Case Study – Tullow Oil

Tullow Oil Upstream Asset Acquisition: A Description and analysis of how Tullow has been able to gain a competitive advantage given its strategy of acquiring mature fields

Introduction

About Tullow Oil

Tullow is quoted on the London and Irish Stock Exchanges and is one of the largest independent exploration and production companies in Europe with production exceeding 63,000 barrels of oil equivalent per day. The Group is engaged in oil and gas exploration and production with a primary focus on gas in the UK Southern North Sea and oil in Africa, with an ongoing appraisal and development programme in South Asia.

The Group is headquartered in London and employs over 200 people worldwide. Tullow is a dynamic industry player with a diverse portfolio of 90 licenses in three core areas spread across 15 countries in NW Europe, Africa and South Asia. Production is expected to grow to over 80,000 barrels of oil equivalent per day during 2007 and our reserves are over 358 million barrels of oil equivalent.

The Group’s primary listing is on the London Stock Exchange (Symbol: TLW) and Tullow’s shares are also listed on the Irish Stock Exchange. The Group is a constituent of the FTSE250 and our market capitalization is approximately £2.5 billion. Over 70% of the issued share capital is held by institutions, with a strong UK shareholder base and growing ownership in both Europe and the US.

Founded in Ireland in 1985, our origins are in Africa. We became active in South Asia in 1990 and in the UK gas market in 2001. Over time we have developed a balanced portfolio, with a mixture of oil and gas assets in mature and developing markets and a balance between growing production output and longer-term exploration.

Tullow’s strategy is to build strong positions in core areas and to consolidate niche positions in developing regions. This is managed through production-led exploration and reserve enhancement, operational innovation and focused acquisitions and divestments. Our aim is to deliver superior returns to shareholders and Total Shareholder Return over the past five years was 325%.

Tullow has a genuine commitment to our environmental and social responsibilities and we look forward to sustaining and improving our high levels of performance in this area as the Group continues to grow. The Group sponsors a wide range of social and community projects in countries where we live and work.

Production

1. NW Europe

Activities in NW Europe are in the UK with a primary focus on gas in the Southern North Sea.

Production

boepd

Oil

2,168

Gas

22,246

Total

24,414

% of Group Total

2. Africa

Interests in 11 countries, with production in Gabon, Equatorial Guinea, Côte d’Ivoire and Congo (Brazzaville).

Production

boepd

Oil

33,434

Gas

189

Total

33,623

% of Group Total

3. South Asia

The Group has extensive acreage with exploration opportunities in Pakistan,

Bangladesh and India.

Production

boepd

Oil

Gas

413

Total

413

% of Group Total

Personnel

Tullow has a strong management team and flat decision making structures. The team comprises a balanced mix of professional management and industry experts, giving Tullow a depth of expertise and knowledge that enables the Group to deliver added-value and strong operational performance from its assets.

£’000

2004
£’000

2003
£’000

2002
£’000

2001
£’000

Sales Revenue

445,232

225,256

129,625

110,610

76,633

Cost of Sales

(243,149)

(141,228)

(131,071)

(82,249)

(75,350)

(46,480)

Gross Profit

202,083

84,028

94,185

47,376

35,260

30,153

Administrative Expenses

(13,793)

(11,573)

(11,017)

(3,059)

(3,925)

(3,859)

Profit/(Loss) on Disposal of Oil and Gas Assets

36,061

2,292

(952)

914

–

Exploration Costs Written Off

(25,783)

(17,961)

(12,772)

(4,169)

(3,945)

Operating Profit

198,568

56,786

67,499

30,593

28,080

22,349

Loss on Hedging Instruments

(159)

–

Finance Revenue

4,367

3,458

2,016

1,409

1,371

Finance Costs

(24,197)

(13,449)

(12,960)

(8,730)

(9,044)

(7,708)

Profit from Continuing Activities before Taxation

178,579

46,795

57,997

23,879

20,445

16,012

Taxation Charge on Profit on Ordinary Activities

(65,443)

(15,460)

(25,048)

(12,958)

(7,649)

(6,702)

Profit for the Year from Continuing Activities

113,136

31,335

32,949

10,921

12,796

9,310

Dividends Paid

(14,555)

(6,995)

(3,782)

–

Retained Profit for the Financial Year

98,581

24,340

25,954

7,139

12,796

9,310

Earnings per Share

Basic – Stg p

17.50

5.88

6.18

2.92

3.56

2.61

Diluted – Stg p

17.20

5.81

6.11

2.90

3.51

2.56

Group Balance Sheet

Fixed Assets

897,602

649,967

599,728

193,263

195,886

207,659

Net Current (Liabilities)/Assets

(71,273)

21,394

23,353

32,521

15,771

8,685

Total Assets less Current Liabilities

826,329

671,361

623,081

225,784

211,657

216,344

Long Term Liabilities

(437,310)

(295,894)

(243,997)

(109,863)

(111,357)

(124,344)

Net Assets

389,019

375,467

379,084

115,921

100,300

92,000

Called Up Equity Share Capital

64,744

64,537

37,784

35,981

35,847

Share Premium Account

123,019

121,656

14,198

2,485

1,993

Other Reserves

60,589

148,591

45,593

69,213

Profit and Loss Account

140,667

40,683

44,300

18,346

(7,379)

(15,053)

Equity Shareholders’ Funds

389,019

375,467

379,084

115,921

100,300

92,000

· Introduction

· An Overview of Tullow oil….Historical analysis..where they are now.

· Company’s reserves assets

· Company’s strategy of remaining competitive/Growth

· Objective of the strategy

· Desired outcome of the strategy

· How are the upstream assets going to be managed

· Issues involved in managing upstream assets

· How will this strategy position the company to remain competive

· Current Financies/Projected finances

· Outcome/Conclusion

INTRODUCTION

The notion of competitive advantage has been a cornerstone of the field known as Strategic Management. As such, research on competitive advantage occupies a central position in strategy literature (1980, 1985; 1984, 1991; 1991; 1997). However, the notion of competitive advantage itself has rarely been systematically addressed and, to date, remains poorly defined and operationalized. Moreover, it is often used interchangeably with firm performance, superior performance in particular.

Is competitive advantage what it takes to compete, a characterization observed during competition, or an outcome of competition? Is competitive advantage contingent on the competitive situation or is it a more general trait of the firm? Put differently, how is competitive advantage different from competence, strengths, and, ultimately, performance?

This article, addressing the above questions, makes three observations regarding competitive advantage. First, competitive advantage does not equate (superior) performance. Second, competitive advantage is a relational construct. Third, competitive advantage is context-specific. In presenting these three observations, this article proposes suggestions to refine and operationalize the “competitive advantage” concept.

COMPETITIVE ADVANTAGE DOES NOT EQUATE PERFORMANCE

The structural approach ( 1980, 1985) and the resource based view (RBV) ( 1984, 1984, 1991) are two dominant perspectives in strategy which purport to explain competitive advantage, sustainable advantage in particular. It seems, however, that neither perspective readily differentiates competitive advantage from superior performance. Instead, they are treated more as interchangeable constructs.

Competitive Advantage: The Structural Approach

The structural approach rooted in IO economics posits that strong defensible market position (read power) in an attractive industry renders sustained competitive advantage (1980, 1985). Here, industry positioning plays an important role in determining the firm’s competitive advantage. Using the structural approach, (1980) advances the industry analysis framework (five-forces) whose ultimate function is to explain the sustainability of profits against bargaining and against direct and indirect competition. To achieve sustainable profit, a firm needs sustainable advantage, in either cost or differentiation (1980, 1985).

