Longboat Energy : Annual Report of the Directors and Financial Statements for the year to 31 December 2021

COMPANY INFORMATION

DIRECTORS

G S Stewart (Non-Executive Chairman)

• J J Saetre (Non-Executive Director)

• K L M Roe (Non-Executive Director)

H A Hammer (Chief Executive Officer) J R Cooper (Chief Financial Officer)

B Cheshire (Senior Non-Executive Director)

N A Ingrassia (Corporate Development Director) (Appointed 1 June 2021)SECRETARY COMPANY NUMBER

J G M Riddick 12020297

REGISTERED OFFICE

5th Floor One New Change London

EC4M 9AF

AUDITOR

BDO LLP

55 Baker Street London

W1U 7EU

NOMINATED ADVISER & BROKER

Stifel Nicolaus Europe Limited 150 Cheapside

London

EC2V 6ET

SOLICITORS

K&L Gates LLP 8 Tavistock Street London

WC2E 7PP

REGISTRARS

COMPANY WEBSITE

Equiniti Company plc Sutherland House Russell Way Crawley West Sussex RH10 1UHwww.longboatenergy.com

CONTENTS

Page
BUSINESS REVIEW
CEO Statement	2
Strategic report	5
GOVERNANCE
Principal risks and uncertainties facing the business	11
Directors' report	16
Directors' responsibilities statement	20
Corporate governance statement	21
FINANCIAL STATEMENTS
Independent auditor's report	42
Statement of comprehensive income	51
Statement of financial position	52
Statement of changes in equity	54
Statement of cash flows	55
Notes to the financial statements	57
APPENDIX SASB REPORT	86

for the year ended 31 December 2021

In June, the Company executed three bilaterally negotiated transactions to farm-in to seven material, exploration wells on the Norwegian Continental Shelf. This transformed our status from an investment company to a fully operational North Sea E&P company with a portfolio of significant non-operated exploration assets. We completed the three transactions in September and during the last four months of the year we delivered the first three wells in the programme. Hydrocarbons were encountered in all three wells, and we are pleased to have made two discoveries which have the potential to become commercial developments.

In the Egyptian Vulture well (Longboat 15%), we made a significant light oil discovery close to infrastructure in the Norwegian Sea. The well was operated by Equinor which is also the operator of the nearby Kristin and Åsgard field, which are potential host facilities. Egyptian Vulture covers a large area of more than 80 km2 and an appraisal well will be required, possibly in 2023 to provide information on lateral extent and reservoir quality.

The Rødhette well operated by Vår Energi (Longboat 20%) discovered between 9 and 12 mmboe (gross) of recoverable gas and oil close to the Goliat field in the Barents Sea. Together with additional resources in the area, Rødhette could form part of a commercial cluster development, which was also highlighted recently by Vår Energi in their IPO materials.

The Mugnetind well (Longboat 20%) encountered hydrocarbons, but the reservoir section was thinner than predicted and is not considered to be commercial in isolation. Since the year end, the results of the Equinor operated Ginny and Hermine well were announced (Longboat 9%) with the well failing to find hydrocarbons.

We are also pleased to report a closing cash balance of £26.3 million at the end of 2021, having completed the three first exploration wells in the programme, Egyptian Vulture, Rødhette and Mugnetind, all on schedule and within budget.

Market conditions

During the latter months of 2021, ahead of the events in Ukraine, we saw global oil demand returning close to pre-pandemic levels at c. 100 mb/d and in December, oil prices rose above 90 USD/bbl, the highest level since 2014. After a period of low investment in new capacity due to both the Covid pandemic and the increasing pressure to reduce carbon emissions, global oil inventories are now at very low levels. Depending on OPEC+'s ability to utilize and increase its spare oil production capacity, we are in a situation in the years ahead that higher crude oil demand could be significantly outstripping supply. Since the year end and following the invasion of Ukraine by Russia, commodity prices have been extremely volatile. The tragic events in the Ukraine may lead to European commodity supply disruption which will exacerbate an already tight market.

