Marketing

Dragon Oil’s primary marketing and sales objective is to ensure the safe and uninterrupted sale and delivery of its entitlement barrels to international markets, and to achieve best available market prices, subject to logistical considerations and market conditions. It is important that multiple marketing routes are available and the marketing team is working hard to develop new outlets on an ongoing basis.

Since the commencement of the PSA for the Cheleken Contract Area, we have marketed and exported most of our entitlement barrels through a long-term crude oil swap agreement with a subsidiary of the National Iranian Oil Company, Naftiran Company Limited (“NICO”).  Historically approximately 80-90% of our crude oil was marketed through this agreement and exported via Neka, Iran, the “southern route”, with the balance exported through Baku, Azerbaijan, the “western route”.

This long-term swap agreement expired at the end of March 2010 and consequently in April 2010 Dragon Oil entered into a short-term swap contract with NICO on a three-month rollover basis on revised terms which expired in July 2010.  All operations under the swap arrangement with NICO have now ceased.

On 16 June 2010 we announced a new 12 month contract with a major international oil trading company for the sale of crude oil, FOB the Aladja Jetty, through the western route, primarily using the BP-operated BTC (Baku-Tbilisi-Ceyhan) pipeline. Dragon Oil plans to sell a substantial portion of our production through this route over the contract period. It is expected that the realised net crude oil prices will be less favourable than the historic netback prices generated through the southern route. For the year to 31 December 2010, we expect to achieve an average realised price in the range of an 8% to 10% discount to Brent. The discount in future years may vary depending on a number of factors and the availability of alternative routes to market.

Dragon Oil is satisfied that the current marketing arrangements provide a secure and reliable export route for our entitlement production with sufficient capacity to satisfy its current anticipated needs. Nonetheless, to gain further access to international markets and maintain flexibility in operations, we continue to review and test alternative routes for exporting our crude oil.