Tanganyika Oil Company Ltd.
TSX VENTURE : TYK

Tanganyika Oil Company Ltd.

May 15, 2006 17:00 ET

Tanganyika First Quarter Report for Period Ended March 31, 2006

CALGARY, ALBERTA--(CCNMatthews - May 15, 2006) - Tanganyika Oil Company Ltd. (TSX VENTURE:TYK)(Nya Marknaden:TYKS) -

Three Months Ended March 31, 2006 and February 28, 2005

(Amounts in United States Dollars unless otherwise stated)



Three Three Seven
Months months months
ended ended ended
Mar. 31, Feb. 28, Dec. 31,
2006 2005 2005
Financial Highlights

Revenue 7,307 2,827 13,410
Cash Flow from Operations(i) 1,983 2,336 3,958
Per share (diluted) 0.04 0.06 0.09
Net profit 532 1,429 91
Per share (diluted) 0.01 0.04 0.02
Total Assets 84,496 38,653 82,915
Working Capital 24,722 19,891 33,619
Weighted Average shares
outstanding (diluted) 44,815 38,550 43,625

Operational Highlights

Average daily production -
Company share (bbl/d)
Egypt 756 663 709
Syria 914 655 725

Average sales price ($)
Egypt 40.85 20.84 40.14
Syria 46.21 25.64 44.67

Operating costs (bbl)
Egypt 2.44 3.63 2.48
Syria 4.35 2.85 3.47

(i) Cash flow from operations is a non-GAAP measure that represents
cash generated from operating activities before changes in
non-cash working capital.


NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.

PRESIDENT'S MESSAGE

During the first quarter of 2006, the Company made significant advances in quantifying the resource potential in the new contract areas of Tishrine-Sheikh Mansour in Syria. A drilling rig started a long-term contract and was drilling the first well in the area at Sheikh Mansour at the end of the quarter. The Company re-established production in an existing well at the Sheikh Suleiman field to confirm the presence of 23 degrees API medium gravity oil from the possible 376 million barrels of oil originally in place. In addition, the potential extension of the West Tishrine field was tested by re-establishing production from a well outside the booked reserves limits of the field.

At Oudeh, development drilling continued with two wells completed and a third development well drilling at the end of the quarter. Core samples were taken in one of the two wells drilled to assist with the steam injection pilot design and further development drilling.

In Egypt, our low cost exploration drilling program continued with two new successes. Stimulation of the new discovery at Arta indicates the well is capable of 150+ barrels of oil per day, and the Company has applied for a development license. The new discovery at South Rahmi is awaiting testing.

The outlook for the remainder of 2006 is to:

- focus on development drilling production additions in both Syria and Egypt;

- appraise the significant resource potential identified by third party engineering firms (Sproule International and Ryder-Scott);

- explore the potential field extensions and additional resource traps identified by the Company; and

- test the enhanced oil recovery potential for steam injection in the Oudeh and Tishrine areas in Syria.

Key to our success in Syria is the ability to secure two additional long-term drilling rigs for work in the Oudeh and Tishrine areas (taking our total rig count to four). At the end of the quarter, the Company was negotiating with a contractor with a target of delivering two rigs late summer - early fall. Steam generators being built in China are scheduled for completion at the end of June and will be immediately shipped to Syria to commence the steam pilot tests over the summer.

In Egypt, the Company will be re-directing the drilling activities to appraise and develop the new fields discovered over the last year. The exploration period deadline is the end of May 2006, although the company has the right to complete any wells started before the end of May. We expect to have the entire exploration program completed and direct our focus at production additions in Egypt by mid-year.

MANAGEMENT'S DISCUSSION AND ANALYSIS

(Amounts in United States Dollars unless otherwise indicated)

Three months ended March 31, 2006 and February 28, 2005

The following discussion and analysis of the results of operations and financial condition ("MD&A") for Tanganyika Oil Company Ltd. (the "Company" or "Tanganyika") should be read in conjunction with the consolidated financial statements for the three month periods ended March 31, 2006 and February 28, 2005 and related notes therein. The financial information in this MD&A is derived from the Company's consolidated financial statements prepared in accordance with Canadian generally accepted accounting principles. The effective date of this MD&A is May 05, 2006.

This MD&A may contain forward-looking statements and information. Forward-looking statements are statements that are not historical fact and are generally identified by words such as believes, anticipates, expects, estimates or similar words suggesting future outcomes. By their nature, forward-looking statements and information involve assumptions, inherent risks and uncertainties, many of which are difficult to predict, and are usually beyond the control of management, that could cause actual results to be materially different from those expressed by these forward-looking statements and information. Risks and uncertainties include, but are not limited to, risk with respect to general economic conditions, regulations and taxes, civil unrest, corporate restructuring and related costs, capital and operating expenses, pricing and availability of financing and currency exchange rate fluctuations. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements.

The Company does not undertake to update or re-issue the forward-looking statements and information that may be contained herein, whether as a result of new information, future events or otherwise.

Tanganyika is a Canadian-based company whose common shares are traded on the TSX Venture Exchange under the symbol "TYK". The Company also has Swedish Depository Receipts that trade on the Nya Marknaden of the Stockholm Stock Exchange. To comply with Swedish reporting regulations, the Company has included additional disclosures under the headings Key Data and Data per Share in its MD&A. Additional information about the Company and its business activities, including the Company's Annual Information Form ("AIF"), is available on SEDAR at www.sedar.com.

Overview

The Company is an international oil and gas exploration and development company based in Canada with interests in exploration and development properties in Egypt and Syria.