Competitive advantage grows fundamentally out of value a firm is able to

create for its buyers that exceeds the firm’s cost of creating it. Value is

what buyers are willing to pay, and superior value stems from offering

lower prices than competitors for equivalent benefits or providing unique

benefits that more than offset a higher price. There are two basic types of

competitive advantage: cost leadership and differentiation. ( 1985)

In this sense, defines competitive advantage in rather specific and concrete ways that seem to implicitly equate competitive advantage to profitability (performance), and sustainable advantage to sustainable profitability. That is, competitive advantage is treated as an outcome (of positioning) and should be pursued as an end in itself. An important question arises: Is either cost advantage or differentiation advantage sufficient and necessary for superior performance? If the answer is no, then we should perhaps conclude that competitive advantage, within Porter’s perspective (1980, 1985) at least, does not equate performance.

A government-sponsored near-monopoly firm in certain industries, for instance, could enjoy high profit without either cost advantage or differentiation advantage over rivals. Also, it is highly conceivable that the firm with the lowest cost in a market may not enjoy better performance than a rival which happens to have (for whatever reason) overwhelming advantage in access to distribution. Although competitive advantage in cost or differentiation may increase the likelihood of better performance, competitive advantage per se is not the same as performance. At least, cost advantage and differentiation advantage, two generic types identified by (1980), are not necessarily the ultimate determinants of performance. Superior performance could also come from other types of competitive advantage, e.g., speed or flexibility, or perhaps more practically, combinations of multiple competitive advantages.

As such, maybe we should not use the general term competitive advantage as a surrogate for superior performance, nor should we assume that competitive advantage, whatever type, automatically leads to superior performance. Competitive advantage and performance are two different constructs and their relationship seems to be complex.

COMPETITIVE ADVANTAGE: THE RESOURCE BASED VIEW

The RBV ( 1984, 1991; 1991) provides another perspective on competitive advantage, whose basic tenet is that unique resources are the sources of sustained competitive advantage ( 1991). To generate such advantage, a resource must be rare, valuable, inimitable, non-tradable, and non-substitutable, as well as firm-specific (1991; 1991).

In RBV, a firm’s unique resource is treated as being inherently related to performance. The unique, inimitable, and immobile resource is valuable precisely in the sense that it generates economic rent ( 1991). Here the linkage between competitive advantage (unique resources) and performance (economic rent) is more direct than that in (1980): it does not even have to specify cost advantage, differentiation advantage, or any other types of competitive advantage. If a firm has valuable, rare, and inimitable resource, then superior performance ensues. That is, the definition of such resources (as the essence of sustained competitive advantage) already has inherent performance implications.

Several questions arise. Does the RBV assume that there is only one particular type of unique resource (hence one type of sustained advantage) in a particular industry? Does the prescription by the RBV preclude the situation where more than one firm can have such resource(s)? If firm A has resource X that fits the RBV prescription and firm B has resource Y that also meets the RBV criteria, then what determines which firm has competitive advantage over the other? Or does it matter? If we can identify the resources that bear the dictation by the RBV and use them to directly predict performance, do we still need constructs like competitive advantage or sustained competitive advantage?

Based on the above review of the two dominant perspectives on competitive advantage in our field, we come to the following observations, which will be further elaborated on in later sections. First, competitive advantage and performance are two different constructs. Second, if competitive advantage, either defined by position or resource, is used casually as a surrogate of superior performance, it is not only redundant but also tautological. Third, competitive advantage, whatever type, does not guarantee superior performance. Finally, for competitive advantage to be a theoretically useful construct, it has to be better defined and operationalized.

COMPETITIVE ADVANTAGE IS A RELATIONAL TERM

In this section, we seek to understand competitive advantage at its most basic level of analysis and in the most basic form. We argue that competitive advantage is a relational term. It is essentially a comparison drawn between a focal firm and its rival(s) on certain dimension(s) of concern in competition. Specifically, we examine competitive advantage in the context of its reference point (1996) and according to its magnitude and composition, and comment on its operationalization.

Reference Point

Competitive advantage, as a relational term, depends on the reference point. That is, we must answer the question such as “against whom?” and “on what?” Does competitive advantage mean that one firm must be superior than all rivals? Or does competitive advantage mean only to be a pair-wise comparison between two rivals of concern? (1980) description of the cost leader advantage seems to suggest that the cost leader has absolutely the lowest cost position among all firms in an industry, hence perhaps his justification for equating such (cost) competitive advantage to superior performance.

In reality, however, competitive advantage could be, and often is, assessed between any pair of rivals on certain dimension(s) that has competitive ramifications. For instance, among three chain stores A, B, and C which compete in an industry where, say, number of is a major area of competition locations (for reason of customer convenience). A has the largest number, B the middle, and C the smallest. Then we could infer that, assuming the number of locations is of linear importance in competition, firm A has competitive advantage over B, which in turn has competitive advantage over C. In this case, we can compare a particular firm with the other two, we can also choose any two focal firms of interest to conduct pair-wise comparison. Such pair-wise comparison on a specific and discrete dimension of competition features competitive advantage in its most basic form and at its most basic level of analysis.

Notice that such conception of competitive advantage separates competitive advantage from firm performance, treating them as distinct constructs. Firm A may have more locations than Firm B, but Firm B may have more sales volume per location due to competitive advantages in other areas, e.g., merchandise selection and service quality. In this sense, Firm B may actually have better performance (profitability) than Firm A. However, just because Firm B performs better than Firm A does not mean that Firm A doesn’t have competitive advantage over Firm B in terms of number of locations. It simply means that there are often multiple dimensions of competition that jointly determine firm performance. A firm may have to have multiple competitive advantages to enjoy superior performance.

In this sense competitive advantage is not an undifferentiated, overall determinant of performance. It is a firm’s relational score on a particular competitive dimension vis-a-vis that of rivals that may contribute to superior performance. However, we do not deny the possibility where one dimension of competition single-handedly determines performance and hence competitive advantage on that dimension is the determinant of superior performance. This is only a special case within the general conception of competitive advantage discussed above.

In summary, we propose the following definition of competitive advantage: the differential between two competitors on any conceivable dimension that allows one to better create customer value than the other. This definition builds on (1985) in emphasizing the importance of creating customer value. It moves down from the generic types of competitive advantage, i.e., cost and differentiation, to a more basic level and form of competitive advantage. In addition, this definition also facilitates the operationalization of the construct: first identify the dimension of competition and then compare a pair of firms against this dimension. It provides a baseline understanding of competitive advantage and readily accommodates the description of competitive advantage by both the structural approach and the RBV, two dominant perspectives in our field.

Magnitude

Given the above definition, two types of competitive advantage can be conceived: heterogeneous vs. homogenous. The resource based view hinges on the concept of resource heterogeneity ( 1984; 1991). Moreover, (1991) treats sustained competitive advantage as an equilibrium term: all attempts to imitate a valuable, rare, and difficult-to-imitate resource cease to exist. In this sense, resource heterogeneity sustains, hence competitive advantage sustains.

Presented in its strongest form: you either have it or you don’t. Those who have it have competitive advantage; those who don’t don’t. Similar to Porter’s conception of cost advantage (1980), here the RBV also focuses on the situation of “best of all” instead of merely pair-wise comparisons among competitors. The examples of such valuable, unique, and difficult-to-imitate resources certainly abound, e.g., De Beers monopoly of supply of raw diamond and Coca-Cola’s brand name (in a league of its own).

If firms by and large could imitate rivals’ resources and products, then these firms are by definition competing on some common dimensions. In such cases, on these common dimensions at least, competitive advantage is the differential between rivals, regardless of whether some of them also have heterogeneous competitive advantage based on other unique dimensions of resources or products. Such differential in (homogenous) firm resources is perhaps the most commonly observed form of competitive advantage, e.g., productivity and other efficiency-related factors.

