Operational risks

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.