Egypt

(a) Summary

The Company acquired its interest in the West Gharib Block, Egypt in 1998 pursuant to a Concession Agreement for Petroleum Exploration and Exploitation. There are five known fields within the block: Hana, Hoshia, West Hoshia, Fadl and Rahmi as well as additional exploration areas. At the end of 2005, the Company had one potential discovery at Arta. In prior years, the Company farmed out a portion of its interest in the West Gharib block. The Company retained a 70% participating interest in the Hana field and a 45% participating interest in all other fields within the block. In 2004, the Company entered into an agreement with a third party to provide financing for 37.5% of the drilling costs for two exploratory wells outside the Hana field and 25% of all future costs. In return, the third party receives 25% of all revenues from successful wells outside the Hana field.

Gross production from the block is divided among the Company, its partners and the Egyptian General Petroleum Company ("EGPC") as follows:

- 70% of the crude oil and natural gas production from the block is designated as profit oil and is split among the Company, its partners and EGPC. The percentage available to the Company and its partner is on a declining scale starting at 30% and reducing to 15% as gross average daily production increases to 100,000 barrels per day.

- Up to 30% of the remaining crude oil and natural gas production is available as cost oil to the Company and its partners to recover exploration, development and operating costs. To the extent that these costs exceed the proceeds from the sale of cost oil in any quarter, the excess can be carried forward into subsequent quarters.

- If the costs are less than the proceeds of the cost oil, the excess proceeds are split between the Company, its partners and EGPC in the same manner as profit oil.

All royalties and taxes are the responsibility of EGPC from its share of profit and excess cost oil.

(b) Update on Current Activities

During the quarter ending March 31, 2006, the Company drilled six wells in Egypt. Within the Hana field, the Company drilled two wells - Hana South-2, a successful oil well, and Hana-10 a dry hole. At the Rahmi field, the Company also drilled two wells - South Rahmi-1, a successful oil well and West Rahmi-3, a dry hole. In addition, the Company drilled two wells to test additional exploration areas within the West Gharib block - Darb-1 and Ghanam-1. Both wells were unsuccessful dry holes. The two successful oil wells that were drilled at Hana and Rahmi are being tested to establish their production capacity and evaluate the structures therefore there was no additional production from these wells for the first quarter.

Syria

(a) Oudeh Block- Summary

The Company acquired its interest in the Oudeh Block in 2003 pursuant to a Contract for Development and Production of Petroleum with the Government of Syria (the "Government"). The objective of the contract, which has a term of 20 years with a provision for a five year extension, is to increase oil recovery and crude oil production within the block by applying enhanced oil recovery techniques.

The Company has an interest in all incremental production above the base crude oil production ("BCP") level from wells in existence at the time the contract was signed. The BCP level declines at a rate of five percent per annum calculated on a monthly basis. A complete schedule of BCP levels for the Oudeh Block for 2006 and 2007 is included in the Company's AIF dated December 31, 2005.

After deduction of the BCP, a royalty of 12.5% is deducted and submitted to the Government. The remaining production is then shareable among the Company and the Syrian Petroleum Company ("SPC") as follows:

- 30% of the shareable crude oil production from the block is designated as profit oil and is split among the Company and SPC. The profit oil is split 30% to the Company and 70% to SPC.

- Up to 70% of the remaining crude oil production is available as cost oil to the Company to recover exploration, development and operating costs. To the extent that these costs exceed the proceeds from the sale of cost oil in any quarter, the excess can be carried forward into subsequent quarters.

- If the costs are less than the proceeds of the cost oil, the excess proceeds are split between the Company and SPC in the same manner as profit oil.

All taxes are the responsibility of SPC from its share of profit and excess cost oil.

(b) Oudeh - Update on Current Activities

During the quarter ending March 31, 2006, the Company drilled two wells at the Oudeh field. One well, OD-143, is an oil producer and has come on production in mid-February. The well has been producing between 250 to 380 barrels of oil per day gross. The second well, OD-144, came on in mid-March but at 100% water cut. The Company suspects that the last 300 meters of the horizontal section of the well encountered fractures which are believed to be the source of the water and a remedial work-over is planned for May.

A third well, OD-145, was drilled after the end of the quarter, and will be stimulated in May and placed on production.

(c) Tishrine-Sheikh Mansour Fields - Summary

The Company acquired its interest in the Tishrine-Sheikh Mansour fields in November 2004 pursuant to a Contract for Development and Production of Petroleum with the Government. The objective of the contract, which has a term of 20 years with a provision for a five year extension, is to apply enhanced oil recovery techniques to increase crude oil production and recoverability.

The Company has an interest in all incremental production above the BCP level from wells in existence at the time the contract was signed. The BCP level declines at a rate of five percent per annum calculated on a monthly basis. A complete schedule of BCP levels for the Tishrine-Sheikh Mansour fields for 2006 and 2007 is included in the Company's AIF.

After deduction of the BCP, a royalty of 12.5% is deducted and submitted to the Government. The remaining production is then shareable among the Company and SPC as follows:

- 52% of the shareable crude oil production from the block is designated as profit oil and is split among the Company and SPC. The profit oil is split 30% to the Company and 70% to SPC.

- Up to 48% of the remaining crude oil production is available as cost oil to the Company to recover exploration, development and operating costs. To the extent that these costs exceed the proceeds from the sale of cost oil in any quarter, the excess can be carried forward into subsequent quarters.

- If the costs are less than the proceeds of the cost oil, the excess proceeds are split between the Company and SPC in the same manner as profit oil.

All taxes are the responsibility of SPC from its share of profit and excess cost oil.

(d) Tishrine-Sheikh Mansour - Update on Current Activities

During the first quarter of 2006, there were several key activities. Drilling was underway at Sheikh Mansour with positive indications that the targeted porous Chilou formation may be thicker than anticipated. The well was completed and will be stimulated for production testing.

Key work-overs were conducted at Tishrine West and Sheikh Suleiman. At Tishrine West, production was re-established in well T-40H at 30-50 barrels of oil per day from the Chilou formation. The well is on the same structural trend, but outside the reserves closure recognized in the companies NI 51-101 reserves booking. The significance of this production suggests the Tishrine West field could grow through field extension.