Composition

Another important concern is the composition of competitive advantage. A competitive advantage could be a discrete one based on a firm’s differential with a rival on one specific dimension of competition, e.g., presence at the retail shelf space. A competitive advantage could also be a compound of multiple individual advantages that work together as an integrative whole. For instance, Wal-Mart’s competitive advantage in low cost is a compound of multiple discrete competitive advantages that include location, information technology, warehouse and transportation systems, and corporate culture, among others (1991).

Although many discrete competitive advantages could contribute to a firm’s performance directly, e.g., dominance of retail shelf space, they also contribute to form compound competitive advantages, which in turn contribute to firm performance. Typical compound competitive advantages include efficiency of organization and production process (cost advantage) and quality and innovation in products (differentiation advantage), and speed and flexibility of market responses.

Operationalization

Regarding operationalization of competitive advantage, some cautions have to be taken. Although we define competitive advantage as differential between a pair of rivals, the direction of the differential is of importance. This may cause problems especially when the “pair-wise” assumption is violated, e.g., statistical analysis done on a large sample of subjects, where firms’ relative competitive advantage is determined by their score on certain dimensions. Take again the store chains as an example. The number of locations may not have a linear effect on competition and after a value creation. After a certain critical number has been reached, increases in number of locations will likely cannibalize a chain’s own stores, reaching into less densely populated areas, and diminishing headquarters managerial attention to individual stores. As such, uncritical use of the raw scores of a group of firms on a certain dimension that has implication for competitive advantage does not always capture the essence of competitive advantage. That is, the same amount of differential may not mean the same degree of competitive advantage, and a positive differential on the very same dimension may mean competitive advantage in one situation, i.e., between a pair of firms below the optimal point, but competitive disadvantage in another, i.e., between a pair of firms beyond the optimal point.

Moreover, the measurement of compound competitive advantage may pose even more problems. It is so because of the multiple dimensions involved and a compound competitive advantage may not be a simple summation of individual competitive advantages. Therefore, the traditional measures of adding scores from multiple dimensions as well as the bilateral linkage between a variable and performance featured in typical statistical analyses may not always capture the essence of such compound competitive advantage. Simultaneous modeling and other more sophisticated methodology which better capture a firm’s position against a rival on multiple frontiers at the same time seem to be more appropriate analytical tools.

COMPETITIVE ADVANTAGE IS CONTEXT-SPECIFIC

Competitive advantage is a relational term between a focal firm and rival(s) within a specific context of competition. Competitive advantage is not a universal, general, and overall characterization of a firm or certain aspects of a firm. Similar terms to competitive advantage could be found in competence and strengths, which seem to be generally regarded as firm-specific traits, but are also argued to be meaningful primarily within a certain context. We first discuss the situational nature of these terms and then explore the context-specific nature of competitive advantage.

(1990) discuss core competence as a unique set of resources and capabilities, both technical and organizational, that allows a firm to be competitive in a wide range of end product markets. However, core competence can also turn into core rigidity (1992). For instance, the highly skilled and sophisticated sales force of Encyclopedia Britannica used to be its core competence over lesser competitors. Yet with the advent of the digital era, that intense personal selling business has been transformed largely into one that values convenience and low cost, allowing lesser competitors to compete more effectively and diminishing the core competence of ( 1997).

Similarly, firm strengths is another term that is often used to refer to or imply competitive advantage (1965; 1971). But such a term is also argued to be highly situational in nature. (1998) observes:

Is Michael Eisner a strength or a weakness for Walt Disney Company? To the

extent that he has masterminded Disney’s revival over the past 14 years he

is an outstanding strength. Yet his quadruple heart-bypass surgery and

inability to implement a management succession plan suggest that he is also

a weakness.”

To be sure, the terms strengths and weakness, in its original context of SWOT analysis (1965), are used in conjunction with opportunities and threats that characterize a firm’s external environment. The moral is that a firm’s strategy should explore the fit between the firm and its environment. As such, strengths (and the underlying resources and traits they represented) are by definition dependent on the environmental context. It is not necessarily the core competence and strengths per se that render competitive advantage. It is the fit between such firm attributes – strengths, resources, core competencies, capabilities, whichever is in vogue in the literature – with the requirement in specific competitive context that really matters.

Somehow this message seems to get lost in the past two decades or so in strategy research. The structural approach made the analysis of competitive environment more systematic and rigorous ( 1980, 1985). The RBV made the analysis of the firm more systematic and rigorous (1991). Consequently, competitive advantage seems to be defined either as a market position ( 1980) or resource position ( 1984). Maybe it is high time that we revisit the message of fit embedded in the original SWOT framework and conceptualize competitive advantage accordingly, for neither market position nor firm resources and capabilities in themselves could by themselves illuminate the “ultimate” source of competitive advantage ( 1994).

In the end, matching a firm’s resources and capabilities along changing market opportunities is perhaps the most fundamental task in creating competitive advantage given its context-specific nature.

CONCLUDING REMARKS

In this article, we have presented three observations on the construct of competitive advantage and conceptually explored competitive advantage as a relational and context-specific construct. Overall, one conclusion seems to have emerged from the tour of literature that we have taken in this article. That is, for competitive advantage to be a theoretically meaningful construct for strategy research, its definition must be more clearly and rigorously stated and its operationalizations better specified. Before we can do that, competitive advantage will only remain a heavily-loaded term, used largely for convenience but not theoretical preciseness.

Trading for 2005 was at record levels, with a strong production performance combining with continuing favorable oil and gas pricing.

Production and Reserve Enhancement

— In 2005 the Group drilled 50 development wells and completed the

operated Horne and Wren development increasing average Group working

interest production to 58,450 boepd, 44% ahead of the average for 2004.

— Current group working interest production is approximately 66,000 boepd

with Tullow’s net UK gas production contributing at an all time high of

200 mmscfd.Further strong production growth is expected from the

ongoing development of the Schooner and Ketch fields, the Okume Complex

and the M’Boundi, West Espoir, Bangora and Chachar fields.

— Working interest production in 2006 is anticipated to average

approximately 68,000 boepd and to reach 75,000 boepd by year end.

— Drilling activity on the Schooner and Ketch project will be enhanced by

a second rig to drill the Schooner NW Extension prospect during Q2

2006.

Exploration and Appraisal Drilling

— During 2005, 11 exploration wells were drilled including the recent

wells in Angola, Mauritania and Uganda of which five discovered

hydrocarbons.

— The Mputa-1 discovery in Uganda has proved the existence of a working

petroleum system in the basin, which has significantly reduced the risk

on Tullow’s prospects in this extensive region. A second well will be

drilled in February on the Waraga-1 prospect.

— UK exploration has been particularly successful. The K3 discovery

significantly boosts the potential of adjacent blocks where numerous

prospects have been identified of which four will be drilled as part of

the 2006 drilling campaign.

— Over the next three months a further eight exploration wells will be

drilled including three wells in the UK and high impact wells in Uganda

and Equatorial Guinea.

— A rig has been contracted to drill two appraisal wells on Kudu, to test

the significant upside potential of this gas field, and will start

drilling in early 2007.

Commenting today, Aidan Heavey, Chief Executive of Tullow said:

“The strong asset performance and production growth seen in 2005 is expected to continue with significant ongoing development projects in each of our core areas. This development work will be complemented by an exciting exploration program that includes a number of wells in regions with very high impact potential.”

CONFERENCE CALL

There will be a conference call at 09:30 (EST) today, hosted by Tom Hickey, Chief Financial Officer of Tullow Oil plc:

For US participants please call (718) 354-1152 and request to be connected to the Tullow Oil teleconference.

