oi annual report and financial statements pl and … · premier oil plc 23 lower belgrave street...

Premier Oil plc23 Lower Belgrave StreetLondon SW1W 0NRUnited Kingdom

Telephone: +44 (0)20 7730 1111Facsimile: +44 (0)20 7730 4696

www.premier-oil.com

2007 ANNUAL REPORT AND FINANCIAL STATEMENTS

2006200520042003200220012000199919981997199619951994199319921991199019891988198719861985198419831982198119801979197819771976197519741973197219711970196919681967196619651964196319621961196019591958195719561955195419531952195119501949194819471946194519441943194219411940193919381937193619351934

GROWTH ANDDEVELOPMENT

OUR STRATEGY IS TO ADD SIGNIFICANTVALUE PER SHARE THROUGH EXPLORATIONAND APPRAISAL SUCCESS, DEVELOPMENTPROJECTS AND ASTUTE ASSET MANAGEMENT

Premier

Oilplc

2007A

NN

UA

LREPO

RTA

ND

FINA

NC

IAL

STATEM

ENTS

“Premier is extremely well placed to meetits stated production target of 50,000 boepdby end 2010 from existing assets. Our focus isturning to the next phase of growth throughexploration, appraisal and acquisition.”Simon Lockett, Chief Executive Officer

From top to bottom:

Simon Lockett, Chief Executive OfficerRobin Allan, Director of Business DevelopmentTony Durrant, Finance DirectorNeil Hawkings, Operations Director

2007 HIGHLIGHTS• Production up 8 per cent to 35.8 kboepd (2006: 33.0 kboepd)

• Reserves increased by 39 per cent to 212 mmboe. Reserves and resources up 28 per cent to 369 mmboe. Reserve replacement of 460 per cent

• Material progress on major development projects commercialising pastexploration successes and adding value to recent acquisitions

• New gas sales agreements in Singapore and Indonesia

• Successful acquisitions adding low cost barrels in UK and Indonesia

• New exploration and appraisal acreage acquired in Norway and Vietnam

• Operating cash flow up 10 per cent to US$269.5 million (2006: US$244.8 million)

• Operating profit up 35 per cent to US$219.4 million (2006: US$162.6 million)

• Low cost financing in place to fund development programme of ~US$1 billion in 2008-2011

• Strong balance sheet with cash resources of US$332.0 million

PREMIER OPERATES WORLDWIDE IN FOURREGIONAL BUSINESSES, EACH WITH PRODUCTION,DEVELOPMENT AND EXPLORATION OPERATIONS. ITHAS A RESERVE AND RESOURCE BASE OF 369 MMBOE

UKExploration and

Production9,850 boepd

– Wytch Farm 12.38%– Kyle 40.00%– Scott 21.83%– Telford 0.82%– Fife 15.00%

NorwayExploration andDevelopment

– Bream 20.00%– Frøy 50.00%

MauritaniaExploration,

Developmentand Production

1,200 boepd

– Chinguetti 8.12%– Tiof 9.23%– Banda 4.62%

CongoExploration

SADRExploration

EgyptExploration

PakistanProduction andDevelopment12,700 boepd

– Zamzama 9.37%– Kadanwari 15.79%– Qadirpur 4.75%– Bhit & Badhra 6.00%– Zarghun South 3.75%

IndiaDevelopment

VietnamExploration andDevelopment

– Chim Sáo 37.5%– Dua 37.5%

PhilippinesExploration

IndonesiaExploration,

Development andProduction

12,000 boepd

– Anoa 28.67%– Gajah Baru 28.67%– Kakap 18.75%– North Sumatra Block A 41.67%

CONTACTS

Registered officePremier Oil plc4th FloorSaltire Court20 Castle TerraceEdinburghEH1 2ENRegistered No. 234781 Scotland

Head officePremier Oil plc23 Lower Belgrave StreetLondonSW1W 0NRTel: +44 (0)20 7730 1111Fax: +44 (0)20 7730 4696www.premier-oil.com

AuditorsDeloitte & Touche LLPHill House1 Little New StreetLondonEC4A 3TR

SolicitorsSlaughter and MayOne Bunhill RowLondonEC1Y 8YY

StockbrokersMerrill Lynch InternationalMerrill Lynch Financial Centre2 King Edward StreetLondonEC1A 1HQ

and

Oriel Securities Ltd125 Wood StreetLondonEC2V 7AN

RegistrarsCapita IRG plc4th FloorErskine House68-73 Queen StreetEdinburghEH2 4NR

Shareholder enquiriesCapita RegistrarsNorthern HouseWoodsome ParkFenay BridgeHuddersfieldHD8 0LATel: 0871 664 0300* (UK)

+44 (0)20 8639 3399Fax: +44 (0)20 8639 3430E-mail: [email protected]

* Calls cost 10p per minute plus network charges

This report is printed on papers that meet International Environmental Standards.

Consort Brilliance uses a combination of TCF (Totally Chlorine Free) and ECF(Elemental Chlorine Free) fibres. They are totally recyclable, biodegradeable andacid-free.

Naturalis Absolute White Smooth is made from 100% ECF (Elemental ChlorineFree) wood pulp sourced from sustainable and renewed forest. The mill generatesa proportion of its renewable power from water turbines. Naturalis is fullyrecyclable and is manufactured within an ISO 14001 certified mill in the UK.

Designed and produced by MAGEEwww.magee.co.uk

Images of Scott courtesy of Nexen Petroleum Ltd

Printed by CTD

CONTINUED GROWTHPREMIER’S STRATEGY OF DELIVERING GROWTH BOTH FROM THE PRODUCTION BASEAND FROM HIGH POTENTIAL EXPLORATION IS BACKED BY A SOLID FINANCIAL POSITION.EXISTING CASH RESOURCES, BANK FACILITIES AND STRONG CASH FLOWS WILL ALLOWUS TO FUND EXISTING AND NEW DEVELOPMENT PROJECTS

FINANCIAL ACHIEVEMENTS

• Our year-end net cash positionof US$79.0 million reflects strongcash generation and a disciplinedapproach to expenditure

• Value-adding acquisitions werefunded from existing bankfacilities and cash

• Our future developmentprogramme will be funded byexisting low-cost financialresources

2007 Net cash US$

79.0m2007 Operating cash flow US$

269.5m

A GROWINGASSET BASESIGNIFICANT PROGRESS ON PROJECTS IN THEPORTFOLIO GIVES US CONFIDENCE THAT PREMIERWILL ACHIEVE ITS STATED PRODUCTION TARGETOF 50,000 BOEPD BY THE END OF 2010

1 INDONESIA – Gajah BaruIn the fourth quarter of 2007 Premier announced thesignature of Heads of Agreement with Sembcorp Gas Pte Ltd for gas sales into the Singapore market, and with PT Perusahaan Listrik Negara and PT UniversalBatam Energy for domestic gas sales into Batam.Development of the Gajah Baru field in the Natuna Seawill now commence with project sanction expected laterthis year and first gas planned for 2010.

2 INDONESIA – North Sumatra Block AA Gas Sale and Purchase Agreement (GSPA) wasconcluded in December 2007. The GSPA will govern thesale of gas from the Alur Rambong, Julu Rayeu, and AlurSiwah fields in North Sumatra to the PIM fertilizer plant onthe northern Aceh coast. A field development plan hasbeen submitted for approval.

3 VIETNAM – Chim SáoPremier discovered oil on the Dua and Chim Sáo(formerly Blackbird) prospects in 2006 and 2007. Projectdevelopment work has made good progress during 2007.Outline development plan approval, approval of the fielddevelopment plan, and project sanction are all expectedin 2008. First production from Chim Sáo is on target for 2010.

4 UK – ScottEquity in the Scott field was increased to 21.83 per centvia acquisition during 2007, adding over 5,000 boepd toPremier’s net production. An infill drilling programme wassuccessfully completed in 2007, and a further campaignwill commence during 2008. With higher oil prices anda strong production performance, payback of Premier’sacquisition cost of US$53 million was achieved within thefirst six months.

1

3

Gas from Gajah Baru will be pipedto the Sembgas facility in Singapore

Chim Sáo and Dua were drilled by the Ocean General and firstproduction is on target for 2010

2

4

Gas from North Sumatra Block A willpower the PIM fertilizer plant

An infill drilling programme willcommence on Scott in 2008

ASIAEXPLOITINGOUR STRONGPOSITION

> THE FULL RANGE OF EXPLORATION, DEVELOPMENT ANDPRODUCTION ACTIVITIES

> STRATEGY

We seek to maximise the potential of our Natuna Sea, North Sumatraand Nam Con Son Basin assets, bringing relationships, knowledge andtechnical skills to bear and developing new business opportunities inrelated technical or geographical areas

North SumatraBlock A

Block 07/03

Block 12W

Tuna

Kakap N

Kakap S

West NatunaBlock A

Anoa

Kakap

I N D O N E S I A

THAILAND

MALAYSIA

SUMATRA

SINGAPORE

VIETNAM

Dumai

Kuala Lumpur

Premier interestsGas fieldsOil & gas fieldsPipeline

“We are continuing to build our portfolio acrossthe exploration, development and productionspectrum in the areas where we have deepknowledge. This is delivering long-term growthto the business.”

Barry O’DonnellAsia Regional Manager

> 2007 HIGHLIGHTS AND ACHIEVEMENTS

• Acquisition of additional equity in North Sumatra Block A

• Agreements signed for gas sales from North Sumatra Block Aand further gas sales from Natuna Sea Block A

• PSCs signed for new exploration blocks in Indonesia (Tuna andButon) and a PSC awarded in Vietnam (Block 104-109/05)

• Completion of farm-in on Block 07/03 (Vietnam) allowingPremier to assume operatorship with 45 per cent interest

• Rig secured for drilling on Block 12W for up to 24 months

• Following successful Chim Sáo drilling in early 2007,progressing combined Chim Sáo/Dua project towardsdevelopment approval

> OUTLOOK

• Approval of Chim Sáo oil development plans targetedfor the second quarter of 2008

• Completion of gas sales agreements on Natuna SeaBlock A, formal government approval of fielddevelopment plans and award of major constructioncontracts expected in 2008

• Approval of North Sumatra Block A gas developmentplans and award of major construction projectsexpected in 2008

• Exploration prospects on Block 12W to be drilled inthe second and third quarter of 2008

• Seismic and other technical work to be progressed for2009 drilling programmes in Vietnam and Indonesia

MIDDLE EAST – PAKISTAN

EXTENDINGOUR FOOTPRINT

> RELATIONSHIP SKILLS AND NEW VENTURE INITIATIVES

> STRATEGY

Building on our well-established and successful position in Pakistan’srapidly growing gas market we are also seeking to extend ourfootprint into the hydrocarbon-prolific areas of the Middle East and North Africa through partnerships and business development activities

ZamzamaBhit

Zarghun South

Kadanwari

Qadirpur

BadhraINDIA

PA K I S TA N

AFGHANISTAN

IRAN

Islamabad

Lahore

Quetta

Sukkur

Karachi

Premier interestsGas producing fields


• De-merger of Pakistan interests from Premier-KUFPEC Pakistanjoint venture

• Continued production growth leading to record Pakistanproduction in excess of 12,600 boepd net to Premier

• Successful drilling of K-18 well on Kadanwari and deeperprospect on Qadirpur

• New production from Badhra

• Conclusion of joint venture agreements with EmiratesInternational Investment Company LLC (EIIC) for activitiesacross the region

> OUTLOOK

• Testing of deep Qadirpur gas discovery

• Production enhancement and expansion projects at Qadirpur,Bhit and Kadanwari

• New high calorific value gas production from Zamzama Phase 2project

• Pursuit of opportunities across the Middle East and North Africawith our Abu Dhabi-based joint venture partner

“Premier remains committed to deriving fullvalue from its world class assets in Pakistan andextending its growth potential both in countryand across the region.”

Zaffar ChidaPakistan Country Manager

NORTH SEARETURNINGTO GROWTH

> SELECTIVE ACQUISITIONS AND OPTIMISATION OF OUR EXISTING RESERVE BASE

> STRATEGY

We will grow our position in the North Sea through participation in new licensing rounds and an active exploration programme inNorway and the UK. This includes the development of discoveriesalready held in the portfolio. In the UK we seek to maximise outputfrom our current production base and will acquire additional assets inthe areas which we know well


• Completed acquisition of 20.05 per cent equity in the Scott fieldfor US$53 million, adding over 5,000 boepd to Premier’s netproduction

• Significant rise in Kyle field production following successfulcompletion of gas lift project

• Award of five licences in the Norwegian APA Licensing Roundin January 2007

34/2

Scott,Telford

Kyle

Flora FergusFife

22/2a

14/25a

39/2b39/7

20/10b, 20/15a21/6a, 21/11b Angus

23/22b21/7b

16/1(part), 16/4

Frøy Area

35/12

34/535/8, 35/9

31/3

36/10

32/1

17/8,9,11,12

18/7,10

8/39/1

18/11

15/24a

15/25f

Wareham Wytch Farm

UKIRELAND

FRANCE

BELGIUM

NETHERLANDS

NORWAY

SCOTLAND

ENGLANDWALES

St FergusCruden Bay

Premier interestsOil producing fields

> OUTLOOK

• Infill well programmes planned on the Scott, Telford, and WytchFarm fields

• Submission of development plans for the Frøy field expectedduring 2008

• Bream appraisal well planned for the second quarter of 2008

• First operated exploration programme in Norway willcommence in 2008 with first well to be drilled in 2009

“Since its expansion into Norway, the North Seabusiness has made excellent progress towardsbuilding a balanced portfolio of exploration anddevelopment projects as well as our existingproduction assets in the UK. We are lookingforward to our programme of exploration andappraisal drilling in the UK and Norway this year,as well as continuing our efforts to maximiseoutput from our current producing assets acrossthe region.”

Nigel WilsonNorth Sea Regional Manager

WEST AFRICA

HIGH-IMPACTEXPLORATION

> TECHNICAL CAPABILITIES ANDCOMMERCIAL DEAL-MAKING

MAURITANIA

Premier interestsOil & gas fields

ATLANTICOCEAN

A F R I C A

SADR

CONGO

> STRATEGY

The West African Business Unit will seek to deliver a programme of high-impactexploration opportunities, which on success will deliver material increases in assetvalue over time. Critical to this programme will be our profile and business-government relationships, backed by technical skills in the region


• Detailed evaluation of deep water exploration acreage in Congo andidentification of high-potential prospects

• Strategic exit from Dussafu Block in Gabon

> OUTLOOK

• Planning and execution of two well high-impact programme in Congo

• Optimisation of Chinguetti production and other future developmentpotential in Mauritania

• Evaluation of new venture proposals in the region with a view to buildinga pipeline of future high-impact opportunities

“We use our technical skills to assess high-impactopportunities, including deep water potential,and our commercial skills to optimise the group’sexposure to drilling opportunities.”

Steve BottomleyWest Africa Regional Manager

TECHNICALEXPERTISE> THE CORE WORK OF OUR GEOLOGISTS

AND ENGINEERS IS TO APPLY SCIENCE TOSECURE THE OPTIMUM DISCOVERY ANDEXTRACTION OF OIL AND GAS

Our professionals use the latest technological tools to keep us at the forefront ofthe industry and we employ the best available specialists in all of the projects thatwe undertake.

Before drilling, we assess the risks from every angle, and fully evaluate the hydrocarbonpotential. We manage our portfolio to ensure that our focus is on the best prospects.

For our development projects, we consider all the possible options, includingappropriate new technology, and assess the range of possible outcomes beforeselecting the optimal design.

We place great value on the imagination and creativity of our geologists, geophysicistsand engineers. This enables us to work in previously overlooked areas, so that, armedwith new scientific concepts, innovative technologies and state-of-the-art equipment,we can operate in such areas more successfully than in the past.

SOCIAL PERFORMANCE

> PREMIER ASPIRES TO BE AN INDUSTRY LEADER IN SOCIAL PERFORMANCE,WHICH COVERS THE AREAS OF SOCIAL RESPONSIBILITY, HEALTH ANDSAFETY, AND ENVIRONMENTAL IMPACT

Our stated policy is to ensure that the risks and impacts of our activities are reduced to ‘as low as reasonably practicable’ at all times. We set targets with reference to our historicalperformance, the performance of our peer group and standards set by external agencies.We publish a Social Performance Report every two years, and from now on in intermediateyears we will prepare a Communication on Progress. These will be available on our website


• Among our local infrastructure initiatives, Premier sponsored construction of twocommunity halls, two kindergarten buildings and a clean water supply to fivevillages in Indonesia, as well as four bridges in Vietnam. We also supported varioushealth-related training programmes and farming projects and donated emergencyequipment to the Cachar district in India during severe flooding

• Premier again exceeded its internal target of lost time injury and restrictedworkday case frequency. This target has been consistently reduced for thelast five years

• Our global drilling function is certified to ISO 14001 and OHSAS 18001 and successfully underwent a number of assessments and surveillance audits. ISO 14001 and OHSAS 18001 are internationally recognised standards to which a company’s environmental and health and safety management system may be certified

• We reduced our greenhouse gas emissions in tonnes per thousand tonnes ofproduction from 232 in 2006 to 171 in 2007

> OUTLOOK

As we progress the development of new operated production projects in Vietnam andIndonesia we will continue to target the highest standards of performance with respectto social responsibility, health and safety and environmental impact


From top to bottom:













UKExploration and




– Bream 20.00%– Frøy 50.00%



1,200 boepd


CongoExploration

SADRExploration

EgyptExploration



IndiaDevelopment


– Chim Sáo 37.5%– Dua 37.5%




12,000 boepd


CONTACTS






and











Printed by CTD

Premier Oil plc 2007 Annual Report and Financial Statements

CONTENTSHighlights 01Chairman’s Statement 02

Section 1: PERFORMANCEChief Executive’s Review 04Financial Review 12Social Performance Review 15

Section 2: GOVERNANCEBoard of Directors 20Corporate Governance Report 22Report of the Directors 28Remuneration Report 31Statement of Directors’ Responsibilities 41Accounting Policies 42

Section 3: FINANCIAL STATEMENTSIndependent Auditors’ Report – group 48Consolidated Income Statement 49Consolidated Statement of Total Recognised Income and Expenses 49Consolidated Balance Sheet 50Consolidated Cash Flow Statement 51Notes to the Consolidated Financial Statements 52Independent Auditors’ Report – parent company 73Parent Company Financial Statements 74

Section 4: ADDITIONAL INFORMATIONFive Year Summary 87Shareholder Information 88Oil and Gas Reserves 89Worldwide Licence Interests 90

PERFORM

AN

CE

GO

VERNA

NC

EFIN

AN

CIA

LSTA

TEM

EN

TSA

DD

ITION

AL

INFO

RM

ATIO

N

PREMIER IS A LEADING FTSE 250 INDEPENDENTEXPLORATION AND PRODUCTION COMPANYWITH OIL AND GAS INTERESTS IN ASIA,MIDDLE EAST AND PAKISTAN, THE NORTHSEA AND WEST AFRICA

01


HIGHLIGHTS

OPERATIONAL• Production up 8 per cent to 35.8 kboepd (2006: 33.0 kboepd)


• Material progress on major development projects commercialising past exploration successes andadding value to recent acquisitions


• Successful acquisitions in the UK and Indonesia adding low cost barrels at around US$2 per barrel;Scott field acquisition achieved payback by year-end

• New exploration and appraisal acreage awarded in Norway and Vietnam

• Significant joint venture established with Emirates International Investment Company LLC for opportunities in the Middle East and North Africa

FINANCIAL• Operating cash flow up 10 per cent to US$269.5 million (2006: US$244.8 million)


• Profit after tax of US$39.0 million (2006: US$67.6 million), after deducting non-cash hedging charges


• Strong balance sheet with cash resources of US$332.0 million and net cash of US$79.0 million (2006: US$40.9 million). Undrawn facilities at year-end were US$223.8 million

2008 OUTLOOK• Development approvals expected on three major projects during 2008

• Increasing production to meet 50,000 boepd target by end 2010

• Extensive drilling programme in Vietnam for up to 24 months

• 13 well exploration and appraisal programme

02


CHAIRMAN’S STATEMENT

Sir David John KCMGChairman

Financial and operating performanceRising oil and gas prices, notably in the second half of the year, generated sales revenuesof US$578.2 million in 2007 (2006: US$402.2 million) further benefiting from strong gasdemand in both Singapore and Pakistan.

Average production for the year rose 8 per cent to 35,750 barrels of oil equivalent per day(boepd) (2006: 33,000 boepd). Production from the Scott field, where we increased ourinterest during the year to 21.83 per cent, boosted our UK production and paid back ouracquisition consideration during the first six months of ownership.

Operating cash flow after tax was US$269.5 million (2006: US$244.8 million) for the year,funding all of our investments in exploration, development projects and acquisitionscompleted during the year.

In May 2007, a convertible debt offering of US$250 million was heavily over-subscribed and provides seven-year funding at a coupon rate of only 2.875 per cent. Cash resources at 31 December 2007 were US$332.0 million (2006: US$40.9 million). Undrawn facilities atyear-end were US$223.8 million.

Operating profit for the year rose 35 per cent to US$219.4 million (2006: US$162.6 million).

Profit before tax for the year was US$147.0 million (2006: US$156.6 million) afterrecognising a US$64.9 million charge representing a mark to market revaluation of ourexisting hedging arrangements. This is a non-cash charge which is expected to reverse outover the life of the hedges. Profit after tax and mark to market revaluation charge wasUS$39.0 million (2006: US$67.6 million).

Oil and gas proven and probable booked reserves increased to 212 million barrels of oilequivalent (mmboe) (2006: 152 mmboe). We also increased our contingent resources by anet 20 mmboe bringing total reserves and resources to 369 mmboe (2006: 289 mmboe).Significant reserve additions included the acquisition of the Scott field interest and anadditional 25 per cent equity in North Sumatra Block A. Reserves associated with ourdevelopment project in the Natuna Sea (Gajah Baru) which commercialises previousexploration successes have been booked for the first time.

A major achievement in 2007 was the progress made in advancing new projects bothtechnically and commercially. Agreement with gas customers in Singapore, Batam andNorth Sumatra has been reached on attractive terms. These projects are scheduled for finalinvestment approval during 2008, together with our oil development in Vietnam.

Our exploration programme in 2007 delivered four successes from 11 exploration andappraisal wells. The Chim Sáo (formerly Blackbird) sidetrack, drilled early in 2007,encouraged us to move into the development stage for that project. We are returning toVietnam to drill the Chim Sáo North appraisal well in March 2008 and continue apotentially high-impact programme for a further three wells. Altogether we plan around 13 exploration and appraisal wells and 18 development wells in 2008. We also continue tobuild our programmes for future years with new licence awards in Norway and Vietnam,seismic surveys under way in Norway, Vietnam and Indonesia and a two-well explorationprogramme planned for Congo in late 2008 or early 2009.

Our efforts on improving our health, safety and environmental performance standards haveagain resulted in us beating our internal targets. We seek continued improvements year-on-year in this area. For the first time our policies will include a focus on carbon emissiontargets. Our 2007 Social Performance Report will be published in April 2008.

“Premier's operating resultsfor 2007 reflect risingproduction and strong oil and gas prices. Withsuccess in commercialisingundeveloped reserves,confidence in our growthprofile is increasing.”

03


“A major achievement in 2007 was theprogress made in advancing new projectsboth technically and commercially.Agreement with gas customers inSingapore, Batam and North Sumatrahas been reached on attractive terms.”

Shareholder returnsDuring 2007, Premier shares increased in value by 6 per cent, contributing to an increase of352 per cent over the five year period to 31 December 2007. This strong performance andthe attractive returns expected from our investment programme have reinforced our policyto reward shareholders principally through share price growth and to utilise cash flowswithin the business.

Board changesWe were pleased to announce the appointments of David Lindsell and Michel Romieu asnon-executive directors in January 2008. Both have had distinguished careers in theirrespective fields and will provide invaluable input to the Board.

Two non-executive directors, Scott Dobbie and Ron Emerson, will retire in June 2008 aftercombined service of 14 years on the Board. We are enormously grateful for theiroutstanding contributions over a long period of time.

OutlookCurrent production has exceeded 40,000 boepd during the early months of 2008.Significant milestones have already been achieved on our key development projects. We have commercialised previous exploration successes and added to our booked reservebase. This gives us increasing confidence that our production target of 50,000 boepd bythe end of 2010 will be achieved. Further significant progress will be made on theseprojects during 2008.

2008 also offers potential to add a new generation of projects with drilling campaigns inVietnam, Norway and Congo being planned and executed.

This combination of exploration, appraisal and development projects offers shareholdersa wide portfolio of growth opportunities which our strong financial position allows usto pursue.

Sir David John KCMGChairman

CHIEF EXECUTIVE’S REVIEW

Simon LockettChief Executive

Production and reserves2007 has seen key milestones in a number of our development projects. These are materialsteps forward in achieving, at a minimum, our production target of 50,000 boepd by end2010 and in growing our portfolio of four regional businesses.

Working interest production for 2007 averaged 35,750 boepd. Comparable productionfrom 2006 was 33,000 boepd. Production comprised 34 per cent liquids and 66 per centgas, with Pakistan and Indonesia accounting for 36 per cent and 34 per cent of the totalrespectively, the UK 28 per cent and West Africa the remainder. On an entitlement basis,group production for the year was 31,450 boepd (2006: 28,900 boepd).

Working interest Entitlement

Production 2007 2006 2007 2006boepd boepd boepd boepd

Asia 12,000 11,550 7,900 7,800Middle East-Pakistan 12,700 12,150 12,700 12,150North Sea 9,850 6,850 9,850 6,850West Africa 1,200 2,450 1,000 2,100

Total 35,750 33,000 31,450 28,900

As at 31 December 2007 proven and probable reserves, on a working interest basis, basedon Premier and operator estimates, were 212 mmboe. This represents a 39 per centincrease in net proven and probable reserves since 31 December 2006.

Proven and Reserves and probable reserves contingent resources

mmboe mmboe

Start of 2007 152 289Production (13) (13)Net additions and revisions 73 93

End of 2007 212 369

At year-end, reserves comprised 18 per cent liquids and 82 per cent gas. The equivalentvolume on an entitlement basis amounted to 183 mmboe (2006: 132 mmboe).

Booked reserve additions and revisions include an increase in booked reserves in IndonesiaWest Natuna Sea Block A resulting from an additional Gas Sales Agreement (GSA), and theNorth Sumatra Block A gas development for which a GSA has been signed with the PIMFertilizer Plant. Significant reserve additions also included the acquisition of the Scott fieldinterest. There were reserves increases on the Kakap field in Indonesia and the Zamzamafield in Pakistan. In the UK, a reduction in Wytch Farm reserves was offset by increasedreserves on the Kyle field. Contingent resource bookings have increased to include theBanda gas discovery in Mauritania, the Kuala Langsa gas discovery in North Sumatra BlockA, the Bream discovery in Norway and the Chim Sáo oil field in Vietnam where an OutlineDevelopment Plan was submitted. These volumes, together with others in the process ofbeing commercialised, give increased total reserves and contingent resources of 369mmboe (2006: 289 mmboe).

04


Proved and probable reserves

0

100

50

150

200

250

2005 2006 2007

(mmboe)

05PERFO

RMA

NC

E

"Premier is extremely well placed tomeet its stated production target of50,000 boepd by end 2010 fromexisting assets. Our focus is turning tothe next phase of growth throughexploration, appraisal and acquisition.”

Exploration and appraisalPremier has continued to drill up and expand its exploration portfolio during 2007. It hasparticipated in 11 exploration and appraisal wells giving four successes; eight of these wellshave been drilled by Premier’s operations team. It has acquired new seismic data, andreprocessed old data, to generate new prospects for 2008 and subsequent drilling, and ithas sought out and signed new licences in Norway and Vietnam.

Exploration spend on drilling and seismic in 2007 was US$104.7 million pre-tax (post-taxand recoveries: US$77.5 million). Costs of the exploration programme were reduced fromoriginal estimates by prudent farm-outs in the UK, India and Guinea Bissau.

A focus of exploration effort in 2007 was in Vietnam on our Block 12W Production SharingContract (PSC); our Chim Sáo sidetrack, drilled early in 2007, confirmed the down-dipextent of the 2006 Chim Sáo discovery. Subsequently a large 3D survey (1,600km2) wasacquired over the block, enabling us to confirm several other prospects that are to bedrilled in our 2008 programme. Premier’s farm-in to the adjacent block, the 07/03 (formerlyBlock 7&8/97) PSC, was ratified by the Vietnamese authorities during the year, allowing usto assume operatorship and to accelerate the exploration of this large, under-exploredblock; a 2D survey is planned in 2008 with drilling planned for 2009. We have been activelybuilding up our Vietnamese knowledge and have been granted another, previously under-explored, licence Block 104-109/05, formally signed in February 2008.

Premier also had an active year in Indonesia, with two discoveries, Pancing and Ibu Lembu,the signing of two new blocks, the Tuna and Buton PSCs, and the purchase of additionalequity in our North Sumatra Block A acreage. These new blocks provide an exciting set ofexploration prospects, and in the case of the North Sumatra acreage will in addition includeappraisal of earlier discoveries.

In Pakistan we participated in the successful Qadirpur Deep-1 well, targeting hithertoundrilled reservoir zones below the Qadirpur field. A similar well, targeting sands below theBadhra field was spudded in January 2008.

Premier also drilled some high-potential but high-risk exploration wells during the year; inadvance of drilling we prudently reduced our financial exposure by farming out the wellcosts on favourable terms. These wells included Masimpur-3 in India, Peveril in the UKCS,two wells offshore Guinea Bissau and the Anne-1 well offshore Pakistan.

In the North Sea region we evaluated new opportunities and subsequently acquired newexploration licences: five in Norway and one in the UK.

Looking ahead to 2008, the exploration focus will be in South East Asia, where we plan todrill several exploration wells in Vietnam Block 12W that, if successful, will enhance andextend our Chim Sáo development hub. We will acquire 2D seismic surveys in thecontiguous Block 07/03 in Vietnam and Tuna in Indonesia, defining prospects for a 2009drilling campaign.

We will be active with the drill-bit in the North Sea where we will be targeting a shallow oilprospect in Block 23/22b in the UK having farmed-out the well costs on favourable terms,and in Norway where an appraisal well will be drilled on the Bream oil discovery.

In West Africa we have firmed up large prospects in the Congo Marine Block IX permit andare in the early stages of planning our first well to be drilled in late 2008 or early 2009depending on rig availability.

Planned spend on exploration and appraisal drilling and seismic in 2008 is US$110.0 millionpre-tax (post-tax and recoveries: US$75.0 million).


