Risks and risk management

PA Resources currently produces at a limited PA Resources currently produces at a limited number of fields. This means that production problems at individual facilities could have a significant negative impact on PA Resources' total production levels and revenue.
   In conjunction with the development of new oilfields and the drilling of new production wells, production levels vary during the entire development period.

Production levels in the Azurite field in the Republic of Congo were lower since the three latest wells encountered a less well-developed reservoir of greater complexity in combination with reduced aquifer. This resulted in a writedown of the field's recoverable reserves.

Production 2008-2010

Without new reserves being added, PA Resources'
reserves and production will reduce over time. New oil and gas reserves must be found or acquired and then developed for production.

PA Resources carries on exploration activities in existing licences and develops discoveries for production.
   The Group strives to have a balanced portfolio of licences with a good spread across the stages of exploration, development and production.

At 31 December 2010, reserves amounted to
SEK 72.5 million barrels (78.9) on a working interest basis and, in 2010, were affected by items
including production, additional development
projects, write-down of the reserves in the Azurite field in the Republic of Congo and an increased working interest in the reserves in the Zarat licence in Tunisia.

The world market price of oil fluctuates from day to day and is influenced by a wealth of factors including weather, size of inventories, financial crises that impact demand and in the long-term by economic growth, availability of oil, investment costs and competing energy sources.

Major price fluctuations are negative since lower revenues and greater uncertainty risk cancelled investments and render planning more complex.

In 2010, the oil price has varied between USD 70 and 95 per barrel. The trend in oil prices has been rising due to the global economy's strong recovery combined with cold winter weather and unrest in North Africa.

Oil price trend 2005-2011
Brent (USD per barrel)

PA Resources may suffer accidents, damage to facilities, environmental damage or personal injuries. For example, fires, explosions, blowouts, accidental leaks, shipping accidents, etcetera can occur. Delays can arise due to bad weather, poorly performed work by partners or suppliers, changes in government requirements and delayed deliveries of equipment.

Efforts are actively pursued in the areas of health, the environment and safety to minimise the risk of accidents, injuries and delays. Safety and risk assessments are performed and measures taken ahead of drilling, seismic surveys and the development of fields.
PA Resources has property and liability insurance in line with international standards, but the Group is not fully insured against all types of risks.

No accidents occurred in 2010. Delays arose in the development of the Azurite field in the Republic of Congo in the fourth quarter. The three latest production wells produced at lower levels due to insufficient
pressure as they lacked support from
water injectors. Refer to Risks; Fluctuating production levels above. Full development of the field has been delayed by one quarter to the second quarter of 2011.

All estimations of oil and gas reserves and resources involve a certain degree of uncertainty. The risk exists that the estimated volumes will not accord with reality. The probability of
discoveries of oil or gas is generally around 20 percent. If a well proves to be dry, there will be no return on the investment.

PA Resources' exposure to this risk is comparable with that of other oil companies. In 2010, finds of hydrocarbons were made in one of two exploration wells drilled and in none of two appraisal wells. A number of planned wells have been delayed until 2011.

PA Resources’ business is dependent on a good supply of drilling rigs, equipment, materials and skilled personnel. To a certain extent there is a shortage of skilled, experienced personnel in the oil industry.

In 2010 it has been relatively easy to get hold of rigs and equipment. Competition for good staff remains in the oil industry, but PA Resources have been able to recruit necassairy personal during the year.

All parts of the petroleum industry are exposed to considerable competition. This also applies to the acquisition of shares in oil and gas licences and the sale of oil and gas, as well as access to the necessary drilling equipment and personnal. The Group competes with several other companies in the search for and acquisition of possible oil and gas resources and when recruiting skilled personnel.

The Group’s competitors include several oil companies that have greater financial resources, more staff and larger facilities than the Group. Among other things, the number of state-owned oil companies has increased substantially in recent years. They do not generally have the same requirements of return as companies in private ownership and are therefore in certain cases willing to pay more.

PA Resources’ business is to a great extent based on concession agreements, production sharing agreements and other agreements that may be subject to interpretation and disputes. The Group is currently operator of 13 of the total of 28 licences in which it owns shares. In the case of the other licences PA Resources is dependent on actions taken by an external operator.

A settlement was reached in June 2010 between PA Resources' subsidiary and Ecumed Petroleum Ltd regarding the El Bibane Field in Tunisia. In September a new agreement for the field was signed between the two partners.

PA Resources’ business is dependent on the authorities in the countries concerned awarding permits and approving licence applications. Applications for licences may be rejected and existing licences may be subjected to restrictions or revoked by the competent authority. Although licences can usually be renewed upon expiry, it is not guaranteed that this will be the case.

No licences were revoked in 2010 due to decisions made by the authorities.

Demand for oil and gas may decrease in the long term due to the climate debate, efforts to reduce carbon dioxide emissions into the atmosphere and other energy political decisions. The climate issue is prompting countries to discuss legislation and various economic incentives to support alternatives to fossil fuels and to raise taxes and environmental levies on fossil fuels. This may in the long run reduce the demand for oil and gas, which may negatively impact the Group’s business, profits and financial position.

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PA Resources’ production facilities could be impacted by natural disasters. Substantial worth can be lost and the oil production can be negatively impacted. If production were brought to a standstill due to a natural disaster, restoring production facilities would involve major expense. Moreover, it would impact the rate of production, leaving the Company without sales revenues. Neither is there any certainty that PA Resources would have sufficient financial resources to be able to make the necessary investments to resume production. Disputes might also arise between the Company's partners and or insurance company.