A replay facility will be available from one hour after the conference call until 18:00 (EST) on Tuesday, February 7. Please call (718) 354-1112, access code: 1702489#.

Trading Statement

This trading statement is provided for the year ended December 31, 2005 in advance of the Group’s 2005 Preliminary Results, which are scheduled for release on March 29, 2006. The information contained herein has not been audited and is subject to further review.

Production

Group working interest production for the second half of 2005 averaged 59,550 boepd, giving a 2005 average of 58,450 boepd, which is 44% ahead of the 2004 production level.

A further breakdown of these figures is provided in the Operational Update under each core area. Production figures remain subject to final reconciliation and do not equate to sales volumes. This is due to variations in lifting schedules and because a portion of the production is delivered to host governments under terms of Production Sharing Contracts. The production figures include 5 months production from the Alba and Caledonia fields and 7 months production from the Nkossa field (offshore Congo (Brazzaville)) prior to their disposals and 9 months of production from Schooner and Ketch following completion of the acquisition in late March 2005.

Working interest production for 2006 is expected to average approximately 68,000 boepd, with year end production reaching 75,000 boepd.

Overlift position

At December 31, 2005, Tullow was in a net overlift position amounting to an estimated 98,000 barrels. Such overlift positions are valued at market value and accordingly a charge of approximately 8.2 million Pounds Sterling will be made to Cost of Sales. In addition a charge of 5.5 million pounds in respect of the Alba and Caledonia overlift position at the time of disposal has been made to cost of sales; an equal and opposite amount has been recognized as part of the profit on disposal and consequently the net impact on the income statement is zero.

Exploration Write-Off

Tullow’s accounting policy is to write-off in full, to the Income Statement, all costs relating to pre-license costs and unsuccessful exploration activities. Based on current estimates, Tullow’s exploration write-off for 2005 is expected to be of the order of 25 million pounds subject to any further technical work.

Portfolio Management

The Group completed the disposal of the Alba and Caledonia offshore assets in the UK and the offshore Congo (Brazzaville) assets in June and August 2005 respectively. In addition, final income has been recognized in relation to incremental consideration receivable based on reserves and performance of the Horne and Wren fields. The profit on disposal amounts to 40.1 million pounds (inclusive of 5.5 million pounds of overlift outlined above).

Capital Expenditure

During 2005 Tullow invested a total of 192 million pounds in development and exploration activities.

Planned capital investment during 2006 is in the order of 280 million pounds, of which approximately 70% will be spent on development activities in the UK, Gabon, Congo (Brazzaville), Cote d’Ivoire, Equatorial Guinea, Pakistan and Bangladesh with the balance focused on exploration activities.

Net Debt and Refinancing Initiatives

Net Debt at December 31, 2005 was 138.7 million pounds, inclusive of all cash balances.

In September 2005 the Group completed an 0 million refinancing exercise. This exercise consolidated existing borrowings into a single facility, which has created a more efficient Group financing structure, has materially reduced cash collateralization and has created significant flexibility for future growth.

International Financial Reporting Standards (IFRS)

The Group has adopted IFRS with effect from January 1, 2004, with the exception of IAS 39, which has been adopted effective January 1, 2005.

IFRS 2 – Share based payments, requires that the fair value of all share based payments are charged through the income statement over the vesting period of the relevant awards. The charge in the income statement for 2005 is of the order of 1.5 million pounds.

IAS 39 – Financial Instruments, requires all derivatives to be recorded on the balance sheet at market value. At December 31, 2005 the Group’s portfolio of derivatives had a negative mark to market value of 140.4m pounds. The majority of the Group’s arrangements qualify for hedge accounting and will therefore be largely reflected in the Income Statement as the related contracts mature. Effectiveness testing has been undertaken on all the Group’s hedges and due to the variations in crude oil discounts and gas nomination patterns there has been a degree of hedge ineffectiveness. However it is anticipated that the charge recognized in the Income Statement for the year ended December 31, 2005 will not differ materially from the charge of 5.6m pounds recorded for the first six months of the year.

Hedging Summary

At January 24, 2006 the Group’s hedge position to the end of 2007 is as follows:

Oil Hedges H1 06 H2 06 2007

Volume – bopd 10,242 11,217 6,000

Average Price* – $/bbl 41.0 43.7 41.9

Gas Hedges H1 06 H2 06 2007

Volume – mmscfd 81.7 42.5 10.0

Average Price* – p/therm 57.1 41.5 59.2

* Average hedge prices are based on market prices as at January 24, 2006

and represent the current value of hedged volumes

Operational Update

This Operational Update summarizes recent key activities in the Production (P), Development (D), Exploration (E) and Appraisal (A) assets of Tullow Oil plc.

1) NW EUROPE CORE AREA

In the UK North Sea, Tullow’s principal interests are in the Southern Gas Basin. During 2005 Tullow consolidated its position and influence in the region through the acquisition of the Schooner and Ketch assets, active participation in the 23rd licensing round and the drilling of 3 exploration wells. Each of these factors has contributed to the Group’s strong production growth in this core area enabling UK production to recently reach an all time high of 200 mmscfd.

Working interest production 2005 Average Current Production

(boepd) (boepd)

UK Southern North Sea (1) 22,245 33,000

UK Oil 2,168 Assets Sold

UK Total 24,413 33,000

(1) Includes condensate

Schooner (P/D) (Tullow 90.35%) and Ketch (P/D) (Tullow 100%)

The facilities maintenance campaign implemented last year has already significantly improved the uptime of the assets to over 95% and increased production potential to over 50 mmscfd.

The field redevelopment program commenced in November 2005 with the arrival of the Ensco 101 drilling rig to drill five new wells and conduct nine workovers on the Schooner and Ketch fields. The first of these wells, Schooner-10, was spudded on November 24, 2005 and is expected to be completed in February. The drilling of Schooner-10 will be followed by the re-drilling of Schooner-7, an existing but non-producing well. A concurrent campaign of stimulation and remedial work on the existing production wells is also ongoing. The rig will then move to the Ketch field and drill three development wells and conduct a well optimization program on existing producing Ketch wells.

A second rig, the Borgsten Dolphin, has recently been contracted to drill the NW Schooner Extension appraisal area during Q2 2006. This opportunity has been accelerated to minimize weather downtime by drilling during the summer months and, if successful, to benefit from 2007/08 winter gas prices.

McAdam (P/D) (Tullow 14%)

First production from the McAdam infill development well, an extension of the CMS III project, commenced on October 13, 2005 adding incremental gross production in excess of 50 mmscfd.

Murdoch (P/D) (Tullow 34%)

The Murdoch D10 well, a sidetrack of the D4 well that has been shut in since 1998, was completed at the end of December and put on production on January 18, 2006 at a gross rate in excess of 30 mmscfd.

UK Exploration (E)

The K3 exploration well (Tullow 22.5%) in block 44/23b completed drilling in September 2005, having encountered excellent quality gas bearing sands in the targeted Lower Ketch interval. Development planning is now under way. The success of this well gives a significant boost to the exploration potential of the adjacent blocks where numerous further prospects have been identified, four of which will be drilled in 2006.

Four of these prospects will be drilled in 2006, the first, to test the Humphrey prospect in block 44/16 (Tullow 17.5%), was spudded on January 3, 2006. This well is expected to reach its target depth during February and will be followed by a well on the K4 prospect (Tullow 22.5%) in block 44/23b. A second rig has been contracted to drill the Cygnus prospect in block 44/12 (Tullow 35%), and is scheduled to commence in the first week of February.

The fourth of these prospects and up to three further exploration wells are planned for later in 2006.

