In the USA Gulf of Mexico, Gulfsands owns interests in 14 leases offshore Texas and Louisiana, which include 9 producing oil and gas fields with proved and probable (2P) working interest reserves at 31 December 2010 of 2.1 mmboe (figures adjusted for the disposal of non-core properties in December 2010 and September 2011).

The Group considers the US business to be non-core and intends to dispose of it as and when market conditions are favourable.

Operations

Production on a working interest basis, including Natural Gas Liquids ("NGLs"), averaged 1,143 boepd in 2010, substantially unchanged from the 1,144 boepd in 2009. The composition of this production was 42% oil, 53% gas and 5% NGLs. After tax and royalties, net interest production in 2010 was 889 boepd.

However, this production figure was distorted by the sale of a package of properties in December: the production from these properties was excluded from the reported total as from the 1 May 2010 effective date of the transaction. In April 2010, the month prior to the effective date, working interest production from these sold properties was 440 boepd.

Production in December (which excludes the sold properties) was 845 boepd (working interest basis), comprising 51% oil, 48% gas and 1% NGLs.

The Group did not participate in any new drilling in this area during 2010. Many drilling programmes in the area were deferred or cancelled as a result of the Deepwater Horizon incident in the Gulf of Mexico during 2010 and the ensuing regulatory realignment.

The Group did, however, participate in a number of major rig-based workover operations ("MRWO") and re-completions in existing wells in order to turn behind pipe reserves into production. With the current relatively low natural gas price environment in North America, these workover and recompletion operations were primarily within oil producing properties at Eugene Island (EI32) and West Delta (WD59). Recompletion opportunities are available at a number of gas producing fields, but these have been deferred due to low product prices.

During the year significant progress was made in the decommissioning of idle facilities on a number of properties including SMI 243/244, HIA 471, GA 250, VR 161 and EI 97. Most of the work in these field areas was completed during 2010, although some of the larger abandonment projects such as HIA 471 will continue into 2011.

Partial Divestment

Portfolio rationalisation continued during 2010 with the sale of our interests in the Eugene Island 57/58 gas field, the Vermilion 379 oil & gas field and the South Pelto 13 oil & gas field for $4.4 million. The transaction completed in January 2011. Since the purchaser has assumed all future abandonment obligations associated with the sold properties this has resulted in the return to Gulfsands of $5.6 million of funds held as collateral for abandonment bonds.

Plans for 2011

During 2011 the Group intends to maximise the value of these assets by continuing to convert both behind pipe and proved but undeveloped reserves into production. Due to the continued relatively low natural gas prices but strong oil price environment, we once again expect to concentrate these operations on oil producing properties such as Eugene Island 32.

The Group is currently participating in a 3D seismic re-processing project, with the objective of identifying undrilled fault blocks and un-tested reservoirs within and around existing fields. These re-processed data will be available for interpretation during the second quarter. The Group expects to participate in at least one and as many as three new wells during 2011.