The second work-over at Sheikh Suleiman was to re-establish production in a vertical well in the Chilou formation. The Company confirmed the presence of 23 degree API oil and the well is currently producing at 25-40 barrels of oil per day. The NI 51-101 reserves booking recognized a possible original oil-in-place of 376 million barrels. Planning is underway to appraise Sheikh Suleiman with drilling later in 2006.

Selected Quarterly Information



Three Months Ended: (1)
-------------------------------------------------------------
($000s,
except
per
share
& pro- Mar Dec Sept May Feb Nov Aug May
duction 31 31 30 31 28 30 31 31
data) 2006 2005 2005 2005 2005 2004 2004 2004
---------------------------------------------------------------------

Total
rev-
enues 7,307 5,852 7,558 3,730 2,826 3,988 2,222 1,704
Earnings
(loss) 532 (2,615) 3,526 (258) 1,429 (1,261) (1,761) 868
Per
share
basic 0.012 (0.059) 0.083 (0.007) 0.038 (0.034) (0.048) 0.027
Per
share
di-
luted 0.012 (0.059) 0.080 (0.007) 0.037 (0.034) (0.048) 0.026
Cash
flow 1,983 (1,071) 5,029 1,540 2,336 16 (456) 342
Per
share
basic 0.045 (0.024) 0.118 0.040 0.062 0 (0.012) 0.011
Per
share
di-
luted 0.044 (0.024) 0.115 0.039 0.061 0 (0.012) 0.010
Average
produc-
tion
(bopd) 1,670 1,522 1,382 1,182 1,322 1,220 804 638
Total
Produc-
tion
(bar-
rels) 150,000 140,000 169,000 109,000 119,000 111,000 74,000 59,000

(1) Except for September 2005 which is for the four months ended


The total revenue for the quarter ended March 31, 2006 is 25% higher than the revenues for the prior quarter. The increase is due to both higher prices for oil and increased production volumes. For the current quarter, the Company had earnings of $532,000 compared to a loss of $2,615,000 for the prior quarter. Higher revenues and lower production costs in the current quarter compared to the prior quarter resulted in the increase to earnings.

Earnings have fluctuated from quarter to quarter as a result of exchange fluctuations, operating cost fluctuations and increases in total expenses. Revenues have steadily increased from quarter to quarter as production volumes have been added from both additional oil and gas concession interests and development activities.

Results of Operations

The Company had a consolidated net profit for the three month period ended March 31, 2006 of $532,000 ($0.012 per share) compared to a consolidated net profit of $1,429,000 ($0.038 per share) for the three month period ended February 28, 2005. For the three month period ended March 31, 2006, the Company had significantly higher revenues than for the comparative period, however, the revenue increases were offset by increases in production costs, depletion, general and administration and other expenses as explained below in more detail.


Three months Three months
ending ending
Mar 31, 2006 Feb 28, 2005
Sales of Oil:
Egypt $ 3,385,000 $ 1,251,000
Syria $ 3,802,000 $ 1,540,000
Total $ 7,187,000 $ 2,791,000
Average oil sales price ($ per bbl):
Egypt $ 40.85 $ 20.84
Syria $ 46.21 $ 25.64
Production:
Egypt:
------
Gross production(1) 232,000 167,000
Gross production,
net of partners' share(2) 118,000 85,000
Company share(3) 68,000 60,000
Company share bbl/day 756 663
Syria:
------
Gross production 736,000 177,000
Company share(4) 82,000 59,000
Company share bbl/day 914 655
Total:
------
Total Company share for Egypt and Syria 150,000 119,000
Total Company share for Egypt
and Syria bbl/day 1,670 1,322
Operating Costs:
Egypt(5) $ 288,000 $ 218,000
Egypt per bbl(6) $ 2.44 $ 3.63
Syria(7) $ 3,205,000 $ 504,000
Syria per bbl(8) $ 4.35 $ 2.85

1) Gross production for Egypt includes production from both
development and exploration fields. However, the production from
exploration fields is not commercial production and therefore does
not contribute towards revenue.
2) Gross production, net of partners' share includes production from
both development and exploration fields net of the partners' share
of such production.
3) Company share of Egypt production represents the Company's share
of revenue generating production (i.e. cost and profit oil).
Production from exploration fields is excluded as it is not
commercial production (i.e. it does not generate revenue).
4) Company share of Syria production represents the Company's share
of cost and profit oil after deduction of royalty and base crude
production.
5) Egypt operating costs that are included in the Company's results
of operations are total operating costs for the concession net of
the partners' share. The partners are billed by the Company for
their share of costs. The Company recovers the remaining operating
costs through the allocation of cost oil.
6) Egypt operating costs on a per barrel basis are calculated as
operating costs divided by gross production net of partners' share.
7) Syria operating costs represent 100% of operating costs associated
with the Syrian concessions. The Company pays 100% of operating costs
and recovers these costs through the allocation of cost oil.
8) Syria operating costs on a per barrel basis are calculated as
operating costs divided by gross production.


Oil Sales:

In both Egypt and Syria, the increase in oil sales for the three month period ended March 31, 2006 compared to the three month period ended February 28, 2005 is due to significantly higher oil prices as well as volume increases. The average daily oil production in Egypt for the period ended March 31, 2006 has increased by approximately 14% over the comparable period for the prior year and in Syria the average daily oil production increased by approximately 40%.

The average oil price in Egypt for the current quarter has increased by approximately 96% over the comparable period from an average of $20.84 per barrel to $40.85 per barrel. For Syria, the average oil price for the current quarter has increased by approximately 80% over the comparable period from an average of $25.64 per barrel to $46.21 per barrel. World oil prices have increased significantly over the past year as can be seen by the prices being received in both Egypt and Syria.