Romania

Costisa-1 (EPI-3) (E) (Tullow 42.06%)

The Costisa-1Z exploration well, located in the EPI-3 Brates block in Romania, reached a final total depth of 4,350m on November 30, 2005. An approved abandonment program was performed and the Romanian authorities granted the well “abandoned with conservation” status. This will enable future re-entry if required. Tullow will relinquish operatorship at the end of the First Exploration Period.

2) AFRICA CORE AREA

In Africa, Tullow has production and development interests in Gabon, Cote d’Ivoire, Congo (Brazzaville), Equatorial Guinea and Namibia. Tullow also has exploration interests in Morocco, Mauritania, Senegal, Cameroon, Uganda, Equatorial Guinea, Angola and Cote d’Ivoire. During 2005 Tullow undertook significant development and drilling work in its producing assets, whilst maintaining an active exploration and New Ventures effort throughout the region. The Production and Development successes in the Group’s African assets continue to contribute to strong production growth. African production is expected to reach 40,000 boepd in 2007. The recent Exploration successes in Mauritania and Uganda also provide enormous encouragement for the future of both basins.

Working interest production 2005 Average Current Production

(boepd) (boepd)

Congo (Brazzaville) 6,052* 6,600

Cote d’Ivoire 4,039 4,350

Equatorial Guinea 6,052 5,450

Gabon 17,480 16,800

West Africa Total 33,623 33,200

* includes 1,166 boepd in respect of disposed interests

Republic of Congo (Brazzaville)

M’Boundi Field (P/D) (Tullow 11%)

The development and infill drilling program on the M’Boundi Field continued throughout 2005 and is ongoing, with 11 successful wells completed since September 2005. These wells were primarily infill wells targeting the higher productivity reservoir in the northeast and the thicker section of the lower quality reservoir in the west. Current gross field production is 60,000 bopd, with 40 wells currently on stream. Four rigs are currently in operation with a fifth rig en route. Engineering work at the export terminal was completed at year-end to facilitate the blending and export of M’Boundi crude with the higher quality N’Kossa blend, thus significantly improving per barrel realizations. The further expansion of the production facilities to 90,000 bopd is in progress, with long lead items already on order. A water injection pilot project will be undertaken during 2006 and if successful will be expanded to the full field.

Equatorial Guinea

Ceiba Field (P/D) (Tullow 14.25%)

The infill drilling program continued throughout 2005, most recently two injection wells C-28i and C-29i were drilled to support the central and southern field production areas. The first of these wells was completed in September 2005 and C-29i is being completed at present. In the third quarter 2005 the C-30 production well was drilled and successfully brought on production in December. This infill drilling program maintained gross field production in excess of 40,000 bopd throughout 2005; this infill program will continue through 2006, with four producers and two injection wells planned.

Okume Complex Development (D) (Tullow 14.25%)

The Okume Complex comprises the Okume, Oveng, Ebano and Elon fields. Two Tension Leg Platforms (TLPs), being constructed in Korea, are nearing completion and will be installed on the deepwater fields Okume, Ebano and Oveng in March/April 2006. The Central Processing facility and other shallow water facilities for the Elon field are being constructed in the US Gulf Coast. These facilities will be installed in two phases, concluding in September 2006. Drilling is expected to commence with a shallow water jack-up rig and a tender assisted semi-submersible rig in late 3Q 2006. The development remains on budget and on schedule for first oil by year end 2006. Oil will be blended with Ceiba and exported via the Ceiba FPSO.

Cote d’Ivoire

East Espoir Field (P/D) (Tullow 21.3%)

Two of the planned infill production wells, EP-7 and EP-8 are now on production. These wells have produced beyond expectation, contributing in excess of 5,000 boepd each to the increased average field production for the fourth quarter of 25,440 boepd. The third infill well, EP-10, a challenging 4.5km step-out, was drilled in the last quarter of 2005 and the fourth and final infill well EP-9 is currently in progress. These two wells are expected to be on production by end Q1 2006 and are expected to increase field production by a further c.7,500 boepd.

West Espoir Development (D) (Tullow 21.3%)

Progress on the West Espoir development project is well advanced. The jacket and wellhead tower were successfully installed in November 2005, all pipelines have been laid and successfully tied back and the Espoir FPSO upgrade is complete. Drilling is expected to commence in May with first oil scheduled for the third quarter of 2006. Three production wells and the commencement of the first West Espoir water injection well are planned for 2006.

Gabon

Niungo (P/D) (Tullow 40%)

The final well in the 2005 Niungo development and appraisal program, Niu 28, was brought on stream in December. Following the success of the 2005 program an additional five infill wells and a minimum of two step-out appraisal wells are planned for 2006.

Tchatamba (P/D) (Tullow 25%)

A number of electrical submersible pump failures reduced the output from the Tchatamba field by 22% in the second half of 2005. These problems have now largely been resolved and the field is producing approximately 30,000 bopd.

Gabon Exploration (E)

The Tullow-operated exploration well on the Equata prospect (Tullow 47.5%) commenced drilling in early December. The well was unsuccessful as the results indicated likely compartmentalization of the structure which would make development sub-commercial. The well has been plugged and abandoned.

Up to four further Gabon wells are planned for 2006, the Akoum-West prospect (Tullow 100%) commenced on January 16 and is expected to complete in February.

Namibia

Kudu (D/A) (Tullow 90%)

Good progress has been made in relation to both the first phase of commercialization of the Kudu gas field, offshore Namibia, via a gas-to-power generation project and the appraisal of the significant upside potential.

Following completion of the Front End Engineering Design (FEED) study a prequalification inquiry was issued for the four well subsea development and onshore gas conditioning plant. Invitations to bid for the various construction activities are expected to be issued during 2006. In parallel with these technical preparations significant progress has been made on the commercial and regulatory arrangements. The Ministry of Mines and Energy in Namibia has approved the production license for the Kudu field area and the Gas Sales Agreement negotiations are nearing completion in parallel with the Power Purchase Agreement negotiations between Nampower and Eskom.

The planning of the two well appraisal program, to prove the potentially significant upside reserves within the Kudu field, has advanced to the point of procuring all the long lead items and contracting a rig to start drilling in early 2007.

Uganda

Block 2 (E) (Tullow 50%)

The Mputa-1 exploration well in Uganda commenced drilling on December 22, 2005 reaching its target depth of 1,186 metres in early January 2006. The well encountered oil zones over a 221 meter interval and oil samples were recovered from an upper interval between 965 and 975 meters. The well is now being cased and suspended for potential future re-entry. The results are very encouraging as they prove the existence of a working petroleum system in the extensive Albertine basin in which Tullow has a 50% interest throughout.

While it is too early to determine the size or potential commerciality of Mputa-1, the results significantly reduce the risk of the prospects mapped in Blocks 2 and 3A. The rig will now move to the Waraga-1 location, where drilling is expected to commence in mid-February. The Waraga prospect is a deeper well of 1,650 meters and has an anticipated well duration of approximately 20 days. Tullow is also in discussion with partners in relation to the potential drilling of the Kingfisher well in Block 3A as part of the current program.

Mauritania

Block 1 (E) (Tullow 20%)

The Faucon-1 exploration well in Block 1 offshore Mauritania was drilled in December 2005 and reached a total depth of 4,170m, encountering a total 96.5m of potential reservoir of which the upper 14m is hydrocarbon bearing. The hydrocarbon fluid samples recovered from the well are currently undergoing laboratory analysis. While the hydrocarbons encountered are unlikely to be commercial on a standalone basis, the discovery of a working petroleum system in this under-explored region provides encouragement for Tullow’s regional position in Mauritania and the adjacent St Louis block in Senegal.

