enable a production capacity of up to 100,000 bopd and 180 mmscfd of gas. The Company has also tendered for up to four new jack-up rigs intended to partially replace the current hired rigs.

The robust balance sheet reflecting zero debt and a cash balance of approximately $654m at 30th June 2008 is expected to adequately support the planned capital expenditure for field development.

Outlook

Dragon Oil continues to make good progress with the field development plan and the infrastructure investment programme. The management team is confident that the Company will achieve its drilling and production targets for 2008.