Dragon Oil

In December Dragon Oil (DGO) announced the completion of well work-over activity at the LAM 21 platform which had been the focus of the company's work-over programme for much of 2004. Dragon has continued to make solid progress with current drilling activity, and is nearing completion on a seismic survey of the company's primary production and exploration area offshore from Turkmenistan. We believe recent drilling successes are an endorsement of the company's active exploration program, which is bolstering reserves, and underpinning future production growth.

Dragon's primary exploration and production area is the Cheleken Contract Area offshore of Turkmenistan in the Caspian Sea. The company estimates its entitlement to reserves in the area at 356 million barrels of oil and 3.44 trillion cubic feet of gas. By the end of last month Dragon was meeting a daily production target in the area of 20,000 barrels of oil per day (bopd). We believe these figures underpin Dragon's significant leverage to robust oil prices.

In December, Dragon completed the LAM 21/106 well despite encountering technical problems earlier in the year. We were pleased to see that the well was tested at a rate of 2,652 bopd. This follows the previously announced completion of the LAM 21/109 well which tested at 5,330 bopd.

Immediately after the completion of LAM 21/106, DGO moved their jack-up rig to the refurbished LAM 10 platform to begin further exploration. Last week Dragon confirmed that LAM 10/110 is currently drilling at a depth of 450 metres, with a planned depth of 4,990 metres. We are encouraged by these developments as they offer a low cost methodology to increase production in the naturally declining Cheleken area.

Dragon's well work-over programme has significantly boosted production from the Cheleken Block to date. We are confident that an ongoing expansion of the programme will yield further production increases in 2005.

We are eagerly anticipating the results from Dragon's 3D seismic survey in the Cheleken area.

The findings are expected to be available in the coming months, and will allow Dragon to identify additional undersea drilling targets. We expect the survey will facilitate a reserve upgrade in an area where DGO is already enjoying much success.

In our opinion Dragon's active exploration programme, rising production profile, and the pending completion of the Cheleken seismic survey all bode very well for medium term earnings growth. We remain confident that the company can double production to 40,000 bopd in the next five years. We also believe that a strong oil market will continue to underpin strength in the oil and gas sector providing additional support to DGO. On this basis we consider Dragon's price earnings ratio of around 9 times as undemanding.

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