Angola

Block 10 (E) (Tullow 15%)

In November 2005 Tullow concluded a farm-in agreement with Sonangol P&P to assume a 15% interest in Block 10 offshore Angola. A two well exploration programme commenced in early November and concluded on December 15 with both wells being plugged and abandoned. Although the wells did not encounter commercial hydrocarbons, they provided critical information to allow further evaluation of the prospectivity of this largely unexplored block.

Block 24 (E) (Tullow 15%)

In January 2006 Tullow concluded a farm-in agreement with Ocean Angola Corporation, a subsidiary of Devon Energy, to assume a 15% interest in Block 24 offshore Angola. A well commenced drilling on the Kabetula-1 prospect in the block on December 22, 2005 but failed to discover hydrocarbons and was plugged and abandoned.

Both Block 10 and Block 24 are expected to yield further high impact opportunities.

3) SOUTH ASIA CORE AREA

In South Asia, Tullow has production, development and exploration interests in Pakistan, development and exploration interests in Bangladesh and exploration interests in India. While activity in this region was limited in 2005, the initiation of production from the Chachar and Bangora projects, along with ongoing exploration and appraisal work in Pakistan, Bangladesh and India have the potential to materially enhance reserves and revenue from this core area.

Working interest production 2005 Average Current Production

(boepd) (boepd)

Pakistan 413 250

South Asia Total 413 250

Bangladesh

Block 9, Bangora-1 (A) (Tullow 30%)

The Bangora/Lalmai Appraisal Programme, approved in early 2005, made significant progress during Q3/Q4 2005. The processing equipment for the long term test is in transit to Bangladesh, and the Bangora pipeline has been installed. It is planned that installation and commissioning of the facility will be completed in the first quarter of 2006, with first gas at an anticipated rate of 50 mmscfd in the second quarter. A 3D seismic program over the entire Bangora-Lalmai structure is well advanced and the two well drilling program with two further optional wells is scheduled to commence in the second quarter.

Blocks 17 and 18 (E) (Tullow 32%)

In December 2005, Tullow reached agreement to farm out a 60% interest in Blocks 17 and 18, offshore Bangladesh, to Total. Tullow will retain a 32% interest and Operatorship of the blocks.

Pakistan

Chachar (D) (Tullow 75%)

Following the approval by the Government of Pakistan of the development of the Chachar field, the design of the wells and production facilities have been finalized. It is planned to drill two wells in the second quarter with production scheduled to commence in the third quarter of 2006 at a rate of 20 mmscfd.

Kohat (E) (Tullow 40%)

Following award of the highly prospective Kohat Block in early 2005, a seismic test line was acquired in November 2005, and the full survey is scheduled to commence shortly.

India

Block CB-ON-1 (E) (Tullow 50%)

The acquisition of approximately 1,200 km of 2D seismic commenced in December 2005 on the high potential CB-ON-1 block in the Indian Cambay Basin. It is anticipated that acquisition and processing will be completed in the second quarter of 2006 and that the first well will be drilled in early 2007.

Tullow had a strong 2005, delivering record results. The Group achieved exceptional asset performance and consistent organic production growth against a background of increasing global oil and gas prices. This performance, coupled with financing initiatives undertaken in 2005, has allowed Tullow to reinvest at record levels while maintaining a progressive dividend policy and modest levels of gearing.

Results Highlights

2005 2004 Change

GBP millions GBP millions

Sales Revenue 445.2 225.3 Up 98%

Operating Profit 198.6 56.8 Up 250%

Profit Before Tax 178.6 46.8 Up 282%

Operating Cash Flow before

Working Capital 288.1 139.5 Up 106%

Stg p Stg p

Basic Earnings per Share 17.50 5.88 Up 198%

Final Dividend per Share 3.00 1.25 Up 140%

* 44% increase in average annual production to 58,450 boepd

* Organic reserves replacement of 118%; total reserves increased by 53

mmboe to 358 mmboe

* Current production is 69,000 boepd and is expected to reach 75,000 boepd

by year end

* Three discoveries close to Tullow infrastructure in the UK and Gabon

* Completion of pounds Sterling 200 million Schooner and Ketch acquisition

and major redevelopment under way Steady progress in development of the

giant Kudu gas project offshore Namibia

* Good progress on the key Okume Complex and West Espoir developments

* Year-to-date exploration: two oil discoveries in Uganda, one UK gas

discovery, two dry holes in Gabon

Commenting today, Pat Plunkett, Chairman, said:

“2005 was a year of many achievements for Tullow which included our first operated UK offshore development, the largest refinancing ever undertaken by a UK oil and gas independent and a record level of development, exploration and new venture activity across the Group’s three core areas. Today’s record results demonstrate the quality and depth of Tullow’s portfolio. We are reaping the benefits of the scale achieved through our major acquisition and investment program of recent years and we look forward to the many exciting opportunities for further development and growth in 2006 and beyond.”

Aidan Heavey, Chief Executive, said:

“Our production is growing strongly and is expected to reach 75,000 boepd by the end of the year. On the exploration front we plan to drill over 20 wells, including further wells in Uganda, where we have scheduled an extensive exploration and appraisal program to build on the recent M’Puta and Waraga discoveries. The outlook for Tullow is very positive. Oil and gas prices are strong and forecast to remain so. Our existing assets and work programs are expected to deliver robust organic growth and our new ventures program and other development opportunities offer compelling upside potential.”

Presentation, Webcast and Conference Calls

In conjunction with these results Tullow is conducting a presentation in London and a number of events for the financial community. Details are available in the 2005 Results Center on the Group’s website at http://www.tullowoil.com/.

2005 Results

For the year ended December 31, 2005

2005 was an excellent year for Tullow, with many new achievements in operations and a record financial performance. These results illustrate the benefits of the Group’s increased scale and deliver on the significant investments made over the past five years, during which period the Group has been transformed through a mixture of organic and acquisition-led expansion.

Record Financial Performance

Sales revenue increased 98% to pounds 445.2 million (2004: pounds 225.3 million), reflecting a full year contribution from the Energy Africa assets, nine months contribution from the Schooner and Ketch fields and oil and gas prices significantly higher than in 2004.

Operating profit increased 250% to pounds 198.6 million (2004: pounds 56.8 million) and profit before tax increased 282% to pounds 178.6 million (2004: pounds 46.8 million), including the profit of pounds 36.1 million on the disposal of non-core oil assets in the UK and offshore Congo and the sale of equity in the Horne & Wren development.

Basic earnings per share amounted to 17.50 pence, an increase of 198% compared to 5.88 pence in 2004. Operating cash flow before movements in working capital amounted to pounds 288.1 million, an increase of 106% over 2004, reflecting the quality of the Group’s producing asset base and allowing record levels of reinvestment in the business.

Progressive Dividend Policy

The Group’s capital expenditure programs are comfortably funded from strong operating cash flow and profit on disposals. The refinancing initiatives undertaken during 2005 have significantly enhanced the Group’s financial flexibility over both the short and long-term. In line with the Group’s progressive dividend policy, and reflecting the cash generated by the business and the capital investment and acquisition opportunities available, the Board recommends a final dividend of 3.00 pence per share. This brings the total dividend for the year to 4.00 pence per share (2004: 1.75 pence per share). Subject to shareholder approval at the Annual General Meeting (AGM), the dividend will be paid on June 7 to shareholders on the register at May 12.

Major investment in People and Facilities

A major investment in people and facilities has been made reflecting the material growth of the Group in recent years. During 2005 the London team moved to a new office at Chiswick, over 40 additional staff were recruited and dedicated teams were put in place for the important Schooner & Ketch and Kudu projects.

