Final Results

PAN ANDEAN RESOURCES PLC 29 September 1999 CHAIRMAN'S STATEMENT Pan Andean has weathered a turbulent period in world oil and is now well positioned to take advantage of rising oil prices and a rapidly growing demand for gas in Bolivia/Brazil. I am pleased to report that Pan Andean is at the final stages of putting together a consortium which will drill the Chipiriri oil target on the giant Chapare oil concession in central Bolivia. The consortium expects to drill quickly - within four months if possible. The start up date is subject to obtaining permits, an environmental impact assessment and the weather. Much work has already been done. All required permits have been applied for, the environmental studies are underway and mobilisation requirements are being managed. The well site at Chipiriri is some 23km further into virgin jungle than our earlier Todos Santos 1 well. It will take up to 12 weeks to construct a road to the proposed site and to build a pad. Once spudded the target depth is 3,500 metres. Drilling is expected to take 50 days. Total well cost will be $5 million. Depending on the final makeup of the consortium Pan Andean may contribute up to $1.5 million. It is important to note the basis of the consortium. It is formed purely to drill Chipiriri. Everyone invests on a 'heads up' basis. That means that they pay no premium. In return they do not participate in any part of the Chapare other than the single well in Chipiriri. Pan Andean will have the right to buy out the participants at an agreed multiple so, if the well is successful, Pan Andean can own 100 per cent of the block. Participants may have an option to stay in for further drilling. This form of participation is a major boost for Pan Andean. We maintain a dominant interest and control while at the same time drilling and meeting our obligations on the entire block. We have boosted management to take on this new work. David Horgan has joined us in a full time position as Managing Director. His energy and enthusiasm is responsible for the consortium being put together. We are delighted to report that Marcelo Paz has joined as Pan Andean's Bolivian local manager. Marcelo was formally Bolivian Energy Minister and an Ambassador. He brings unique skills and relationships with key decision-makers in Bolivia and elsewhere. He will be in the forefront co-ordinating the consortium and the drilling as well as developing some additional opportunities in Bolivia. What is outlined above is very exciting. It represents the culmination of three years work. The Chapare is a highly prospective oil/gas block. Successful discoveries require drilling. This we are doing while at the same time maintaining most of the equity. It is worthwhile reviewing what has happened in the Chapare block where over $32 million has already been spent. When Pan Andean acquired the block in 1991 it was outside the traditional oil/gas areas of Bolivia. We spent two years in discussions with prospective partners. Between 1994 and 1996 over $20 million was spent by our then partner on seismic and surface studies. In the meantime oil discoveries were made to the east and south of Chapare. Pan Andean and BHP drilled a $7million well at Todos Santos in mid 1996. This well produced significant indications of gas over substantial lengths. There were disagreements between Pan Andean and the operator BHP, over the well site location and over the decision not to test the well. With hindsight we should have been more forthright in negotiations on both areas. Our geological advice was to drill the Chipiriri prospect, a very well defined target. BHP, our partner and operator, chose the Todos Santos target because, we believe, it was closer to infrastructure and cheaper to drill. The well location at Todos Santos was also subject to dispute. Our advisors chose a location 3km northeast of the site which was spudded but the operator had the final say. The well results were confusing. The nature of Bolivian geology in the Chapare area is such that standard well testing can give false results. Pan Andean had the right to test the well at our own expense. We declined to do so and have wondered since. Once the drilling ceased it took a further eight months to evaluate and analyse the well logs. In May 1997 our then partner sought changes in the relationship which we were unable to accept so the agreement terminated. We were comfortable that a new partner could be found. This proved more difficult than anticipated despite the fact that additional discoveries had been made close to the Chapare. Part of the reason was that the oil business in Bolivia had gone through rapid change. The privatisation of YPFB the State oil company offered investors many alternative exploration opportunities. The pipeline to Brazil was delayed and world oil prices slumped. New laws relating to oil introduced in 1996 while flexible are expensive for explorers. For instance Pan Andean must pay $400,000 a year rent. The new hydrocarbon law places two obligations on prospectors, minimum work commitments and annual rents. The work commitments on the entire Chapare block for the 3 year period ending July 2002 will be more than covered by drilling Chipiriri. The reason being the credits held by Pan Andean from previous work. The reason for the high rent cost is the size of our block. It is the largest in the country. If we wish we can reduce the cost by reducing the block size. The current year has seen a welcome improvement in the oil industry. The gas pipeline to Brazil is now working. This offers a huge market in Brazil for Bolivian gas. The incentive is already effective with numerous new gas discoveries being announced. The rising oil price is slowing filtering into exploration budgets. There are still many competing opportunities for oil and gas exploration in Bolivia but the Chapare because of its size, its location and the availability of seismic lines and well log data is once more attractive. The target in Chipiriri is oil though we will be happy with gas. The whole area of central Bolivia is now highly prospective with hit rates way above the world average. But do not for one minute think or believe that success is certain. Oil exploration is a high reward high risk venture. The only way to find out what is three miles into the ground is to drill. Given the cost of each well every effort is made to minimise risk but it still remains. Other Activities While drilling the Chapare is the primary focus of Pan Andean your directors must take note of the risks and take steps to ensure the success of the company. In the slow days of 