Operating Costs:

In order to determine the operating costs on a per barrel basis for Egypt, the Company's operating costs, which are net of partners' share of costs, must be divided by production volumes net of the partners' share. Operating costs for the three month period ended March 31, 2006 were $2.44 per barrel, a decrease of approximately 33% compared to the three month period ended February 28, 2005 cost of $3.63 per barrel. Gross production, net of partners' share, has increased approximately 39% compared to the prior period indicating that the decrease in Egypt's operating costs on a per barrel basis is mainly the result of total higher production volumes over which to spread total operating costs.

Under the terms of the Syrian concession agreements for Oudeh and Tishrine-Sheikh Mansour, the Company is responsible for paying 100% of operating costs. Accordingly, the Company has reflected total operating costs in its results of operations. Further to the concession agreements, the Company is entitled to claim for reimbursement of the portion of costs attributable to BCP. The Company has estimated that approximately $1.5 million of operating costs for the three month period ended March 31, 2006 are recoverable from SPC in relation to BCP. This is in addition to the $3.6 million that the Company estimated as recoverable up to December 31, 2005 as disclosed in its Annual Report. The specific allocation method for the determination of the recoverable amount of operating costs has not been approved by SPC; therefore the Company has not reflected any potential recoveries in its results of operations. Any amounts ultimately recovered will reduce the total operating costs reflected in the Company's results of operations. The Company is currently in discussions with SPC on this issue and working towards agreement on the allocation method.

In order to determine the operating costs on a per barrel basis for Syria, gross operating costs must be divided by gross production volumes. The table above indicates that operating costs on a per barrel basis for Syria for the three month period ended March 31, 2006 were $4.35 per barrel compared to $2.85 per barrel for the three month period ended February 28, 2005. Both gross production volumes and total operating costs increased significantly for the current quarter compared to the prior year quarter. During the current period, there were several work-overs performed in Tishrine and several new operations staff were added which both resulted in higher total operating costs.

Depletion:

Depletion for the three month period ended March 31, 2006 was $908,000 compared to $649,000 for the three month period ended February 28, 2005. The increase in total depletion is the result of higher production volumes as depletion is calculated on a unit-of-production basis using estimated proved oil and gas reserves.

Depletion for the first quarter, on a per-unit basis, was approximately $1.56 per barrel for Egypt and $0.86 per barrel for Syria. Syria's depletion rate on a per barrel basis has decreased from the prior year due to the addition of proved reserves for the Tishrine-Sheikh Mansour fields. The capitalized costs are therefore spread out over a larger proved reserves base.

Interest and Service Income

Interest income was $64,000 for the three month period ended March 31, 2006 compared to $22,000 for the three month period ended February 28, 2005. Interest income represents interest earned on bank deposit balances during the period.

Service income was $56,000 for the three month period ended March 31, 2006 compared to $15,000 for the three month period ended February 28, 2005. Service income represents the overhead provision Egypt is entitled to as operator. The service income is based on monthly expenditures which increased for the period ending March 31, 2006 compared to the prior period.

General and Administrative and Other Expenses

For the three month period ended March 31, 2006 total expenses, excluding the impact of foreign exchange gains and losses, were $2,449,000 compared to $924,000 for the three month period ended February 28, 2005.

The exchange gain for the three month period ending March 31, 2006 was $74,000 compared to an exchange gain of $898,000 for the three month period ended February 28, 2005. The exchange gains and losses relate mainly to the translation of the Canadian dollar denominated cash balance to U.S. dollars. There was a much higher cash balance to translate to U.S. dollars for the quarter ended February 28, 2005 compared to the current quarter.

Salaries and benefits for the three month period ended March 31, 2006 were $641,000 compared to $409,000 for the three month period ended February 28, 2005. The salaries and benefits increase over the prior period are the result of the addition of staff for the Syria and Calgary offices starting in June 2005.

Travel expenses for the three month period ended March 31, 2006 were $223,000 compared to $13,000 for the three month period ended February 28, 2005. The significant increase in travel costs is mainly due to travel between Canada and Syria to oversee operations.

General and administration for the three month period ended March 31, 2006 was $811,000 compared to $179,000 for the three month period ended February 28, 2005. The increase in general and administration for the current period is the result of higher costs incurred in Syria. Since the quarter ended February 28, 2005, the Syria office has added additional staff and the operations have increased, all adding to the total general and administration costs.

Management fees for the three month period ended March 31, 2006 were $106,000 compared to $39,000 for the three month period ended February 28, 2005. The increase is the result of additional fees paid during the first quarter in accordance with the terms of the management agreement with Namdo Management Services Ltd., a related party.

Legal and accounting fees for the three month period ended March 31, 2006 were $15,000 compared to $109,000 for the three month period ended February 28, 2005.

Interest and bank charges for the three month period ended March 31, 2006 were $53,000 compared to $4,000 for the three month period ended February 28, 2005. The interest charges relate to interest paid on outstanding letters of credit.

Shareholder information and transfer agent costs were $59,000 for the three month period ended March 31, 2006 compared to $88,000 for the three month period ended February 28, 2005.

Depreciation for the three month period ended March 31, 2006 was $135,000 compared to $83,000 for the three month period ended February 28, 2005. The increase in depreciation is the result of the addition of office furniture and equipment for the setup of the Damascus, Syria office and the Calgary, Canada office during the latter half of 2005.

The Company uses the fair value method of accounting for stock options granted to directors, officers and employees whereby the fair value of all stock options granted is recorded as a charge to operations. Stock based compensation for the three month period ended March 31, 2006 was $407,000 compared to $nil for the three month period ended February 28, 2005. For the three months ended March 31, 2006, the Company issued 309,500 options at prices ranging from CDN $9.00 to CDN $11.50.

Financial Condition

At March 31, 2006, total assets were $84,496,000 compared to $82,915,000 at December 31, 2005. The increase of approximately $1.7 million is mainly due to an increase in the oil and gas interests which is offset against lower cash balances.