The Group has not been affected by any natural disaster in 2010 or previous years.

PA Resources is affected by the tax regulations in force in the countries where the Group has operations. Each country controls and determines the amount of tax the oil industry pays. Tax of en consists of a combination of royalties, discounts on oil produced, income tax, subsidies for investments, stamp duty, capital gains tax, etc. Oil-producing developing countries have had a tendency to raise taxes as and when the price of oil goes up and this may have a negative impact on the Group’s cash flow.

The Group has not been negatively affected by any changes in taxes in 2010.
     PA Resources is not either affected by the 2011 increase in the supplementary charge in respect of profits from oil and gas production in the UK and UK Continental Shelf from 20 percent to 32 percent, as we do not have any production in UK.

The Group is responsible for the costs incurred when production facilities are to be dismantled, oil wells plugged and abandoned and the ground cleaned-up.

Environmental and safety legislation regarding this may be amended. This may result in the more stringent or additional measures than those currently required and in more extensive liability for the Group and its board members and employees.

Up to now the Group has not accrued any significant costs relating to retirement of production facilities.

PA Resources' reporting currency is SEK but the Group conducts business in a number of other countries. The assets in oil and gas licences are valued by the market in USD and generate revenue in USD, while costs are incurred both in USD and in local currencies. Borrowing takes place in USD and in local currencies. Currency risks mainly impact the Group through transaction risks and translation risks. Read more in PA Resouces Annual Report 2010, Note 30, Financial risks.

From and including 1 October 2010, PA Resources in Tunisia changed reporting currency from local currency to USD which reduced the impact on the Group's financial results from currency translations.

The dollar (USD) rate's impact on profit/loss 2010 (MSEK)

The Group's net interest expense is affected by the balance between variable and fixed interest rates in the Group's financing in relation to changes in market interest rates. The effect of a change in interest rates on the profit depends on the fixed term applicable. Future increases in interest rates could have a negative impact on PA Resources' results and business opportunities.

Average fixed-interest period was 1.3 years at year-end.

Sensitivity analysis 2011:
Should interest rates change by one percentage point in all the countries in which the Group has loans, the impact on net financing in 2011 based on variable-rate debt at year-end would be, ± SEK 11.9 million.

PA Resources' business activities are capital intensive. Exploration and development of fields
requires access to financing as a supplement to internally generated cash flow.

The ability to make the necessary investments
may be impaired if the cash flow from
operations were to be insufficient and external
sources of capital were limited.

Continuous work on raising capital and refinancing through bond loans and other types of facilities.

According to the strategic plan that was adopted in 2010, the debt/equity ratio is not permitted, more than temporarily, to exceed
50 percent (assuming full conversion of outstanding
convertibles).

In 2010, several refinancing activities including a rights issue of shares and a new bond loan were completed to strengthen the capital
structure. For more information, see Note 22 in PA Resouces Annual Report 2010.

On the balance
sheet date, cash and
cash equivalents
amounted to SEK
1,260.4 million (123.9). Net debt/equity ratio amounted to 38.3 percent (54.6) assuming full conversion.

The Group is exposed to the risk of not receiving payment from customers for deliveries of oil and gas.

Credit risks also arise in the investment of cash and cash equivalents. The use of financial derivatives such as interest swaps involves a risk through the counterparties with which the transaction is conducted.

Deliveries of oil are made only to a small number of recognised, creditworthy customers, primarily major international oil and gas companies. The Group checks the creditworthiness of all customers who wants to do business on credit. Receivable balances are monitored on an ongoing basis. The Group do not take our any credit insurances due to the customer structure and historical outcomes.

Both investments in cash and cash equivalents and trading in derivates are normally limited to banks with a strong credit rating. The Group strives to establish ISDA agreements with its counterparties in transactions with derivates.

In 2010, no bad debt losses were acounted for.

The value of cash and cash equivalents and financial investments were 1,260.4 (123.9) MSEK on 31 Dec 2011.

PA Resources conducts business activities in countries where a certain level of risk exists in respect of political instability. The concept, political instability, comprises financial vulnerability and vulnerability to unrest. Business activities are also, to a certain extent, conducted in countries where corruption can occur. Bribes and other forms of corruption lead to significant problems for those companies that become involved.

In so far as it is possible, the Group endeavours to avoid unstable countries with unrest. When re-quired, the Group utilises the OEC D’s tools for corporate risk manage-ment in countries with weak governments. Read more at www.sweden.gov.se. The Group has deter-mined to support the Extractive Industry Transparency Initiative (EITI) that aims to increase the transpa-rency of payment flows and thus counter corrup-tion. The Republic of Congo is a candidate country to the initiative and Equatorial Guinea has announced its intent to become a candidate.

According to the Economist Intelligence Unit’s Index 2009/2010* of political instability, none of the countries in which PA Resources operates are included among the 70 highest risk countries in the world. However, it is extremely difficult to predict where unrest will appear. At the end of 2010, the Jasmine revolution commenced in Tunisia. The Group has therefore raised assessments of the likelihood of the risk imp acting the Group in 2011.

*Source: Economist Intelligence Unit, www.viewswire.eiu.com