06


CHIEF EXECUTIVE’S REVIEW (CONTINUED)

AsiaIndonesiaPremier’s core asset in Indonesia is in the West Natuna Sea, where it operates the Anoafield in Block A (28.67 per cent interest) and is a partner in the Kakap field (18.75 per centinterest). These fields supply gas under a long-term sales contract to Singapore. In 2007,Premier sold an average of 137 billion British thermal units per day (BBtud) gross from the Anoa field and a further 66 BBtud gross from the non-operated Kakap field, under this agreement.

Gross oil and condensate production from these two fields averaged 2,498 barrels of oilper day (bopd) for Anoa (2006: 2,581 bopd) and 7,977 bopd for Kakap (2006: 6,998 bopd).Anoa is showing a slow natural oil decline as it matures, but has the potential for furtherdrilling in 2009 to reverse this trend. Kakap meanwhile has benefited from the drilling ofthe Jangkar well in 2006 and enjoyed improved performance and a full year’s netproduction in 2007 of 1,495 bopd (2006: 1,312 bopd).

Overall net production from Indonesia increased to 12,000 boepd in 2007 (Anoacontributing 8,190 boepd and Kakap 3,810 boepd), compared with 11,550 boepd in 2006.The improvement is attributable to increased gas demand from Singapore and increasedoil production on Kakap.

On the Gajah Baru development, Premier met its 2007 goal to have definitive agreementsin place for further gas sales from Natuna Sea Block A and retains its target to startproducing this gas in 2010. Heads of Agreement were signed with Sembcorp Gas Pte Ltdfor supply of gas to Singapore and with PT Palayanan Listrik Nasional Batam and PTUniversal Batam Energy for domestic supply of gas to Batam. Engineering work confirmedthe development concept for the three fields supplying the gas (Gajah Baru, Naga andIguana) and a draft Plan of Development was submitted to the government. Negotiationswith the Singapore buyer were completed on 29 February 2008 and the current focus is onconclusion of ancillary agreements. Formal government approval of field developmentplans and the award of major construction contracts are expected later in 2008.

2007 saw three exploration wells drilled in Indonesia. In Natuna Sea Block A, the IbuLembu-1 well was drilled to prove the hydrocarbon potential in the adjacent up-dipstructure to the 2006 Lembu Peteng-1 discovery. The well encountered gas in the primarytarget but following the running of an extensive data acquisition programme was pluggedand abandoned as sub-economic. The second well, Gajah Sumatera-1 was drilled toappraise a potential extension to the Gajah Puteri field in Natuna Sea Block A. While thewell encountered some gas shows while drilling, wireline logs indicated that no significanthydrocarbons were encountered and the well was plugged and abandoned. Furthertechnical studies are being carried out in the area to define the hydrocarbon-bearing sanddistribution proven by adjacent wells. The Pancing-1 well was drilled in the Kakap Block totest a deep structure close to existing infrastructure. The well flowed oil although at sub-economic rates, however the well’s results are significant in encountering hydrocarbons inan under-explored play in the area, raising the possibility of further exploration potential.

2008 exploration activities within Natuna Sea Block A will focus on maturing and high-grading the existing prospects and leads for an anticipated 2009 drilling programme.

Premier completed the joint acquisition with Medco of ConocoPhillips’ 50 per cent share of North Sumatra Block A in January 2007, bringing our interest to 41.67 per cent.Negotiations to sell gas from the undeveloped Alur Siwah, Alur Rambong and Julu Rayeufields progressed well through the year culminating in a December signing of a Gas Salesand Purchase Agreement with two fertilizer plants owned by PT Pupuk Iskandar Muda(PIM), a state-owned entity, for the delivery of 110 BBtud gross for seven years. A secondgas sale to Palayanan Listrik Nasional (PLN) for local electricity generation is progressingwell with an expectation of completing agreements in the first quarter of 2008.Development studies were ongoing through the year with a Plan of Developmentsubmitted in December. Project sanction is anticipated by mid-2008.

Indonesia

Philippines

Vietnam

India

07


Technical studies including field mapping and sampling took place on the Buton PSC onthe south-eastern side of Buton Island, Sulawesi, with the aim of firming up multiple leadsoriginally identified from satellite imagery. Towards the end of the year a contract wasawarded for the acquisition of 265km of 2D seismic data across the block. The surveycommenced in January 2008 and is expected to take approximately six months to complete.The data will help to high-grade the acreage and focus on identifying a high-impact drillingopportunity for 2009. Premier has a non-operated 30 per cent equity interest in the block.

In March, Premier was awarded a 65 per cent operating equity interest in the Tuna PSC inthe North East Natuna Sea. The block covers 4,992km2 and lies south of Premier’s operatedBlock 07/03 and Block 12W in Vietnam and to the east of the Natuna Sea Block A andKakap PSCs in Indonesia. The Tuna PSC represents an under-explored area in the middle ofa region in which Premier has a strong technical understanding. Multiple leads have beenidentified which will be followed up in 2008 with the acquisition of new seismic dataleading to the drilling of two wells on the block.

VietnamFollowing the discovery of the Chim Sáo and Dua oil fields in 2006, Premier acquired andinterpreted 3D seismic data in the first half of 2007. The development plan is to producefirst oil in 2010 from two wellhead platforms on the Chim Sáo field with production from athird wellhead platform on the Dua field following in 2011. Oil will be processed and storedon a leased FPSO facility located between the fields. During December, Premier submittedreserve reports and development plans for these fields to the Government of Vietnam. TheReserve Assessment Report was approved on 4 March 2008. Approval of the developmentplan is targeted for mid-2008.

During 2007, Premier and the Government of Vietnam agreed the merger of Block 12E intoBlock 12W and extension of the exploration period of the merged PSC until late 2009. Detailedinterpretation of the 3D seismic data acquired in 2007 defined several exploration prospects.These will be drilled with the Wilboss jack-up rig; drilling will commence in mid-March 2008 witha well in the northern part of the Chim Sáo field. The rig will then drill three exploration wellsincluding the Chim Ung (Falcon) well, which will test a prospect on trend with Chim Sáo, and thehigh-impact Chim Công (Peacock) prospect. The programme will target reserves in excess of200 million barrels (mmbbls) with the ability to tie-back discoveries into the core Chim Sáodevelopment. Premier operates a 37.5 per cent exploration working interest in Block 12W.

During 2007, Premier assumed the operatorship of Block 07/03 with a 45 per cent explorationworking interest. A comprehensive interpretation of the existing seismic data identified severalpotentially high-impact prospects over which further seismic will be acquired in 2008. Premieris actively seeking a drilling unit to drill exploration wells in Block 07/03 during 2009.

IndiaDiscussions continue with the Government of India to resolve outstanding issues withrespect to the Ratna field development. The Ratna fields lie in shallow water offshoreMumbai and are estimated to contain around 80 mmbbls. Premier has a 10 per centcarried interest and is the operator.

The Masimpur-3 well in Cachar was successfully drilled with costs being carried in part. The well did not flow commercial gas or oil volumes during testing and was plugged andabandoned. The PSC will now terminate since no commercial discovery has been madeduring the exploration period.

PhilippinesPremier entered 2007 holding a 42.5 per cent operated participating interest in PhilippinesLicence SC43 located in the Ragay Gulf area of SE Luzon. During the course of the yearPremier farmed-out the operatorship of SC43 and a 21.5 per cent participating interest,leaving Premier with a 21 per cent participating interest. In exchange for this considerationall of Premier’s costs relating to the Monte Cristo-1 exploration well, which is expected tobe drilled in the first half of 2008, will be carried. In the fourth quarter of 2007 a 371km 2Dmarine seismic survey was carried out on the same licence over a prospective trend in thePanaon Limestone formation. This data is currently being processed.

PERFORM

AN

CE

08



Middle East-PakistanPakistanProduction in 2007 surpassed the previous record levels achieved in 2006. Production netto Premier in 2007 was 12,700 boepd, an increase of 5 per cent on last year (2006: 12,150boepd). This additional volume was due to increased gas demand and was primarily metthrough additional supply from the Zamzama field.

Qadirpur produced an average of 3,980 boepd from Premier’s net interest of 4.75 per cent(2006: 3,866 boepd). The project to enhance Qadirpur plant capacity from 500 millionstandard cubic feet per day (mmscfd) to 600 mmscfd continued during 2007 and first gasfrom that increased capacity is expected by the end of April 2008. In addition to the above,negotiations are ongoing with the existing gas buyer for an additional supply of 75 mmscfdpermeate gas (equivalent to 40 mmscfd processed gas) for subsequent use in powergeneration. First gas is expected in 2010. The Qadirpur Deep-1 well was drilled to a depthof 4,681 metres in 2007 encountering hydrocarbons in several zones. The well wassuspended following higher than anticipated temperatures and pressures. Specialisedequipment has since been ordered and testing of the well is expected to resume in thesecond quarter of 2008.

On Kadanwari, the K-18 well was drilled and tested successfully during 2007, and broughtonstream in February 2008. Additional production from K-18 will more than compensate for the natural field decline in 2008. In 2007 the field produced an average of 1,260 boepd(2006: 1,200 boepd) from Premier’s 15.79 per cent net interest. An additional well isplanned to be drilled in the second half of 2008.

Zamzama produced an average of 4,620 boepd in 2007 (2006: 4,140 boepd) from Premier’s9.37 per cent interest. Work continued in 2007 on the Zamzama Phase 2 developmentproject, to produce gross 150 mmscfd High Calorific Value (HCV) gas for sale, but plantproblems mean that only Medium Calorific Value (MCV) gas can currently be supplied. HCV deliveries are expected to be achieved later in 2008.

Bhit production was 2,840 boepd in 2007 (2006: 2,944 boepd) from Premier’s 6.00 per centworking interest. The slight fall in production in 2007 was due to an extended shut downfor Phase 2 tie-in work. Work on the Phase 2 project to enhance Bhit plant capacity to 315 mmscfd is now complete allowing accelerated Bhit field production and delivery of first gas from Badhra reserves.

The Badhra South-1 well spudded in January 2008 to prove additional reserves in theMughalkot reservoir. In the event of success, the well will be deepened to test threeidentified sand lobes. The well is expected to complete in the third quarter of 2008.

On Zarghun South, negotiations on the Pipeline Tariff Agreement were concluded with thegas buyer (a condition precedent for the already agreed GSA). First gas is planned for thefirst quarter of 2010. Premier’s interest of 3.75 per cent in this asset is carried by theoperator during the development and production phases of the field.

EgyptIn September 2007 Premier reduced its equity in the North West Gemsa Concession from 37.5 per cent to 10.0 per cent resulting in a reimbursement of some previous costs fromthe operator. During the latter part of the year, the operator conducted geological studiesto define the SE Al Amir prospect which is scheduled for drilling in March 2008.

Abu DhabiShareholder agreements were executed in December with Emirates InternationalInvestment Company LLC (EIIC), forming two new joint venture companies. These companieswill pursue the acquisition of upstream oil and gas assets across the Middle East and NorthAfrica, and will be headquartered in Abu Dhabi.

The first joint venture, to be known as PREMCO, will be owned 49 per cent by Premier and51 per cent by EIIC and will hold all joint venture assets which are acquired in the U.A.E. Inthe event of a change of control of Premier, EIIC will have a pre-emptive right to purchasePremier’s 49 per cent of this joint venture at fair market value.

Egypt

Pakistan

09


The second joint venture, to be known as PREMBV, will be owned 50 per cent by Premier,50 per cent by EIIC, and will hold all joint venture assets which are acquired in the MiddleEast and North Africa (excluding the U.A.E).

At the formation of the joint ventures, there will be no assets or profits attributable to thesenew entities. Future acquisitions of new assets by each joint venture will be funded byPremier and EIIC in accordance with their relevant percentage holding.

This joint venture partnership will enable Premier to access acquisition opportunities acrossthe Middle East and North Africa via EIIC’s relationship networks, whilst EIIC will benefitfrom Premier’s industry expertise and operating capabilities.

North SeaDuring 2007, Premier continued with its stated strategy of building the North Seaexploration portfolio to seek high-impact exploration drilling opportunities whilemaximising the value from existing production and development assets.

UKProduction in the UK amounted to 9,850 boepd (2006: 6,850 boepd) representing 28 percent of the group total (21 per cent in 2006). The increase, compared to 2007, is due to acombination of improved field performance across most of the producing assets and theimpact of the Scott field acquisition completed on 17 May 2007.

The Wytch Farm oil field contributed 2,960 boepd net production to Premier, down 8 percent on last year. Production was adversely impacted by problems with the M19 well, offsetby an A08 sidetrack well which was drilled and completed in September. Drilling is continuingon the M20 water injection well, to be completed in 2008 as part of the Phase 1 waterhandling project. Seawater injection service was also reinstated after a prolonged outage. The shortfall in production due to the drilling problems was partly compensated by betterthan expected production rates from the remaining wells and successful workover activities.

Net production from Kyle was 2,470 boepd, an improvement of 26 per cent on last yearfrom better well performance. The gas lift project was completed for all four productionwells resulting in a substantial boost in production with initial gross rates around 9,000boepd. The K-16 well has been delayed until at least 2009 pending further evaluation.

Premier completed the purchase of an additional 20.05 per cent equity in the Scott field inMay 2007 adding an average of 5,240 boepd net over the remainder of the year. As aresult of this transaction, Premier’s working interest has become 21.83 per cent. The Scottfield gross production for the year was 27,750 boepd; this amounted to a full year averageof 3,630 boepd net to Premier at the combined equity levels.

Telford produced slightly below expectations during 2007 following disappointing resultsfrom the Marmion well; gross field production averaged 9,560 boepd (70 boepd net toPremier). 2007 saw the completion of a substantial infill drilling programme consisting of sixwells on Scott and one well on Telford. Future targets are being evaluated for a furthercampaign starting in the fourth quarter of 2008.

In the Fife Area, Premier’s net production amounted to 720 bopd, below expectation dueto major integrity issues with the flexible risers. The operator has made a recommendationto suspend production in May 2008 and remove the Uisge Gorm floating production unit.Premier has retained the right to redevelop the area with an alternative facility.

Premier operated the Peveril prospect well, located only 10km south of the Fife field, whichwas completed within budget at no cost to Premier. The Peveril well encountered anunexpectedly thick interval Kimmeridge Clay and no target Fife reservoir sands.

In the UK 24th Licensing Round, Premier was awarded a split portion of 15/24a. The firmwork programme includes seismic reprocessing and study work.

In February 2008, agreement was reached with Oilexco for a well to be drilled on theSparrow prospect, on P1181. This will be spudded mid-March 2008. Oilexco will carryPremier through the well and Premier will retain a 25 per cent interest post completion.

Norway

United Kingdom

PERFORM

AN

CE

10



NorwayOn the Frøy field in Norway, development planning is progressing. Following conceptselection in September, lease/purchase bids were sought for the jack-up production drillingstorage and offtake unit. These show significant increases on previous budgetary estimatessubmitted by suppliers; the operator has been requested to implement a major costreduction exercise to bring investment down to an acceptable level. The operator is alsoinvestigating third-party business opportunities and exploration upside to improve therobustness of the project as well as tackling other key issues such as contract guarantees.

The partnership issued a Declaration of Continuation at the beginning of January;submission of the Plan of Development is expected during 2008 provided viability of thechosen concept can be confirmed.

Premier was awarded a further five licences in the APA Licensing Round in January 2007.Building on the APA 2005 portfolio, Premier was successful in capturing two of the mostsought after blocks in the 2006 APA round: the Bream appraisal licence and the adjacentBream exploration licence, PL407 and PL406 respectively. The Bream field was initiallydiscovered in 1971 but no development decision was reached. Interpretation of the 2005PGS 3D dataset across the structure suggests that between 60–80 mmbbls reserves maybe present. The planning for the commitment appraisal well is at an advanced stage and isscheduled to be drilled in the first half of 2008.

The exploration licence adjacent to Bream is Premier’s first operated licence in Norway.This has the potential to add between 100–250 mmbbls reserves to the proven Breamaccumulation. Premier will be acquiring 500km2 of new 3D across the PL406 licence inMarch 2008 using PGS’s ‘Ramform Sovereign’ vessel with a firm well on PL406 planned for mid-2009.

The three other licences Premier was awarded were PL418 and PL419, down-dip from theGjoa discovery and PL417 adjacent to our existing licence PL378.

West AfricaMauritaniaChinguetti production averaged 14,800 boepd (1,200 boepd net to Premier) in 2007.Drilling of the Chinguetti-18 well was completed in the first quarter of 2007, in line withexpectations, and a work-over was conducted on Chinguetti-14. Operational planning wasprogressed for the Phase 2B development of Chinguetti in 2008 comprising two newproduction wells and three work-overs.

High resolution 3D seismic surveys were recorded over the Chinguetti and Tiof areas in2007. Integration of newly acquired data into existing field models is currently beingfinalised. A 4D seismic survey was also recorded over the Chinguetti field, which greatlyassists selection of production well locations for the Phase 2B development programme.

In 2007, Premier terminated discussions with a preferred bidder for its Mauritanianoperations. In late 2007, Petronas acquired Woodside Energy’s assets, and operatorship, inMauritania PSC A, PSC B and Chinguetti. Opportunities and development options on PSCsA and B continue to be evaluated with the new operator. The PSC B joint venture plans todrill the Banda-NW well in April 2008 with the objective of further defining Banda gas andoil resources, and to assess its commercial viability. In addition, Tiof will be re-evaluatedwith the integration of 2007 high resolution 3D seismic data with an expectation ofprogressing this discovery to a development decision. The joint venture will re-assess theexploration potential of the blocks during 2008.

The Atwood Hunter drilling rig has been contracted for the Chinguetti Phase 2B andBanda-NW appraisal programme, which is expected to commence in April 2008 and to beconcluded by August 2008.

Mauritania

SADR

Congo

11


Guinea BissauPremier operated a two-well exploration programme during the first half of the year, usingthe Global Santa Fe jack-up rig ‘Baltic’. The wells were completed within budget andwithout incident. Premier reduced its exposure to the drilling costs by farming out some of its interests.

The Espinafre-1 well was plugged and abandoned on 23 March 2007 after encounteringhole stability problems. The Eirozes-1 well was plugged and abandoned on 24 April 2007.This well encountered a significant reservoir section but no hydrocarbons.

Following post-well analyses and re-assessment of the remaining prospectivity of theSinapa and Esperança Permits, Premier effectively withdrew from both concessions inGuinea Bissau in December 2007.

GabonThe Themis Permit (non-operated) is located in the Gamba play fairway, offshore southernGabon. The Themis PSC joint venture commenced drilling the Themis Admiral Marin-1(THAM-1) well in December 2007; the well was plugged and abandoned with hydrocarbonshows on 13 January 2008.

The Dussafu Permit (non-operated) is located south of Themis, adjacent to the Congoleseborder. The PSC was extended to a Second Exploration Term effective May 2007, with a2D seismic commitment. In December 2007, Premier signed a Sale and PurchaseAgreement with a qualified party to acquire Premier’s 25 per cent participating interest inthe Dussafu PSC. The transaction was completed on 8 March 2008.

CongoSignificant progress has been made in the evaluation of the deep water Marine Block IXexploration acreage. Premier, as operator, has conducted a detailed evaluation of Albian‘raft’ prospectivity, the characteristic proven play in the area. This has identified the Fridaand Ida prospects, both in excess of 250 mmbbls gross potential. The joint venture is alsomapping the potential of Tertiary channel sands that have proven productive in theadjacent Haute Mer Concession.

Premier and its joint venture partner are actively progressing planning for a discretionarydrilling programme of up to two wells in late 2008, or early 2009. Completion of thisprogramme is subject, among other issues, to rig availability. Premier is in advanceddiscussions with a party to farm-in to Premier’s equity interest in Marine Block IX in returnfor a carry of its costs.

SADRThe company’s exploration rights in the Saharawi Arab Democratic Republic (SADR) remain under force majeure, awaiting resolution of sovereignty under a United Nationsmandated process.

PERFORM

AN

CE

12


FINANCIAL REVIEW

Tony DurrantFinance Director

Economic environment2007 was another year of record oil and gas commodity prices, approaching US$100 perbarrel (bbl) towards the end of the year. The Brent oil price, which began the year atUS$60.1/bbl, averaged US$72.7/bbl, reaching a peak of US$95.8/bbl during November. Gasprices worldwide were also boosted according to the degree of linkage with crude oil. Theearly part of 2008 has seen increased volatility in commodity prices. The fragile health of theglobal economy has put downward pressure on average 2008 prices but this has been morethan offset by supply concerns and average 2008 prices are currently above US$90/bbl.

The sustained period of stronger commodity prices and increased industry activity levelshave put further pressure on both operating and development costs. Rig rates and otherdrilling service costs are at historically high levels. Shortages of experienced staff andlonger lead times for development equipment added further cost pressures on the industry.The industry is responding to cost and availability issues by optimising the use of availableresources, innovative resource-sharing and focussing on fast track development solutions.

Income statementProduction levels in 2007, on a working interest basis, averaged 35,750 boepd comparedto 33,000 boepd in 2006. On an entitlement basis, which allows for additional governmenttake under the terms of our PSCs, production was 31,450 boepd (2006: 28,900 boepd).Realised oil prices averaged US$72.3/bbl compared with US$64.9/bbl in the previous year.

Gas production averaged 135 mmscfd (23,500 boepd) during the year, or approximately 66per cent of total production. Average gas prices for the group were US$5.60 per thousandstandard cubic feet (mscf) (2006: US$5.11/mscf). Gas prices in Singapore, which are linkedto High Sulphur Fuel Oil (HSFO), have moved broadly in line with crude pricing, averagingUS$11.30/mscf (2006: US$9.43/mscf) during the year.

Following the group’s decision to terminate discussions with a preferred bidder, thefinancial results for Mauritanian operations are no longer required to be presentedseparately. The corresponding amounts for 2006 have been re-presented accordingly.During the year, the group also restructured its business in Pakistan by de-merging interestsfrom the Premier-KUFPEC Pakistan joint venture and now fully consolidates its share ofoperations in Pakistan. This restructuring had no impact on the consolidated financialstatements.

Total sales revenue from all operations was 44 per cent higher than 2006 at US$578.2million (2006: US$402.2 million) as a result of higher production and commodity prices.

Cost of sales was US$267.5 million (2006: US$179.2 million) after including a cost ofUS$26.8 million for inventory acquired with the Scott field acquisition. The year-endinventory position moved from a stock overlift to an underlift position, driven by the timingof liftings around each year-end, and resulted in a charge to cost of sales of US$27.3 million(2006: credit of US$22.4 million). After excluding the effect of inventory movements,underlying unit operating costs were higher at US$9.0 per barrel of oil equivalent (boe)(2006: US$7.1/boe) due to one-off cost increases in Indonesia and increased productionfrom the Scott field in the North Sea. Unit amortisation amounted to US$8.2/boe (2006: US$7.9/boe). Exploration expense and pre-licence exploration costs amounted toUS$65.3 million (2006: US$21.8 million) and US$8.3 million (2006: US$21.8 million) respectively,after taking into account a US$25.7 million write-down of costs in Guinea Bissau.

Administrative costs were stable at US$17.7 million (2006: US$16.8 million). This included acharge of US$4.7 million (2006: US$5.7 million) in respect of current year and futureprovisions for long-term incentive plans.

Operating profit

0

100

50

150

200

250

2005 2006 2007

($ million)

13


“Total sales revenue from all operationswas 44 per cent higher than 2006 at US$578.2 million (2006: US$402.2million) as a result of higher productionand commodity prices.”

Operating profits were US$219.4 million, a 35 per cent increase from the prior year.Finance charges net of interest income totalled US$7.5 million (2006: US$4.0 million). Pre-tax profits were US$147.0 million (2006: US$156.6 million). This included a significantnon-cash item relating to mark to market revaluation of the group's oil and gas hedgestotalling US$64.9 million (pre-tax). Such accounting losses arise as oil and gas pricesincrease, however, given the current range of spot and forward prices it is not expectedthat the hedging programme will have any material cash flow impact on the group. The taxcharge totalled US$108.0 million (2006: US$89.0 million) due to underlying higher taxableprofits. Basic earnings per share amounted to 47.6 cents (2006: 82.6 cents).

Cash flowCash flow from operating activities, before movements in working capital, amounted toUS$408.1 million (2006: US$310.8 million). After working capital items and tax payments,cash flow from operating activities amounted to US$269.5 million (2006: US$244.8 million).Capital expenditure was US$261.2 million after inclusion of asset acquisition costs ofUS$88.6 million.

2007 2006Capital expenditure $ million $ million

Fields/developments 65.7 88.7Exploration 104.7 49.6Acquisitions 88.6 17.0Other 2.2 1.2

Total 261.2 156.5

The principal development projects were the Kyle gas lift project in the UK, the West Lobedevelopment in Indonesia and the Zamzama Phase 2 development in Pakistan. Explorationcosts of US$104.7 million take into account savings of US$30.9 million due to farm-outs inGuinea Bissau, the UK and India.

Net cash positionNet cash at 31 December 2007 amounted to US$79.0 million (2006: net cash of US$40.9million) following the successful completion of a US$250 million convertible bonds issue inJune. This funding provides seven-year fixed rate debt at a cash coupon of 2.875 per centand, together with our undrawn bank facilities, contributes substantially towards thefinancing of Premier's significant development programme over the next three years.

2007 2006Net cash $ million $ million

Cash and cash equivalents 332.0 40.9Convertible bonds* (200.0) –Other long-term debt** (53.0) –

Net cash 79.0 40.9

* Excluding unamortised issue costs and allocation to equity.** Excluding unamortised issue costs.

Cash flow from operating activities

0

100

50

150

200

300

250

2005 2006 2007

($ million) PERFORM

AN

CE

14


FINANCIAL REVIEW (CONTINUED)

Hedging and risk managementThe Board’s policy remains to lock in oil and gas price floors for a portion of expectedfuture production at a level which protects the cash flow of the group and the businessplan. Such floors are purchased for cash or by selling calls at a ceiling price when marketconditions are considered favourable. All transactions are matched as closely as possiblewith expected cash flows to the group; no speculative transactions are undertaken.

During 2007 zero cost collar oil hedges for a further 2.4 mmbbls were entered into byextending the maturity of the collars to the end of 2012. This increased the average floorprice from US$38.55/bbl to US$39.3/bbl whilst maintaining the cap at US$100.0/bbl.During 2007 hedges for 1.8 mmbbls matured for which no cash settlement under the termsof the collars was made. At the end of 2007 a four and a half-year physical off-takeagreement for the sale of certain oil production was entered into with effect from 1 July2008. This agreement for 8.1 mmbbls incorporates the parameters of existing oil collarsand effectively replaces the equivalent amount of hedging.

In addition, zero cost collars for a further 150,000 metric tonnes (mt) of HSFO were enteredinto which raised the average floor price from US$245/mt to US$250/mt whilst maintainingthe cap at US$500/mt. During 2007 hedges for 120,000 mt matured for which a smallpayment under the terms of the hedges was made during the year. At the end of 2007, atotal of 642,000 mt of HSFO was hedged (approximately 120,000 mt per annum)representing approximately one third of Indonesian gas production, until June 2013.

Under International Financial Reporting Standard (IFRS) zero cost collar hedges are requiredto be marked to market at the balance sheet date. The aggregate valuation is a US$65.2million liability (2006: US$0.3 million liability) generating a US$64.9 million non-cash pre-taxcharge in the 2007 income statement. The entry into the physical off-take agreement for oilproduction from 1 July 2008 will reduce the volatility of mark to market revaluations on theincome statement. The existing US$37.9 million provision in respect of oil hedges will bewritten back to the income statement over the life of these hedges.

Since the group now reports in US dollars, exchange rate exposures relate only to Sterlingreceipts and expenditures, which are hedged in dollar terms on a short-term basis. Thegroup recorded a loss of US$0.4 million on such hedging at year-end.

Cash balances are invested in short-term bank deposits, AAA managed liquidity funds andA1/P1 commercial paper subject to Board approved limits.

The group undertakes an insurance programme to reduce the potential impact of thephysical risks associated with its exploration and production activities. In addition, businessinterruption cover is purchased for a proportion of the cash flow from producing fields.

Key performance indicators

2007 2006 Change

LTI and RWDC frequency rate* 1.86 1.24 Up 50%Production (kboepd) 35.8 33 Up 8%Cash flow from operations ($ million) 269.5 244.8 Up 10%Operating cost per boe ($) 9.0 7.1 Up 27%Gearing** 0% 0% –Realised oil price per barrel ($) 72.3 64.9 Up 11%Realised gas price per mcf ($) 5.6 5.11 Up 10%

* Lost time incidents (LTI) and restricted workday cases (RWDC) per million man-hours worked.** Gearing is net debt divided by net assets.

Net cash/(debt)

-40

20

-20

0

40

60

80

100

2005 2006 2007

($ million)

15


SOCIAL PERFORMANCE REVIEW

IntroductionPremier aspires to be an industry leader in social performance, which we define as coveringthe areas of social responsibility, health and safety, and environmental impact. We settargets for these areas with reference to our historical performance, that of our peer groupand the standards set by external agencies. It is our stated policy to ensure that the risksand impacts of our activities are reduced to ‘as low as reasonably practicable’ (ALARP) at all times.

We continue to publish a Social Performance Report every two years, and from now onin intermediate years will prepare a Communication on Progress, both of which will beavailable on our website. Our Social Performance Report is prepared in line with theInternational Petroleum Industry Environmental Conservation Association (IPIECA) Oil andGas Industry Guidance on Voluntary Sustainability Reporting (2005). The report also takesfull account of the requirements of other key organisations such as the United NationsGlobal Compact (UNGC) principles, FTSE4Good, the World Resources InstituteGreenhouse Gas Protocol and the International Finance Corporation Equator Principles.

Social responsibility Premier is keenly aware of its responsibilities as a corporate citizen. Backed by a strongBoard-level commitment, we have designed and implemented a coherent set of policiesthat lay down the principles by which we manage our relationships with communities, thehealth and safety of our people and our impact on the environment. During 2007, wecontinued to work closely with local communities, business partners and regulatoryauthorities to make a positive difference within the localities where we operate.

Community and societyWe continue to actively support social and community projects in the areas that we work.

In Indonesia, we have been pleased to see delivery of projects identified by ourCommunity Development Baseline Study, developed in close collaboration with BPMIGAS(the Indonesian oil and gas regulator) and the local community, on Matak and surroundingislands. Projects included construction of two community halls in Terempa (Siantan Island)and Payalaman (Matak Island) and the supply of clean water to five villages on PalmatakIsland. Within these communities we have maintained our support for local education andwelfare, including the completion of two kindergarten buildings, the sponsorship of amaternal and child health training programme and local paramedic training. We handedover management of the Anoa Kindergarten to the local community, after eight years ofPremier management. We remain committed to supporting the school and have providedadditional assistance through support of a pre-school teacher training programme withthe aim of establishing three more schools. We have also maintained our support for theNatuna Malay Art Revitalisation Programme to preserve and promote this culture. Two local arts students were also sponsored to study a four-year course at the Institut Kesenian Jakarta.