As announced in February, Adrian Nel, Tullow’s Exploration Director, will retire at the AGM in May. Since his appointment to the Board in September 2004, Adrian has made an outstanding contribution to the integration of Tullow’s exploration activities and enhanced the Group’s license portfolio and exploration strategy. Angus McCoss will join Tullow in April as General Manager Exploration. Angus previously worked for the Shell Group in Nigeria. Paul McDade is appointed to the Board of Tullow, with effect from today. Paul joined the Group in 2001 and became Chief Operating Officer following the Energy Africa Acquisition in 2004.

Continuing Positive Outlook

Tullow has steadily developed a balanced portfolio of international exploration and production assets. The performance of these assets during 2005 and the organic growth expected in 2006 provide a solid base for further growth. Projects such as the development of the Kudu field in Namibia and the exploration program in Uganda provide possibilities for significant changes in the Group’s scale, while the Group’s cash flow and modest gearing create the flexibility to accelerate programs and take advantage of development and acquisition opportunities as they arise. The outlook for Tullow is very positive.

Operations Review

The focus of Tullow’s business is to maintain a strong portfolio of assets and a growth strategy that will allow the Group to continue its development through all phases of the resource price cycle. Over time we have built a balanced portfolio focused on three core areas — North West Europe, Africa and South Asia. We strive to maintain this balance in the various aspects of our portfolio: between oil and gas production, between our geographical areas, across political and currency exposures and between moderate and high-risk exploration programs.

Growing in the UK Gas Market

Tullow has steadily increased its acreage and developed its reputation as a technically innovative and commercially astute operator since its entry into the UK Southern North Sea in 2001. Tullow now has over 40 licenses and a strategic position in terms of acreage and infrastructure. During this time, the UK has become a net importer of gas to satisfy indigenous demand. This market change has increased pressure on pricing, resulting in sustained gas price rises for domestic and industrial consumers. While a number of initiatives are planned to increase national supply capability, the recent extreme volatility in European gas markets provides further evidence that the prospects for independent producers in the UK gas market remain very favorable.

The Group continues to extend and enhance its position through a combination of acquisitions, organic growth via active development, exploration and participation in licensing rounds. 2005 activity, including the completion of the operated Horne & Wren development, the acquisition of the Schooner and Ketch assets and infill drilling in producing fields brought Tullow’s UK Gas production to over 200 mmscfd for the first time in December. This production level has since increased to over 210 mmscfd with the recent completion of the Delilah well. In addition, the first well in the Schooner and Ketch redevelopment, Schooner-10, has successfully encountered the reservoir and is being prepared for production in April 2006.

Exploration is an important part of the UK business and the gas discoveries during 2005 by the Opal and K3 exploration wells, and more recently of the Humphrey well, continue to demonstrate the prospectivity of the region and support its long-term future. Tullow plans a further six UK exploration wells for this year, including the Cygnus exploration well which is currently drilling.

African Reserve and Production Growth

Tullow believes there is an outstanding opportunity over the coming years for the Group to continue to build a truly pan-African oil and gas business. During 2005 we invested over pounds 139 million in our African business, with exceptional results:

* In Gabon, infill drilling and exploration programs have more than

doubled reserves over the last two years and allowed us to maintain net

production to Tullow in excess of 17,000 boepd;

* In Equatorial Guinea, ongoing infill drilling and careful management of

the Ceiba field have enabled it to attain production levels not seen

since 2002, while the Okume project remains within budget and on

schedule for first oil by the end of 2006;

* In Congo, the M’Boundi field delineation is almost complete. In 2005 the

field delivered further significant increases in production and reserves

and improved sales prices;

* In Cote d’Ivoire, infill drilling on Espoir has brought production

increases of over 20% in recent months, while first oil from the West

Espoir development project is expected before year end;

* Current African oil production exceeds 34,000 bopd, with further

increases anticipated over the remainder of the year.

In Namibia, Tullow continues to make steady progress in the development of the Kudu gas field. This is a strategic project, with the potential to transform the Namibian energy market and contribute significantly to its future energy requirements. 2006 will be an important year both for the gas sales negotiations for the gas-to-power development and for the preparation for two appraisal wells scheduled for the first quarter of 2007. These wells will assist in determining the potential of the significant reserves upside of the field.

Africa is a region of high exploration potential. During 2005 Tullow drilled a total of six wells, recording a discovery in Gabon and providing significant support for future work in Mauritania. Three wells were drilled in Angola and while results were disappointing, a number of further opportunities have been identified. The 2006 drilling program has already brought very encouraging results. High impact exploration projects in Uganda produced two discoveries, M’puta and Waraga and could mark the first stage in the development of a material new hydrocarbon province. Tullow and its partners plan a minimum of four further onshore wells in 2006 and two additional wells in Lake Albert in 2007 as part of an extensive exploration and appraisal program across its Albertine Basin acreage. Neither of two wells in early 2006 on the Akoum West and Soulandaka prospects in Gabon discovered commercial hydrocarbons and the rig will now move to drill the Dogbolter prospect in the Gryphon Marin license.

Tullow continues to seek new ventures in Africa and in March 2006, the Government of Madagascar approved Tullow’s participation in the onshore Block 3109. Further exploration and development opportunities are currently in the final stages of negotiation and should include entry into at least one additional country.

Renewing the South Asia Business

While Tullow’s production in South Asia has been modest, an extensive work program in 2005 covering a number of important exploration and development projects has the potential to transform the Group’s business in the area.

In Bangladesh, Tullow submitted an Appraisal Program to Petrobangla for the Bangora and Lalmai discoveries in Block 9. The program includes extensive 3D seismic, appraisal drilling and the initiation of production on a long-term test basis to help supply much needed gas to the Dhaka region. The seismic has been completed and provided key information and encouragement for the appraisal drilling, which will start in April 2006, as will first gas from the long-term test. The introduction of Total as a partner in offshore Blocks 17&18 brought a renewal of activity with the recent commencement of an offshore seismic survey.

In Pakistan, work on the development of Chachar field continues, with first gas forecast for the final quarter of 2006. Drilling has commenced on the Shahpur Chakar well in the Nawabshah block. We also added a number of potentially high impact exploration blocks to our portfolio in Pakistan including Kohat, where a seismic survey is under way and drilling is likely to begin early in 2007.

In India, we recently commenced a 1,152 km 2D seismic program in Block CB-ON/1. In parallel, the joint venture is integrating information from significant regional discoveries to the South and the North, and we anticipate a multi-well drilling program in 2007.

Rigorous Operational Risk Management

Risk management is central to our business, particularly in light of the international spread of our activities and the dynamic nature of our industry. The Group gives regular consideration to the key risks facing the business, with particular reference to those concerning the overall safety of our operations, the geographical balance of our activities and the characteristics of our individual assets and joint ventures.

Finance Review

Tullow had a very strong 2005, achieving record profits, earnings and cash flow from operations.

Compliance with IFRS

The results for 2005 have been prepared in accordance with the Group’s policies under IFRS. Tullow adopted IFRS with effect from January 1, 2004, with the exception of IAS 39 in respect of derivative financial instruments, which has been adopted with effect from January 1, 2005. The 2004 financial statements have been restated under IFRS and were published on August 22, 2005 with full details of the accounting policies adopted and are published on the Group’s website at http://www.tullowoil.com/.

Strong Results across Key Performance Indicators

The Group’s financial performance was complemented by strong results across key performance indicators.