The restricted cash in the amount of $13,204,000 at March 31, 2006 represents pledged amounts against the issuance of letters of guarantee and outstanding balances against letters of credit issued to various suppliers in Egypt and Syria. The restricted cash includes a letter of guarantee in the amount of $9 million issued in favour of SPC for the Tishrine-Sheikh Mansour work program and letters of credit issued relating to Syria and Egypt operations in the amount of $4,204,000.

Oil and gas interests by country (net of depletion):



March 31, December 31,
2006 2005
Egypt $ 9,771,000 $ 7,976,000
Syria $ 36,074,000 $ 27,820,000
Total $ 45,845,000 $ 35,796,000


Since December 31, 2005, Egypt's oil and gas assets have increased $2,170,000 as a result of exploration and development drilling. Syria's oil and gas assets have increased $8,786,000 as a result of development drilling. In accordance with the concession agreements, tangible costs will be recovered from cost oil over time periods specified in the individual agreements. The net increase, after depletion, in oil and gas interests for the three month period ended March 31, 2006 was $10,049,000.

Net property, plant and equipment increased from $1,077,000 at December 31, 2005 to $1,183,000 at March 31, 2006.

The advances to contractors increased from $1,121,000 at December 31, 2005 to $2,045,000 at March 31, 2006. This represents advances made by the Company to contractors in Syria for services and equipment relating to drilling and work-over programs.

The amounts receivable and other assets increased from $7,981,000 at December 31, 2005 to $9,618,000 at March 31, 2006. The main reason for the increase is that receivables for oil sales have increased due to higher oil prices and higher volumes. In accordance with the terms of the agreements in Egypt and Syria, the national oil companies are required to market the Company's share of crude production but the Company retains the right to sell its share of crude production on its own behalf. The Company does not believe this concentration of credit risk resulting from the national oil companies selling its share of crude production will result in any loss to the Company based on past payment experience.

Inventory increased from $3,281,000 at December 31, 2005 to $3,459,000 at March 31, 2006. The inventory balance is predominantly equipment and supplies for the drilling and work-over programs in Syria.

Prepaid expenses decreased from $254,000 at December 31, 2005 to $110,000 at March 31, 2006. The prepaid expenses at March 31, 2006 include approximately $65,000 for prepaid accommodation costs in Syria, $30,000 for prepaid rent in Calgary and $15,000 for prepaid geological software maintenance costs.

The Company had total liabilities of $12,746,000 at March 31, 2006 compared to $12,423,000 at December 31, 2005. The liabilities are the result of purchase orders for drilling equipment and supplies to support the drilling activities in Syria and Egypt.

Liquidity and Capital Resources

At March 31, 2006 the Company held a free cash amount of $7,550,000 compared to $16,678,000 at December 31, 2005. The decrease is due to funding the development activities in Syria.

The Company's working capital was $24,722,000 at March 31, 2006 compared to $33,619,000 at December 31, 2005. The decrease in the working capital is mainly due to the decrease in the free cash amount.

Funds from operations were $1,983,000 for the three month period ended March 31, 2006 compared to $2,336,000 for the three month period ended February 28, 2005. The difference between the two periods is mainly the result of a lower income amount for the current period compared to the prior period. Net cash flow used in operating activities, after taking into consideration non-cash working capital, was $8,399,000 for the three month period ended March 31, 2006 compared to $1,356,000 for the three month period ended February 28, 2005. The increase is mainly the result of the increase in the inventory balance, increase in accounts receivable and a decrease in the amounts payable related to operating activities compared to the prior period.

Net cash used in investing activities was $1,109,000 for the three month period ended March 31, 2006 compared to $3,492,000 for the three month period ended February 28, 2005. The gross investment in oil and gas interests for the three month period ended March 31, 2006 was $10,957,000 and the net change, after giving effect to the change in non-cash investing working capital, was $4,388,000. The main reason for the decrease in total cash used in investing activities for the current period compared to the prior period is the result of the release of a pledge for bank guarantees.

At March 31, 2006, share capital was $90,340,000 compared to $89,906,000 at December 31, 2005.

The increase in the contributed surplus of $293,000 is due to the net stock based compensation for the period. Contributed surplus was credited in the amount of $407,000, the stock compensation expense for the three month period ended March 31, 2006. This amount was calculated using the Black-Scholes option value method. When options are exercised, a proportionate amount of the value recorded on the granting of the options is moved from contributed surplus to share capital. For the three month period ended March 31, 2006, contributed surplus was reduced by an amount of $114,000 for options exercised.

Management considers that the cash generated from the Egypt fields, after providing for related capital expenditures, will continue to significantly contribute towards funding the Company's exploration and development activities in Egypt. However, the Company does not generate sufficient cash flow from all operations to fund its entire exploration and development activities and has therefore relied upon the issuance of securities and the sale of concession interests to provide additional financing. The Company may also consider additional issuances of equity securities as well as debt instruments, to assist with financing its exploration and development activities to the extent that sufficient cash flow from operations is unavailable in the future. Accordingly, the Company's financial statements are presented on a going-concern basis.

Financial Instruments

The carrying amounts of financial instruments comprising cash and short term deposits, restricted cash, amounts receivable and amounts payable approximate their fair value due to the immediate or short-term nature of these financial instruments.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Outstanding Share Data

As at May 05, 2006 the Company had 44,521,742 common shares outstanding and 1,608,000 stock options outstanding under its stock-based compensation plan.

On March 31, 2006, the Company announced that it had agreed to sell on a non-brokered private placement basis up to 4.3 million common shares in Sweden at a price of SEK 92 per share (approximately CDN $13.83 per share) for gross proceeds of approximately $51 million (approximately CDN $60 million). The net proceeds of the private placement will be used towards the development of the Company's oil and gas assets in Syria as well as for general corporate purposes.