In Vietnam, we sponsored the construction of four bridges in the Mekong Delta to reducethe safety risk to local people who were previously crossing on unsafe wooden structures.We also supported the relief efforts following severe typhoon damage in the Vung Tauregion.

PERFORM

AN

CE

16


In India, we supported local charities aiding cancer patients in Delhi and the TamannaSchool Project which provides free education to Delhi’s street children. In the Cachardistrict, close to our 2007 well operations, we also supported projects in two villages toprovide clean water, sanitation and waste management, and a fish farming project inconjunction with the local government. We also donated emergency equipment when the area suffered extensive flooding.

Employment practicesWe aim to attract, develop and retain talented and committed people in order to maintainthe capability of the group to deliver our business objectives. Premier’s policy is to ensureequal opportunity in career development, promotion, training and reward for all ouremployees. We aim to ensure that all our employees understand our business goals andour values. As an international group we believe that our workforce should reflect thecommunities in which we operate and so it is important that we increase the quality andexperience of our local employees. We also actively encourage employee exchangesbetween different offices and nationalities. Our objective at all times is to adhere to thehighest standards of business ethics in all of our activities.

We recently conducted an employee satisfaction survey, in which employees generallyexpressed a high level of satisfaction with respect to their working lives and a belief thatsocial performance issues were very relevant to their work.

Health and safetyIt is our stated policy to ensure that the risks to our employees, and contractors working onour behalf, are reduced to ALARP. We strive to continually improve our performance in theareas of both occupational health and safety, and process safety.

Occupational health and safety2007 was a year of high activity for Premier particularly with respect to exploration drilling.We conducted an offshore seismic survey in Vietnam, drilled five operated offshoreexploration wells, drilled a major onshore exploration well in India, and maintained a highlevel of offshore drilling and production activity at the Anoa field in Indonesia.

We report our safety performance in terms of significant injuries including fatalities, losttime injuries, and restricted workday cases. During the 2007 work programme we incurredseven such incidents. Four involved relatively minor injuries, two were lost time injuries andone was a contractor fatality. The resultant combined significant injury frequency was 1.8per million man-hours for the year. We have consistently set ourselves improving safetytargets over the past five years (reducing from 3.4 to 1.9). We have set our target for 2008 at 1.7 significant injuries per million man-hours.

2007 2006

Number of lost time injuries (LTIs) 3 4Number of restricted workday cases (RWDCs) 4 –Man-hours worked (millions) 3.8 3.3Target LTI/RWDC frequency (per million man-hours worked) 1.9 2.1Actual LTI/RWDC frequency (per million man-hours worked) 1.8 1.3

We benchmark our health and safety performance by contributing our data to an industrydatabase compiled and published by the Association of Oil and Gas Producers (OGP) andour safety performance has been in line with or better than the OGP average over the pastthree years.

SOCIAL PERFORMANCE REVIEW (CONTINUED)

17


In 2007 we enhanced our improvement processes by focusing on high-potential incidents;near miss or minor incidents that could potentially have had serious consequences. Thiswas done throughout the business by involving senior management in the review of high-potential incidents and by issuing safety alerts focusing on the lessons learnt. Afterembedding this process in 2007 we have now included a high-potential incident frequencytarget as a key performance indicator in 2008.

We underwent a number of independent Occupational Health and Safety Advisory Service(OHSAS) 18001 assessments and surveillance audits on our worldwide operations toconfirm compliance of our health and safety management systems with this standard. Ourglobal drilling function retained the certification it had first achieved in June 2004 thoughour Indonesian production operations have further assessment ongoing.

We are seeking to improve the health and wellbeing of all our employees and therefore all persons working offshore or in remote areas must undertake fitness for work healthexaminations. We have introduced a travel risk assessment process to ensure all businesstravellers are made fully aware of any specific or new health risks and appropriatecontingency measures.

Process safetyPremier aims to utilise best industry practice wherever we operate. In Indonesia, althoughnot a local requirement, we have adopted the UK Safety Case regime for our operatedproduction facilities which includes a review every five years to ensure that changes tofacilities have been accounted for and that risks to personnel remain ALARP. Premier willensure that a similar regime is applied to any new operated projects that we developelsewhere in the world.

In 2007 Premier assessed the implications for our operations of findings on safety culturefrom recent major incidents on other facilities in the oil industry. To deliver confidence that process safety systems are fully functional, we are enhancing our maintenancemanagement system to better monitor the performance of safety critical equipment. Wecontinue to work towards a full, independently assessed verification scheme. Another areaidentified for improvement is that of operating staff competence, where we are aiming tointroduce new initiatives geared to providing international vocational qualifications to helpaddress this.

In line with our desire for a robust process safety management system we have upgradedour drilling management system to strengthen the requirement therein for an independentassessment of the condition, functionality and maintenance regime of all safety criticalequipment on newly contracted rigs. To capture this new process we reviewed the contentof our Health, Safety and Environmental Well Assessment Measurement and have set newtargets.

Environmental impactOur environmental policy is to ensure that our environmental emissions and discharges are ALARP. We will also adhere to the precautionary approach outlined in the UNGC towhich Premier is a signatory. Accordingly, we intend to conduct an ALARP assessment foreach operated project/activity as part of its environmental aspects analysis.

PERFORM

AN

CE

18


Premier aims to have its environmental management systems certified to InternationalOrganization for Standardization (ISO) 14001. In 2006 we achieved this goal for ourIndonesian production operations, however, as a result of an audit performed in 2007, thiscertification was suspended. We are currently resolving the issues that were raised in orderthat the certification can be reinstated in 2008. We have successfully maintained ISO 14001certification for our global drilling operations since 2004.

We specifically include a requirement to assess risks to biodiversity in our Corporate Health, Safety, Environment and Security Policy and include this assessment as part of ourEnvironmental Impact Assessment (EIA) process. We have also maintained our membershipof the United Nations Environment Programme Proteus Initiative which seeks to provide thebest available biodiversity data wherever practicable. We continue to engage with localstakeholders to ensure that we have all available data and that this is reflected in our EIAs.

Environmental indicatorsIn line with IPIECA we report environmental performance in the following four core areas:

2007 2006

Oil in produced water (parts per million) 20 21Oil spills (tonnes) 13.7 3.9Greenhouse gases (tonnes per thousand tonnes of production) 171 232Energy use (gigajoules per tonne of production) 1.8 1.9

For further information please refer to the 2007 Social Performance Report on our website,www.premier-oil.com.

Spills and dischargesThere was no significant change in the volume of produced water discharged from ourAnoa production facilities from 2006 to 2007. The concentration of oil in produced water,which improved from 21 to 20 parts per million, remained well within the limits set by theIndonesian Government.

In 2007 there were 15 reported environmental incidents worldwide, down from 29 in 2006.Most of these incidents involved small spills of hydraulic oil, diesel or chemical to the deckand were not discharged overboard. We incurred four significant incidents, three of whichwere from the same drilling rig and involved the spill of 13.7 tonnes of synthetic oil-basedmud to sea. The other significant spill involved the discharge of 28.0 tonnes of water-basedmud to sea following a flowline valve failure. The spills had a very minor effect on theenvironment and quickly dissipated. However, three out of four of the incidents wereclassified as ‘high-potential’. These have been thoroughly investigated and correctiveactions taken, including the aforementioned revisions to the drilling management system.

SOCIAL PERFORMANCE REVIEW (CONTINUED)

19


EmissionsWe calculate our greenhouse gas (CO2 equivalent) emissions both in tonnes emitted and in tonnes per thousand tonnes of production for both operated and joint ventureoperations across our global portfolio. In 2007 we emitted approximately 222,000 tonnesof greenhouse gas in total. When based on our net production this equated to 171 tonnesper thousand tonnes of production. This shows a marked improvement compared with2006 when we emitted 232 tonnes per thousand tonnes of production. The improvement is due in part to the efforts we have made to enhance gas compressor reliability at ourproduction facilities. The consequent decrease in compressor downtime has resulted in asignificant reduction in flaring.

We benchmark our environmental performance by contributing our data to an industrydatabase compiled and published by the OGP. Our greenhouse gas emissionsperformance has been in line with the OGP average over the past three years.

Resource useThe main sources of energy that power our facilities are fuel gas and diesel. There has beenlittle variation in our energy use over the last few years, and energy use (gigajoules pertonne of production) in 2007 remained between 1.8 and 1.9.

PERFORM

AN

CE

BOARD OF DIRECTORS

20


Sir David John (69), became non-executiveChairman in March 1998. He was non-executive Chairman of the BOC Group plcfrom January 1996 until January 2002 and iscurrently Chairman of Balfour Beatty plc andthe British Standards Institution. Sir David is a Member of the CBI’s International AdvisoryBoard, and is the Chairman of Premier’sNomination Committee.

Robin Allan (48), joined Premier from BurmahOil in July 1986, working initially as ageologist. After technical and new ventureroles he spent six years in South East Asia,initially managing Premier’s Asian existingand new venture business and laterbecoming Premier’s Country Manager inIndonesia. He became a member of thePremier Board on 9 December 2003 asDirector of Business Development.

Joe Darby (59), joined Premier’s Board as anon-executive director in September 2007.Mr Darby has over 35 years of experience in the energy sector, including eight yearswith Shell Petroleum before becomingManaging Director of Thomson North SeaLtd. He has held a number of senior roles,including Chief Executive, with LASMO plc.Mr Darby is currently the senior independentdirector at British Nuclear Fuels plc. He hasheld non-executive roles at Mowlem plc andCenturion Energy Inc and was Chairman ofMowlem plc (2005-2006) and FaroePetroleum plc (2003-2007). Mr Darby is amember of Premier’s Audit and Risk,Remuneration and Nomination Committees.

Scott Dobbie (68), joined Premier’s Board asa non-executive director in December 2000.He has a career background in stockbroking,as Managing Director of Wood Mackenzieand subsequently Chairman of NatWestSecurities. He is currently Chairman of theSecurities & Investment Institute, TheEdinburgh Investment Trust plc and ofStandard Life European Private Equity Trust.He is also a Commissioner of the JerseyFinancial Services Commission. Mr Dobbie is a member of Premier’s Audit and Risk,Remuneration and Nomination Committees.Mr Dobbie will retire from the Board at theclose of the 2008 AGM.

Tony Durrant (49), joined Premier in June2005. After qualifying as a CharteredAccountant with Arthur Andersen, he joinedLehman Brothers in London, initially as an oilsector analyst. He joined the investmentbanking division of Lehman in 1987 and from1997 was a Managing Director and Head ofthe European Natural Resources Group. In thisrole, he managed both client relationshipsand numerous transactions for a variety ofEuropean and North American clients. He is anon-executive director of Clipper Windpowerplc. He joined the Premier Board on 1 July2005 as Finance Director.

Ronald Emerson (61), joined Premier’s Boardas a non-executive director in March 2001.He has held a number of senior positions inthe banking sector, including roles at Bank ofAmerica, Nomura Bank and, most recently,with Standard Chartered Bank where he wasChief Executive of their Malaysian operationsbefore becoming the Group Head ofCorporate Banking. He was a Senior Advisor tothe Bank of England between 1997 and 1998,and to the Financial Services Authority between1998 and 2000. He is a non-executive directorof Ace European Group Ltd, Noventa Ltd andthe Habib Group. Mr Emerson is Chairmanof Premier’s Audit and Risk Committee, and amember of the Remuneration and NominationCommittees. Mr Emerson will retire from theBoard at the close of the 2008 AGM.

Neil Hawkings (46), joined Premier in May2005 after more than 20 years withConocoPhillips where he worked in a varietyof engineering, commercial andmanagement roles around the world,undertaking assignments in the UK, Dubaiand Indonesia. He joined the Premier Boardon 23 March 2006 as Operations Director.

David Lindsell (60), joined Premier’s Board inJanuary 2008 as a non-executive director. MrLindsell has recently retired from Ernst & YoungLLP, where he was a partner for nearly 30 years.He has extensive experience across a rangeof industry sectors, with a strong knowledgeof the oil and gas sector. He is a member ofthe Financial Reporting Review Panel, amember of the Standards Advisory Councilof the International Accounting StandardsBoard and a member of the SupervisoryBoard of the European Financial ReportingAdvisory Group. Mr Lindsell is a member ofPremier’s Audit and Risk Committee.

Simon Lockett (43), Chief Executive, joinedPremier in January 1994 from Shell and hasworked in a variety of roles for Premier,including the management of investorrelations, as Commercial Manager inIndonesia and as Country Manager inAlbania. He became a member of thePremier Board on 9 December 2003 asOperations Director. He was appointed ChiefExecutive on 24 March 2005.

John Orange (65), joined Premier’s Board as a non-executive director in February 1997.He held a variety of senior internationalmanagement and legal posts during his 30 years with the BP Group. Mr Orange isPremier’s senior independent non-executivedirector, Chairman of the RemunerationCommittee and a member of the Audit andRisk and Nomination Committees.

Professor David Roberts (64), joined Premierin June 2006 as a non-executive director.Professor Roberts has over 30 yearsexperience in all aspects of explorationworldwide and extensive knowledge of deepwater areas, sedimentary basins, stratigraphyand prospect assessment. He spent 22 yearswith BP in a number of technical roles,including Global Exploration Adviser andDistinguished Exploration Adviser. On hisretirement from BP in 2003, ProfessorRoberts established his own geoscienceconsultancy. He is a visiting professor andfellow of Royal Holloway, University ofLondon, the University of Southampton andIFP School in Paris. He is a non-executivedirector of GETECH plc. Professor Roberts isa member of Premier’s Remuneration andNomination Committees.

Michel Romieu (68), joined Premier’s Boardas a non-executive director in January 2008.Mr Romieu has over 30 years experience inthe international energy sector, including 25 years with the Elf Group, where he heldseveral senior positions including ChiefExecutive Officer of Elf UK and the group’sGas Division. During his period as CEO of ElfUK, he was elected President of the UKOffshore Operator’s Association for the year1995. On his retirement from Elf in 2000, MrRomieu became Director for Gas of CRE, theFrench energy regulator, a position he helduntil 2003. He has established his ownconsultancy specialising in providing adviceto the gas industry, and is a lecturer at theFrench Petroleum Institute. Mr Romieu is alsoPresident of Uprigaz.

21


Sir David John Simon Lockett Tony Durrant

Robin Allan Neil Hawkings Joe Darby

Scott Dobbie Prof. David Roberts David Lindsell

Ronald Emerson John Orange Michel Romieu

GO

VERNA

NC

E

CORPORATE GOVERNANCE REPORT

Compliance and the role of our BoardThe company has established procedures and policies to ensure compliance with the code provisions set out in Section 1 of theCombined Code on Corporate Governance (the Code). As required by the Code, we report below on how the main and supportingprinciples of the Code have been applied throughout the year and explain any areas where we have not complied with any of theCode’s provisions. While this is an important exercise, the Board does not believe that good governance can be defined merely interms of compliance with a set of rules. The overall purpose of the Board is to represent the company’s owners, ensure that thecompany’s strategic objectives are properly pursued and the major business risks are actively monitored and managed. This goesbeyond regulatory compliance and puts the interests of our shareholders as the Board’s primary focus.

The Board considers that the company has complied with the provisions of the Code throughout the year under review (andsubsequently up to the date of this report) except in those areas mentioned below.

The BoardThe Board of Directors currently comprises the Chairman, the Chief Executive, three other executive directors and sevenindependent non-executive directors. Brief biographical details of each director and a note of their Board committee membershipsare set out on page 20.

The Chairman’s role is part-time and he is a non-executive director. His key responsibility is the leadership of the Board, ensuring itseffectiveness on all aspects of its role and setting its agenda. Between Board meetings the Chairman is responsible for ensuring theintegrity and effectiveness of the Board/Executive relationship. This requires regular contact with the Chief Executive between Boardmeetings, as well as contact with other Board members, shareholders, joint venture partners and host governments. In 2007, theChairman visited several of the company’s overseas operations to meet senior industry and government representatives. TheChairman and the non-executive directors meet periodically without the executive directors present and the non-executive directorsmeet once a year without the Chairman.

The division of responsibilities between the Chairman and the Chief Executive has been clearly established.

Premier is an international business which has to manage a variety of political, technical and commercial risks. It is thereforeimportant that the Board contains the appropriate mix of skills and experience to meet these challenges. Premier’s Board has such a mix given the diverse business backgrounds of the non-executive directors. They are encouraged to have direct contact with thecompany’s senior executives between Board meetings and also encouraged to visit the company’s operations abroad in order tofamiliarise themselves with their activities and to meet local management. The Board visited the company’s operations in Vietnam in January 2007 and in Indonesia in November 2007.

The Board is responsible for overall group strategy, acquisition and divestment policy, approval of major capital expenditureprojects, corporate overhead costs and consideration of significant financing matters. The Board has continued to focus its efforts in 2007 on strategic issues which will create shareholder value, monitoring performance against agreed objectives and discussingfuture business opportunities.

The formal agenda for each Board meeting is set by the Chairman in consultation with the Chief Executive and the Company Secretary.Formal Board and Board Committee minutes are circulated to all directors at the next Board meeting. Board members receive amonthly report of the company’s activities which incorporates an update on the annual budget and progress against major objectives.In accordance with the authority given under the company’s Articles of Association, the company has established a standing committeeof the Board, consisting of any two directors, to carry out routine business. The minutes of all meetings of this committee are circulatedto the Board.

There are formal and transparent procedures for the appointment of new directors and it is the responsibility of the NominationCommittee to consider Board composition and succession planning, including the appointment and reappointment of directors. Mr J R W Orange, who is Chairman of the Remuneration Committee, is the company’s senior independent non-executive director. In this role, he is available to shareholders who have concerns that cannot be resolved through discussion with the Chairman orChief Executive. Matters reserved for Board decision are clearly laid down in writing, including the appointment of the CompanySecretary who is responsible for ensuring that Board procedures and rules are applied. Formal procedures are in place to enableindividual Board members to take independent advice where appropriate. Details of the executive directors’ service contracts andthe non-executive directors’ letters of appointment are laid out in the Remuneration Report on page 32.

The company has directors’ and officers’ liability insurance in place.

The company has granted indemnities to all its directors, to the fullest extent permitted by applicable law.

22


Executive CommitteeThe Board has delegated the day-to-day running of the group to the Chief Executive who has established an Executive Committeeto assist him in this role. The Committee is made up of each of the executive directors and the Company Secretary. The ExecutiveCommittee is chaired by the Chief Executive.

The responsibilities of the Executive Committee include the development of group strategy for approval by the Board, portfoliomanagement and the monitoring of performance against the targets set by the Board. At its weekly meetings it also reviews health,safety, environmental and security performance and operational business performance reports. The Executive Committee is alsoresponsible for reviewing the information provided to the Board.

Four regional business units – North Sea; West Africa; Middle East-Pakistan and Asia – have been established in order to manageeffectively the increasing geographical spread of business in the group. Each business unit is headed by a regional businessmanager who delivers against specific strategies and performance targets set by the Executive Committee.

Board performance evaluationThe Board and its directors are subject to regular appraisal. The aim is to improve both individual contributions and group achievement.

The Board carried out a questionnaire-based evaluation process in 2007, using an external facilitator. In addition to completing thequestionnaire, the directors were offered the opportunity to meet the facilitator in order to expand upon their answers or to raiseother issues. While it is not a fixed policy, the current view of the Board is that alternation between internal and external reviews hassignificant merits, not least in keeping the exercise fresh amongst Board members.

The results of the evaluation were reviewed by the Chairman and discussed in detail by the Board, at a special meeting attended bythe facilitator. The results in general were extremely positive, although there were one or two issues of a minor administrative naturethat needed to be addressed and they are receiving attention.

Non-executive directors The non-executive directors bring independent judgement to bear on issues of strategy, performance and resources including keyappointments and standards of conduct. Non-executive directors comprise over one half of the Board. Selection of suitable non-executive directors is a matter for Board approval following recommendations made by the Nomination Committee.

We require that all our non-executive directors are free from any relationship with the executive management of the company thatcould materially interfere with the exercise of their independent judgement. In the Board’s view, all our non-executive directors fulfilthis requirement. It determined all six who served during 2007 to be independent directors.

Mr J R W Orange was appointed to the Board in 1997. Whilst his service exceeds the term referred to in the Code, the Boardconsiders that his experience and long-term perspective of Premier’s business continues to provide a most valuable contributionand that it benefits from his input to the Board’s deliberations.

The Board is strongly of the view that the important qualities when considering the issue of independence of non-executivedirectors are independence of spirit and objectivity of mind, and therefore regards Mr J R W Orange as an independent director. In accordance with Code provisions, he will be considered for re-election at the Annual General Meeting (AGM).

Sir David John completed ten years of service in March 2008, and in accordance with Code provisions, he will be considered for re-election at the AGM.

The Board, in co-ordination with the Nomination Committee, has addressed the issue of ongoing Board succession anddevelopment, and in particular, the refreshing of the non-executive directors. External search and recruitment consultants are utilisedto identify appropriate candidates. Interviews were conducted with a number of suitable candidates during the year, and as a resultof this Mr J Darby was appointed as a non-executive director on 1 September 2007. The process of refreshing the Board hascontinued in 2008 with the appointment of Mr D C Lindsell and Mr M Romieu, both on 17 January 2008.

Re-election of directorsIn accordance with the company’s Articles of Association one third of directors retire each year, with their re-appointment being subject tothe approval of shareholders. This requires directors to submit themselves for re-election at least every three years. In addition, any non-executive director having held office for more than nine years will be subject to re-election on an annual basis.

Board committeesThe Board has established an Audit and Risk Committee, a Remuneration Committee and a Nomination Committee, each of whichhas formal terms of reference approved by the Board. The terms of reference for each Committee can be found on the company’swebsite (www.premier-oil.com). The Company Secretary provides advice and support to the Board and all Board committees.

23


GO

VERNA

NC

E

CORPORATE GOVERNANCE REPORT (CONTINUED)

Audit and Risk CommitteeAn objective and professional relationship is maintained with the auditors, Deloitte & Touche LLP. The Audit and Risk Committee,comprising only non-executive directors, meets at least four times a year for a detailed review of the group’s accounts and itsinternal controls. During the year, the members of the Audit and Risk Committee were Messrs R V Emerson (Chairman), J Darby, S JDobbie and J R W Orange. Mr D C Lindsell became a member of the Committee upon his appointment to the Board in January2008. Minutes of the meetings of the Committee are distributed to all Board members, all of whom are invited to attend meetingsof the Committee (as observers) since the Board believes that the work of the Committee, particularly in the areas of riskmanagement and internal control, is increasingly important for all Board members.

The Audit and Risk Committee has four scheduled meetings each year; the January meeting raises issues which need to beconsidered at the full-year results in March, allowing time for Committee members to consider these; the March meeting reviews thefull-year results for the previous calendar year and also reviews the annual corporate governance report; the August meeting reviewsthe results for the six-month period ending on 30 June and the December meeting plans the audit work for the forthcoming year.The Committee met five times in 2007.

The Audit and Risk Committee is mainly responsible for:– reviewing the company’s internal financial control and risk management systems; full details of which are shown on pages 25 to 26;– reviewing accounting policies, accounting treatments and disclosures in financial reports to ensure clarity and completeness;– overseeing the company’s relationship with its external auditors, including making recommendations as to the appointment or

reappointment of the external auditors, reviewing their terms of engagement and monitoring their independence; and– reviewing the company’s whistleblowing procedures and ensuring these are adequately published within the organisation, that

the Committee Chairman is promptly informed of any issues, and that there are arrangements in place for the investigation ofany alleged improprieties.

The Audit and Risk Committee also carried out its annual review into whether it is appropriate for the company to establish aninternal audit function. The Committee places great emphasis on the importance of imbuing a culture of risk management andcontrol at all operating levels in the business and is confident that this culture is in place. The Committee took account of the factthat the company obtains independent confirmation of its internal controls from a variety of sources; these include joint venture andgovernment audits and the use of specific reviews using third-party specialists. The Committee also took account of the businesscontrols reviews and risk management process, more fully described on pages 25 to 26. As a result, the Committee concluded thatthere was no need for a dedicated internal audit resource.

The Audit and Risk Committee also regularly reviews the issue of the independence of our external auditors, in the light of the factthat they provide tax advice to the group. In all services purchased, the group aims to select the provider who is best placed todeliver the service in terms of quality and cost. The Committee does not believe that the provision of tax advice to the group by theexternal auditor creates a threat to the independence of the audit process. This is principally because neither the nature or scale ofthe non-audit service could, or could be seen to, impair the objectivity of the external auditors’ opinion on the financial statements.The Committee also requires the external auditor to confirm that in providing non-audit services, it complies with Ethical Standardsof the UK Auditing Practices Board. This confirmation was received for 2007.

Remuneration CommitteeThe Remuneration Committee normally meets at least four times a year and determines the remuneration of the executive directorsand senior employees. The group’s remuneration policy is to provide a level of remuneration which is sufficient to attract and retainemployees of the level of expertise we require. In relation to executive directors and senior employees, the objective is that asignificant element of the remuneration package is linked to corporate performance. No director is involved in setting his ownremuneration. The members of the Remuneration Committee are Messrs J R W Orange (Chairman), J Darby, S J Dobbie, R V Emerson and Professor D G Roberts. The Chairman and the Chief Executive attend by invitation when appropriate. Full detailsof the directors’ remuneration are shown in the Remuneration Report on pages 31 to 40.

The role of the Remuneration Committee includes:– considering and determining the remuneration policy for executive directors;– within this agreed policy, considering and determining the total compensation package of each executive director of the company;– considering and advising on the general principles under which compensation is applied to employees of the company;– determining the awards to be made under the company’s long-term incentive schemes; and– determining the policy for pension arrangements, service agreements and termination payments to directors.

As in previous years, the principal focus of the Remuneration Committee in 2007 has been to ensure that the remunerationpackages of the senior executives are set at levels which are sufficient to retain and attract high-quality individuals particularly at atime when the market for these individuals is extremely competitive.

The determination of the remuneration of the non-executive directors is a matter for the Board.

24


Nomination CommitteeThe Nomination Committee comprises Sir David John (Chairman), Messrs J Darby, S J Dobbie, R V Emerson, S C Lockett, J R W Orange and Professor D G Roberts. The Committee met once in 2007.

The role of the Nomination Committee is to review the structure, size and composition of the Board and make recommendations tothe Board on these matters and to put in place succession plans with regard to both Board and senior appointments. This involves anongoing assessment of the appropriate skills-mix required at Board level in light of the strategy of the company in the medium-term.

The Board considers that the membership of the Audit and Risk Committee, Remuneration Committee and Nomination Committeeare in compliance with the Code recommendation, on the basis that it considers Mr J R W Orange to be independent,notwithstanding his length of service.

The number of meetings of the Board and its committees during 2007 and individual attendance by directors, is shown below:

Audit Board and Risk Remuneration Nomination

Number of meetings 6 5 51 1Attendance:Sir David John 6/6 5/5* 3/5* 1/1R A Allan 6/6 1/5* – –J Darby2 1/2 3/3 2/2 0/0S J Dobbie 4/6 5/5 3/5 1/1A R C Durrant 6/6 4/5* – –R V Emerson 6/6 5/5 5/5 1/1N Hawkings 6/6 1/5* – –S C Lockett 6/6 2/5* 3/5* 1/1J R W Orange 6/6 5/5 5/5 1/1Professor D G Roberts 5/6 – 2/5 0/1

Notes: 1. There were four scheduled meetings of the Remuneration Committee during the year; the remaining meeting (only attended by Messrs R V Emerson and

J R W Orange) was called to approve the detail of arrangements approved in principle by a prior scheduled meeting of the Committee.2. Mr J Darby was appointed to the Board on 1 September 2007 and to the Audit and Risk Committee, Remuneration Committee and Nomination Committee

on 18 September 2007. He attended one Board meeting and all Audit and Risk Committee and Remuneration Committee meetings following his appointment.He attended one Audit and Risk Committee meeting and one Remuneration Committee meeting, by invitation, prior to his appointment. There were noNomination Committee meetings held after the date of his appointment.

* By invitation.

Internal controlThe directors are responsible for establishing and maintaining the group’s system of internal control. The internal control system isregularly reviewed by the Board. Internal control systems in any group are designed to meet the particular needs of that group andthe risks to which it is exposed, and by their nature can only provide reasonable but not absolute assurance against materialmisstatement or loss. The key procedures which the directors have established with a view to providing effective internal controlrequired by Code provision C.2.1 are described below. These procedures have been in place for the year under review and up tothe date of approval of the Annual Report and Financial Statements.

Management of business risks – This is an ongoing process, in accordance with the Turnbull guidance, and has been established foridentifying, evaluating and managing risks faced by the group. This is based on each business unit and corporate functionproducing a risk matrix which identifies the key business risks – financial, operational, environmental, social and political – theprobability of those risks occurring, their impact if they do occur and the actions being taken to manage those risks to the desiredlevel. Risk acceptance and reduction objectives are defined with particular attention given to safety and environmental factors, andapplied to ensure that the risks are at a level that is as low as reasonably practicable.

The directors receive assurance directly from the business units and functional management through the completion of annualdeclarations confirming compliance with the group’s policies, procedures and risk management processes. These processes aredesigned to manage rather than eliminate risk of failure to achieve business objectives.

The company has adopted a framework model for application across the group and an annual report is produced in compliancewith that model and with the group risk management process. The report is presented to the Audit and Risk Committee.

Monitoring – An enhanced Business Management System (BMS) is in force which regulates a wide range of day-to-day activitiesboth in the UK and overseas offices, including environmental controls, health and safety regulations and political risks. Theapplication of internal control procedures is reviewed during visits to the overseas offices by head office staff. Audits are carried outby partners in joint ventures from time-to-time.

25


GO

VERNA

NC

E

CORPORATE GOVERNANCE REPORT (CONTINUED)

A process of business control reviews has been developed and implemented across the group. This process is designed, inter alia,to provide assurance to the Board that the company is embedding effective risk management into its operations. The report of eachreview is presented to the Audit and Risk Committee. A rolling three year plan to cover all business units has been put in place andthe group’s Asian operations will be reviewed during 2008.

During 2007, the key business risks and internal control weaknesses identified were formally discussed by the Executive Committeeand the Board on a periodic basis. This process will continue during 2008.

The Board will receive regular reports on any major problems that have occurred and how the risks have changed over the periodunder review.

Management structure – The Board has overall responsibility for the group and there is a formal schedule of matters specificallyreserved for decision by the Board. Each executive director has been given responsibility for specific aspects of the group’s affairs.The executive directors together with the Company Secretary constitute the Executive Committee which normally meets weekly.

Corporate accounting – Responsibility levels are communicated throughout the group as part of corporate accounting and anauthorisation manual which sets out, inter alia, authorisation levels, segregation of duties and other control procedures.