2021 saw record gas prices with new records set in December for many commodities. Global gas prices have traded over $40/mcf and European electricity traded well above Euro 400/mWh. Similarly to the oil market, gas prices have been driven higher by a combination of under investment in energy and low levels of gas storage. Other factors which have caused the very tight European gas market are increasing European CO2 prices, periods of low wind generation, reduced supply of gas from Russia and lower international LNG supply. Absent events in Ukraine and uncertainty around Russian gas supplies being curtailed, there is a general concern in the markets that the under-investment in energy supply will result in a sustained energy crisis. This concern is heightened by the ongoing Russian invasion of Ukraine, the West's sanctions and threats around gas supply volumes.

In the North Sea, we have seen an increasingly active M&A market and continued consolidation during 2021. Several large transactions were announced in the UK including the combination of Chrysaor and Premier to create Harbour Energy. In Norway, several large deals were agreed such as the purchase of a controlling stake in Idemitsu Norge by INPEX, the merger of AkerBP with Lundin

for the year ended 31 December 2021

and the acquisition of Spirit Norge by the HitecVision-owned Sval Energi. In February, we have also seen the largest IPO in the E&P sector for many years when the ENI and HitecVision owned Vår Energi listed on Oslo Stock Exchange.

The active M&A market has continued into the new year and several large processes are currently ongoing both in the UK and in Norway. The trend over many years in the North Sea has been towards fewer and larger E&P companies, of which many are now private or PE-owned. As several of these larger players are now looking to realise value, exit the market or rationalise and streamline the portfolios, the expectation is that the active M&A market is set to continue. However, we are yet to see how the events in Ukraine will impact this market and whether vendors will defer disposal programmes.

Norwegian Tax Change and Development Activity

In August, the Norwegian Government announced a proposal to change the Norwegian Petroleum Tax System from 2022 onwards, which seemed to have wide political support and is therefore anticipated to be approved by the Storting (parliament) in the spring of this year. The tax change will have significant impact on the industry by stimulating near term development activity, allowing for new financing solutions in development projects, and implicitly affecting the M&A market.

In the proposal, the total marginal tax rate remains unchanged at 78 per cent, but the new system involves the immediate expensing of investments and the current exploration refund at 78 per cent will cease to exist and companies will instead receive the tax value of losses (on all costs including exploration costs) refunded in cash at the revised Special Petroleum Tax rate at 71.8 per cent at the end of the year after incurrence. The remaining corporation tax element (6.2 per cent) will be carried forward to be set off against future profits.

Whilst the new legislation will bring an end to the current exploration rebate and thereby the Exploration Finance Facility ('EFF'), an implication of the new tax system will be significantly improvedeconomics of new development projects in the form of quicker pay-back and higher rate of return on investment. In addition, a further improvement in the economics and reduced working capital can be envisaged if the EFF, which Longboat already has in place, is replaced by a similar bank financing facility to cover all E&P expenses including development costs. We still await the detail of the new tax system which we expect to be published before the end of Q2 which will also clarify the continuation or otherwise of the current arrangements whereby an entity can pledge security over the tax receivable to a lending bank, which is integral to the EFF. In considering the continued availability of the EFF the Directors (and the EFF lending banks) considered written assurances from the Norwegian Ministry of Finance that the existing security structure of the tax refunds will be preserved for 2022.

The temporary tax change introduced during the pandemic period, together with the new permanent tax changes, have already resulted in a record number of 30 development projects being planned for project sanctioning in Norway in 2022. Many projects are subsea tie-back projects and, as a consequence, the use of existing infrastructure and pipeline systems on the NCS is being maximised in a timely and economic manner. The high development activity level is also resulting in increased M&A activity as companies adapt to the increased development activity and companies chose to optimise their portfolios by either acquiring or divesting development assets.

ESG

As an exploration and intended development and production business, Longboat's role in the energy transition is to produce hydrocarbons responsibly and minimise emissions. Longboat is committed to being net zero by 2050 with an earlier target date to be set dependent on the profile of the asset base delivered through the drilling campaign and M&A strategy. The oil and gas industry has been key in transforming the world economy and the wealth of nations since the beginning of the twentieth century. The industry also has an essential role in the energy transition as reflected in the current EU Taxonomy discussion and also

Business Review

GovernanceFinancial StatementsAppendix SASB