Related Party Transactions

The Company has entered into transactions with related parties, which were measured at the exchange amounts. During the three month period ended March 31, 2006, the Company paid $106,000 to Namdo Management Services Ltd. ("Namdo"), a private corporation owned by Lukas H. Lundin, a director of the Company, pursuant to a services agreement. Namdo provides administration and financial services to a number of public companies.

Accounting Policies and Critical Accounting Estimates

The preparation of financial statements in conformity with Canadian GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses for the period reported.

Management believes that the most critical accounting estimates that may have an impact on the Company's financial results relate to estimates for its oil and gas interests. Amounts recorded for depletion and the impairment test are based on estimates of proved reserves, production rates, oil prices, future costs and other relevant assumptions. Actual results could differ materially from such estimates.

The accounting policies and critical accounting estimates used by the Company in the preparation of the March 31, 2006 consolidated financial statements are unchanged from those used in the preparation of the Company's December 31, 2005 consolidated financial statements, which are disclosed in detail in the December 31, 2005 Annual Report.

Changes in Accounting Policies

Effective June 1, 2005, based on the growth in the Company's U.S. dollar denominated revenues and costs, the Company changed its reporting currency to the U.S. dollar and reclassified its foreign operations from integrated to self-sustaining. Effective June 1, 2005 the Company adopted the current rate method of translation in accordance with CICA Handbook Section 1651. All prior periods have been restated in accordance with CICA Emerging Issues Committee Abstract 130.

Effective June 1, 2005, the Company changed its financial year-end from May 31 to December 31. The Company made this change in order that its financial year-end would be comparable to its peers in the oil and gas industry.

New Accounting Pronouncements

There has been no changes to the new accounting pronouncements that were disclosed in detail in the Company's December 31, 2005 Annual report.

Risks and Uncertainties

The Company is exposed to a number of risks and uncertainties inherent in exploring for, developing and producing crude oil and natural gas. These risks and uncertainties are disclosed in detail in the Company's December 31, 2005 Annual Report and Annual Information Form.

Disclosure Control and Procedures

The discussion and conclusion with respect to the Company's disclosure controls and procedures contained in Management's Discussion and Analysis disclosed in the Company's December 31, 2005 Annual Report remains unchanged at March 31, 2006.

Outlook

The Company's main focus continues to be the further development of its oil and gas interests in the West Gharib block in the Egypt concession and the Oudeh block and Tishrine-Sheikh Mansour fields in Syria. The Company's recently announced private placement will provide approximately CDN $60 million for the capital development program for Syria. The thermal enhanced oil recovery pilot tests in Syria are planned for the third quarter of 2006. In Egypt, the Company has multiple exploration targets which will be drilled prior to the exploration license expiration. Cash flow from the Egypt operations will continue to fund Egypt's exploration and development program. The Company's strategy remains an aggressive, but paced, capital development program of the oil and gas interests in both Syria and Egypt.



Key Data
--------
Three Three Seven
Months months months
ended ended ended
March February December
31, 2006 28, 2005 31, 2005
-------- -------- --------
Return on equity, %(1) 0.75% 4.04% 1.77%
Return on capital employed, %(2) 0.83% 3.95% -0.90%
Debt/equity ratio, %(3) 0% 0% 0%
Equity ratio, %(4) 85% 93% 87%
Share of risk capital, %(5) 85% 93% 87%
Interest coverage ratio, %(6) 1110% 36208% 4482%
Operating cash flow/interest
expense, %(7) 7112% 52629% 11034%
Yield, %(8) 0% 0% 0%

1) Return on equity is defined as the Company's net results divided
by average shareholders' equity (the average over the financial
period).
2) Return on capital employed is defined as the Company's profit before
tax and minority interest plus interest expense plus/less exchange
differences on financial loans divided by the total average capital
employed (the average balance sheet total less non interest-bearing
liabilities).
3) Dept/equity ratio is defined as the Company's interest-bearing
liabilities in relation to shareholders' equity.
4) Equity ratio is defined as the Company's shareholders' equity,
including minority interest, in relation to balance sheet total.
5) Share of risk capital is defined as the sum of the Company's
shareholders' equity and deferred taxes, including minority
interest, in relation to balance sheet total.
6) Interest coverage ratio is defined as the Company's profit before
tax and minority interest plus interest expense plus/less exchange
differences on financial loans divided by interest expense.
7) Operating cash flow/interest ratio is defined as the Company's
operating income less production costs and less current taxes
divided by the interest charge for the financial period.
8) Yield is defined as dividend in relation to quoted share price at
the end of the financial period.


Data per share
--------------
Three Three Seven
Months months months
ended ended ended
March February December
31, 2006 28, 2005 31, 2005
-------- -------- --------
Shareholders' equity, USD(1) 1.62 0.92 1.59
Operating cash flow, USD(2) 0.08 0.06 0.14
Cash flow from operations(3) 0.04 (0.10) 0.09
Earnings(4) 0.012 0.038 0.02
Earnings (fully diluted)(5) 0.012 0.038 0.02
Dividend 0 0 0
Quoted price at the end of the
financial period 14.10 7.35 8.71
P/E-ratio(6) 1,175.4 194.3 390.6
Number of shares at financial
period end 44,413,742 39,106,841 44,347,475
Weighted average number of
shares for the financial
period(7) 44,381,635 37,785,050 43,271,237
Weighted average number of
shares for the financial
period (fully diluted)(5,7) 44,815,413 38,036,384 44,448,565

1) Shareholders' equity per share defined as the Company's equity
divided by the number of shares at period end.
2) Operating cash flow per share defined as the Company's operating
income less production costs and less current taxes divided by the
weighted average number of shares for the financial period.
3) Cash flow from operations per share defined as cash flow from
operations in accordance with the consolidated summarized cash flow
statements divided by the weighted average number of shares for the
financial period.
4) Earnings per share defined as the Company's net results divided by
the weighted average number of shares for the financial period.
5) Earnings per share defined as the Company's net results divided by
the weighted average number of shares for the financial period after
considering the dilution effect of outstanding (options and
warrants).
6) P/E-ratio defined as quoted price at the end of the period divided
by earnings per share.
7) Weighted average number of shares for the financial period is
defined as the number of shares at the beginning of the financial
period with new issue of shares weighted for the proportion of
the period they are in issue.