Quality and integrity of personnel – The integrity and competence of personnel is ensured through high recruitment standards andsubsequent training.

Budgetary process – There is a comprehensive budgeting system with an annual budget approved by the Board, covering capitalexpenditure, cash flow, the income statement and balance sheet. Monthly results are reported against budget, and revised forecastsfor the year are prepared regularly.

Investment appraisal – The group has clearly defined procedures for capital expenditure. These include authority levels,commitment records and reporting, annual budget and detailed appraisal and review procedures. The authority of the directors isrequired for key treasury matters including changes to equity and loan financing, interest rate and foreign currency policy includingforeign currency hedging, oil price hedging, cheque signatories and opening of bank accounts. Comprehensive due diligence workis carried out if a business or an asset is to be acquired.

During 2007, the Board reviewed the group’s system of internal control and is satisfied that all the controls in place are appropriateto provide reasonable assurance against any material misstatement or loss. The review is conducted on a regular basis and changesare made to internal control systems to capture any new risks or exposures arising as a result of changes to the business or thebusiness environment.

During the year, the Board approved an initiative to create a unified Business Management System (BMS) across the group. Part ofthis BMS will be a documented review and assurance activity, which will deal with the risk review and audit processes. The purposeof the audit process is to ensure that the policies and procedures within the BMS are being adhered to. The purpose of the riskreview process is to identify the significant risks to the business, rate them consistently, and ensure we have mitigating measures inplace to manage them. The Group HSES Manager is accountable for the overall running of the process with the Group FinancialController specifically responsible for the financial aspects.

Going concern After making enquiries and in light of the group’s loan facilities, the group budget for 2008 and the medium-term plans, thedirectors have reasonable expectation that the group has adequate resources to continue operations for the foreseeable future. The going concern basis for the financial statements has therefore continued to be adopted.

Communication with shareholdersCommunication with shareholders is given significant attention. Extensive information about the group’s activities is provided in theAnnual Report and Financial Statements and the Interim Report which are published for shareholders. The company has also produceda separate brochure in each of the last five years highlighting Premier’s capabilities and operations. These documents are availableto all shareholders. The company’s website (www.premier-oil.com) also provides detailed information on the group’s activities.

In October 2007, the company wrote to all of its shareholders to inform them that, following the passing of the resolution at thecompany’s AGM on 18 May 2007, the company would be using its website to publish statutory documents, such as the AnnualReport and Financial Statements, as its default method of publication. Shareholders were given 28 days to indicate whether theywished to continue to receive hard copies of all statutory documents by post, before being deemed as consenting to web-basedcommunications. Consenting shareholders will be sent notification in the post each time the company places a statutory documenton its website. Shareholders were reminded that they have the right to request – at any time – all future communications to be sentby post, or to request a hard copy of a particular document which has been published on the company’s website.

The company believes that the reduction in the number of unwanted communications printed and sent by post, following this‘deemed consent’ process, will not only result in cost savings to the company, but also reduce the impact that the unnecessaryprinting and distribution of reports has on the environment.

26


27


The company continues to promote the Premier Oil plc Shareholder Portal, at www.premier-oil-shares.com. By registering on thewebsite, shareholders are able to access their shareholding online, at their convenience, and have the ability to update theirshareholding account (i.e. change their address) and submit queries on their account directly to the company’s Registrars.Shareholders will also have the ability to vote online prior to the 2008 AGM. The Shareholder Portal also encourages shareholders toregister to receive communications by e-mail, rather than by post, thus further reducing the number of documents printed anddistributed. Shareholders who have registered for this service will receive an e-mail notifying them when the company has added astatutory document to its website, ensuring a prompt and efficient delivery of information. For each new registration processed, thecompany will donate £1 to Climate Care, an organisation that funds projects that reduce greenhouse gases.

The company has posted on its website, guidelines advising shareholders of how to deal with potential Boiler Room scams, whereshareholders may have received unsolicited phone calls concerning investment matters, often where callers have stated they workfor a subsidiary of, or on behalf of, the company. Shareholders were advised to be wary of any unsolicited advice, offers to buy sharesat discount, or offers of free analysis reports, as the company does not retain the services of any such business for these purposes.

There is regular dialogue with institutional investors, and the Chairman, Chief Executive and Finance Director, who are the directorsresponsible for dealing with shareholders, ensure that other members of the Board receive full reports of shareholder meetings.Enquiries from individuals on matters relating to their shareholding and the business of the group are welcomed and are dealt within a timely manner. All shareholders are encouraged to attend the AGM to discuss the progress of the group.

By order of the Board

S C HuddleCompany Secretary12 March 2008

GO

VERNA

NC

E

REPORT OF THE DIRECTORS

The directors submit their report and the audited group financial statements for the year ended 31 December 2007.

Results and dividendsThe group’s net profit for the year amounted to US$39.0 million (2006: profit of US$67.6 million). A dividend is not proposed (2006: US$nil).

Principal activitiesThe principal activities of the group are oil and gas exploration, development and production. The group operates throughsubsidiary undertakings and joint ventures, details of which are shown on page 58.

Business reviewThe company is required by the Companies Act to set out in this report a fair review of the business of the group during thefinancial year ended 31 December 2007 and of the position of the group at the end of the year and a description of the principalrisks and uncertainties facing the group (the business review). The information that fulfils the requirements of the business review canbe found within the following sections of this Annual Report and Financial Statements: Chief Executive’s Review on pages 4 to 11,Financial Review on pages 12 to 14 and the Social Performance Review on pages 15 to 19, which are incorporated in this report byreference. The Chairman’s Statement and Financial Review also include details of expected future developments in the business ofthe group and details of the key performance indicators used by management.

Annual General MeetingThe company’s 6th AGM will be held on Friday 6 June 2008 at 11.00am. The Notice of the Meeting accompanies this report.

Share capitalThe company’s authorised share capital is £157,612,281.475 comprising 311,904,002 Ordinary Shares of 50 pence each (representing98.95 per cent of the total authorised share capital) and 9,487,317 Non-Voting Convertible Shares of 17.5 pence each (representing1.05 per cent of the total authorised share capital). The rights attached to the company’s authorised share capital can be found innote 20. No person has any special rights of control over the company’s share capital and all issued shares are fully paid.

There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the generalprovisions of the Articles of Association and prevailing legislation. The directors are not aware of any agreements between holdersof the company’s shares that may result in restrictions on the transfer of securities or on voting rights.

The authority given to the directors to allot shares at the 2007 AGM was granted for a period of one year. There were 166,577Ordinary Shares issued under the group’s share option schemes during the year. A resolution will be put to the forthcoming AGM torenew this authority.

At the 2007 AGM, authority was also given to the directors for one year to allot shares for cash either in connection with a rightsissue, or of up to 5 per cent of the then issued share capital as if statutory pre-emption rights did not apply. A similar resolution willbe put to the impending AGM to renew this authority, although at the present time the directors do not have plans for any issue ofshares, other than to satisfy share awards made under the company’s long-term incentive schemes.

At the end of the year 229,799,953 shares in the authorised Ordinary Share capital of the company were unissued.

The AGM held in 2007 authorised the purchase by the company of up to 12,295,010 shares and the balance of this authority willremain available until the forthcoming AGM, when the granting of a similar authority will be proposed. No shares were purchasedduring the year.

DirectorsThe directors who served throughout the year (except as noted) were as follows:

– Sir David John (Chairman)– Mr Robin Allan– Mr Joe Darby (appointed 1 September 2007)– Mr Scott Dobbie– Mr Tony Durrant – Mr Ronald Emerson– Mr Neil Hawkings– Mr David Lindsell (appointed 17 January 2008)– Mr Simon Lockett (Chief Executive)– Mr John Orange– Professor David Roberts– Mr Michel Romieu (appointed 17 January 2008)

Biographical details of all directors can be found on page 20.

28


29


Directors’ election and rotation– Messrs J Darby, D C Lindsell and M Romieu, having been appointed since the 2007 AGM are each required by the Articles

of Association to stand for election at the forthcoming AGM;– Messrs R A Allan and A R C Durrant are the directors retiring by rotation, and, being eligible, will offer themselves for re-election

at the forthcoming AGM; – Sir David John and Mr J R W Orange, as non-executive directors with more than nine years service, will retire under the

provisions of the Combined Code, and, being eligible, will offer themselves for re-election at the forthcoming AGM; and – Messrs S J Dobbie and R V Emerson will retire from the Board with effect from the conclusion of the forthcoming AGM.

With regard to the appointment and replacement of directors, the company is governed by its Articles of Association, theCombined Code, the Companies Acts and related legislation. The powers of directors are described in Matters Reserved for BoardDecisions, copies of which can be found on the company’s website, www.premier-oil.com, and the Corporate Governance Report onpage 22.

Directors’ interestsBeneficial interests of directors holding office at the year-end, and of their families, in Ordinary Shares of the company are set outbelow:

1 January 2007 or date of 31 December At 12 March

Name appointment 2007 2008

Sir David John1, 3 16,700 16,700 16,700R A Allan2 2,387 11,881 11,974J Darby – – –S J Dobbie3 10,000 10,000 10,000A R C Durrant2 30,250 30,380 30,408R V Emerson3 10,000 10,000 10,000N Hawkings2 250 380 408S C Lockett2 28,207 35,969 43,742J R W Orange3 5,000 5,000 5,000Professor D G Roberts – – –

Notes: 1. This includes 1,700 Ordinary Shares held by Sir David John’s wife.2. The beneficial interests of the executive directors include personal shareholdings together with Share Incentive Plan Partnership Shares and any Matching Shares

held for more than three years. It should be noted that the beneficial interests of the executive directors shown in the Report of the Directors for 2006 includedpersonal shareholdings, deferred bonus share awards and full Share Incentive Plan entitlements.

3. The beneficial interests of the non-executive directors comprise personal shareholdings.

Directors’ interests in share options, deferred bonus shares, deferred and matching share awards under the Asset and Equity Planand deferred Share Incentive Plan entitlements are shown in the Remuneration Report on pages 31 to 40 together with details of theremuneration of all directors who served during the year.

Directors’ indemnitiesThe company has granted an indemnity to all its directors under which the company will, to the fullest extent permitted by law andto the extent provided by the Articles of Association, indemnify them against all costs, charges, losses and liabilities incurred bythem in the execution of their duties.

Substantial shareholdersAt 12 March 2008 the company had received notification from the following institutions, in accordance with chapter 5 of theDisclosure and Transparency Rules, of interests in excess of 3 per cent of the company’s issued Ordinary Shares with voting rights:

Notified Notified number of percentage of Nature of

voting rights voting rights holding1

Schroders plc 8,094,087 9.88% IndirectAXA S.A. (Group) 5,783,588 7.04% IndirectAviva plc 4,720,954 5.76% Direct Ameriprise Financial, Inc 4,235,496 5.15% IndirectLegal & General Group plc (Group) 4,199,944 5.11% Direct

Notes: 1. Where the nature of the holding is both direct and indirect, the larger holding has been quoted.

GO

VERNA

NC

E

REPORT OF THE DIRECTORS (CONTINUED)

30


Payment policyThe group’s policy in respect of its suppliers is to establish terms of payment when agreeing the terms of business transactions andto abide by the terms of payment. At 31 December 2007 the group had trade creditors totalling US$51.5 million (2006: US$26.8 million).

Hedging and risk managementDetails of the group’s policy on hedging and risk management are provided on page 14 of the Financial Review. A further disclosurehas been made in note 18 of the financial statements related to various financial instruments and exposure of the group to price,credit, liquidity and cash flow risk.

Subsequent eventsPost balance sheet events are disclosed in note 27 to the financial statements.

DonationsDuring the year the company made charitable contributions amounting to US$66,688 (2006: US$162,715). No political contributionswere made during the year (2006: US$nil).

Significant agreements – change of controlThere are a number of agreements that take effect, alter or terminate upon a change of control of the company such as commercialcontracts, bank loan agreements, property lease arrangements and employees’ share plans. None of these are considered to besignificant in terms of their likely impact on the business of the group as a whole.

Furthermore, the directors are not aware of any agreements between the company and its directors or employees that provide forcompensation for loss of office or employment that occurs because of a takeover bid.

AuditorsEach of the persons who is a director at the date of approval of this Annual Report confirms that:

– so far as the director is aware, there is no relevant audit information of which the company’s auditors are unaware; and – the director has taken all the steps that they ought to have taken as a director in order to make themselves aware of any

relevant audit information and to establish that the company’s auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985. A resolution to reappoint Deloitte & Touche LLP as auditors will be put to shareholders at the forthcoming AGM.


S C HuddleCompany Secretary12 March 2008

REMUNERATION REPORT

ComplianceThis report has been prepared in accordance with the Companies Act 1985 as amended by the Directors’ Remuneration ReportRegulations 2002. As required, this report is being put to shareholders at the forthcoming AGM for an advisory vote.

The sections within this report that have been audited by Deloitte & Touche LLP are indicated.

Throughout 2007 the company complied with Schedule A of the Combined Code on Corporate Governance (the Code) regardingbest practice on the design of performance related remuneration.

The remuneration, including pensions and compensation payments, of all executive directors and the Chairman is determined bythe Remuneration Committee (the Committee) and ratified by the Board. The Committee also reviews and advises on the generalprinciples under which remuneration (including any bonus or long-term incentive schemes and pensions) is applied to employees ofthe company. The Committee is composed entirely of non-executive directors whom the Board considers to be independent, andcomprises Mr J R W Orange, who chairs the Committee and is the company's senior non-executive independent director, Messrs JDarby (appointed 18 September 2007), S J Dobbie, R V Emerson and Professor D G Roberts. Sir David John, the company’sChairman, is not a member of the Committee, but attends by invitation. The Chairman is absent during any discussions about hisown remuneration. Mr S C Lockett is not a member of the Committee but usually attends meetings by invitation, except when hisown remuneration is being discussed, as the company considers it important that the Chief Executive is fully aware of discussionsconcerning remuneration policy and the remuneration packages of its most senior employees. The Committee acts within its agreedwritten terms of reference and complies with the relevant provisions of the Code in implementing its remuneration policy. The termsof reference are published on the company’s website (www.premier-oil.com). None of the executive directors of the company areinvolved in determining their own remuneration.

The Committee takes independent advice from New Bridge Street Consultants LLP, a leading firm of remuneration consultants,which is appointed as an advisor to the Committee. New Bridge Street Consultants LLP do not provide any other services to thecompany. No other person or company materially assisted the Committee during the year.

Remuneration policyThe company’s remuneration policy is to provide remuneration packages which ensure that directors and senior management arefairly and responsibly rewarded for their contributions. The aim is to provide remuneration packages which are sufficientlycompetitive to attract, retain and motivate individuals of the quality required to achieve the group’s objectives and thereby enhanceshareholder value. The Committee takes account of the level of remuneration paid to executive directors and senior managers ofcomparable public companies, as well as pay and conditions throughout the remainder of the group.

The main components of executive directors’ remuneration are basic salary, an annual performance-related cash and share bonusscheme with a deferred element, benefits, long-term incentives and pension provision. Each element is discussed in detail below.

The remuneration therefore contains a suitable balance of direct performance-related remuneration, which links both the short-termfinancial performance of the group and the long-term shareholder return with the executive’s total remuneration. The remunerationpackage is weighted so that the majority of reward may potentially come from the performance-related elements of the package.

The Committee endorses the principle of mitigation of damages on early termination of a service contract.

It is the Committee’s current intention to continue with the above remuneration approach for 2008 and subsequent years althoughthe Committee will keep the matter under review. The Committee’s current intention with regard to share options is that they willcontinue to be awarded only in special circumstances. Shareholders approved the adoption of the Asset and Equity Plan (AEP) atthe AGM in 2004 (together with a matching shares element approved at the AGM in 2006), and the Committee continues to regardthis plan as the most appropriate method of rewarding the company’s executives for achieving growth in share price and theunderlying asset value of the company. The matching shares element also provides a good alignment between executives andinvestors, as this rewards relative stock market outperformance.

The company’s Articles of Association provide that the remuneration paid to non-executive directors is to be determined by theBoard within the limits set by the shareholders.

31


GO

VERNA

NC

E

REMUNERATION REPORT (CONTINUED)

Performance chartThe chart below shows the company's total shareholder return (TSR) over the last five financial years compared with the equivalentinformation in respect of the Oil & Gas Exploration and Production sector, which the Committee considers to be the closest equitymarket index. The company has recorded eight consecutive years of positive TSR.

Total shareholder return

Contracts of serviceSave for automatic termination when each executive director becomes 60 years of age, the executive directors have rolling servicecontracts and are subject to re-election by shareholders under the company’s Articles of Association and the provisions of the Code.The service contract of each executive director may be terminated on 12 months’ notice in writing by either side, in accordance withcurrent market practice. In such event, the compensation commitments in respect of their contracts could amount to one year’sremuneration based on base salary, annual bonus and long-term incentive scheme entitlement, benefits in kind and pension rightsduring the notice period. There are provisions for earlier termination by the company in certain circumstances. If such circumstanceswere to arise, the executive director concerned would have no claim against the company for damages or any other remedy inrespect of the termination. There are no other provisions, such as liquidated damages clauses, which expressly provide forcompensation in the event of early termination. The Committee would apply general principles of mitigation to any payment madeto a departing executive director and would consider each case on an individual basis.

Details of the contracts of employment for the executive directors are as follows:

Director Effective date of contract Unexpired term Notice period Provision for payment upon early termination

S C Lockett 09.12.2003 – 12 months None specifiedR A Allan 09.12.2003 – 12 months None specifiedA R C Durrant 01.07.2005 – 12 months None specifiedN Hawkings 23.03.2006 – 12 months None specified

Non-executive directors have letters of appointment, which are all effective for a period of three years (subject to reappointment bythe members in General Meeting), all of which have a notice period of three months. Sir David John and Messrs S J Dobbie, R VEmerson and J R W Orange have letters of appointment issued on 28 July 2006. Professor D G Roberts has a letter of appointmentdated 30 June 2006 following his appointment to the Board on 28 June 2006. Mr J Darby was issued with a letter of appointmentdated 1 September 2007 following his appointment to the Board on that date.

External appointmentsExecutive directors are entitled to accept non-executive appointments outside the company providing that the Board’s approval issought. Mr A R C Durrant currently holds one external non-executive directorship with Clipper Windpower plc and is entitled toretain the fees earned connected therewith (2007: US$43,500).

32


0

50

100

150

200

250

300

350

400

450

500

Value (£)

31 Dec 02

Premier Oil plc

This graph looks at the value, at 31 December 2007, of £100 invested in Premier Oil plc on 31 December 2002 compared with the value of £100 invested in the FTSE All Share Oil & Gas Producers Index.

31 Dec 03 31 Dec 04 31 Dec 05 31 Dec 06 31 Dec 07

£451.70

£204.20

FTSE All Share Oil & Gas Producers Index

Remuneration structureThe remuneration package for the executive directors comprises base salary, benefits, bonus, pension, and entitlement toparticipate in the company’s all-employee share schemes and long-term executive share schemes.

Base salaryBase salary is reviewed each year against other comparable companies in the oil and gas sector and general market data on thebasis of companies in similar industries and those of a similar size. The objective is to ensure that the base salary, when takentogether with the rest of the package, provides a competitive but performance-driven remuneration package. The policy of theCommittee has been to position base salaries between the median and upper quartile. This is felt to be necessary and appropriatebearing in mind the fact that there is a shortage of executive talent in the industry and the current executive team is consideredhighly attractive for other companies.

The salaries of the executive directors as at 1 January 2008 are as follows:

Percentage increase

Salary from 2007£ %

S C Lockett 395,000 5.6R A Allan 285,000 5.9A R C Durrant 290,000 7.4N Hawkings 260,000 6.6

The percentage range of base salary increases for 2008 was between 5 and 8 per cent. For all the executive directors, the increaseswere determined after considering a range of factors such as company performance and the development of the executive, as wellas taking account of the recommendations of New Bridge Street Consultants LLP that these levels represent salaries betweenmedian and upper quartile for executives in similar roles, in companies of similar size in the oil and gas sector and in generalindustry companies (excluding financial services) also of a similar size.

While salary is reviewed by reference to market conditions, the performance of the company and the performance of the individual,the Committee would not regard this element of remuneration as directly performance-related.

Annual bonus schemeThe total annual bonus potential, which is non-pensionable, is 100 per cent of base salary. Half of any bonus earned is payableimmediately in cash and the remaining half is payable in shares and deferred for three years. The deferred element of the bonus iscontingent upon the relevant beneficiary remaining in employment for the three years from the date of the award, but is notdependent on any further performance-related measures.

Performance measures for 2007 are explained in the table below:

Performance measures Maximum bonus potential Conditions

Cash flow 10% Base target to achieve the operating cash flow numbercontained in the 2007 budget approved by the Board.

10% Stretch target to achieve the base target plus 15 per cent.

Health, safety, environment and security 10% Combined frequencies of lost time injuries and restrictedworkday cases of or below 1.9 cases per million man-hours worked.

Exploration, portfolio management 70% Various milestones identified to achieve the medium-term and strategic development production target of 50,000 boepd. These include the

drilling and success of exploration wells, the control ofoperating costs and the development of strategicinvestment/divestment opportunities.

Following a review of the 2007 targets, the Committee agreed that the cash flow targets (base and stretch) and the health, safety,environment and security target had been achieved. The Committee agreed a 35 per cent award out of the maximum 70 per cent inrelation to the exploration, portfolio management and strategic development targets. This resulted in a total award of 65 per cent ofsalary (32.5 per cent paid as cash and 32.5 per cent deferred in shares as indicated above) for performance against the above targets(2006: 75 per cent of salary, paid as 37.5 per cent cash and 37.5 per cent deferred shares).

33


GO

VERNA

NC

E


The annual bonus scheme for the 2008 financial year has a similar structure and the same maximum award level. The performancemetrics have been changed slightly to include production and operating cost per barrel targets, rather than cash flow targets whichwere included in previous years. This reflects the current priorities of the business. Performance measures for 2008 are explained inthe table below:

Performance measures Maximum bonus potential Conditions

Production 10% To achieve the production number contained in the 2008budget approved by the Board.

Operating cost per barrel 10% To achieve the operating cost per barrel numbercontained in the 2008 budget approved by the Board.

Health, safety, environment and security 10% Combined frequencies of lost time injuries and restrictedworkday cases of or below 1.7 cases per million man-hours worked.

Exploration, portfolio management 70% Various milestones identified for the year, to achieve theand strategic development medium-term production target in excess of 50,000

boepd, including the drilling and success of explorationwells and the development of strategicinvestment/divestment opportunities.

BenefitsMessrs S C Lockett, R A Allan, A R C Durrant and N Hawkings each received the benefit of a car allowance and medical insurance.Mr R A Allan also received a gym membership subsidy.

Summary of actual remuneration (Audited)

Benefits Annual Pension Pension Salary and fees in kind* cash bonus Total Total contributions contributions

2007 2007 2007 2007 2006 2007 2006£’000 £’000 £’000 £’000 £’000 £’000 £’000

Executive directors:S C Lockett (Chief Executive)1 409.7 16.6 121.6 547.9 463.6 15.7 –R A Allan 269.0 16.8 87.4 373.2 339.7 54.4 47.0A R C Durrant2 317.9 19.7 87.8 425.4 383.7 – –N Hawkings3 244.0 16.2 79.3 339.5 289.8 49.4 36.4Non-executive directors:4

Sir David John (Chairman) 115.0 – – 115.0 115.0 – –J R W Orange5

(Senior independent director) 46.0 – – 46.0 46.0 – –J Darby6 11.7 – – 11.7 – – –S J Dobbie 35.0 – – 35.0 35.0 – –R V Emerson 41.0 – – 41.0 41.0 – –Professor D G Roberts7 35.0 – – 35.0 17.5 – –

Former directors8 – – – – 28.5 – –

Total 1,524.3 69.3 376.1 1,969.7 1,759.8 119.5 83.4

Notes: 1. £35,672 of Mr S C Lockett’s remuneration relates to a salary supplement, received as part of his pension arrangements. From September 2007, this supplement

was paid as a contribution to Mr S C Lockett’s personal money purchase pension scheme. 2. £47,869 of Mr A R C Durrant’s remuneration relates to a salary supplement as part of his pension arrangements.3. Mr N Hawkings’ total remuneration in 2006 is calculated from 23 March 2006, being the date of his appointment to the Board.4. The basic fee for each of the non-executive directors (excluding the Chairman) at the end of 2007 was £35,000 per annum. An additional fee of £6,000 per

annum was paid per committee Chairmanship. 5. Mr J R W Orange is provided with an additional set fee of £5,000 per annum in respect of his position as senior independent non-executive director.6. Mr J Darby was appointed to the Board on 1 September 2007. 7. Professor D G Roberts’ total remuneration in 2006 is calculated from 28 June 2006, being the date of his appointment to the Board.8. Relates to the non-executive director fees for Messrs M A K Alizai and I Gray, who retired from the Board in 2006. On 22 July 2006 the company entered into an

Advisory Service Agreement with Mr M A K Alizai, under which he continues to provide services as an advisor to the Board at a rate of US$150,000 per annum.This agreement will terminate on 21 July 2008.

* Benefits in kind represent gym membership, car allowance and medical insurance.

34


Shares held in trust in respect of the deferred element of the annual bonus for directors are as follows:

Awarded on Awarded on Awarded on Awarded on 22 March 2005 at 574.5p1 21 March 2006 at 888p1 17 January 2007 at 1128p1 11 January 2008 at 1317p1

and to be released and to be released and to be released and to be released on 22 March 2008 on 21 March 2009 on 17 January 2010 on 11 January 2011

S C Lockett 11,422 5,631 9,973 9,229R A Allan 11,422 4,730 7,812 6,638A R C Durrant – 2,956 7,812 6,662N Hawkings – 3,604 7,812 6,021

Notes: 1. Mid-market closing price on date of award.

Pension schemes (Audited)Mr S C Lockett is a member of the Premier Oil plc Retirement and Death Benefits Plan (the Scheme), subject to the Earnings Cap.The Scheme is a funded, registered final salary scheme, which provides a pension on broadly a fiftieths accrual basis of up to two-thirds salary at the normal pension age of 60. Benefits are actuarially reduced on early retirement before age 60 and pensions inpayment increase in line with the lower of inflation or 5 per cent per annum.

The company has decided to continue to operate its own cap on pensionable earnings beyond April 2006, when the external capwas removed. For the year to 31 December 2007 this was set at £108,600, increasing to £112,800 for the year to 31 December 2008.

The company has agreed to provide Messrs S C Lockett, R A Allan, A R C Durrant and N Hawkings with a pension substantially as ifthey were contributing members of the Scheme and, in regard to service completed subsequent to their appointment as directors,not subject to the Earnings Cap. The additional value of this target pension provision, relative to the standard terms applied to staff,is made available at the directors’ option in the form of either an enhanced scale of pension contributions or a non-pensionablesalary supplement. As at the year-end, Messrs S C Lockett, R A Allan and N Hawkings had elected the former and Mr A R C Durranthad elected the latter. For life insurance purposes, Messrs R A Allan, A R C Durrant and N Hawkings are members of the Scheme.

Messrs R A Allan and N Hawkings are members of a money purchase pension arrangement to which, during 2007, the companycontributed £54,428 and £49,436 respectively; these amounts include £32,178 and £27,186 respectively in regard to the enhancedpension contributions referred to above. Mr S C Lockett is a member of a money purchase pension arrangement to which, during2007, the company contributed £15,684 in regards to the enhanced pension contributions referred to above.

The accrued pension entitlements of the directors who were members (or deemed members) of the Scheme during 2007 are as follows:

(b) (d) (f) (a) Transfer value (c) Transfer value Increase from (e) Increase

Accrued in respect Accrued in respect (d) to (b) less Transfer value in accruedpension as at of (a) as at pension as at of (c) as at contributions of increase pension31 December 31 December 31 December 31 December by director in accrued (excluding

2007 2007 2006 2006 during 2007 benefit inflation) £'000 pa £'000 £'000 pa £'000 £'000 £'000 £’000

S C Lockett 42.7 290.8 32.3 211.2 58.2 62.7 10.4R A Allan 17.9 166.8 11.5 103.7 48.0 55.9 6.4A R C Durrant 11.9 117.3 6.5 61.4 40.8 51.3 5.4N Hawkings 8.0 68.9 3.3 27.3 28.0 39.6 4.7

Notes:– The amounts of accrued pension under (a) and (c) represent the accrued pension entitlements of the director as at the stated dates.– The transfer values under (b), (d) and (e) have been calculated on the basis of actuarial advice in accordance with the guidance note ‘GN11: Retirement Benefit

Schemes – Transfer Values’ issued by the Board for Actuarial Standards under the Financial Reporting Council.– The amounts under (e) represent the increase in value of the directors' benefits in terms of the value, on the transfer value basis in force at the end of the year, of

the excess of the end-year accrued benefits over the start-year accrued benefits (as revalued by price inflation) less contributions by the directors.– The values stated above correspond with the target level of final salary pension provision; in practice, the pension benefits for these directors are principally

established through individual money purchase arrangements and salary supplements. Thus, in the case of Mr A R C Durrant, who has elected not to receiveenhanced pension contributions, the company’s pension obligation will be met entirely by the payment of salary supplements.

– In addition to the current provision noted above, Mr R A Allan is entitled to a deferred pension under the Scheme in respect of a prior service period with thecompany between September 1986 and November 1999.

– Members of the Scheme have the option to pay additional voluntary contributions; none of the directors have elected to do so.

35


GO

VERNA

NC

E


The following payments were made to a former director of the company in respect of unfunded pension liabilities:

Amount of unfunded Amount of unfundedpension paid during 2007 pension paid during 2006

£ £

J A Heath 31,275 29,956

Long-term incentive arrangementsThe company currently operates four share option schemes, the Asset and Equity Plan (AEP) and the Share Incentive Plan (SIP). TheScheme of Arrangement relating to the group’s capital in 2003 affected two of the option schemes in operation at that time. Thecompany therefore adopted two new share option schemes to replace the Executive Share Option Scheme 1995 and the SavingsRelated Share Option Scheme 1999.

Asset and Equity Plan (Audited)This plan is designed to reward an improvement in the asset value of the business and the market value of the company over athree-year period. The plan therefore has two bonus pools – an asset bonus pool and an equity bonus pool. The asset bonus pool iscreated by reference to the increase in the net asset value per share of the company over a three-year period and the equity bonuspool is created by reference to the increase in the equity value per share of the company over a three-year period. In both cases, nobonus pool is created where the compound growth per annum in the relevant measure (asset value or share price) is below 10 percent. At 10 per cent compound growth per annum, 1 per cent of the growth becomes the pool. At 20 per cent compound growthper annum, 2.5 per cent of the growth becomes the pool. There is proportionate vesting between these two points. The maximumbenefit that an individual may receive will normally be limited to twice his or her base salary per annum, except where thecompound growth rate exceeds 20 per cent per annum in either the asset or equity bonus pool, in which case the RemunerationCommittee may increase the limit on such a proportionate basis as it determines to be fair and reasonable.

