Mayo de 2006

Chairman's statement

The results for the year ended 31 December 2005 are set out below. The profit shown after tax was entirely due to interest received and exchange gains. The latter resulting from your Board's decision to hold most of the Company's funds in dollars. As in previous years, overheads, which are covered by interest received, have been kept low despite the very considerable increase in activity consequent upon preparations to drill in the North Falkland Basin.

The focus of the year's activities was on preparing a three-well drilling programme in Tranches C and D in the North Falkland Basin and sourcing a suitable drilling rig to fulfil it. There is a well-publicised, world-wide shortage of drilling rigs which has severely affected the entire Industry, not least Desire. Rig-rental rates are also at historically high levels.

In view of the extraordinarily tight rig market and the major increase in costs, your Board, whilst continuing actively to secure a rig, has reviewed the Company's strategy for renewing drilling in Tranches C and D. At the moment, there appear to be two alternative options: to await a change in the rig market or to seek a partner with access to a drilling rig. As the second of these options does not preclude the first, a programme to identify and secure a suitable partner was initiated early this year (2006).

Possible partners include oil companies with long-term rig contracts or drilling companies themselves. In the past, drilling companies have not normally been interested in taking equity positions in drilling programmes except when the rig market was exceptionally weak and it was one of the few ways of utilising their hardware. However, the current, historically-high, rig-rental rates have had the effect of making many drilling companies cash-rich; this factor, together with the attraction of major multiples from successful equity participation in oil and/or gas discoveries, has caused them to take a fresh look at equity deals and a number of drilling companies are now prepared to discuss such ventures. Even so, most drilling companies do not, themselves, have spare rig capacity because most of their rigs are tied-up in long-term contracts.

Nevertheless, Desire has entered into discussions with a number of companies with rigs interested in equity in Tranches C and D. The nature of the participations under discussion may not take the usual form of industry farm-outs and your Board is considering innovative ways of structuring them. It is not yet possible to say that these discussions will be successful nor, if they are, at what date a rig will become available.

The rig market itself is likely, in due course, to return, as it has done in the past, to more normal conditions of supply and demand. Rig supply will increase as new rigs are built and demand can be expected to slacken, either because of a lack of exploration success or because major new discoveries are made. Current exploration success rates are poor world-wide and, if this continues to be the case, more rigs will become available as companies draw their exploration horns in. As a consequence of this lack of exploration success, the attractiveness of the North Falkland Basin, with its world-class source rock, is likely to increase.

Despite the lack of a rig, work has continued on preparations for the drilling programme. Peak Well Management has been appointed to oversee the programme, nine drilling locations have been selected, well designs are being finalised, initial site surveys have been carried out using the 3D seismic survey, the Environmental Impact Assessment has been submitted to the Falkland Island Government (FIG), the well tubulars and wellheads (of which there is also a world-wide shortage) have been ordered and a myriad other requirements and contracts, such as for waste disposal, helicopters, crew-change facilities, etc., are being put in place. Apart from the requirement by the UK Health and Safety Executive, on behalf of FIG, to approve the safety management system of the rig when contracted, all of the essential plans for the drilling program are well underway or in place and drilling will be able to commence as soon as an approved rig is acquired.

One strategy option, so far rejected by your Board, is that of farming-in to the existing exploration drilling programmes of other companies. Although several opportunities have been considered, none were anywhere near as attractive, either technically or in terms of potential upside, as drilling in Tranches C and D. Accordingly, the decision has been taken to conserve the Company's funds and to continue to concentrate all efforts in the North Falkland Basin.

I am very pleased to welcome Mr Edward Wisniewski to the Board. Eddie is a Chartered Accountant with extensive oil-industry experience whose contributions, both as a non-Executive Director and Chairman of the Audit Committee, have already been substantial. All of my other Board colleagues continue to play essential roles, in particular Dr Ian Duncan in his capacity as Chief Executive.

Although the past year has been a frustrating one, not least for your Board, I believe that the strategy adopted is the correct one which will, in due course, lead to a resumption of drilling in the North Falkland Basin.

Yours sincerely,

Dr Colin B. Phipps