Tanganyika Oil Company Ltd.
Consolidated Balance Sheets
As at March 31, 2006 and December 31, 2005
(expressed in U.S. dollars)
March 31, December 31,
2006 2005
$ $

Assets
Current Assets
Cash and short-term deposits 7,550,015 16,678,492
Restricted cash (note 2) 13,204,382 16,726,382
Advances to contractor 2,044,634 1,120,717
Amounts receivable and other assets 9,618,424 7,981,340
Amounts due from joint venture partners 192,620 -
Inventory 4,746,977 3,280,715
Prepaid expenses 110,374 254,280
----------- ------------

37,467,426 46,041,926

Oil and gas interests (note 3) 45,845,206 35,796,451

Property, plant and equipment 1,183,440 1,076,578
----------- ------------

84,496,072 82,914,955
----------- ------------
----------- ------------

Liabilities
Current liabilities
Amounts payable and accrued liabilities 12,745,636 12,423,390
----------- ------------

Shareholders' Equity
Capital stock (note 4) 90,339,604 89,905,794

Contributed surplus (note 4) 6,075,429 5,782,777

Cumulative translation adjustment (175,745) (175,745)

Deficit (24,488,852) (25,021,261)
----------- ------------

71,750,436 70,491,565
----------- ------------

84,496,072 82,914,955
----------- ------------
----------- ------------

Approved by the Directors:

"William A. Rand" "Keith Hill"
Director Director


Tanganyika Oil Company Ltd.
Consolidated Statements of Operations and Deficit
Three months ended March 31, 2006 and February 28, 2005
(expressed in U.S. dollars)
Three months Three months
ended ended
March 31, February 28,
2006 2005
$ $

Revenue
Sale of oil 7,186,943 2,790,500
Interest income 64,181 21,548
Service income 55,958 14,737
----------- ------------

7,307,082 2,826,785
----------- ------------

Expenses
Production costs 3,491,901 722,169
Depletion 907,826 649,199
Salaries and other benefits 641,148 409,130
Travel 222,636 12,803
General and administration 810,984 179,281
Management fees 105,692 39,152
Legal and accounting 14,547 109,103
Stock-based compensation 406,847 -
Interest and bank charges 52,739 3,958
Shareholder information and transfer agent 59,127 87,458
Depreciation 135,492 83,321
Foreign exchange gain (74,266) (897,949)
----------- ------------

6,774,673 1,397,625
----------- ------------

Profit for the period 532,409 1,429,160

Deficit - beginning of period (25,021,261) (27,103,310)
----------- ------------

Deficit - end of period (24,488,852) (25,674,150)
----------- ------------
----------- ------------

Profit per share
Basic 0.012 0.038
Diluted 0.012 0.038

Weighted average number of
shares outstanding
Basic 44,381,635 37,785,050
Diluted 44,815,413 38,036,384


Tanganyika Oil Company Ltd.
Consolidated Statements of Cash Flows
Three months ended March 31, 2006 and February 28, 2005
(expressed in U.S. dollars)
Three months Three months
ended ended
March 31, February 28,
2006 2005
$ $

Cash flows from operating activities
Profit for the period 532,409 1,429,160
Items not affecting cash:
Stock-based compensation 406,847 -
Depreciation 135,492 83,321
Depletion 907,826 649,199
Unrealized foreign exchange loss - 210,328
Effect of changes in exchange rates - (35,676)
----------- ------------
Funds from operations 1,982,574 2,336,332
----------- ------------
Changes in non-cash operating
working capital:
Increase in amounts receivable and
other assets and advances (2,561,001) (397,489)
Increase in inventory (1,466,262) (222,928)
Increase in amounts due from
joint venture partners (192,620) (6,354)
Decrease in prepaid expenses 143,906 18,055
Decrease in amounts payable and
accrued liabilities (6,246,021) (311,806)
----------- ------------

(10,321,998) (920,522)
----------- ------------

(8,339,424) 1,415,810
----------- ------------
Cash flows from investing activities
Investment in oil and gas interests,
net of changes in non-cash investing
working capital (4,388,314) (1,196,451)
Investment in property,
plant and equipment (242,354) (132,209)
Releases (pledges) of bank guarantees 3,522,000 (414,378)
Partial release of pledged deposit
in lieu of guarantee issued - 317,932
Release of exploration commitment - (523,370)
----------- ------------

(1,108,668) (1,948,476)
----------- ------------
Cash flows from financing activities
Issuance of common shares 319,615 38,703
----------- ------------

319,615 38,703
----------- ------------

Decrease in cash and short-term deposits (9,128,477) (493,963)

Cash and short-term deposits -
beginning of period 16,678,492 6,042,684
----------- ------------

Cash and short-term deposits -
end of period 7,550,015 5,548,721
----------- ------------
----------- ------------


Tanganyika Oil Company Ltd.
Notes to the Consolidated Financial Statements
For the Three months ended March 31, 2006 and February 28, 2005
(Unaudited)
(in US Dollars)


1. Basis of Presentation

The interim consolidated financial statements for Tanganyika Oil Company Ltd. (collectively with its subsidiaries, the "Company") have been prepared in accordance with accounting principles generally accepted in Canada, using the same accounting policies and methods of computation as set out in note 3 to the audited consolidated financial statements in the Company's Annual Report for the period ended December 31, 2005. The disclosures provided herein are incremental to those included with the audited consolidated financial statements. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the period ended December 31, 2005.