Under this plan awards can be made annually and will mature on the third anniversary of the date of grant. They are notpensionable. The AEP is a broadly-based plan, with participation points being awarded to eligible employees, including executivedirectors, throughout the group. In addition to the performance conditions set out above, vesting of awards is subject to theRemuneration Committee being satisfied that there has been satisfactory improvement in the performance of the company.

Awards are normally made in January in the first year of each three-year award period. New employees who join the company partof the way through the duration of a three-year award are awarded participation points in that award on a time-apportioned basis. In addition, employees who receive a significant promotion during an award period are eligible to receive an increased participation,also on a time-apportioned basis. Messrs A R C Durrant and N Hawkings thus received participation points under the 2005 award,time-apportioned to their date of joining the company, and Mr S C Lockett received additional participation points in the 2005award, to reflect his promotion to Chief Executive in March 2005.

At the time of vesting, 50 per cent of an award is payable in cash and 50 per cent is payable in the form of an award of deferredshares.

Matching Award scheme At the 2006 AGM, shareholders approved an amendment to the plan which gave participants in the plan the option to increase thesix-month deferral of the share element released under the plan to three years. This extended deferral is mandatory for theexecutive directors and senior management but voluntary for other staff. Where shares are deferred for three years, individuals willbe able to participate in a Matching Award. The release of this part of the award will therefore be six years following the initial grantof the award under the plan.

The number of shares awarded by way of matching will be subject to the achievement of a performance condition, which iscomparative TSR over the three-year deferral period. The comparator group consists of about thirty-five companies in the oil andgas sector derived from the Alternative Investment Market as well as the main Market. TSR will be measured as the percentageincrease in a return index between the beginning and end of the performance period, which begins on the first day of the financialyear in which the Matching Award is granted. The return index at the beginning of the performance period is the average of thereturn index on each weekday in the three-month period prior to the start of the performance period. In order to ascertain thereturn index at the end of the performance period, the same averaging method will be used for the three months prior to the endof the performance period. The comparator companies will then be ranked, in descending order, according to their TSR. If thecompany is ranked at or above the median against the comparator group, then Matching Awards will be eligible to vest. Matchingwill be between one-half of a share for each deferred share where the comparative performance is at the median and 2.5 shares foreach deferred share where the performance is at or above the upper decile. There will be proportionate vesting between these points.

The Committee will obtain independent external advice to assess whether the company has met the TSR performance condition atthe end of the performance period and to confirm that the companies which made up the index and the measurement of thecompany’s performance are both in accordance with the rules of the long-term incentive plan.

36


Details of Matching Awards granted under the Matching Award scheme are set out below:

Matching Matching Matching Matching Awards Awards Awards Awards Matching

Deferred as at granted lapsed vested Awards as at Earliest shares 1 January during during during 31 December vesting

awarded1 2007 the year2 the year the year 2007 date

S C Lockett 42,268 – 105,670 – – 105,670 01.01.10R A Allan 29,600 – 74,000 – – 74,000 01.01.10A R C Durrant 15,574 – 38,935 – – 38,935 01.01.10N Hawkings 13,206 – 33,015 – – 33,015 01.01.10

Notes: 1. As disclosed in the 2006 Remuneration Report, the deferred shares vested on 17 January 2007 under the Asset and Equity Plan 2004 award. 2. The Matching Awards granted during the year relate to the deferred shares which vested in 2007, and are the maximum award possible under the Matching

Award scheme, subject to performance criteria. The mid-market closing price on the date of grant of Matching Awards (27 March 2007) was £12.35.

Release of 2005 awards The equity bonus pool of the 2005 award was calculated by comparing the market value calculated by reference to the averageshare price for the three months prior to the date of award (1 January 2005), with the market value similarly calculated to 31 December 2007.

An independent external valuation of the equity pool was undertaken when the 2005 award matured and the RemunerationCommittee determined the 2005 vesting level as set out in the table below. 50 per cent of the awards were released in cash and 50 per cent in deferred shares.

The minimum vesting threshold for the asset bonus pool was not achieved, resulting in this part of the award lapsing.

The benefits received by directors under the 2005 award were as follows:

Cash awarded Deferred shares£ awarded1

S C Lockett 443,909 33,706R A Allan 264,913 20,114A R C Durrant 264,913 20,114N Hawkings 232,559 17,658

Notes: 1. The mid-market closing price on the date of calculation (11 January 2008) was £13.17. The deferred shares will be held in the Matching Award scheme until 31

December 2010.

Outstanding awardsAs at 31 December 2007, a total of 1,255.65 participation points have been allocated under the 2006 award. 1,171.251 participationpoints were awarded in 2006 on the date of grant and 163.90 have been awarded since then, as time-apportioned compensatoryawards to employees who have joined the company during the three-year performance period. 79.50 participation points have beenforfeited due to participants leaving the employment of the company. The directors have been allocated the following points:

Number of participation points

S C Lockett 62R A Allan 45A R C Durrant 45N Hawkings 45

Notes: 1. The figure of 1,292.50 published in the 2006 Annual Report regarding the 2006 award contained 121.25 compensatory awards issued in the latter part of 2006.

37


GO

VERNA

NC

E


As at 31 December 2007, a total of 6,266.20 participation points have been allocated under the 2007 award. The increase inaggregate participation points reflects the decision to extend the award to all global employees. The directors have been allocatedthe following points:

Number of participation points

S C Lockett 320R A Allan 210A R C Durrant 210N Hawkings 210

2008 awards Awards for the 2008 plan have not been granted as at the date of this report, but are expected to be issued in the second quarter of 2008.

Share option schemes (Audited)

Executive Share Option Scheme 1995Options granted under the 1995 scheme are normally exercisable, at the acquisition price, not less than three years after their dateof grant and will lapse (unless previously exercised) on their tenth anniversary. No payment is made for the grant of an option.Options cannot be exercised until pre-determined performance conditions have been achieved. For options granted prior to 2000the performance requirement was that the share price plus the value of dividends paid must, as measured at the end of anyconsecutive three-year period, have grown at a rate equal to or greater than the Oil Exploration and Production Index over thesame period. Options granted during and after 2000 are dependent upon growth in the company's earnings per share of at least 3 per cent per annum compound above the Retail Price Index over a three-year period.

Mr S C Lockett held options under this scheme during the financial year. The options are listed in the table below:

Options Mid-market Options Acquisition held at price on held at

price per 1 January date of 31 DecemberDate of grant Exercisable dates share (£) 2007 Event exercise (£) 2007

S C Lockett 07.04.97 07.04.02 – 07.04.07 4.00 7,680 Exercised1 12.64 –16.04.98 16.04.03 – 16.04.08 3.725 7,680 – – 7,680

Notes:1. The mid-market closing price on the date of exercise (29 March 2007) was £12.64 resulting in a gain on exercise of £8.64 per share.

Executive Share Option Scheme 2003This scheme replaced the 1995 scheme on completion of the company’s Scheme of Arrangement in 2003. Options granted underthe scheme are normally exercisable not less than three years after their date of grant and will lapse (unless previously exercised) ontheir tenth anniversary. No payment is made for the grant of an option. Options cannot normally be exercised until pre-determinedperformance conditions have been achieved. In the case of certain employees the performance condition is growth in earnings pershare of at least 3 per cent per annum compound above the Retail Price Index over a three-year period. In other cases, includinggrants made to Mr A R C Durrant under the scheme in 2005, the performance condition is based on the company’s TSR incomparison with a group of eight companies as follows: Burren Energy, Cairn Energy, Dana Petroleum, Paladin Resources, TullowOil, Venture Production, Soco International and JKX Oil & Gas, measured between 1 June 2005 and 31 May 2008. Options will vestas to 30 per cent in the event that median performance is achieved, with proportionate vesting on a straight-line basis up to 100 percent if upper quartile performance is achieved. TSR was selected as the performance measure for this plan as it aligns the interestsof directors with shareholders by requiring superior TSR compared to competitor companies.

38


39


Directors’ interests under this scheme are shown below:

Optionsheld at

1 January Mid-market OptionsAcquisition 2007 price on held at

price per or date of date of 31 December Date of grant Exercisable dates share (£) appointment Event exercise (£) 2007

A R C Durrant1 01.06.05 01.06.08 – 31.05.15 5.87 100,000 – – 100,000N Hawkings2 16.05.05 16.05.05 – 15.05.15 5.35 20,000 – – 20,000

Notes: 1. The grant to Mr A R C Durrant was made as part of his recruitment terms, to compensate him for the value loss he suffered on leaving his previous employer.2. The grant to Mr N Hawkings was made as part of his recruitment terms, where it was agreed that the grant would not be subject to any pre-vesting performance

conditions.

Savings Related Share Option Scheme 1999Under this scheme, employees (including executive directors) with six months or more continuous service are invited, within a periodof 42 days of the announcement of the annual results, to join the scheme. Employees may save between £5 and £250 per month,through payroll deduction for a period of three or five years, after which time they can acquire shares at a market value set at thetime of invitation discounted by up to 20 per cent.

Mr R A Allan held options under this scheme during the financial year. The options are listed in the table below:


price per 1 January date of 31 December Date of grant Exercisable dates share (£) 2007 Event exercise (£) 2007

R A Allan 23.04.02 01.06.07 – 01.12.07 1.82 9,093 Exercised1 10.24 –

Notes:1. The mid-market closing price on the date of exercise (12 June 2007) was £10.24 resulting in a gain on exercise of £8.42 per share.

Savings Related Share Option Scheme 2003This scheme replaced the 1999 scheme on completion of the Scheme of Arrangement. Its terms are similar to those of the 1999scheme.

Directors’ interests under this scheme are shown below:


price per 1 January date of 31 December Date of grant Exercisable dates share (£) 2007 Event exercise (£) 2007

S C Lockett 22.04.04 01.06.07 – 30.11.07 4.32 2,181 Exercised1 10.24 –03.05.07 01.06.10 – 30.11.10 9.96 – Grant of – 948

options R A Allan 03.05.07 01.06.12 – 30.11.12 9.96 – Grant of – 1,644

optionsA R C Durrant 04.05.06 01.06.11 – 30.11.11 8.16 1,973 – – 1,973N Hawkings 04.05.06 01.06.11 – 30.11.11 8.16 1,973 – – 1,973

Notes:1. The mid-market closing price on the date of exercise (12 June 2007) was £10.24 resulting in a gain on exercise of £5.92 per share.

The mid-market closing price of the company's shares at 31 December 2007 was £13.10 (29 December 2006: £12.40). The intra-daytrading price of the company’s shares during 2007 was between £9.02 and £13.60.

GO

VERNA

NC

E


40


Share Incentive Plan (Audited)Under this plan, employees, including executive directors, may make contributions to acquire shares in the company (PartnershipShares). If an employee agrees to buy Partnership Shares, the company currently matches the number of Partnership Shares boughtwith an award of shares (Matching Shares), on a one-for-one basis. Should an employee leave the SIP scheme before the end of thethree-year holding period they will lose the right to the Matching Shares, unless he/she leaves due to injury, redundancy, TUPEtransfer, retirement, death or the sale of the company.

In the case of the award of Matching Shares, the company has not required performance criteria to be fulfilled, as the purpose ofthe plan is to encourage all employees to become shareholders in the company.

The company invites all company employees to make contributions to acquire Partnership Shares on a monthly basis. During 2007,Messrs S C Lockett, R A Allan, A R C Durrant and N Hawkings contributed the maximum monthly amount of £125 to the plan.

Shares held beneficially in this plan by the directors during the financial year were as follows:

Total Total Matching Partnership Partnership Shares and Matching

Shares awarded in Sharespurchased in 2007 at prices Shares acquired

2007 at prices between 1020p held on between Shares held on between 1020p and 1270p, 31 December 1 January and 1 January 2007 and 1270p vesting in 2010 2007 12 March 2008

S C Lockett 3,049 130 130 3,309 56R A Allan1 3,040 130 130 3,300 56A R C Durrant 500 130 130 760 56N Hawkings 500 130 130 760 56

Notes: 1. Mr Allan’s shares include shares held in the offshore Premier Oil plc Employee Benefit Trust. His Matching Shares in that plan are held by the trustees on his

behalf in the form of a conditional award of shares.

Sourcing of shares and dilution limits The company uses the Premier Oil plc Employee Benefit Trust to satisfy the obligations of the AEP and the directors’ deferredbonus shares. The Trust currently holds sufficient shares to meet short-term requirements, and future obligations will be met using acombination of market purchases, financed by the company, and newly-issued shares. The number of shares held by the EmployeeBenefit Trust as at 31 December 2007 was 205,152 (31 December 2006: 485,733).

The rules of each of the company’s share-based incentive schemes, including the AEP, share option and employee share savingsschemes, contain limitations on the total number of options and awards over new shares that can be awarded, in accordance withthe Association of British Insurers’ guidelines.


J R W OrangeChairman of the Remuneration Committee12 March 2008

41


STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The directors are responsible for preparing the Annual Report, Remuneration Report and the financial statements in accordancewith applicable law and regulations.

Group financial statements Company law requires the directors to prepare financial statements for each financial year. The directors are required by theInternational Accounting Standard (IAS) Regulation to prepare the group financial statements under International FinancialReporting Standards (IFRSs) as adopted by the European Union. The group financial statements are also required by law to beproperly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation.

IAS 1 requires that financial statements present fairly for each financial year the group’s financial position, financial performance andcash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with thedefinitions and recognition criteria for assets, liabilities, income and expenses set out in the IAS Boards ‘Framework for thePreparation and Presentation of Financial Statements’. In virtually all circumstances, a fair presentation will be achieved bycompliance with all applicable IFRSs. Directors are also required to:

• properly select and apply accounting policies;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandableinformation; and

• provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users tounderstand the impact of particular transactions, other events and conditions on the group’s financial position and financialperformance.

Parent company financial statementsCompany law requires the directors to prepare financial statements for each financial year. Under that law the directors have electedto prepare the company only financial statements in accordance with United Kingdom Generally Accepted Accounting Practice(United Kingdom Accounting Standards and applicable law). The financial statements are required by law to give a true and fair viewof the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financialstatements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable United Kingdom Accounting Standards have been followed; and

• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the group will continue inbusiness.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time thefinancial position of the company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraudand other irregularities, and for the preparation of the Report of the Directors and the Remuneration Report which comply with therequirements of the Companies Act 1985.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on thecompany’s website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements maydiffer from legislation in other jurisdictions.

GO

VERNA

NC

E

ACCOUNTING POLICIES

General informationPremier Oil plc is a limited company incorporated in Scotland and listed on the London Stock Exchange. The principal activities ofthe company and its subsidiaries (the group) are oil and gas exploration and production in North Sea, Middle East-Pakistan, WestAfrica and Asia.

These financial statements are presented in US$ since that is the currency in which the majority of the group’s transactions aredenominated.

Adoption of new and revised StandardsIn the current year, the group has adopted IFRS 7 – ‘Financial Instruments: Disclosures’ which is effective for annual reporting periodsbeginning on or after 1 January 2007. The impact of the adoption of IFRS 7 has been to expand the disclosures provided in thesefinancial statements regarding the group’s financial instruments, their significance and the nature and extent of risks to which theygive rise (see note 18). There was no effect on the group’s reported income or net assets as a result of the adoption of this newStandard.

Basis of accountingThe financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as endorsed bythe Council of European Union.

The financial statements are prepared under the historical cost convention except for the revaluation of financial instruments andcertain properties at the transition date to IFRS.

At the date of approval of these financial statements the group has not applied the following IFRSs and International FinancialReporting Interpretations Committee (IFRIC) interpretations which are in issue but not yet effective:

• IFRS 8 – ‘Operating Segments’

• Amendments to IAS 1 – ‘Presentation of Financial Statements – A Revised Presentation’

• Amendments to IAS 23 – ‘Borrowing Costs’

• IFRIC 11: IFRS 2 – ‘Group and Treasury Share Transactions’

• IFRIC 12: ‘Service Concession Arrangements’

• IFRIC 13: ‘Customer Loyalty Programmes’

• IFRIC 14: IAS 19 – ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’

The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact onthe financial statements of the group except for additional segment disclosures when IFRS 8 comes into effect for periodscommencing on or after 1 January 2009.

During the year the group decided to terminate the disposal process for the sale of its interests in Mauritania. As a consequence thefinancial results for the Mauritanian operations have been fully consolidated in the 2007 financial statements. The correspondingamounts for 2006, which had been disclosed as discontinued operations, have been re-presented accordingly (see note 7).

During the year the group also restructured its business in Pakistan. The group entered into an agreement with Kuwait ForeignPetroleum Exploration KSC (KUFPEC) to de-merge their respective interests in Pakistan from the Premier-KUFPEC Pakistan jointventure. The de-merged field portfolios now run as separately owned businesses. The results of the Pakistan operations are nowfully consolidated in the financial statements of the group.

Basis of consolidationThe consolidated financial statements incorporate the financial statements of the company and entities controlled by the company(its subsidiaries) made up to 31 December each year. Control is achieved where the company has the power to govern the financialand operating policies of an investee entity so as to obtain benefits from its activities.

On acquisition the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date ofacquisition. Any excess/deficiency of the cost of acquisition over/below the fair values of the identifiable net assets acquired isrecognised as goodwill/negative goodwill. The interest of minority shareholders is stated at the minority’s proportion of the fairvalues of the assets and liabilities recognised.

The results of subsidiaries acquired or disposed of during the year are included in the income statement from the effective date ofacquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into linewith those used by other members of the group.

All significant inter-company transactions and balances between group entities are eliminated on consolidation.

42


Interest in associatesAn associate is an entity in which the group has a long-term equity interest and over which it has significant influence, but notcontrol, through participation in the financial and operating policy decisions of the investee.

The results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting.Interests in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the group’s share of the netassets of the associate, less any impairment in the value of individual investments. Any excess/deficiency of the cost of acquisitionover/below the group’s share of the net fair values of the identifiable assets, liabilities and contingent liabilities of the associate atthe date of acquisition is recognised as goodwill/negative goodwill.

Where a group entity transacts with an associate of the group, unrealised profits and losses are eliminated to the extent of thegroup’s interest in the relevant associate.

Interest in joint venturesA joint venture is a contractual arrangement whereby the group and other parties undertake an economic activity that is subject tojoint control.

Where a group company undertakes its activities under joint venture arrangements directly, the group’s share of jointly controlledassets and any liabilities incurred jointly with other venturers are recognised in the financial statements of the relevant company andclassified according to their nature.

Liabilities and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accrual basis.Income from the sale or use of the group’s share of the output of jointly controlled assets, and its share of joint venture expenses,are recognised when it is probable that the economic benefits associated with the transactions will flow to/from the group and theiramount can be measured reliably.

Joint venture arrangements which involve the establishment of a separate entity in which each venturer has an interest are referredto as jointly controlled entities. The group reports its interests in jointly controlled entities using proportionate consolidation – thegroup’s share of the assets, liabilities, income and expenses of jointly controlled entities are combined with the equivalent items inthe consolidated financial statements on a line-by-line basis.

Where the group transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent of the group’sinterest in the joint venture.

Sales revenue and other incomeSales of petroleum production are recognised when goods are delivered or the title has passed to the customer.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable.

Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.

Oil and gas assetsThe company applies the successful efforts method of accounting for exploration and evaluation (E&E) costs, having regard to therequirements of IFRS 6 – ‘Exploration for and Evaluation of Mineral Resources’.

(a) Exploration and evaluation assetsUnder the successful efforts method of accounting, all licence acquisition, exploration and appraisal costs are initially capitalisedin well, field or specific exploration cost centres as appropriate, pending determination. Expenditure incurred during the variousexploration and appraisal phases is then written off unless commercial reserves have been established or the determinationprocess has not been completed.

Pre-licence costsCosts incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement asthey are incurred.

Exploration and evaluation costsCosts of E&E are initially capitalised as E&E assets. Payments to acquire the legal right to explore, costs of technical servicesand studies, seismic acquisition, exploratory drilling and testing are capitalised as intangible E&E assets.

Tangible assets used in E&E activities (such as the company’s vehicles, drilling rigs, seismic equipment and other property, plantand equipment used by the company’s exploration function) are classified as property, plant and equipment. However, to theextent that such a tangible asset is consumed in developing an intangible E&E asset, the amount reflecting that consumption isrecorded as part of the cost of the intangible asset. Such intangible costs include directly attributable overhead, including thedepreciation of property, plant and equipment utilised in E&E activities, together with the cost of other materials consumedduring the exploration and evaluation phases.

E&E costs are not amortised prior to the conclusion of appraisal activities.

43


GO

VERNA

NC

E

ACCOUNTING POLICIES (CONTINUED)

Treatment of E&E assets at conclusion of appraisal activitiesIntangible E&E assets related to each exploration licence/prospect are carried forward, until the existence (or otherwise) ofcommercial reserves has been determined subject to certain limitations including review for indications of impairment. Ifcommercial reserves have been discovered, the carrying value, after any impairment loss, of the relevant E&E assets, is thenreclassified as development and production assets. If, however, commercial reserves have not been found, the capitalised costsare charged to expense after conclusion of appraisal activities.

(b) Development and production assetsDevelopment and production assets are accumulated generally on a field-by-field basis and represent the cost of developingthe commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in findingcommercial reserves transferred from intangible E&E assets, as outlined in accounting policy (a) above.

The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directlyattributable overheads, finance costs capitalised, and the cost of recognising provisions for future restoration anddecommissioning.

Depreciation of producing assetsThe net book values of producing assets are depreciated generally on a field-by-field basis using the unit-of-productionmethod by reference to the ratio of production in the year and the related commercial reserves of the field, taking into accountfuture development expenditures necessary to bring those reserves into production.

Producing assets are generally grouped with other assets that are dedicated to serving the same reserves for depreciationpurposes, but are depreciated separately from producing assets that serve other reserves.

Pipelines are depreciated on a unit-of-throughput basis.

(c) Impairment of development and production assetsAn impairment test is performed whenever events and circumstances arising during the development or production phaseindicate that the carrying value of a development or production asset may exceed its recoverable amount.

The carrying value is compared against the expected recoverable amount of the asset, generally by reference to the presentvalue of the future net cash flows expected to be derived from production of commercial reserves. The cash generating unitapplied for impairment test purposes is generally the field, except that a number of field interests may be grouped as a singlecash generating unit where the cash flows of each field are interdependent.

(d) Acquisitions, asset purchases and disposalsAcquisitions of oil and gas properties are accounted for under the purchase method where the transaction meets the definitionof a business combination.

Transactions involving the purchase of an individual field interest, or a group of field interests, that do not qualify as a businesscombination, are treated as asset purchases irrespective of whether the specific transactions involved the transfer of the fieldinterests directly or the transfer of an incorporated entity. Accordingly, no goodwill and no deferred tax gross up arises, and theconsideration is allocated to the assets and liabilities purchased on an appropriate basis.

Proceeds on disposal are applied to the carrying amount of the specific intangible asset or development and production assetsdisposed of and any surplus is recorded as a gain on disposal in the income statement.

InventoriesInventories, except for petroleum products, are valued at the lower of cost and net realisable value. Petroleum products and underand overlifts of crude oil are recorded at net realisable value, under inventories and other debtors or creditors respectively.

TaxIncome tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxableprofit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income orexpense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The group’sliability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilitiesin the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for usingthe balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences anddeferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductibletemporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises fromgoodwill/negative goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in atransaction that affects neither the taxable profit nor the accounting profit.

44


Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, andinterests in joint ventures, except where the group is able to control the reversal of the temporary difference and it is probable thatthe temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longerprobable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the year when the liability is settled or the asset is realised.Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity,in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off corporation tax assets against corporation tax liabilities and when they relate to income taxes levied bythe same tax authority and the group intends to settle its current tax assets and liabilities on a net basis.

Translation of foreign currenciesIn the accounts of individual companies, transactions denominated in foreign currencies, being currencies other than the functionalcurrency, are recorded in the local currency at actual exchange rates as of the dates of the transactions. Monetary assets andliabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at thebalance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translatedat the rates prevailing at the date when the fair value was determined. Non-monetary assets held at historic cost are translated atthe date of purchase and are not retranslated. Any gain or loss arising from a change in exchange rate subsequent to the dates ofthe transactions is included as an exchange gain or loss in the income statement.

On consolidation, the assets and liabilities of the group’s overseas operations are translated at exchange rates prevailing on thebalance sheet date. Income and expense items are generally translated at the average exchange rates for the year. Exchangedifferences arising, if any, are classified as equity and transferred to the group’s translation reserve. Such translation differences arerecognised as income or as expenses in the year in which the operation is disposed of.

Group retirement benefitsPayments to defined contribution retirement benefit plans are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution plans where the group’s obligations underthe schemes are equivalent to those arising in a defined contribution retirement benefit plan.

The group operates a defined benefit pension scheme, which requires contributions to be made to a separately administered fund.The cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out ateach balance sheet date. Actuarial gains and losses are recognised immediately in the statement of total recognised income andexpense. Past service cost is also recognised immediately to the extent that the benefits are already vested, and otherwise isamortised on a straight-line basis over the average period until the benefits become vested.

The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation asadjusted for unrecognised past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this calculationis limited to unrecognised past service cost, plus the present value of available refunds and reductions in future contributions to the plan.

RoyaltiesRoyalties are charged as production costs to the income statement in the year in which the related production is recognised as income.

LeasingRentals payable for assets under operating leases are charged to the income statement on a straight-line basis over the lease term.

Financial instrumentsFinancial assets and financial liabilities are recognised on the group’s balance sheet when the group becomes a party to thecontractual provisions of the instrument.

Trade receivablesTrade receivables are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

Bank borrowingsInterest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges,including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accrual basis to theincome statement using the effective interest method and are added to the carrying amount of the instrument to the extent thatthey are not settled in the year in which they arise.

45


GO

VERNA

NC

E

ACCOUNTING POLICIES (CONTINUED)

Trade payablesTrade payables are stated at their nominal value.

Derivative financial instruments The group uses derivative financial instruments (derivatives) to manage its exposure to changes in foreign currency exchange rates,interest rates and oil price fluctuations.

All derivative financial instruments are initially recorded at cost, including transaction costs. Derivatives are subsequently carried atfair value. Apart from those derivatives designated as qualifying cash flow hedging instruments, all changes in fair value are recordedas financial income or expense in the year in which they arise.

For the purposes of hedge accounting, hedging relationships may be of three types. Fair value hedges are hedges of particular risksthat may change the fair value of a recognised asset or liability. Cash flow hedges are hedges of particular risks that may change theamount or timing of future cash flows. Hedges of net investment in a foreign entity are hedges of particular risks that may changethe carrying value of the net assets of a foreign entity.

To qualify for hedge accounting the hedging relationship must meet several strict conditions on documentation, probability ofoccurrence, hedge effectiveness and reliability of measurement. If these conditions are not met, then the relationship does notqualify for hedge accounting. In this case the hedging instrument and the hedged item are reported independently as if there wereno hedging relationship. In particular any derivatives are reported at fair value, with changes in fair value included in financial incomeor expense.

For qualifying fair value hedges, the hedging instrument is recorded at fair value and the hedged item is recorded at its previouscarrying value, adjusted for any changes in fair value that are attributable to the hedged risk. Any changes in the fair values arereported in financial income or expense.

For qualifying cash flow hedges, the hedging instrument is recorded at fair value. The portion of any change in fair value that is aneffective hedge is included in equity, and any remaining ineffective portion is reported in financial income. If the hedgingrelationship is the hedge of a firm commitment or highly probable forecasted transaction, the cumulative changes of fair value of thehedging instrument that have been recorded in equity are included in the initial carrying value of the asset or liability at the time it isrecognised. For all other qualifying cash flow hedges, the cumulative changes of fair value of the hedging instrument that have beenrecorded in equity are included in financial income at the time when the forecasted transaction affects net income.

For qualifying hedges of net investment in a foreign entity, the hedging instrument is recorded at fair value. The portion of anychange in fair value that is an effective hedge is included in equity.

Any remaining ineffective portion is recorded in financial income or expense where the hedging instrument is a derivative and inequity in other cases. If the entity is disposed of, then the cumulative changes of fair value of the hedging instrument that have beenrecorded in equity are included in financial income at the time of the disposal.

Derivatives embedded in other financial instruments or non-derivative host contracts are treated as separate derivatives when theirrisks and characteristics are not closely related to those of host contracts and the host contracts are not carried at fair value withunrealised gains or losses reported in the income statement.

Fair value is the amount for which a financial asset, liability or instrument could be exchanged between knowledgeable and willingparties in an arm’s length transaction. It is determined by reference to quoted market prices adjusted for estimated transaction coststhat would be incurred in an actual transaction, or by the use of established estimation techniques such as option pricing modelsand estimated discounted values of cash flows.

Cash and cash equivalentsCash comprises cash in hand and deposits repayable on demand, less overdrafts payable on demand.

Cash equivalents comprise funds held in term deposit accounts with a maturity not exceeding three months.

46


Share-based paymentsThe group has applied the requirements of IFRS 2 – ‘Share-based Payment’. In accordance with the transitional provisions, IFRS 2has been applied to all grants of equity instruments after 7 November 2002 that were unvested at 1 January 2005.

The group issues equity-settled and cash-settled share-based payments to certain employees. Equity settled share-based paymentsare measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair valuedetermined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vestingperiod, based on the group’s estimate of shares that will eventually vest and adjusted for the effect of non market-based vestingconditions.

Fair value is measured by use of the Monte Carlo simulation. The main assumptions are provided in note 20 on page 67.

A liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balancesheet date for cash-settled, share-based payments.

Convertible bondsThe net proceeds received from the issue of convertible bonds are split between a liability element and an equity component at thedate of issue. The fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible bonds and the fair value assigned to the liabilitycomponent, representing the embedded option to convert the liability into equity of the group, is included in equity and is not re-measured. The liability component is carried at amortised cost.

Issue costs are apportioned between the liability and equity components of the convertible bonds based on their relative carryingamounts at the date of issue. The portion relating to the equity component is charged directly against equity.

The interest expense on the liability component is calculated by applying the prevailing market interest rate, at the time of issue, forsimilar non-convertible debt to the liability component of the instrument. The difference between this amount and the interest paidis added to the carrying amount of the convertible bonds.

47


GO

VERNA

NC

E

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF PREMIER OIL PLC

We have audited the group financial statements of Premier Oil plc for the year ended 31 December 2007 which comprise theConsolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the ConsolidatedStatement of Total Recognised Income and Expenses and the related notes 1 to 27. These group financial statements have beenprepared under the accounting policies set out therein. We have also audited the information in the Remuneration Report that isdescribed as having been audited.