Key Performance Indicators 2005 2004 Change

Lost Time Incident Frequency

Rate(1) 0.82 1.96 Down 58%

Production (boepd) 58,450 40,600 Up 44%

Operating Cash flow before

working capital per

boe (pounds) 13.50 9.45 Up 43%

Cash Operating Costs per

boe (pounds)(2) 4.84 4.40 Up 10%

Gearing (%)(3) 36% 17% Up 19%

Reserve Replacement (%) 118% 83% Up 35%

Realized Oil Price per bbl ($) 43.05 34.13 Up 26%

Realized Gas Price

(pence per therm) 33.85 22.89 Up 47%

(1) Lost Time Incidents per million man hours worked

(2) Cash operating costs are cost of sales excluding depletion and

amortization and under/over lift movements

(3) Gearing is net debt divided by net assets

Excellent Operating Performance

Working interest production averaged 58,450 boepd, while sales volumes averaged 53,350 boepd. These production figures are 44% ahead of 2004, principally as a result of a full year contribution from the Energy Africa assets and a nine-month contribution from the Schooner and Ketch acquisition, completed in March. During the year the Group disposed of the Alba and Caledonia assets in June and the offshore Congo (Brazzaville) interests in August.

Average prices realized during the year were significantly higher than in 2004. Oil was US.05/bbl (2004: US.13/bbl) and UK gas was 33.85p/therm (2004: 22.89p/therm). Tullow’s oil production sold at an average discount of 13% to Brent during the year. This discount is expected to reduce to between 8% and 9% during 2006. The Group also received tariff income of pounds 14.7 million (2004: pounds 9.4 million) from use of its UK infrastructure.

The combination of the higher prices and increased volumes meant that revenue increased 98% to pounds 445.2 million (2004: pounds 225.3 million).

Revenue analyzed by

Core Area Oil Gas Total

GBP millions GBP millions GBP millions % of Total

NW Europe (UK) 17.6 161.9 179.5 40%

Africa 264.9 - 264.9 60%

South Asia - 0.8 0.8 -

Total 282.5 162.7 445.2

% of Total 63% 37%

Operating profit before exploration activities amounted to pounds 224.4 million (2004: pounds 74.7 million), up 200%, reflecting the strong growth in Group production, profit on disposals and realized oil and gas prices.

Underlying cash operating costs, which exclude depletion and amortization and movements on under/over lift, amounted to pounds 102.2 million (pounds 4.84/boe). These costs were marginally above expectations and reflected, in particular, oil price linked royalty payments on Gabonese production. Reported operating costs before depletion and amortization for the year of pounds 123.5 million (2004: pounds 60.1 million) are also impacted by the inclusion at market value of pounds 8.2 million associated with overlifted volumes at December 31, pounds 5.5 million of overlift associated with the disposal of Alba and Caledonia and pounds 7.6 million of overlift associated with the sale of the Group’s offshore Congo interests, completed in August 2005.

Depreciation, depletion and amortization for the year amounted to pounds 119.7 million (pounds 5.67/boe). Depreciation includes a total of pounds 2.4 million of impairment costs associated with Tullow’s producing interests in Pakistan.

Higher Exploration Write-off reflecting Increased Activity

Exploration costs written off were pounds 25.8 million (2004: pounds 18.0 million), in accordance with the Group’s “successful efforts” accounting policy, which requires that all costs associated with unsuccessful exploration are written off to the Income Statement. The Group drilled 10 wells in 2005, achieved four discoveries, and is planning to drill 20 wells in 2006.

Hedging reflected in Income Statement under IFRS

At December 31, 2005 the Group’s derivative instruments had a negative mark to market value of pounds 147.8 million. Of this amount, pounds 97.2 million (66%) relates to contracts acquired as part of the acquisition of Energy Africa in 2004. While the bulk of these arrangements qualify for hedge accounting and will consequently be largely reflected in the Income Statement as the related contracts mature, the variations in crude oil discounts and gas production patterns for Tullow inevitably led to a degree of hedge ineffectiveness which is accordingly included in the charge of pounds 0.2 million recognized in the Income Statement for the year. The charge also reflects the effect of time value on the mark to market value of the Group’s derivative instruments. The Group’s hedge position as at March 22, 2006 can be summarized as follows:

Hedge Position H1 2006 H2 2006 2007

Oil

Volume – bopd 10,242 11,217 7,000

Current Price Hedge -

US$/bbl 39.99 42.90 45.06

Gas Hedges

Volume – mmscfd 91.67 50.00 15.00

Current Price Hedge – p/therm 58.70 42.61 58.68

Healthy Interest Cover

The net interest charge for the year was pounds 19.8 million (2004: pounds 10.0 million). The increase reflects higher levels of net debt arising from acquisitions and a one-off non-cash charge of pounds 4.1 million representing accelerated amortization of financing fees associated with facilities cancelled during the year as part of the Group’s refinancing. Excluding these items, and eliminating gains from asset disposals, interest was covered over 15.5 times (2004: 15.9 times).

Taxation

The tax charge of pounds 65.4 million (2004: pounds 15.5 million) relates to the Group’s enlarged North Sea and Gabonese activities and represents 37% of the Group’s profit before tax (2004: 33%). After adjusting for exploration costs and non-recurring items associated with the profit on asset disposals, the Group’s underlying effective tax rate for the year is 35% (2004: 25%).

While Tullow’s UK business has prospered, the Government’s decision to raise the supplemental corporation tax rate for the industry is difficult to understand at a time when the UK, as a net importer of gas, is seeking to promote investment in exploration and maximize recovery of indigenous reserves.

Acquisitions and Portfolio Management

During the year Tullow completed the acquisition of the Schooner and Ketch assets for a net cash payment on completion of pounds 189.3 million. A purchase price allocation exercise has been undertaken on these assets incorporating the fair value of all reserves, costs and contractual arrangements acquired, resulting in a total allocation to oil and gas assets of pounds 218.0 million. A creditor of pounds 31.3 million in respect of the gas contracts which were out-of-the-money as at March 31, 2005 has also been recognized; the majority of these contracts expire in late 2007.

The Group completed the disposal of the Alba and Caledonia offshore assets in the UK and the offshore Congo (Brazzaville) assets in June and August 2005 respectively. In addition, final income has been recognized in relation to incremental consideration received based on reserves and performance of the Horne & Wren fields. The profit on disposals amounts to pounds 36.1 million (inclusive of the pounds 5.5 million of overlift outlined above).

Record Operating Cash Flow and Strong Balance Sheet

The strong pricing environment, allied to increasing production and effective control of underlying operating costs, led to record operating cash flow before working capital movements of pounds 288.1 million, 106% ahead of 2004. This cash flow enabled the Group to maintain modest gearing of 36% at year end, to increase dividends to shareholders in respect of the period by 129% and to invest pounds 193.0 million in exploration and development activities in the year.

Over 80% of Group capital expenditure was associated with ongoing development and production enhancement projects in the UK, Gabon, Congo (Brazzaville), Equatorial Guinea and Cote d’Ivoire. The programs associated with this expenditure have allowed Tullow to achieve organic reserve replacement of 118% over the period. Tullow has approved total 2006 capital expenditure of pounds 280 million across all assets, driving group production to a target of over 75,000 boepd by year end.

Net assets at December 31, 2005 amounted to pounds 389.0 million (2004: pounds 375.5 million). Net assets were reduced by pounds 120.4 million in the year due to the recognition of a hedge reserve in accordance with IAS 39 (adopted January 1, 2005). An increase in net assets (foreign currency translation reserve) of pounds 32.4 million resulted from the strengthening of the US Dollar against Sterling from US.93 to US.72 in the year.

Successful major Refinancing

Over the last five years Tullow has undertaken a range of acquisitions and field developments, all of which have been wholly or partly debt financed. During 2005 the Group completed a US0 million refinancing, the largest such facility ever negotiated by a UK independent oil company. This has allowed Tullow to consolidate existing borrowings into a single facility, to halve its collateralization obligations and to maintain financial flexibility for future growth. The Group currently has over US0 million of unutilized debt capacity in addition to its cash balances.

Credit:ivythesis.typepad.com

Case Study – Tullow Oil

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Case Study – Tullow Oil

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