97 and 98 when we were finding it tough to interest investors and partners in the Chapare block we looked at other opportunities in Bolivia and elsewhere. We are well established in Bolivia. As you will read below Bolivia is becoming the energy hub of South America. With our experience, skill and contacts we are well placed to assist newcomers to Bolivia. I am hopeful that the coming months may yield some developments in this area. Our new manager has ideas and concepts which may prove fruitful. Despite the best efforts of everyone involved it can happen that exploration opportunities do not work. While the management of Pan Andean concentrates on Bolivia I undertook to evaluate opportunities in other parts of the world. A number of projects were examined and discarded. The low oil price of 1998 cast a cloud over many prospects. We spent time and money examining a large gas deposit in North Africa. Markets were difficult to find. We looked at, and discarded, projects in Eastern Europe and in parts of the Middle East. We are currently in discussions with a company which has attractive acreage in Africa. I must repeat that these are peripheral activities. For the foreseeable future exploring the Chapare is our mission. Finance Pan Andean has only 47 million shares in issue. We are loath to dilute existing holders. A fund raising of $1million in late 1997 has financed operations to date. Depending on the final makeup of the consortium Pan Andean may contribute up to $1.5 million out of $5million. Should funds be required they will be raised in a small private placement. Future As I have said before exploration in frontier areas is not for the faint hearted. Success will bring great rewards. To be successful we must drill. On your behalf I want to pay tribute to our managers who have persistently believed in the potential of the Chapare block. Hopefully their belief will be justified in the coming well. CONSOLIDATED PROFIT AND LOSS ACCOUNT for the year ended 31 March 1999 1999 1998 £ £ Turnover - - Operating charges - - ------- ------- Gross result - - Administrative expenses (113,031) (402,212) ------- ------- Total administrative expenses (113,031) (402,212) ------- ------- Operating loss (113,031) (402,212) Interest receivable and similar income 29,730 13,535 ------- ------- Loss on ordinary activities before taxation (83,301) (388,677) Taxation - - ------- ------- Loss on ordinary activities after taxation (83,301) (388,677) ======= ======= Loss per share (0.18p) (0.82p) Loss per share - diluted (0.17p) (0.78p) ======= ======= The loss for the year can be analysed as follows: Holding company (83,301) (388,677) Subsidiary - - ------- ------- (83,301) (388,677) ======= ======= BALANCE SHEETS as at 31 March 1999 Group Company Group Company 1999 1999 1998 1998 £ £ £ £ Fixed Assets Intangible assets 1,133,144 1,133,144 761,132 761,132 Tangible assets 25 25 2,499 2,499 Investments 1,955 1,955 1,885 1,885 --------- --------- --------- --------- 1,135,124 1,135,124 765,516 765,516 --------- --------- --------- --------- Current Assets Stocks 157 157 252 252 Debtors 6,372 6,372 249,992 249,992 Cash at bank 386,831 386,831 721,420 721,420 --------- --------- --------- --------- 393,360 393,360 971,664 971,664 Creditors (amounts falling due within one year) (33,246) (33,246) (168,023) (168,023) --------- --------- --------- --------- Net current assets 360,114 360,114 803,641 803,641 --------- --------- --------- --------- Total assets less current liabilities 1,495,238 1,495,238 1,569,157 1,569,157 ========= ========= ========= ========= Capital and Reserves Called up share capital 472,569 472,569 472,569 472,569 Share premium 2,908,217 2,908,217 2,908,217 2,908,217 Profit and loss account - deficit (1,885,548) (1,885,548) (1,811,629) (1,811,629) --------- --------- --------- --------- Equity shareholders' funds 1,495,238 1,495,238 1,569,157 1,569,157 ========= ========= ========= ========= CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 March 1999 1999 1998 £ £ Net cash inflow/(outflow) from operating activities 7,693 (275,360) --------- --------- Returns on Investments and Servicing of Finance Interest received 29,730 13,535 Costs associated with shares issued during the year - (37,452) --------- --------- Net cash inflow/(outflow) from returns on investments and servicing of finance 29,730 (23,917) --------- --------- Capital Expenditure and Financial Investment Payments to acquire intangible fixed assets (372,012) (629,672) --------- --------- Net cash outflow from capital expenditure and financial investment (372,012) (629,672) --------- --------- Net cash outflow before financing (334,589) (928,949) --------- --------- Financing Issue of ordinary share capital - 1,544,198 Net cash inflow from financing - 1,544,198 --------- --------- (Decrease)/increase in cash (334,589) 615,249 ========= ========= STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES for the year ended 31 March 1999 1999 1998 £ £ Loss attributable to group shareholders (83,301) (388,677) Currency translation adjustments 9,382 (7,401) --------- --------- Total recognised losses for the year (73,919) (396,078) ========= ========= RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS 1999 1998 £ £ Total recognised losses (73,919) (396,078) New share capital subscribed - 1,544,198 Costs associated with shares issued during the year - (37,452) --------- --------- Net change in shareholders' funds (73,919) 1,110,668 Opening shareholders' funds 1,569,157 458,489 --------- --------- Closing shareholders' funds 1,495,238 1,569,157 ========= ========= Notes: 1. Continuing Operations None of the Group's activities were acquired in this financial year or discontinued during the above two financial years. 2. Total Recognised Gains and Losses The Group has no recognised gains or losses other than the loss for the above two financial years. 3. Loss Per Share The calculation of the undiluted earnings per share is based on losses of £83,301 (1998: £388,677) and 47,256,905 shares (1998: 47,256,905) being the average number of shares in issue during the year weighted on a time basis. 4. The results set out above are not full accounts as defined in s.254 of the Companies Act 1985. The auditors have made an unqualified report on the accounts for each of the years ended 31 March 1997 and 1998 under s.236 of the Companies Act 1985 which have been and will be filed with the Registrar of Companies. 5. A copy of this announcement will be available at the offices of the Company for 14 days from the date of this announcement.

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