We have reported separately on the parent company financial statements of Premier Oil plc for the year ended 31 December 2007.

This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our auditwork has been undertaken so that we might state to the company’s members those matters we are required to state to them in anauditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyoneother than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report, the Remuneration Report and the group financial statements inaccordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are setout in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory requirements andInternational Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the group financial statements give a true and fair view, whether the group financialstatements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the part of the Remuneration Report described as having been audited has been properly prepared in accordance with theCompanies Act 1985. We also report to you whether in our opinion the information given in the Report of the Directors is consistentwith the group financial statements. The information given in the Report of the Directors includes that specific information presentedin the Chief Executive’s and Financial Reviews that is cross referred from the business review section of the Report of the Directors.

In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, orif information specified by law regarding director’s remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Report reflects the company’s compliance with the nine provisions of the 2006Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We arenot required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on theeffectiveness of the group’s corporate governance procedures or its risk and control procedures.

We read the other information contained in the Annual Report as described in the contents section and consider whether it isconsistent with the audited group financial statements. We consider the implications for our report if we become aware of anyapparent misstatements or material inconsistencies with the group financial statements. Our responsibilities do not extend to anyfurther information outside the Annual Report.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing PracticesBoard. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the group financialstatements and the part of the Remuneration Report to be audited. It also includes an assessment of the significant estimates andjudgements made by the directors in the preparation of the group financial statements, and of whether the accounting policies areappropriate to the group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the group financial statements and the part of theRemuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. Informing our opinion we also evaluated the overall adequacy of the presentation of information in the group financial statements andthe part of the Remuneration Report to be audited.

OpinionIn our opinion:• the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the

state of the group’s affairs as at 31 December 2007 and of its profit for the year then ended;• the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the

IAS Regulation; • the part of the Remuneration Report described as having been audited has been properly prepared in accordance with the

Companies Act 1985; and• the information given in the Report of the Directors is consistent with the group financial statements.

Deloitte & Touche LLPChartered Accountants and Registered Auditors LondonUnited Kingdom12 March 2008

48


CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2007

2007 2006Note $ million $ million

Sales revenues 1 578.2 402.2 Cost of sales 2 (267.5) (179.2)Exploration expense (65.3) (21.8)Pre-licence exploration costs (8.3) (21.8)General and administration costs (17.7) (16.8)

Operating profit 219.4 162.6 Interest revenue, finance and other gains 5 10.7 2.0 Finance costs and other finance expenses 5 (18.2) (6.0)Mark to market revaluation on commodity hedges 18 (64.9) (2.0)

Profit before tax 147.0 156.6 Tax 6 (108.0) (89.0)

Profit after tax 39.0 67.6

Earnings per share (cents):Basic 8 47.6 82.6 Diluted 8 46.9 81.7

The results relate entirely to continuing operations. Certain operations previously presented as discontinuing in 2006 have been re-presented as continuing operations in these financial statements and 2006 comparatives have been restated accordingly (see note 7).

CONSOLIDATED STATEMENT OF TOTAL RECOGNISEDINCOME AND EXPENSESFor the year ended 31 December 2007


Currency translation differences 4.1 0.3 Pension costs – actuarial gains 25 0.1 1.4

Net gains recognised directly in equity 4.2 1.7 Profit for the year 39.0 67.6

Total recognised income 43.2 69.3

Reconciliation to net assets:

2007 2006$ million $ million

Net assets at 1 January 449.1 376.1 Total recognised income 43.2 69.3 Provision for share-based payments 7.8 3.0 Issue of Ordinary Shares 1.0 0.7 Equity component of convertible bonds issued 21 48.8 –Transfer between reserves 21 3.0 –

Net assets at 31 December 552.9 449.1

49


FINA

NC

IAL

STATE

ME

NTS

CONSOLIDATED BALANCE SHEETAs at 31 December 2007


Non-current assets:Intangible exploration and evaluation assets 9 153.3 114.7 Property, plant and equipment 10 739.5 502.6 Investments in associates 11 0.1 –

892.9 617.3

Current assets:Inventories 22.5 14.8 Trade and other receivables 13 266.7 174.4 Cash and cash equivalents 18 332.0 40.9 Assets held for sale 7 – 90.4

621.2 320.5

Total assets 1,514.1 937.8

Current liabilities:Trade and other payables 14 (252.6) (169.6) Current tax payable (73.1) (52.4) Liabilities directly associated with assets held for sale 7 – (14.2)

(325.7) (236.2)

Net current assets 295.5 84.3

Non-current liabilities:Convertible bonds 15 (195.6) –Other long-term debt 15 (52.1) –Deferred tax liabilities 19 (194.5) (194.1) Long-term provisions 17 (147.2) (49.6) Long-term employee benefit plan deficits 25 (8.2) (8.8) Deferred revenue 18 (37.9) –

(635.5) (252.5)

Total liabilities (961.2) (488.7)

Net assets 552.9 449.1

Equity and reserves:Share capital 20 73.5 73.3 Share premium account 21 9.4 8.6 Revenue reserves 21 415.5 365.6 Capital redemption reserve 21 1.7 1.7 Translation reserves 21 4.0 (0.1) Equity reserve 21 48.8 –

552.9 449.1

The financial statements were approved by the Board of Directors and authorised for issue on 12 March 2008.

They were signed on its behalf by:

S C LockettA R C DurrantDirectors

50


CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December 2007


Net cash from operating activities 23 269.5 244.8

Investing activities:Capital expenditure (261.2) (156.5) Pre-licence exploration costs (8.3) (21.8) Proceeds from disposal of intangible exploration and evaluation assets 1.0 2.6

Net cash used in investing activities (268.5) (175.7)

Financing activities:Issue of Ordinary Shares 1.0 0.7 Issue of convertible bonds 250.0 –Issue costs for the convertible bonds (5.9) –Loan drawdowns 53.0 –Repayment of long-term financing – (65.0)Interest paid (9.3) (2.7)

Net cash from/(used in) financing activities 288.8 (67.0)

Currency translation differences relating to cash and cash equivalents 1.3 –

Net increase in cash and cash equivalents 291.1 2.1 Cash and cash equivalents at the beginning of the year 40.9 38.8

Cash and cash equivalents at the end of the year 23 332.0 40.9

51


FINA

NC

IAL

STATE

ME

NTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2007

1 Geographical segmentsThe group’s operations are located in the North Sea, Asia, Middle East-Pakistan, and West Africa. These geographical segmentsare the basis on which the group reports its primary segmental information. Sales revenue represents amounts invoiced, exclusiveof sales-related taxes, for the group’s share of oil and gas sales.


Revenue:North Sea 280.5 119.3 Asia 180.2 149.9 Middle East-Pakistan 91.8 89.6 West Africa 25.7 43.4

Total group sales revenue 578.2 402.2 Interest and other finance revenue 10.0 2.0

Total group revenue 588.2 404.2

ResultsGroup operating profit/(loss):North Sea 105.2 54.3 Asia 101.6 91.4 Middle East-Pakistan 47.1 50.2 West Africa (26.5) (17.5) Unallocated* (8.0) (15.8)

Group operating profit 219.4 162.6 Interest revenue, finance and other gains 10.7 2.0 Finance costs and other finance expenses (18.2) (6.0) Mark to market revaluation on commodity hedges (64.9) (2.0)

Profit before tax 147.0 156.6 Tax (108.0) (89.0)

Profit after tax 39.0 67.6

Balance sheetSegment assets:North Sea 404.4 234.1Asia 514.8 450.4Middle East-Pakistan 123.4 108.9West Africa 101.5 102.9 Unallocated* 369.9 41.4Investments in associates:West Africa 0.1 0.1

Total assets 1,514.1 937.8

Liabilities:North Sea (282.6) (178.7) Asia (187.9) (206.8) Middle East-Pakistan (46.3) (28.4) West Africa (20.4) (21.5) Unallocated* (424.0) (53.3)

Total liabilities (961.2) (488.7)

Other informationCapital additions:North Sea 203.1 46.7 Asia 107.7 90.8 Middle East-Pakistan 19.9 22.9 West Africa 37.8 26.0

Total capital additions 368.5 186.4

52


1 Geographical segments (continued)


Amortisation and depreciation:North Sea 53.2 36.4 Asia 30.3 25.1 Middle East-Pakistan 12.3 9.8 West Africa 12.1 24.6

Total amortisation and depreciation 107.9 95.9

* Unallocated expenditure, assets and liabilities include amounts of a corporate nature and not specifically attributable to a geographical segment. Theseitems include cash, hedging, tax, convertible bonds and other long-term debt.

2 Cost of sales


Operating costs 116.8 83.2Stock overlift/underlift movement* 27.3 (22.4)Royalties 15.5 14.4 Amortisation and depreciation of property, plant and equipment:Oil and gas properties 106.9 94.6 Other 1.0 1.3 Impairment of property, plant and equipment – 8.1

267.5 179.2

* Includes US$26.8 million of stock acquired with the Scott field acquisition.

3 Auditors’ remuneration


Audit fees:Fees payable to the company’s auditors for the company’s annual report 0.5 0.4Audit of the company’s subsidiaries pursuant to legislation 0.1 0.1

0.6 0.5

Non-audit fees:Other services pursuant to legislation – interim review 0.1 0.1Tax services 0.8 1.0Corporate finance services – transaction support – 0.4Other services 0.2 0.1

1.1 1.6

4 Staff costs


Staff costs, including executive directors:Wages and salaries 54.4 53.0 Social security costs 4.4 4.5 Pension costs:Defined contribution 1.4 1.2 Defined benefit 1.7 1.0

61.9 59.7

A portion of the group’s staff costs above are recharged to the joint venture partners or capitalised where they are directly attributableto capital projects. The above costs include share-based payments to employees as disclosed in note 20 on pages 66 to 67.

53


FINA

NC

IAL

STATE

ME

NTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)For the year ended 31 December 2007

4 Staff costs (continued)

2007 2006

Average number of employees during the year*:Technical and operations 215 195 Management and administration 145 114

360 309

* Staff numbers include executive directors.

5 Interest revenue and finance costs


Interest revenue, finance and other gains:Short-term deposits 7.9 2.0 Others 2.1 –Exchange differences 0.7 –

10.7 2.0

Finance costs and other finance expenses:Bank loans and overdrafts (5.2) (2.6) Payable in respect of convertible bonds 15 (7.0) –Unwinding of discount on decommissioning provision (4.6) (2.0) Long-term debt arrangement fees (0.5) (0.4) Mark to market valuation on foreign exchange contracts (0.4) –Others (0.5) –Exchange differences – (1.0)

(18.2) (6.0)

6 Tax


Current tax:UK corporation tax on profits 27.2 18.4 UK petroleum revenue tax 29.2 18.7 Overseas tax 70.1 63.4 Adjustments in respect of previous periods (0.2) (2.4)

Total current tax 126.3 98.1

Deferred tax:UK corporation tax (4.7) (12.3) UK petroleum revenue tax (9.4) 4.5 Overseas tax (4.2) (1.3)

Total deferred tax (18.3) (9.1)

Tax on profit on ordinary activities 108.0 89.0

54


6 Tax (continued)The tax charge for the year can be reconciled to the profit per the income statement as follows:


Group profit on ordinary activities before tax 147.0 156.6

Group profit on ordinary activities before tax at 77.6% weighted average rate (2006: 62.1%) 114.1 97.2 Tax effects of:Income/expenses that are not taxable/deductible in determining taxable profit 6.4 8.6Tax and tax credits not related to profit before tax (including UK petroleum revenue tax) (11.6) 7.2 UK expenditure in 2005 relieved at higher rates in 2006 – (9.0) Increase in rate of supplementary charge – 4.9 Utilisation and recognition of tax losses not previously recognised (1.6) (17.5) Adjustments in respect of previous periods 0.7 (2.4)

Tax expense for the year 108.0 89.0

Effective tax rate for the year 73.5% 56.8%

The weighted average rate is calculated based on the tax rates weighted according to the profit or loss before tax earned bythe group in each jurisdiction. The change in the weighted average rate year on year relates to the mix of profit and loss in eachjurisdiction. The effective tax rate for UK ring fence profits is 50 per cent.

There are no significant unrecognised temporary differences associated with undistributed profits of subsidiaries, associates andjoint ventures. The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet in theabsence of suitable forecast profits is US$12.7 million in the UK (2006: US$56.2 million). This gives rise to a potential deferred taxasset of US$3.8 million (2006: US$16.9 million).

7 Discontinued operationsIn December 2006 management decided to dispose of the group’s Mauritanian operations. Negotiations with several interestedparties subsequently took place. These operations, which were expected to be sold within 12 months, were classified as adisposal group held for sale and presented separately in the balance sheet in the 2006 financial statements. The 2006 results ofthe Mauritanian operations were presented in discontinued operations in the group’s 2006 income statement.

In October 2007 discussions with a preferred bidder were terminated and a decision was made to retain the group’s interests inMauritania. As a consequence the financial results for the Mauritanian operations are no longer required to be presentedseparately from the group’s continuing operations in the 2007 income statement and corresponding amounts for 2006 havebeen re-presented accordingly.

The major classes of assets and liabilities comprising the disposal group classified as held for sale in 2006 were as follows:

2006$ million

Intangible exploration and evaluation assets 16.2 Property, plant and equipment 65.3 Investments in associates 0.1 Trade and other receivables 8.8

Total assets classified as held for sale 90.4

Trade and other payables (5.4) Long-term provisions (7.2) Deferred tax liabilities (1.6)

Total liabilities associated with assets classified as held for sale (14.2)

Net assets of disposal group 76.2

A loss of US$8.1 million arose on the re-categorisation of the Mauritanian assets as a held for sale group, being the differencebetween the fair values less cost to sell of the disposal group and the carrying values of its net assets. This has been recognisedas an impairment of property, plant and equipment in cost of sales.

55


FINA

NC

IAL

STATE

ME

NTS


8 Earnings per shareThe calculation of basic earnings per share is based on the profit after tax and on the weighted average number of OrdinaryShares in issue during the year. The diluted earnings per share allows for the full exercise of outstanding share purchase optionsand adjusted earnings.

Basic and diluted earnings per share are calculated as follows:

Weighted average Profit after tax number of shares Earnings per share

2007 2006 2007 2006 2007 2006$ million $ million million million cents cents

Basic 39.0 67.6 82.0 81.8 47.6 82.6 Outstanding share options – – 1.2 0.9 * *

Diluted 39.0 67.6 83.2 82.7 46.9 81.7

* The inclusion of the outstanding share options in the 2007 and 2006 calculations produces a diluted earnings per share. The outstanding share optionsnumber includes any expected additional share issues due to future share-based payments. At 31 December 2007 8,003,434 (2006: nil) potential OrdinaryShares in the company that are underlying the company’s convertible bonds and that may dilute earnings per share in the future have not been included inthe calculation of diluted earnings per share because they are anti-dilutive for the year to 31 December 2007.

9 Intangible exploration and evaluation (E&E) assets

Oil and gas properties

Middle West North Sea Asia East-Pakistan Africa Total

Note $ million $ million $ million $ million $ million

Cost:At 1 January 2006 1.8 26.2 13.2 26.2 67.4 Additions during the year 11.5 65.3 4.3 11.5 92.6 Disposals – (6.9) – – (6.9) Transfer to tangible fixed assets (0.4) – – – (0.4)Exploration expenditure written off (2.2) (0.1) (11.2) (8.3) (21.8) Reclassified as held for sale 7 – – – (16.2) (16.2)

At 1 January 2007 10.7 84.5 6.3 13.2 114.7

Reclassified as no longer held for sale 7 – – – 16.2 16.2 Exchange movements 1.0 – – – 1.0 Additions during the year 31.1 90.2 6.8 28.3 156.4Disposals – – – (2.5) (2.5) Transfer to tangible fixed assets – (67.2) – – (67.2) Exploration expenditure written off (6.6) (18.5) (13.1) (27.1) (65.3)

At 31 December 2007 36.2 89.0 – 28.1 153.3

The amounts for intangible E&E assets represent costs incurred on active exploration projects. These amounts are written off tothe income statement as exploration expense unless commercial reserves are established or the determination process is notcompleted and there are no indications of impairment. The outcome of ongoing exploration, and therefore whether thecarrying value of E&E assets will ultimately be recovered, is inherently uncertain.

56


10 Property, plant and equipment

Oil and gas properties

Middle West Other North Sea Asia East-Pakistan Africa fixed assets Total

Note $ million $ million $ million $ million $ million $ million

Cost:At 1 January 2006 240.6 315.3 115.3 82.5 5.4 759.1 Exchange movements – – – – 0.2 0.2 Additions during the year 34.5 25.0 18.6 14.5 1.2 93.8 Transfer from intangible fixed assets 0.4 – – – – 0.4 Reclassified as held for sale 7 – – – (97.0) – (97.0)

At 1 January 2007 275.5 340.3 133.9 – 6.8 756.5 Reclassified as no longer held for sale 7 – – – 97.0 – 97.0 Exchange movements – – – – 0.1 0.1 Additions during the year 170.4 17.1 12.9 9.5 2.2 212.1 Disposals – – – – (0.1) (0.1) Transfer from intangible fixed assets – 67.2 – – – 67.2

At 31 December 2007 445.9 424.6 146.8 106.5 9.0 1,132.8

Amortisation and depreciation:At 1 January 2006 74.2 47.1 57.3 – 3.9 182.5 Exchange movements – – – – 0.1 0.1 Charge for the year 35.3 24.9 9.8 24.6 1.3 95.9 Reclassified as held for sale 7 – – – (24.6) – (24.6)

At 1 January 2007 109.5 72.0 67.1 – 5.3 253.9 Reclassified as no longer held for sale 7 – – – 31.7 – 31.7 Exchange movements – – – – (0.1) (0.1)Charge for the year 52.4 30.1 12.3 12.1 1.0 107.9 Disposals – – – – (0.1) (0.1)

At 31 December 2007 161.9 102.1 79.4 43.8 6.1 393.3

Net book value:At 31 December 2006 166.0 268.3 66.8 – 1.5 502.6

At 31 December 2007 284.0 322.5 67.4 62.7 2.9 739.5

Amortisation and depreciation for oil and gas properties is calculated on a unit-of-production basis, using the ratio of oil andgas production in the period to the estimated quantities of proved and probable reserves at the end of the period plusproduction in the period, on a field-by-field basis. Proved and probable reserve estimates are based on a number of underlyingassumptions including oil and gas prices, future costs, oil and gas in place and reservoir performance, which are inherentlyuncertain. Management uses established industry techniques to generate its estimates and regularly references its estimatesagainst those of joint venture partners or external consultants. However, the amount of reserves that will ultimately be recoveredfrom any field cannot be known with certainty until the end of the field’s life.

57


FINA

NC

IAL

STATE

ME

NTS


11 Investments and associatesDetails of the group’s associates as at 31 December 2007 are as follows:

Country of incorporation Interest votingAssociate Business and area of operation or registration power held

Fusion Mauritania A Ltd Exploration, Mauritania Jersey 29.9%FP Mauritania A BV Exploration, Mauritania Netherlands 29.9%

The associates were reclassified as no longer held for sale during the year (see note 7).

Aggregated amounts relating to associates:


Total assets 1.6 1.7 Total liabilities (1.5) (1.6)

0.1 0.1 Reclassified as held for sale – (0.1)

At 31 December 0.1 –

SubsidiariesThe company has investments in the following 100 per cent owned subsidiaries which principally affected the profits or netassets of the group. To avoid a statement of excessive length, details of investments which are not significant have beenomitted.

Country of incorporation Name of company Business and area of operation or registration

Premier Oil Group Ltd* Intermediate holding company, UK ScotlandPremier Oil Finance (Jersey) Ltd* Convertible bond issuing company, Jersey JerseyPremier Oil Exploration Ltd Exploration, production and development, UK ScotlandPremier Pict Petroleum Ltd Exploration, production and development, UK ScotlandPremier Oil Kakap BV Exploration, production and development, Indonesia NetherlandsPremier Oil Natuna Sea BV Exploration, production and development, Indonesia NetherlandsPremier Oil Holdings Ltd Intermediate holding company, UK England and WalesFP Mauritania B BV Exploration, production and development, Mauritania NetherlandsPremier Oil Mauritania B Ltd Exploration, production and development, Mauritania JerseyPremier Oil Vietnam Offshore BV Exploration, production and development, Vietnam NetherlandsPremier Oil Sumatra (North) BV Exploration, production and development, Indonesia NetherlandsPKP Exploration Ltd** Exploration, production and development, Pakistan England and WalesPKP Kadanwari 2 Ltd** Exploration, production and development, Pakistan Cayman IslandsPKP Kirthar 2 BV** Exploration, production and development, Pakistan Netherlands

* Held directly by Premier Oil plc. All other companies are held through subsidiary undertakings.** In September 2001, a joint venture was formed with Kuwait Foreign Petroleum Exploration Company KSC (KUFPEC) to hold Premier’s and KUFPEC’s

interests in Pakistan through a company called Premier-Kufpec Pakistan BV. During 2007 the company entered into an agreement with KUFPEC to de-merge their respective interests in Pakistan from the Premier-KUFPEC Pakistan joint venture. The de-merged field portfolios now run as separatelyowned businesses.

58


12 Investments in joint venturesAs described in note 11 the company entered into an agreement with KUFPEC during the year to de-merge their respectiveinterests in Pakistan from the Premier-KUFPEC Pakistan joint venture.

The following amounts were included in the balance sheet for 2006 as a result of the proportionate consolidation of Premier-Kufpec Pakistan BV, in which the group had a 50 per cent interest.

2006$ million

Non-current assets 66.8 Current assets:Inventories 2.0 Trade and other receivables 33.5 Cash and cash equivalents 5.0 Current liabilities:Trade and other payables (40.5) Non-current liabilities:Deferred tax liabilities (12.8) Long-term provisions (3.3)

Net assets 50.7

Included in the income statement for 2006 were the results for Premier-Kufpec Pakistan BV, with revenues at US$89.6 million,profit before tax US$63.9 million, tax charge US$16.6 million and profit after tax US$47.3 million.

The results of the group’s de-merged share of the Pakistan operations are fully consolidated in the financial statements of thegroup for 2007.

13 Trade and other receivables


Trade receivables 115.5 87.7 Other receivables 75.8 51.5Mark to market valuation on commodity hedges 18 37.9 0.5Prepayments 11.3 8.5 Tax recoverable* 26.2 26.2

266.7 174.4

* The recoverable tax balance includes advance payments of overseas corporation taxes totalling US$13.8 million (2006: US$16.8 million).

The carrying values of the trade and other receivables are equal to their fair value as at the balance sheet date.

14 Trade and other payables


Trade payables 51.5 26.8 Accrued expenses 96.5 117.7 Other payables 36.7 20.1 Mark to market valuation on commodity hedges 18 65.2 0.8Short-term provisions 2.7 4.2

252.6 169.6

The carrying values of the trade and other payables are equal to their fair value as at the balance sheet date.

59


FINA

NC

IAL

STATE

ME

NTS


15 Borrowings


Amounts falling due in two to five years:Other long-term debt – bank loans* 18 53.0 –Amounts falling due over five years:Convertible bonds* 200.0 –

Total borrowings 253.0 –

Cash:Cash at bank and in hand 7.6 9.6 Short-term deposits 324.4 31.3

Total cash 332.0 40.9

* The carrying value of the convertible bonds and the other long-term debt on the balance sheet are stated net of the unamortised portion of the issue costs(US$4.4 million) and debt arrangement fees (US$0.9 million) respectively.

The borrowings are repayable as follows:


Borrowings analysed by maturity:Bank loans – in the third year 53.0 –Convertible bonds – in the seventh year 200.0 –

Total borrowings 253.0 –

The group’s principal bank facilities are US$275 million and £53 million (2006: US$275 million). The original facility was taken outon 13 September 2005 and amended in April 2007 and will continue until 31 July 2010. The facilities are unsecured and bear afloating interest rate based on LIBOR.

Convertible bondsIn June 2007, the group issued bonds at a par value of US$250 million which are convertible into Ordinary Shares of thecompany at any time from 6 August 2007 until six days before their maturity date of 27 June 2014. At the initial conversion priceof £15.82 per share there are 8,003,434 Ordinary Shares of the company underlying the bonds. If the bonds have not beenpreviously purchased and cancelled, redeemed or converted, they will be redeemed at par value on 27 June 2014. Interest of2.875 per cent per annum will be paid semi-annually in arrears up to that date.

The net proceeds received from the issue of the convertible bonds were split between a liability element and an equitycomponent at the date of issue. The fair value of the liability component was estimated using the prevailing market interest ratefor similar non-convertible debt. The difference between the proceeds of issue of the convertible bonds and the fair valueassigned to the liability component, representing the embedded option to convert the liability into equity of the group, wasincluded in equity reserves.

Issue costs were apportioned between the liability and equity components of the convertible bonds based on their relativecarrying amounts at the date of issue. The portion relating to the equity component was charged directly against equity.

$ million

Nominal value of convertible bonds issued net of issue costs 244.0Equity component (51.8)

Liability component at date of issue 192.2 Interest charged 7.0 Interest paid (3.6)

Total liability component as at 31 December 2007 195.6

The total interest charged for the year has been calculated by applying an effective annual interest rate of 6.73 per cent to theliability component for the period since the bonds were issued. The non-cash accrual of interest will increase the liabilitycomponent (as the cash interest is only paid at 2.875 per cent) to US$250 million at maturity.

There is no material difference between the carrying amount of the liability component of the convertible bonds and their fairvalue. This fair value is calculated by discounting the future cash flows at the market rate.

60


16 Obligations under leases


Minimum lease payments under operating leases recognised as an expense in the year 7.6 6.0

Outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:Within one year 7.1 6.5 In two to five years 12.5 12.7 Over five years 1.0 1.0

20.6 20.2

Operating lease payments represent the group’s share of rentals payable by the group for FPSOs, and for certain of its officeproperties, office equipment, and motor vehicles.

17 Long-term provisions


Asset and Equity Plan:At 1 January 12.5 –Provision in the year 1.9 12.5 Reclassification of provision to creditors falling due within one year (8.6) –

At 31 December 5.8 12.5

Decommissioning costs:At 1 January 37.1 38.5 On assets reclassified as no longer held for sale 7.2 –On asset acquisitions 57.7 –Revision arising from:

Change in estimates of future decommissioning costs 34.3 (0.5) Exchange differences 0.5 4.3

Unwinding of discount on decommissioning provision 4.6 2.0 On assets reclassified as held for sale – (7.2)


Total provisions 147.2 49.6

The company currently operates an Asset and Equity Plan to reward employees for improvement in the asset value of thebusiness and the market value of the company over a three-year period. Further details of this plan are disclosed in note 20 onpages 66 to 67.

The decommissioning provision represents the present value of decommissioning costs relating to the UK, West Africa andPakistan oil and gas interests, which are expected to be incurred up to 2030. These provisions have been created based onPremier’s internal estimates and, where available, operator’s estimates. Based on the current economic environment,assumptions have been made which the management believe are a reasonable basis upon which to estimate the future liability.These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actualdecommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works required,which will reflect market conditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend onwhen the fields cease to produce at economically viable rates. This in turn will depend upon future oil and gas prices, which areinherently uncertain.

61


FINA

NC

IAL

STATE

ME

NTS


18 Financial instruments

Hedging instrumentsThe group’s activities expose it to financial risks of changes, primarily in oil and gas prices but also foreign currency exchangeand interest rates. The group uses derivative financial instruments to hedge certain of these risk exposures. The use of financialderivatives is governed by the group’s policies and approved by the Board of Directors, which provide written principles on theuse of financial derivatives.

It is group policy that all transactions involving derivatives must be directly related to the underlying business of the group. Thegroup does not use derivative financial instruments for speculative exposures. Premier undertakes oil and gas price hedgingperiodically within Board limits to protect operating cash flow against weak prices.

Oil and gas hedging is undertaken with collar options. Oil is hedged using Dated Brent oil price options. Indonesian gas ishedged using HSFO Singapore 180cst which is the variable component of the gas price.

During the year the group entered into further transactions at zero cost which both enhanced existing coverage and changedthe method by which this was achieved.

Oil productiona) Transactions were entered into during 2007 which increased both coverage and the floor price. Production from 2008 to

2012 is now 54 per cent hedged with an average floor of US$39.3/bbl and a cap of US$100.0/bbl.

b) At the end of 2007 an off-take agreement was agreed in which the parameters of the above hedges were embedded. Thisagreement is for four and a half years effective from 1 July 2008 and replaces the financially-settled hedges for that period.

c) A further option agreement which has the effect of closing out the floor and cap in the original financially-settled hedgespreviously in place.

d) The value at inception of the option agreement totalling US$37.9 million represents deferred income which will beamortised over the life of the off-take agreement.

Indonesian gas productionA transaction was entered into which increased coverage and the floor price. Production from 2008 to mid-year 2013 is now 34per cent hedged with a floor of US$250.0/mt and a cap of US$500.0/mt.

During the year gas hedges matured generating a cash cost of US$42,300 (2006: US$nil). No cash cost or gain was made on oilhedges (2006: US$nil). While all hedges were assessed to be effective, all movements in the fair values have been recognised inthe income statement, as all such movements relate to the time-value portion of hedges under IAS 39.

Fair value of hedges

Oil Gas TotalAsset/(liability) $ million $ million $ million

At 1 January 2006 3.4 (1.7) 1.7 Charge to income statement for 2006 (4.2) 2.2 (2.0)

At 1 January 2007 (0.8) 0.5 (0.3) Charge to income statement for 2007 (40.0) (24.9) (64.9)

At 31 December 2007 (40.8) (24.4) (65.2)

Fair value of option at 31 December 2007 37.9 – 37.9

Deferred revenue at 31 December 2007 (37.9) – (37.9)

The fair values, which have been determined from counterparties with whom the trades have been concluded, have beenrecognised in the balance sheet in trade and other receivables and trade and other payables.

The key variable which affects the fair value of the group’s hedge instruments is market expectations about future commodityprices. The following illustrates the sensitivity of net income and equity to a ten per cent increase and a ten per cent decreasein this variable:

Oil Gas Total$ million $ million $ million

Ten per cent increase 5.3 41.6 46.9Ten per cent decrease (0.3) (11.6) (11.9)

62


63


FINA

NC

IAL

STATE

ME

NTS

18 Financial instruments (continued)

Interest rate risk profile of financial liabilitiesThe interest rate profile of the financial liabilities of the group as at 31 December was:

Fixed rateweighted

average Fixed rate Floating rate Total interest rate

$ million $ million $ million %

2007:Bank loans – 53.0 53.0 – Convertible bonds 250.0 – 250.0 2.875

Total 250.0 53.0 303.0 –

In 2006 there were no outstanding bank loans or convertible bonds in issue.

The carrying values on the 2007 balance sheet of the bank loans and the convertible bonds which are stated net of debtarrangement fees and issue costs are as follows:

2007$ million

Bank loans 52.1Convertible bonds:Liability component 195.6Equity component 48.8

The floating rate financial liabilities comprise bank borrowings bearing interest at rates set by reference to US$ LIBOR, exposingthe group to a cash flow interest rate risk.

Interest rate risk profile of financial assetsThe interest rate profile of the financial assets of the group as at 31 December was:

Floating rate Interest free Total$ million $ million $ million

2007Cash and short-term deposits:Sterling 0.3 – 0.3 US$ 313.1 5.3 318.4 Other 11.0 2.3 13.3

Total 324.4 7.6 332.0

2006Cash and short-term deposits:Sterling 0.5 – 0.5 US$ 25.2 8.3 33.5 Other 5.6 1.3 6.9

Total 31.3 9.6 40.9

The floating rate cash and short-term deposits consist of cash held in interest-bearing current accounts and deposits placed onthe money markets for periods ranging from overnight to three months.

The impact of an interest rate sensitivity analysis is immaterial to the group’s results.



Borrowing facilitiesThe group has committed borrowing facilities of US$275 million and £53 million, in addition to the convertible bonds. The undrawnbalance as at 31 December was:


Expiring in more than two years, but not more than five years 222.0 275.0

Fair value of financial assets and financial liabilitiesThe fair values of the financial assets and financial liabilities are:

2007 2007 2006 2006 Carrying Estimated Carrying Estimatedamount fair value amount fair value

$ million $ million $ million $ million

Primary financial instruments held or issued to financethe group’s operations:Cash and short-term deposits 332.0 332.0 40.9 40.9 Bank loans (53.0) (53.0) – –Liability component of convertible bonds (200.0) (200.0) – –

Derivative financial instruments held or issued to hedge the group’s exposure on expected future sales:Forward commodity contracts – net (0.4) (0.4) (0.3) (0.3)

Fair value is the amount at which a financial instrument could be exchanged in an arm’s length transaction, other than in aforced or liquidated sale. Where available, market values have been used to determine fair values. The estimated fair valueshave been determined using market information and appropriate valuation methodologies. Values recorded will not necessarilybe realised. Non-interest bearing financial instruments, which include accounts receivable from customers, and accountspayable are recorded materially at fair value reflecting their short-term maturity and are not shown in the above table.

Credit riskThe group’s credit risk is attributable to its trade receivables and its bank deposits. The amounts of receivables presented in thebalance sheet are net of allowances for doubtful receivables which were immaterial in 2007. The group does not requirecollateral or other security to support receivables from customers or related parties. The credit risk on liquid funds andderivative financial instruments is limited because the counterparties are banks with at least single A credit ratings assigned byinternational credit rating agencies.

The group has no significant concentration of credit risk.

The ageing profile of the group’s trade and other receivables and trade and other payables as at 31 December was:

Less than 3 months 1 month 2 to 3 months to 1 year 1 to 5 years Over 5 years Total$ million $ million $ million $ million $ million $ million

2007:Trade and other receivables 139.9 26.3 25.1 – – 191.3 Trade and other payables (64.9) (8.7) (14.6) – – (88.2) Convertible bonds – – (7.2) (28.8) (260.8) (296.8)

Total 75.0 17.6 3.3 (28.8) (260.8) (193.7)

2006:Trade and other receivables 112.6 16.8 9.8 – – 139.2 Trade and other payables (34.3) (0.9) (11.6) – – (46.8) Convertible bonds – – – – – –

Total 78.3 15.9 (1.8) – – 92.4

64



Currency riskTo cover Sterling exposures an amount of £57.1 million was purchased with forward contracts during the year (2006: £38.0 million).Premier’s activities are largely conducted in US$. All borrowings at the year-end were denominated in US$ to match thecurrency of the assets.

Liquidity riskUltimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidityrisk management framework for the management of the group’s short, medium and long-term funding and liquiditymanagement requirements. The group manages liquidity risk by maintaining adequate reserves, banking facilities andborrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financialassets and liabilities.

19 Deferred tax

UK UK petroleum corporation

revenue tax tax Overseas tax Total$ million $ million $ million $ million

At 1 January 2006 47.7 19.7 130.1 197.5 Charged to income statement 4.5 (12.3) (1.3) (9.1) Other movement – – 7.3 7.3On assets reclassified as held for sale – – (1.6) (1.6)

At 31 December 2006 52.2 7.4 134.5 194.1 On assets reclassified as no longer held for sale – – 1.6 1.6Charged to income statement (9.4) (4.7) (4.2) (18.3)Other movement – – 17.1 17.1

At 31 December 2007 42.8 2.7 149.0 194.5

Deferred corporation tax included US$6.2 million of deferred UK petroleum revenue tax (2006: US$4.9 million) and US$33.5 millionof deferred UK corporation tax (2006: US$17.0 million) related to decommissioning provisions in the UK. The majority of theremaining deferred tax balances arose as a result of temporary differences between the carrying values and tax bases of fixedassets. The other movement relates to the deferred effect of Norwegian tax rebates.

65


FINA

NC

IAL

STATE

ME

NTS


20 Share capital


Balance at 1 January 73.3 73.2Shares issued 0.2 0.1

Balance at 31 December 73.5 73.3

2007 2007 2006 200650p shares £ 50p shares £

Ordinary Shares:Authorised 311,904,002 155,952,001 311,904,002 155,952,001 Called-up, issued and fully paid 82,104,049 41,052,025 81,937,472 40,968,736

2007 2007 2006 200617.5p shares £ 17.5p shares £

Non-Voting Convertible Shares:Authorised 9,487,317 1,660,280 9,487,317 1,660,280 Called-up, issued and fully paid – – – –

Share-based paymentsShares issued relate to the company’s share option plans. There has been no new issue of shares in relation to the Asset andEquity Plan.

Share option plansThe company has share option schemes under which options to subscribe for the company’s shares have been granted tocertain executives and employees. Options granted are normally exercisable not less than three years after their grant and willlapse on their tenth anniversary. Options cannot be exercised until pre-determined performance conditions have beenachieved.

Under the Savings Related Share Option Scheme, eligible employees with six months or more continuous service can join thescheme. Employees can save to a maximum of £250 per month through payroll deductions for a period of three or five years,after which time they can acquire shares at up to a 20 per cent discount.

Under the Share Incentive Plan employees are invited to make contributions to buy Partnership Shares. If an employee agreesto buy Partnership Shares the company currently matches the number of Partnership Shares bought with an award of shares(Matching Shares), on a one-for-one basis.

2007 2006Weighted Weighted

average average Options exercise price Options exercise price

Outstanding at the beginning of the year 566,161 £3.31 723,949 £3.03Granted during the year 24,497 £9.96 16,125 £8.16Lapsed during the year (5,689) £5.36 (9,522) £4.09Exercised during the year (166,577) £2.88 (164,391) £2.49

Outstanding at the end of the year 418,392 £3.85 566,161 £3.31

Exercisable at the end of the year 214,660 £1.67 312,781 £2.04

The weighted average share price at the date of exercise for share options exercised during the year was £2.88. The optionsoutstanding at 31 December 2007 had a weighted average exercise price of £3.85 and a weighted average remainingcontractual life of 1.6 years.

The fair value of the options granted during the year was determined using the Black-Scholes valuation model and is not material.

The group recognised total expenses of US$7.8 million and US$3.0 million related to equity-settled share-based paymenttransactions in 2007 and 2006 respectively.

66


20 Share capital (continued)Asset and Equity PlanThe company currently operates an Asset and Equity Plan to reward employees for improvement in the asset value of thebusiness and the market value of the company over a three-year period. The plan has two bonus pools – an equity bonus pooland an asset bonus pool. The asset bonus pool is created by reference to the increase in the net asset value per share of thecompany over a three-year period and the equity bonus pool is created by reference to the increase in the equity market valueper share of the company over a three-year period.

Full details about this plan have been provided in the Remuneration Report on pages 31 to 40.

The company uses a Monte Carlo simulation model to calculate the value of the equity bonus pool of the plan.

The main assumptions used for the calculations are as follows:

Volatility: 29.0% to 33.0%Risk free rate of interest: 3.9% to 4.9%Historic market value growth factor: 91.0% to 204.0%

For the asset bonus pool a discounted cash flow model based on the average oil price over the period is used to calculate thefinal value of the pool and to estimate the value of future asset bonus pools.

For the year ended 31 December 2007, the total cost recognised by the company for share-based payments is US$15.7 million(2006: US$26.4 million), with a cumulative liability on the balance sheet of US$18.3 million (2006: US$26.7 million) and a cost ofUS$7.8 million recorded in equity (2006: US$3.0 million). Like other elements of remuneration, this charge is processed throughthe time-writing system which allocates cost, based on time spent by individuals, to various entities within the Premier Oilgroup. Part of this cost is therefore capitalised as directly attributable to capital projects and part is charged to the incomestatement as exploration expense, operating costs, pre-licence exploration costs or general and administration costs.

Ordinary Shares and Non-Voting Convertible SharesThe rights and restrictions attached to the Ordinary Shares and Non-Voting Convertible Shares (of which none of the Non-VotingConvertible Shares are currently issued) are as follows:

Dividend rightsThe rights of the holders of Ordinary Shares and Non-Voting Convertible Shares shall rank pari passu in all respects with eachother in relation to dividends.

Winding up or reduction of capitalOn a return of capital on a winding up or otherwise (other than on conversion, redemption or purchase of shares) the rights ofthe holders of Ordinary Shares and Non-Voting Convertible Shares to participate in the distribution of the assets of thecompany available for distribution shall rank pari passu in all respects with each other.

Voting rightsThe holders of Non-Voting Convertible Shares shall be entitled to receive notice of, but not to attend, vote or speak at, anyGeneral Meeting of the company. The holders of Ordinary Shares shall be entitled to receive notice of, attend, vote and speakat any General Meeting of the company.

ConversionThe Non-Voting Convertible Shares shall be converted into fully paid Ordinary Shares on the basis of one Ordinary Share forevery Non-Voting Convertible Share so converted, at the times and in the manner described below:

– upon transfer of Non-Voting Convertible Shares to the company with a duly executed and stamped stock transfer form inrespect of such shares;

– where any person who is a holder of the Non-Voting Convertible Shares ceases to be a permitted holder (a person towhom a Non-Voting Convertible Share is originally issued and any person of subsidiary undertaking or holding companywhich holds the Non-Voting Convertible Shares) or upon the transfer of Non-Voting Convertible Shares to a person who isnot a permitted holder;

– upon the issue of Ordinary Shares by the company pursuant to the exercise of share options under any of the Premiershare option schemes; and

– each holder of Non-Voting Convertible Shares has the right to require the company to convert some or all of its Non-VotingConvertible Shares into Ordinary Shares.

67


FINA

NC

IAL

STATE

ME

NTS


21 Consolidated statement of changes in equity

Share Capital Translation Share premium Revenue redemption and hedging Equity

capital account reserves reserve reserves reserve TotalNote $ million $ million $ million $ million $ million $ million $ million

At 1 January 2006 73.2 8.0 293.6 1.7 (0.4) – 376.1 Issue of Ordinary Shares 0.1 0.6 – – – – 0.7 Provision for share-based

payments 20 – – 3.0 – – – 3.0 Total recognised income – – 69.0 – 0.3 – 69.3

At 31 December 2006 73.3 8.6 365.6 1.7 (0.1) – 449.1 Issue of Ordinary Shares 0.2 0.8 – – – – 1.0 Provision for share-based

payments 20 – – 7.8 – – – 7.8 Equity component of

convertible bonds issued 15 – – – – – 51.8 51.8 Transfer between reserves – – 3.0 – – (3.0) –Total recognised income – – 39.1 – 4.1 – 43.2

At 31 December 2007 73.5 9.4 415.5 1.7 4.0 48.8 552.9

22 Own shares


At 1 January 8.5 8.5 Release of shares for long-term incentive plan (4.9) –


The own shares reserve represents the cost of shares in Premier Oil plc purchased in the market and held by the Premier Oil plcEmployee Benefit Trust to satisfy options under the group’s share option schemes.

68


23 Notes to the cash flow statement


Profit before tax for the year 147.0 156.6 Adjustments for:Depreciation, depletion, amortisation and impairment 107.9 104.0Exploration expense 65.3 21.8Pre-licence exploration costs 8.3 21.8 Net operating charge for long-term employee benefit plans less contributions (0.6) (1.9) Provision for share-based payments 7.8 3.0 Interest payable, other finance expenses and mark to market revaluation on commodity hedges 83.1 8.0Interest revenue, finance and other gains (10.7) –Release of warranty provision – (2.5)

Operating cash flows before movements in working capital 408.1 310.8 Increase in inventories (7.1) (1.5) Increase in receivables (43.7) (32.4) (Decrease)/increase in payables (4.5) 84.1

Cash generated by operations 352.8 361.0 Income taxes paid (90.3) (116.2)Interest income received 7.0 –

Net cash from operating activities 269.5 244.8

Analysis of changes in net cash


a) Reconciliation of net cash flow to movement in net cash:Movement in cash and cash equivalents 291.1 2.1 Proceeds from long-term loans (53.0) –Repayment of long-term loans – 65.0 Proceeds on issue of convertible bonds – debt component (200.0) –

Increase in net cash in the period 38.1 67.1 Opening net cash/(debt) 40.9 (26.2)

Closing net cash 79.0 40.9

b) Analysis of net cash:Cash and cash equivalents 18 332.0 40.9 Long-term debt* 18 (253.0) –

Total net cash 79.0 40.9

* The carrying value of the convertible bonds and other long-term debt on the balance sheet are stated net of the unamortised portion of the issue costs(US$4.4 million) and debt arrangement fees (US$0.9 million) respectively.

24 Capital commitments and guaranteesAt 31 December 2007, the group had capital commitments on exploration and development licences totalling US$19.3 million(2006: US$70.6 million), US$0.1 million as retainer fees for its alliance partners (2006: US$0.1 million), performance guarantees ofUS$12.6 million (2006: US$10.7 million), and customs guarantees of US$0.9 million (2006: US$0.4 million).

As described in note 11 the company entered into an agreement with KUFPEC during the year to de-merge their respectiveinterests in Pakistan from the Premier-KUFPEC Pakistan joint venture. The results of the Pakistan operations are fullyconsolidated in the financial statements of the group for 2007. At 31 December 2006, the group’s share of joint ventureexploration and development licences was US$13.7 million and the group’s share of joint venture customs guarantees wasUS$0.9 million.

69


FINA

NC

IAL

STATE

ME

NTS


25 Group pension schemes


UK funded pension scheme 2.6 3.4UK unfunded pension scheme 1.1 1.0 Indonesia unfunded termination benefit scheme 4.5 4.4

Total liability in balance sheet 8.2 8.8

Funded benefit schemesThe group operates a defined benefit pension scheme in the UK – The Premier Oil plc Retirement and Death Benefits Plan (theScheme). The Scheme was closed to new members (aside from the provision of insured death in service benefits) in 1997 and anew scheme, providing benefits on a defined contribution basis, was started. Both schemes are funded by the payment ofcontributions to separately administered trust funds. As a consequence of being closed to new entrants, the current servicecosts of the Scheme under the IAS 19 – ‘Employee Benefits’ valuation will increase as the members approach retirement.

The pension costs for the Scheme are determined with the advice of an independent qualified actuary. The most recent formalvaluation was undertaken as at 1 January 2005 using the Attained Age Method and a market-related funding basis, of which theprincipal financial assumptions were investment return: 6.5 per cent pa, salary growth: 4.8 per cent pa and pension increases:2.8 per cent pa. The market value of the Scheme’s assets was £9.9 million and, on the specific method and assumptionsadopted, the assets covered 93 per cent of the members’ accrued benefits based on projected pensionable salaries. During2007, the employer contributed to the Scheme at the rate of 19 per cent of pensionable salaries together with £336,000 paid inmonthly instalments. Aside from any lump sum contribution, the employer expects to contribute £427,000 to the Scheme in 2008.

The following figures have been prepared in compliance with IAS 19 – ‘Employee Benefits’ by an independent actuary on thebasis of membership data current as at 31 December 2007 but taking account of pension increases effected on 1 January 2008.The benefit obligations and service cost have been measured using the projected unit credit method and the pension expensehas been assessed on the basis that the group adopts the policy of fully recognising actuarial gains and losses during theperiod in which they arise.

The principal actuarial assumptions used were as follows:

At At 31 December 31 December

2007 2006% pa % pa

Discount rate 5.9 5.2Salary growth 5.4 5.1Return on assets 6.7 6.0Price inflation 3.4 3.1Pension increases 3.4 3.1

Defined benefit obligations and assets:



Value of funded benefit obligations 31.9 31.4 less fair value of Scheme assets (29.3) (28.0)

Liability in balance sheet 2.6 3.4

70


25 Group pension schemes (continued)Changes in the present value of benefit obligations:


Benefit obligation at 1 January 31.4 28.1 Service costs excluding employee contributions 0.3 0.3 Interest cost 1.7 1.4 Benefits paid (1.2) (0.7) Actuarial gains (0.5) (1.6) Currency translation effects 0.2 3.9

Benefit obligation at 31 December 31.9 31.4

Changes in the fair value of Scheme assets:


Assets at 1 January 28.0 21.1 Employer contributions 0.8 3.0 Actual return on Scheme assets 1.3 1.5 Benefits paid (1.2) (0.7) Currency translation effects 0.4 3.1

Assets at 31 December 29.3 28.0

Portfolio distribution and expected returns at 31 December:

2007 2006Expected Expected

rate of return Fair value rate of return Fair value% pa $ million % pa $ million

Equities 7.9 12.6 7.2 11.7Bonds 5.9 11.0 5.2 10.7Cash 5.5 5.7 5.0 5.6

Total at 31 December 6.7 29.3 6.0 28.0

Pension expense:


Service cost 0.3 0.4 Interest cost 1.7 1.4 Expected return on Scheme assets (1.7) (1.3) Investment losses/(gains) 0.4 (0.2) Actuarial gains (0.6) (1.6)

Total pension expense for the year 0.1 (1.3)

A total gain of US$0.2 million (2006: gain of US$1.5 million) was recognised directly in equity during the year.

Reconciliation of balance sheet liability:


At 1 January 3.4 7.0 Pension expense for the year 0.1 (1.3) Contributions paid (0.9) (3.0) Currency translation effects – 0.7


71


FINA

NC

IAL

STATE

ME

NTS


25 Group pension schemes (continued)Five year history of experience adjustments at 31 December:

2007 2006 2005 2004 2003$ million $ million $ million $ million $ million

Value of defined benefit obligation (31.9) (31.4) (28.1) (25.1) (20.9) Fair value of Scheme assets 29.3 28.0 21.1 18.9 16.2Deficit in the Scheme (2.6) (3.4) (7.0) (6.2) (4.7) Experience adjustments on Scheme liabilities:Amount – gain/(loss) – (0.6) 0.1 0.7 (1.5) Percentage of Scheme liabilities 0% (2%) 0% 3% (7%)Experience adjustments on Scheme assets:Amount – gain/(loss) (0.4) 0.2 1.6 0.2 0.8Percentage of Scheme assets (1%) 1% 8% 1% 5%

Unfunded benefit schemesIn Indonesia the group operates a Service, Severance and Compensation pay scheme under a Collective Labour Agreementwith the local workforce. This is an unfunded post-employment defined benefit scheme in nature.

In addition, the group is paying an unfunded pension to a former director of the company in regard to which annual increasesand a reversionary spouse’s pension apply on the same basis as to pensions paid under the Scheme.

On the same actuarial basis as used to asses the Scheme’s pension costs, the present value as at 31 December 2007 of thefuture payments projected to be made in respect of UK unfunded pensions is US$1.1 million (2006: US$1.0 million).

A total loss of US$0.1 million (2006: loss of US$0.1 million) was recognised directly in equity during the year.

Defined contribution benefit schemeThe group operates a defined contribution retirement benefit scheme. The only obligation of the group with respect to theretirement benefit scheme is to make specified contributions. Payments to the defined contribution scheme are charged as anexpense as they fall due. The total cost charged to income of US$1.4 million (2006: US$1.2 million) represents contributionspayable to these schemes by the group at rates specified in the rules of the scheme.

26 Related party transactionsTransactions between the company and its subsidiaries, associates and joint ventures, which are related parties, have beeneliminated on consolidation and are not disclosed in this note.

Directors and executive remunerationThe remuneration of directors and other key members of management during the year is highlighted below. Furtherinformation regarding the remuneration of individual directors is provided in the audited part of the Remuneration Report on pages 31 to 40.


Short-term employee benefits 4.8 3.5Post-employment benefits 0.5 0.5Other long-term benefits 2.8 3.3

8.1 7.3

27 Events after the balance sheet dateThe group announced well results for THAM-1 (Gabon) prior to the announcement of its full-year results. The results of this wellare described in the Chief Executive’s Review. At 31 December 2007, the related cost capitalised in the balance sheet, inintangible exploration and evaluation assets, was US$6.4 million.

72


INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF PREMIER OIL PLC

73


We have audited the parent company financial statements of Premier Oil plc for the year ended 31 December 2007 which comprisethe Balance Sheet, Statement of Total Recognised Gains and Losses and the related notes 1 to 14. These parent company financialstatements have been prepared under the accounting policies set out therein.

We have reported separately on the group financial statements of Premier Oil plc for the year ended 31 December 2007 and on theinformation in the Remuneration Report that is described as having been audited.

This report is made solely to the company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our auditwork has been undertaken so that we might state to the company’s members those matters we are required to state to them in anauditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyoneother than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report and the parent company financial statements in accordance withapplicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out inthe Statement of Directors’ Responsibilities.

Our responsibility is to audit the parent company financial statements in accordance with relevant legal and regulatory requirementsand International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether theparent company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report toyou whether in our opinion the Report of the Directors is consistent with the parent company financial statements. The informationgiven in the Report of the Directors includes that specific information presented in the Chief Executive’s and Financial Reviews that iscross referred from the business review section of the Report of the Directors.

In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all theinformation and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and othertransactions is not disclosed.

We read the other information contained in the Annual Report as described in the contents section and consider whether it isconsistent with the audited parent company financial statements. The other information comprises only the Report of the Directors,the Chairman’s Statement and the Chief Executive’s and Financial Reviews. We consider the implications for our report if we becomeaware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilitiesdo not extend to any further information outside the Annual Report.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing PracticesBoard. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent companyfinancial statements. It also includes an assessment of the significant estimates and judgements made by the directors in thepreparation of the parent company financial statements, and of whether the accounting policies are appropriate to the company’scircumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in orderto provide us with sufficient evidence to give reasonable assurance that the parent company financial statements are free frommaterial misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the parent company financial statements.

OpinionIn our opinion:

• the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally AcceptedAccounting Practice, of the state of the company’s affairs as at 31 December 2007;

• the parent company financial statements have been properly prepared in accordance with the Companies Act 1985; and

• the information given in the Report of the Directors is consistent with the parent company financial statements.

Deloitte & Touche LLPChartered Accountants and Registered Auditors LondonUnited Kingdom12 March 2008

FINA

NC

IAL

STATE

ME

NTS

PARENT COMPANY FINANCIAL STATEMENTS: BALANCE SHEETAs at 31 December 2007


Fixed assets:Property, plant and equipment 3 79.2 75.6 Investments in subsidiaries 4 553.2 501.4

Total fixed assets 632.4 577.0

Current assets:Debtors 5 8.7 10.6 Deferred tax asset 5 16.2 7.7

Total current assets 24.9 18.3 Creditors: amounts falling due within one year 6 (36.3) (29.2)

Net current liabilities (11.4) (10.9)

Total assets less current liabilities 621.0 566.1 Creditors: amounts falling due after one year 7 (396.0) (471.7)

Net assets excluding pension liability 225.0 94.4

Provisions for liabilities 8 (12.6) (16.2) Pension liability 9 (3.7) (4.4)

Net assets including pension liability 208.7 73.8

Capital and reserves:Called-up share capital 11 73.5 73.3 Share premium account 12 9.4 8.6 Profit and loss account 12 72.3 (9.8) Capital redemption reserve 12 1.7 1.7 Equity reserve 12 51.8 –

Total equity shareholders’ funds 13 208.7 73.8

The financial statements were approved by the Board of Directors and authorised for issue on 12 March 2008.

They were signed on its behalf by:

S C LockettA R C DurrantDirectors

74


PARENT COMPANY FINANCIAL STATEMENTS: STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSESFor the year ended 31 December 2007


Profit/(loss) for the financial year 74.2 (29.7)Pension costs – actuarial gains 9 0.1 1.4

Total recognised gains and losses relating to the year 74.3 (28.3)

75


FINA

NC

IAL

STATE

ME

NTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTSFor the year ended 31 December 2007

1 Significant accounting policies

Basis of accountingThe separate financial statements of the company are presented as required by the Companies Act 1985. They have beenprepared under the historical cost convention and in accordance with applicable United Kingdom Accounting Standards andlaw.

The principal accounting policies are summarised below. They have all been applied consistently throughout the year and thepreceding year.

InvestmentsFixed asset investments in subsidiaries and associates are shown at cost less provision for impairment.

Pension costsThe company operates a defined benefit pension scheme, which requires contributions to be made to a separatelyadministered fund. The scheme was closed to new members (aside from the provision of insured death in service benefits) in1997. The company accounts for pension costs in line with Financial Reporting Standard (FRS) 17 – ‘Retirement Benefits’.

The amounts charged to operating profit regarding the defined benefit scheme are the current service costs and gains andlosses on settlements and curtailments. Past service costs are recognised immediately in the profit and loss account if thebenefits have vested. If the benefits do not vest immediately, the costs are recognised over the period until vesting occurs. Theinterest costs and the expected return on the assets are shown as a net amount of other financial costs or credits adjacent tointerest. Actuarial gains and losses are recognised immediately in the statement of total recognised gains and losses.

Pension scheme assets are measured at fair values and liabilities are measured on an actuarial basis using the Projected UnitCredit Method, and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalentcurrency and term to the scheme liabilities.

The actuarial valuations are obtained at least triennially and are updated at each balance sheet date. The resulting defined benefitasset or liability, net of related deferred tax, is presented separately after other net assets on the face of the balance sheet.

Foreign exchangeTransactions denominated in foreign currencies are recorded in the local currency at actual exchange rates as of the dates ofthe transactions. Monetary assets and liabilities denominated in foreign currencies at the year-end are reported at the rates ofexchange prevailing at the year-end. Any gain or loss arising from a change in exchange rate subsequent to the dates of thetransactions is included as an exchange gain or loss in the profit and loss account.

Cash flow statementNo cash flow statement is prepared for the company under FRS 1 – ‘Cash Flow Statements’ as the cash flows of the companyhave been included in the group cash flow statement of Premier Oil plc.

Related party transactionsThe company has taken advantage of the exemption available under FRS 8 – ‘Related Party Disclosures’ with regard to the non-disclosure of transactions between group companies.

Share-based paymentsThe company has applied the requirements of FRS 20 – ‘Share-based Payments’. In accordance with the transitional provisions,FRS 20 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005.

The company issues equity-settled and cash-settled share-based payments to certain employees. Equity-settled share-basedpayments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight-line basis over the vesting period, based on the company’s estimate of sharesthat will eventually vest.

Fair value is measured by use of the binomial model. The expected life used in the model has been adjusted, based onmanagement’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

A liability equal to the portion of the goods or services received is recognised as the current fair value determined at eachbalance sheet date for cash-settled share-based payments.

Sales revenueSales of petroleum production are recognised when goods are delivered or the title has passed to the customer.

TaxCurrent tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using thetax rates and laws that have been enacted or substantively enacted by the balance sheet date.

76


1 Significant accounting policies (continued)

Deferred taxDeferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet datewhere transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or toreceive more tax, with the following exceptions:

– provision is made for deferred tax that would arise on remittance of the retained earnings of overseas subsidiaries, associatesand joint ventures only to the extent that, at the balance sheet date, dividends have been accrued as receivable; and

– deferred tax assets are recognised only to the extent that the directors consider that it is more likely than not that there willbe suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timingdifferences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.

Fixed assetsOil and gas assets(a) Development and production assets

Development and production assets are accumulated generally on a field-by-field basis and represent the cost ofdeveloping the commercial reserves discovered and bringing them into production.

The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directlyattributable overheads, finance costs capitalised, and the cost of recognising provisions for future restoration anddecommissioning.

Depreciation of producing assetsThe net book values of producing assets are depreciated generally on a field-by-field basis using the unit-of-productionmethod by reference to the ratio of production in the period and the related commercial reserves of the field, taking intoaccount future development expenditures necessary to bring those reserves into production.

Producing assets are generally grouped with other assets that are dedicated to serving the same reserves for depreciationpurposes, but are depreciated separately from producing assets that serve other reserves.

Pipelines are depreciated on a unit-of-throughput basis.

(b) Impairment of development and production assetsAn impairment test is performed whenever events and circumstances arising during the development or production phaseindicate that the carrying value of a development or production asset may exceed its recoverable amount.

The carrying amount is compared against the expected recoverable amount of the asset, generally by reference to thepresent value of the future net cash flows expected to be derived from production of commercial reserves. The cashgenerating unit applied for impairment test purposes is generally the field, except that a number of field interests may begrouped as a single cash generating unit where the cash flows of each field are interdependent.

(c) DecommissioningProvision for decommissioning is recognised in full at the commencement of oil and gas production. The amount recognisedis the present value of the estimated future expenditure. A corresponding tangible fixed asset is also created at an amountequal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. Any change inthe present value of the estimated expenditure is reflected as an adjustment to the provision and the fixed asset.

Stock and underliftNon-production related stocks are valued at the lower of cost or net realisable value. Under and overlifts of crude oil arerecorded at market value.

Derivative financial instrumentsThe company accounts for derivative financial instruments in line with FRS 25 – ‘Financial Instruments: Disclosure andPresentation’ and FRS 26 – ‘Financial Instruments: Recognition and Measurement’.

The company uses derivative financial instruments (derivatives) to manage its exposure to oil price fluctuations. All derivativesare initially recorded at cost, including transaction costs. Derivatives are subsequently carried at fair value. All changes in fairvalue are recorded as financial income or expense in the year in which they arise.

Fair value is the amount for which a financial asset, liability or instrument could be exchanged between knowledgeable andwilling parties in an arm’s length transaction. It is determined by reference to quoted market prices adjusted for estimatedtransaction costs that would be incurred in an actual transaction, or by the use of established estimation techniques such asoption pricing models and estimated discounted values of cash flows.

77


FINA

NC

IAL

STATE

ME

NTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)For the year ended 31 December 2007

2 Profit/(loss) for the yearAs permitted by section 230 of the Companies Act 1985, the company has elected not to present its own profit and lossaccount for the year. Premier Oil plc reported a profit for the financial year ended 31 December 2007 of US$74.2 million (2006:loss of US$29.7 million).

The auditors’ remuneration for audit services to the company was US$10,000 (2006: US$10,000).

3 Property, plant and equipment

Oil and gas propertiesNorth Sea

$ million

Cost:At 1 January 2006 –Additions during the year 82.2

At 1 January 2007 82.2 Additions during the year 15.3

At 31 December 2007 97.5

Amortisation and depreciation:At 1 January 2006 –Charge for the year 6.6

At 1 January 2007 6.6 Charge for the year 11.7


Net book value:At 31 December 2006 75.6


Amortisation and depreciation for oil and gas properties is calculated on a unit-of-production basis, using the ratio of oil andgas production in the period to the estimated quantities of proved and probable reserves at the end of the period plusproduction in the period, on a field-by-field basis. Proved and probable reserve estimates are based on a number of underlyingassumptions including oil and gas prices, future costs, oil and gas in place and reservoir performance, which are inherentlyuncertain. Management uses established industry techniques to generate its estimates and regularly references its estimatesagainst those of joint venture partners or external consultants. However, the amount of reserves that will ultimately be recoveredfrom any field cannot be known with certainty until the end of the field’s life.

4 Fixed asset investments


Cost and net book value:Subsidiary undertakings 501.4 501.4 Additions in the year 51.8 –

553.2 501.4

78


4 Fixed asset investments (continued)The company has investments in the following 100 per cent owned subsidiaries which principally affected the profits or netassets of the group. To avoid a statement of excessive length, details of investments which are not significant have beenomitted.

Country of incorporation Name of company Business and area of operation or registration

Premier Oil Group Ltd* Intermediate holding company, UK ScotlandPremier Oil Finance (Jersey) Ltd* Convertible bond issuing company, Jersey JerseyPremier Oil Exploration Ltd Exploration, production and development, UK ScotlandPremier Pict Petroleum Ltd Exploration, production and development, UK ScotlandPremier Oil Kakap BV Exploration, production and development, Indonesia NetherlandsPremier Oil Natuna Sea BV Exploration, production and development, Indonesia NetherlandsPremier Oil Holdings Ltd Intermediate holding company, UK England and WalesFP Mauritania B BV Exploration, production and development, Mauritania NetherlandsPremier Oil Mauritania B Ltd Exploration, production and development, Mauritania JerseyPremier Oil Vietnam Offshore BV Exploration, production and development, Vietnam NetherlandsPremier Oil Sumatra (North) BV Exploration, production and development, Indonesia NetherlandsPKP Exploration Ltd** Exploration, production and development, Pakistan England and WalesPKP Kadanwari 2 Ltd** Exploration, production and development, Pakistan Cayman IslandsPKP Kirthar 2 BV** Exploration, production and development, Pakistan Netherlands

* Held directly by Premier Oil plc. All other companies are held through subsidiary undertakings.** In September 2001, a joint venture was formed with Kuwait Foreign Petroleum Exploration Company KSC (KUFPEC) to hold Premier’s and KUFPEC’s interests

in Pakistan through a company called Premier-Kufpec Pakistan BV. During 2007 the company entered into an agreement with KUFPEC to de-merge theirrespective interests in Pakistan from the Premier-KUFPEC Pakistan joint venture. The de-merged field portfolios now run as separately owned businesses.

5 Debtors: amounts falling due within one year


Trade debtors – 5.6 VAT 0.2 –Other debtors 8.2 4.6 Prepayments and accrued income 0.3 0.4

8.7 10.6

Deferred taxThe deferred tax asset of US$16.2 million (2006: US$7.7 million) is considered to be recoverable on the basis that it is more likelythan not that there will be suitable taxable profits in the future from which the losses giving rise to the asset can be deducted.

6 Creditors: amounts falling due within one year


Trade creditors – 3.1 Other taxation and social security 14.5 0.1 Other creditors 10.7 0.2 Accruals and deferred income 11.1 25.8

36.3 29.2

79


FINA

NC

IAL

STATE

ME

NTS


7 Creditors: amounts falling due after one year


Amounts owed to subsidiary undertakings 396.0 471.7

The amounts owed to subsidiary undertakings relate to a balance which bears interest based on LIBOR and is not secured. Thisis repayable on 31 December 2012.

8 Provisions for liabilities


Asset and Equity Plan:At 1 January 8.7 –Provision in the year 1.9 8.7Reclassification of provision to creditors falling due within one year (7.0) –


Decommissioning costs:At 1 January 7.5 –Provision for abandonment 1.0 6.3 Unwinding of discount on decommissioning provision 0.4 0.3 Exchange differences 0.1 0.9


Total provisions 12.6 16.2

The company currently operates an Asset and Equity Plan to reward employees for improvement in the asset value of thebusiness and the market value of the company over a three-year period. Further details of this plan are disclosed in note 11 onpages 83 to 85.

The decommissioning provision represents the present value of decommissioning costs relating to the UK oil and gas interests,which are expected to be incurred between 2008 and 2014. These provisions have been created based on Premier’s internalestimates and, where available, operator’s estimates. Based on the current economic environment, assumptions have beenmade which management believe are a reasonable basis upon which to estimate the future liability. These estimates arereviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs willultimately depend upon future market prices for the necessary decommissioning works required, which will reflect marketconditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease toproduce at economically viable rates. This in turn will depend upon future oil and gas prices, which are inherently uncertain.

80


9 Pension liability


UK funded pension scheme 2.6 3.4 UK unfunded pension scheme 1.1 1.0

Total liability in balance sheet 3.7 4.4

The company operates a defined benefit pension scheme in the UK – The Premier Oil plc Retirement and Death Benefits Plan(the Scheme). The Scheme was closed to new members (aside from the provision of insured death in service benefits) in 1997and a new scheme, providing benefits on a defined contribution basis, was started. Both schemes are funded by the paymentof contributions to separately administered trust funds. As a consequence of being closed to new entrants, the current servicecosts of the Scheme under the FRS 17 – ‘Employee Benefits’ valuation will increase as the members approach retirement.

The pension costs for the Scheme are determined with the advice of an independent qualified actuary. The most recent formalvaluation was undertaken as at 1 January 2005 using the Attained Age Method and a market-related funding basis, of which theprincipal financial assumptions were investment return: 6.5 per cent pa, salary growth: 4.8 per cent pa and pensions increases:2.8 per cent pa. The market value of the Scheme’s assets was £9.9 million and, on the specific method and assumptionsadopted, the assets covered 93 per cent of the members’ accrued benefits based on projected pensionable salaries. During2007, the employer contributed to the Scheme at the rate of 19 per cent of pensionable salaries together with £336,000 paid inmonthly instalments. Aside from any further lump sum contribution, the employer expects to contribute £427,000 to theScheme in 2008.

The following figures have been prepared in compliance with FRS 17 – ‘Employee Benefits’ (incorporating the amendmentannounced in December 2006) by an independent actuary on the basis of membership data current as at 31 December 2007but taking account of pension increases effected on 1 January 2008. The benefit obligations and service cost have beenmeasured using the projected unit credit method.

The principal financial assumptions adopted for this actuarial valuation were:

Rate of investment return: 6.5% paRate of salary increases: 4.8% paRate of pension increases: 2.8% pa

Employee benefit obligationsThe amounts recognised in the balance sheet are as follows:



Present value of funded obligations (31.9) (31.4)Fair value of Scheme assets 29.3 28.0

Deficit before allowing for deferred tax (2.6) (3.4)

The amounts recognised in profit and loss are as follows:


Current service cost 0.3 0.4 Interest on obligation 1.7 1.4 Expected return on Scheme assets (1.7) (1.3)

Total 0.3 0.5

Actual return on Scheme assets 1.3 1.5

A total gain of US$0.2 million (2006: gain of US$1.5 million) was recognised directly in equity during the year.

81


FINA

NC

IAL

STATE

ME

NTS


9 Pension liability (continued)Changes in the present value of the defined benefit obligations are as follows:



Opening defined benefit obligation 31.4 28.1Service cost excluding employee contributions 0.3 0.3 Interest cost 1.7 1.4 Actuarial gains (0.5) (1.6)Benefits paid (1.2) (0.7)Currency translation effects 0.2 3.9

Closing defined benefit obligation 31.9 31.4

Changes in the fair value of Scheme assets are as follows:



Opening fair value of Scheme assets 28.0 21.1 Expected return 1.7 1.3 Investment (losses)/gains (0.4) 0.2 Employer contributions 0.8 3.0 Benefits paid (1.2) (0.7)Currency translation effects 0.4 3.1

Closing fair value of Scheme assets 29.3 28.0

Major categories of Scheme assets as a percentage of total Scheme assets are as follows:


2007 2006

Equities 43% 42%Bonds 38% 38%Cash 19% 20%

Principal actuarial assumptions at the balance sheet date:

At 31 December 2007 At 31 December 2006

Discount rate 5.9% pa 5.2% paExpected return on Scheme assets 6.7% pa 6.0% paSalary growth 5.4% pa 5.1% paPrice inflation 3.4% pa 3.1% paPension increases 3.4% pa 3.1% paMortality PxA92 by year of birth PxA92 by year of birth

with ‘medium cohort’projections

82


83

9 Pension liability (continued)Sensitivity to changes in assumptionsChanges to the assumed discount rate would have a significant effect on the value placed on the defined benefit obligations.As at 31 December 2007, a one percentage point change in this assumption would have had the following effects on theclosing defined benefit obligation:

Discount rate: 5.9% pa Discount rate: Discount rate:

(as used for report) 4.9% pa 6.9% pa$ million $ million $ million

Defined benefit obligation 31.9 37.6 27.4

5 year historic record:

2007 2006 2005 2004 2003$ million $ million $ million $ million $ million

Defined benefit obligation (31.9) (31.4) (28.1) (25.1) (20.9)Fair value of Scheme assets 29.3 28.0 21.1 18.9 16.2 Deficit in the Scheme (2.6) (3.4) (7.0) (6.2) (4.7)Experience adjustments on Scheme liabilities – (0.6) 0.1 0.7 (1.5)Experience adjustments on Scheme assets (0.4) 0.2 1.6 0.2 0.8

Unfunded pensionsIn addition, the company is paying an unfunded pension to a former director of the company in regard to which annualincreases and a reversionary spouse’s pension apply on the same basis as to pensions paid under the Scheme.

On the same actuarial basis as used to assess the Scheme’s pension costs, the present value as at 31 December 2007 of thefuture payments projected to be made in respect of unfunded pensions is US$1.1 million (2006: US$1.0 million). A total loss ofUS$0.1 million (2006: loss of US$0.1 million) was recognised directly in equity during the year.

10 Capital commitments and guaranteesAt 31 December 2007 the company had capital commitments on exploration and development licences totalling US$nil(2006: US$1.6 million), US$0.1 million as retainer fees for its alliance partners (2006: US$0.1 million), performance guarantees ofUS$4.6 million (2006: US$10.7 million), and customs guarantees of US$0.4 million (2006: US$0.4 million).

The company, together with certain subsidiary undertakings, has jointly guaranteed the group’s borrowing facilities of US$275million and £53 million, maturing on 31 July 2010.

11 Share capital


Balance at 1 January 73.3 73.2 Shares issued 0.2 0.1

Balance at 31 December 73.5 73.3

2007 2007 2006 200650p shares £ 50p shares £

Ordinary Shares:Authorised 311,904,002 155,952,001 311,904,002 155,952,001 Called-up, issued and fully paid 82,104,049 41,052,025 81,937,472 40,968,736

2007 2007 2006 200617.5p shares £ 17.5p shares £

Non-Voting Convertible Shares:Authorised 9,487,317 1,660,280 9,487,317 1,660,280 Called-up, issued and fully paid – – – –


FINA

NC

IAL

STATE

ME

NTS


11 Share capital (continued)Share-based paymentsShares issued relate to the company’s share option plans. There has been no new issue of shares in relation to the Assetand Equity Plan.

Share option plansThe company has share option schemes under which options to subscribe for the company’s shares have been granted to certainexecutives and employees. Options granted are normally exercisable not less than three years after their grant and will lapse ontheir tenth anniversary. Options cannot be exercised until pre-determined performance conditions have been achieved.

Under the Savings Related Share Option Scheme, eligible employees with six months or more continuous service can join thescheme. Employees can save to a maximum of £250 per month through payroll deductions for a period of three or five years,after which time they can acquire shares at up to a 20 per cent discount.

Under the Share Incentive Plan employees are invited to make contributions to buy Partnership Shares. If an employee agreesto buy Partnership Shares the company currently matches the number of Partnership Shares bought with an award of shares(Matching Shares), on a one-for-one basis.

2007 2006Weighted Weighted

average average Options exercise price Options exercise price

Outstanding at the beginning of the year 566,161 £3.31 723,949 £3.03Granted during the year 24,497 £9.96 16,125 £8.16Lapsed during the year (5,689) £5.36 (9,522) £4.09Exercised during the year (166,577) £2.88 (164,391) £2.49

Outstanding at the end of the year 418,392 £3.85 566,161 £3.31

Exercisable at the end of the year 214,660 £1.67 312,781 £2.04

The weighted average share price at the date of exercise for share options exercised during the year was £2.88. The optionsoutstanding at 31 December 2007 had a weighted average exercise price of £3.85 and a weighted average remainingcontractual life of 1.6 years.

The fair value of the options granted during the year was determined using the Black-Scholes valuation model and is not material.

The company recognised a cost of US$7.8 million and US$3.0 million related to equity-settled share-based paymenttransactions in 2007 and 2006 respectively.

Asset and Equity PlanThe company currently operates an Asset and Equity Plan to reward employees for improvement in the asset value of thebusiness and the market value of the company over a three-year period. The plan has two bonus pools – an equity bonus pooland an asset bonus pool. The asset bonus pool is created by reference to the increase in the net asset value per share of thecompany over a three-year period and the equity bonus pool is created by reference to the increase in the equity market valueper share of the company over a three-year period.

Full details about this plan have been provided in the Remuneration Report on pages 31 to 40.

The company uses a Monte Carlo simulation model to calculate the value of the equity bonus pool of the plan.

The main assumptions used for the calculations are as follows:

Volatility: 29.0% to 33.0%Risk free rate of interest: 3.9% to 4.9%Historic market value growth factor: 91.0% to 204.0%

For the asset bonus pool a discounted cash flow model based on the average oil price over the period is used to calculate thefinal value of the pool and to estimate the value of future asset bonus pools.

For the year ended 31 December 2007, the total cost recognised by the company for share-based payments is US$10.4 million(2006: US$17.5 million), with a cumulative liability on the balance sheet of US$12.3 million (2006: US$18.3 million) and a cost ofUS$7.8 million recorded in equity (2006: US$3.0 million). Like other elements of remuneration, this charge is processed throughthe time-writing system which allocates cost, based on time spent by individuals, to various entities within the Premier Oilgroup. Part of this cost is therefore capitalised as directly attributable to capital projects and part is charged to the profit andloss account as exploration expense, operating costs, pre-licence exploration costs or general and administration costs.

84


85

11 Share capital (continued)

Ordinary Shares and Non-Voting Convertible SharesThe rights and restrictions attached to the Ordinary Shares and Non-Voting Convertible Shares (of which none of the Non-VotingConvertible Shares are currently issued) are as follows:

Dividend rightsThe rights of the holders of Ordinary Shares and Non-Voting Convertible Shares shall rank pari passu in all respects with eachother in relation to dividends.

Winding up or reduction of capitalOn a return of capital on a winding up or otherwise (other than on conversion, redemption or purchase of shares) the rights ofthe holders of Ordinary Shares and Non-Voting Convertible Shares to participate in the distribution of the assets of thecompany available for distribution shall rank pari passu in all respects with each other.

Voting rightsThe holders of Non-Voting Convertible Shares shall be entitled to receive notice of, but not to attend, vote or speak at, anyGeneral Meeting of the company. The holders of Ordinary Shares shall be entitled to receive notice of, attend, vote and speakat any General Meeting of the company.

ConversionThe Non-Voting Convertible Shares shall be converted into fully paid Ordinary Shares on the basis of one Ordinary Share forevery Non-Voting Convertible Share so converted, at the times and in the manner described below:

– upon transfer of Non-Voting Convertible Shares to the company with a duly executed and stamped stock transfer form inrespect of such shares;

– where any person who is a holder of the Non-Voting Convertible Shares ceases to be a permitted holder (a person towhom a Non-Voting Convertible Share is originally issued and any person of subsidiary undertaking or holding companywhich holds the Non-Voting Convertible Shares) or upon the transfer of Non-Voting Convertible Shares to a person who isnot a permitted holder;

– upon the issue of Ordinary Shares by the company pursuant to the exercise of share options under any of the Premiershare option schemes; and

– each holder of Non-Voting Convertible Shares has the right to require the company to convert some or all of its Non-VotingConvertible Shares into Ordinary Shares.

12 Share capital and reserves

Share Capital Share premium Profit and redemption Equity

capital account loss account reserve reserve Total$ million $ million $ million $ million $ million $ million

Balance at 1 January 2006 73.2 8.0 15.5 1.7 – 98.4 Issue of Ordinary Shares 0.1 0.6 – – – 0.7Loss for the year – – (29.7) – – (29.7)Provision for share-based payments – – 3.0 – – 3.0 Pension costs – actuarial gains – – 1.4 – – 1.4

Balance at 31 December 2006 73.3 8.6 (9.8) 1.7 – 73.8Issue of Ordinary Shares 0.2 0.8 – – – 1.0 Profit for the year – – 74.2 – – 74.2Provision for share-based payments – – 7.8 – – 7.8 Pension costs – actuarial gains – – 0.1 – – 0.1Equity component of convertible bonds issued – – – – 51.8 51.8

Balance at 31 December 2007 73.5 9.4 72.3 1.7 51.8 208.7

In June 2007, Premier Oil Finance (Jersey) Ltd, a 100 per cent subsidiary of the company, issued convertible bonds at par valueof US$250 million. These bonds are convertible into Ordinary Shares of the company at any time from 6 August 2007 until sixdays before their maturity date of 27 June 2014. At the initial conversion price of £15.82 per share there are 8,003,434 OrdinaryShares of the company underlying the bonds. If the bonds have not been previously purchased and cancelled or converted,they will be redeemed at par value on 27 June 2014. Interest of 2.875 per cent per annum will be paid semi-annually in arrearsup to that date.


FINA

NC

IAL

STATE

ME

NTS


13 Reconciliation of movements in shareholders’ funds


Opening shareholders’ funds 73.8 98.4

Pension costs – actuarial gains 0.1 1.4 Issue of Ordinary Shares 1.0 0.7 Provision for share-based payments 7.8 3.0 Equity component of convertible bonds issued 51.8 –Profit/(loss) for the year 74.2 (29.7)

Net addition to/(reduction in) shareholders’ funds 134.9 (24.6)

Closing shareholders’ funds 208.7 73.8

14 Financial instruments

Oil hedgingDuring the year the group's treasury company, Premier Oil Holdings Ltd, entered into further hedging transactions at zero costwhich both enhanced its existing coverage and changed the method by which this was achieved:

Oil productiona) Transactions were entered into during 2007 which increased both coverage and the floor price. Production from 2008

to 2012 is now 54 per cent hedged with an average floor of US$39.3/bbl and a cap of US$100.0/bbl.

b) At the end of 2007 an off-take agreement was agreed in which the parameters of the above hedges were embedded. Thisagreement is for four and a half years effective from 1 July 2008 and replaces the financially-settled hedges for that period.

c) A further option agreement which has the effect of closing out the floor and cap in the original financially-settled hedgespreviously in place.

d) The value at inception of the option agreement totalling US$37.9 million represents deferred income which will beamortised over the life of the off-take agreement.

The company entered into an intra-group hedging arrangement with Premier Oil Holdings Ltd under which a proportion of theoverall benefit and obligation of these hedging arrangements were transferred to the company as a hedge against a proportionof its future oil production. These instruments are accounted for as hedges.

The fair value of the above oil hedges is a liability of US$10.2 million which is recognised in the balance sheet in other creditors.While the above hedges were assumed to be effective, all the movements, considered non-intrinsic, in the fair values have beenrecognised in the profit and loss account.

The fair value of the above hedges has been determined from the bank counterparties with whom the hedges have beenconcluded.

Financial assets and liabilitiesThe carrying value of the company's financial assets and liabilities approximates their fair value.

86


FIVE YEAR SUMMARY

Financials 2007 2006 2005 2004 2003Accounting basis IFRS IFRS IFRS IFRS UK GAAP

Sales revenues ($ million) 578.2 402.2 359.4 251.8 420.1

Profit before tax ($ million) 147.0 156.6 124.6 53.5 132.2 Net profit for the year after tax ($ million) 39.0 67.6 38.6 22.1 66.5 Cash flow from operating activities ($ million) 269.5 244.8 121.2 109.6 221.7

Shareholders’ funds ($ million) 552.9 449.1 376.1 354.1 388.8 Net cash/(debt) including joint ventures ($ million) 79.0 40.9 (26.2) 19.6 12.7

Per share statistics:Revenue per share (cents/share) 705.1 491.7 437.8 304.5 308.9 Earnings per share – basic (cents/share) 47.6 82.6 47.0 26.8 48.9 Earnings per share – diluted (cents/share) 46.9 81.7 46.6 26.1 48.1 Cash flow from operating activities per share (cents/share) 328.7 299.3 147.6 132.5 163.0 Reserves per share – year-end (boe/share) 2.58 1.86 1.99 2.13 2.15

Issued Ordinary Shares – average (million) 82.0 81.8 82.1 82.7 136.0

Operations:Production (working interest basis) (kboepd) 35.8 33.0 33.3 34.7 53.6 Proved and probable reserves

(working interest basis) (mmboe) 211.5 152.1 163.5 176.8 175.4 Employees – UK (number) 60 60 62 56 59

– Overseas (number) 300 249 219 217 373

Key indices:Realised average oil price ($ per bbl) 72.30 64.90 48.38 29.92 28.83 Average exchange rates ($/£) 2.00 1.84 1.82 1.83 1.63 Closing exchange rates ($/£) 1.98 1.96 1.72 1.92 1.79

2004 numbers were originally reported under UK GAAP but have been restated in accordance with International Financial ReportingStandards (IFRSs).

The numbers relating to 2003 have been translated into US dollars using the respective year exchange rates and are based on UKGAAP. The profit and loss amounts have been translated using average exchange rates and balance sheet numbers using closingexchange rates.

Certain operations previously presented as discontinuing in 2006 have been re-presented as continuing operations in 2007. Thenumbers for 2006 and 2005 have been restated accordingly.

87


AD

DITIO

NA

LIN

FOR

MA

TION

SHAREHOLDER INFORMATION88

Analysis of shareholding as at 12 March 2008:

Number of Number of Size of shareholding holders % shares held %

1 – 5,000 12,255 95.39 6,184,246 7.535,001 – 10,000 184 1.43 1,318,414 1.6010,001 – 50,000 226 1.76 5,033,148 6.1350,001 – 100,000 67 0.52 4,882,688 5.95100,001 – 500,000 80 0.62 18,834,523 22.94500,001 and over 36 0.28 45,865,460 55.85

Total 12,848 100.00 82,118,479 100.00

Dealing information Financial calendarSEAQ short code – PMO Announcements:

Interim – August 2008Preliminary – March 2009


OIL AND GAS RESERVESAs at 31 December 2007

89

Working interest basis

West North Sea Middle East-Pakistan* Asia Africa Total

Oil and Oil and Oil and Oil and Oil and Oil, NGLs NGLs Gas NGLs Gas NGLs Gas NGLs NGLs Gas and gas

mmbbls bcf mmbbls bcf mmbbls bcf mmbbls mmbbls bcf mmboe

Group proved plus probable reserves:At 1 January 2007 15.9 14 1.5 365 5.4 343 3.8 26.6 722 152.1Revisions1 (0.1) – 0.1 16 1.3 106 (0.1) 1.2 122 24.1Acquisitions and divestments2 10.1 10 – – – – – 10.1 10 11.9Others3 – – – – 4.6 193 – 4.6 193 36.4Production (3.1) (2) (0.1) (29) (0.8) (18) (0.4) (4.4) (49) (13.0)

At 31 December 2007 22.8 22 1.5 352 10.5 624 3.3 38.1 998 211.5

Total group developed and undeveloped reserves:Proved developed 12.1 17 1.0 210 3.4 145 0.6 17.1 372 81.4Proved undeveloped 1.0 – – 22 3.5 289 1.0 5.5 311 60.1Probable developed 5.1 5 0.4 94 1.3 16 0.4 7.2 115 26.5Probable undeveloped 4.6 – 0.1 26 2.3 174 1.3 8.3 200 43.5

At 31 December 2007 22.8 22 1.5 352 10.5 624 3.3 38.1 998 211.5

Notes:1. Revisions include upgrades on Natuna Sea Block A (resulting from additional GSAs) and Kakap fields in Indonesia, and Qadirpur and Zamzama fields in Pakistan.2. Acquired additional 20.05 per cent equity in Scott field (completed 17 May 2007).3. Reserves include North Sumatra Block A gas development in Indonesia (Alur Siwah, Alur Rambong and Julu Rayeu fields) for which a GSA was signed in

December 2007.* During 2007 the group entered into an agreement with Kuwait Foreign Petroleum Company KSC (KUFPEC) to de-merge their respective interests in Pakistan

from the Premier-KUFPEC Pakistan joint venture. All reserves which were previously categorised as held through joint venture at the end of 2006 have beenreclassified as group reserves.

Proved and probable reserves are based on operator or third-party reports and are defined in accordance with the Statement ofRecommended Practice (SORP) issued by the Oil Industry Accounting Committee (OIAC), dated July 2001.

The group provides for amortisation of costs relating to evaluated properties based on direct interests on an entitlement basis,which incorporates the terms of the Production Sharing Contracts in Indonesia and Mauritania. On an entitlement basis reservesincreased by 55.3 mmboe giving total entitlement reserves of 187.7 mmboe as at 31 December 2007 (2006: 132.4 mmboe). This wascalculated in 2007 using an oil price assumption of US$60.0/bbl (2006: US$50.0/bbl). The entitlement reserves, if calculated on an oilprice assumption of US$94.0/bbl, would be 182.8 mmboe.


AD

DITIO

NA

LIN

FOR

MA

TION

WORLDWIDE LICENCE INTERESTSAs at 12 March 2008

Licence Block Operator Equity % Field

Congo Marine IX Marine IX Premier 58.50

Egypt NW Gemsa Vegas Oil & Gas 10.00

Indonesia Buton Japex 30.00Kakap Star Energy 18.75 KakapNatuna Sea Block A Premier 28.67 AnoaNorth Sumatra Block A Medco 41.67 Tuna Premier 65.00

Mauritania PSC A Deep Water 3 and Petronas 4.62Shallow Water Blocks 4 & 5

PSC B Block 4 & 5 Petronas 9.23PSC B Chinguetti Petronas 8.12 Chinguetti

Norway PL359 16/1 (part), 16/4 Lundin 30.00PL364 25/2, 25/3, 25/5, 25/6 Pertra 50.00PL374 34/2, 34/5 BG 15.00PL378 35/12, 36/10 Revus 40.00PL406 7/12, 18/10, 18/11, 8/3 & 9/1 Premier 40.00PL407 17/8, 9, 11, 12 & 18/7, 10 BG 20.00PL417 31/3, 32/1, 36/10 Revus 40.00PL418 35/8 Nexen 15.00PL419 35/9 Nexen 25.00

Pakistan Exploration Licences Indus E 2365-1 Shell 12.50Production Leases Bolan MGCL 3.75 Zarghun South

Dadu BHP 9.37 ZamzamaKirthar ENI 6.00 BadhraKirthar ENI 6.00 BhitQadirpur OGDCL 4.75 QadirpurTajjal ENI 15.79 Kadanwari

Philippines Ragay Gulf SC43 SC43 Pearl Energy 21.00

United Kingdom P218 15/21a Nexen 45.83 Scott†

P218 15/21a Nexen 3.75 Telford††

P257 14/25a Talisman 1.25P288 31/21a, 31/26a, 31/26f, Hess 15.00 Angus, Fife, Flora

31/26g, 31/27aP354 22/2a Premier 30.00 Non-Chestnut Field AreaP534 98/6a, 98/7a BP 12.50 Wytch Farm (Offshore)†††

P748 29/2c CNR 40.00 KyleP758 31/26c Hess 35.00P802 39/1a Hess 15.00 FifeP802 39/2a Hess 35.00 FergusP1022 98/11 BP 12.38P1048 21/6a Oilexco 18.75PL089 L97/10 BP 12.50 Wytch Farm/Wareham†††

P1177 21/7b Premier 87.50P1181 23/22b Premier 87.50P1466 15/24c, 15/25f Premier 25.00

Vietnam Offshore 12W Premier 37.5007/03 Premier 45.00104-109/05 Premier 50.00

† Unitised share of 21.83 per cent †† Unitised share of 0.82 per cent††† Unitised share of 12.38 per cent

The group holds a 29.9 per cent interest in Fusion Mauritania A Ltd (which wholly owns FP Mauritania A BV) (together Mauritania A)with the balance being owned by Sterling Northwest Africa Holdings Ltd. Mauritania A will become a wholly owned subsidiary oncompletion of the acquisition which will occur once the Mauritanian Government approves a field development plan for a field in PSC A, or earlier with partners’ approval.

90



From top to bottom:













UKExploration and




– Bream 20.00%– Frøy 50.00%



1,200 boepd


CongoExploration

SADRExploration

EgyptExploration



IndiaDevelopment


– Chim Sáo 37.5%– Dua 37.5%




12,000 boepd


CONTACTS






and











Printed by CTD

Premier Oil plc23 Lower Belgrave StreetLondon SW1W 0NRUnited Kingdom

Telephone: +44 (0)20 7730 1111Facsimile: +44 (0)20 7730 4696

www.premier-oil.com

2007 ANNUAL REPORT AND FINANCIAL STATEMENTS

2006200520042003200220012000199919981997199619951994199319921991199019891988198719861985198419831982198119801979197819771976197519741973197219711970196919681967196619651964196319621961196019591958195719561955195419531952195119501949194819471946194519441943194219411940193919381937193619351934

GROWTH ANDDEVELOPMENT

OUR STRATEGY IS TO ADD SIGNIFICANTVALUE PER SHARE THROUGH EXPLORATIONAND APPRAISAL SUCCESS, DEVELOPMENTPROJECTS AND ASTUTE ASSET MANAGEMENT

Premier

Oilplc

2007A

NN

UA

LREPO

RTA

ND

FINA

NC

IAL

STATEM

ENTS

oi annual report and financial statements pl and … · premier oil plc 23 lower belgrave street...

Documents