2. Restricted Cash

The Company has provided cash security for certain letters of guarantee and credit issued to third parties. At March 31, 2006, restricted cash represents a pledged amount of $9,000,000 against the issuance of a letter of guarantee in favour of the Syrian Petroleum Company (SPC) in connection with the concession agreements. Restricted cash also includes outstanding balances relating to letters of credit issued to various suppliers for operations in Egypt and Syria. At March 31, 2006, an amount of $4,204,382 is restricted as security for letters of credit.

3. Oil and Gas Interests



March 31, 2006
-----------------------------------
Accumulated
Depletion & Net book
Cost write-downs value
-----------------------------------
Arab Republic of Egypt
Producing oil and gas
properties 13,486,681 10,183,972 3,302,709
Exploration and development
properties 6,468,708 - 6,468,708
-----------------------------------
19,955,389 10,183,972 9,771,417
-----------------------------------

Syrian Arab Republic
-----------------------------------
Producing oil and gas
properties 38,715,972 2,642,183 36,073,789
-----------------------------------

-----------------------------------
Total 58,671,361 12,826,155 45,845,206
-----------------------------------

December 31, 2005
-----------------------------------
Accumulated
Depletion & Net book
Cost write-downs value
-----------------------------------
Arab Republic of Egypt
Producing oil and gas
properties 13,486,681 9,808,727 3,677,954
Exploration and development
properties 4,298,383 - 4,298,383
-----------------------------------
17,785,064 9,808,727 7,976,337
-----------------------------------

Syrian Arab Republic
-----------------------------------
Producing oil and gas
properties 29,929,716 2,109,602 27,820,114
-----------------------------------

-----------------------------------
Total 47,714,780 11,918,329 35,796,451
-----------------------------------


4. Share Capital

(a) The authorized and issued chare capital is as follows:

Authorized - Unlimited number of common shares without par value

Issued and outstanding:



-------------------------
March 31, 2006
-------------------------
Number Amount
-------------------------
Balance, beginning of period 44,347,475 $ 89,905,794
Private placements, net 0 0
Exercise of options 66,267 433,810
-------------------------
Balance, end of period 44,413,742 $ 90,339,604
-------------------------


(b) Contributed Surplus - Stock Based Compensation



March 31, December 31,
2006 2005
-------------------------
Balance, beginning of period $ 5,782,777 $ 5,060,385
Stock based compensation 406,847 1,046,168
Transfer to share capital
on exercise of options (114,195) (323,776)
-------------------------
Balance, end of period $ 6,075,429 $ 5,782,777
-------------------------


(c) Stock Options Continuity



-------------------------
March 31, 2006
-------------------------
Weighted
Average
Exercise
Number Price CDN $
-------------------------
Balance, beginning of period 1,364,767 $ 6.82
Granted 309,500 $ 9.31
Exercised (66,267) $ 5.85
-------------------------
Balance, end of period 1,608,000 $ 7.30
-------------------------


At March 31, 2006 there were 1,048,500 exercisable options.



-------------------
Three Months Ended
March 31, 2006
-------------------
Weighted average fair value of
stock options granted (per option) CDN $ 2.69
Expected life of stock options (years) 2
Expected volatility (weighted average) 51.34%
Risk free rate of return (weighted average) 3.88%
Expected dividend yield 0


5. Related Party Transactions

The Company has entered into transactions with related parties, which were measured at the exchange amounts. The Company paid $105,692 to Namdo Management Services Ltd., a private corporation owned by Lukas H. Lundin, a director of the Company, pursuant to a services agreement.

6. Segmented Information



March 31, 2006
Syria Egypt Corporate Total
--------------------------------------------------------------------
Sale of oil (3,802,407) (3,384,536) - (7,186,943)
Interest income - (861) (63,320) (64,181)
Service income - (55,958) - (55,958)
Production cost and
depletion 3,737,282 662,445 4,399,727
Depreciation 95,962 22,443 17,087 135,492
Foreign exchange
(gain)/loss 6,694 (210) (80,750) (74,266)
Other expenses 1,162,370 113,664 1,037,686 2,313,720
----------------------------------------------
Segment (profit) loss 1,199,901 (2,643,013) 910,703 (532,409)
----------------------------------------------


Segment assets 44,743,913 20,885,702 18,866,457 84,496,072
----------------------------------------------

Segment expenditures
Oil and gas
interests 4,082,989 305,325 - 4,388,314
Property, plant and
equipment 105,346 100,672 36,336 242,354
----------------------------------------------
4,188,335 405,997 36,336 4,630,668
----------------------------------------------

February 28, 2005
Syria Egypt Corporate Total
--------------------------------------------------------------------
Sale of oil (1,539,905) (1,250,595) - (2,790,500)
Interest income (864) - (20,684) (21,548)
Service income - (14,737) - (14,737)
Production cost and
depletion 873,276 498,092 1,371,368
Depreciation 83,321 - - 83,321
Foreign exchange
(gain)/loss 376,058 (276,745) (997,262) (897,949)
Other expenses 416,161 56,076 368,648 840,885
----------------------------------------------
Segment (profit) loss 208,047 (987,909) (649,298) (1,429,160)
----------------------------------------------


Segment assets 15,570,665 10,758,441 12,324,315 38,653,421
----------------------------------------------

Segment expenditures
Oil and gas
interests 543,326 653,125 - 1,196,451
Property, plant and
equipment 127,542 4,667 - 132,209
----------------------------------------------
670,868 657,792 - 1,328,660
----------------------------------------------

December 31, 2005
Syria Egypt Corporate Total
--------------------------------------------------------------------
Sale of oil (6,928,648) (6,081,047) - (13,009,695)
Interest income (6,896) (6,525) (345,153) (358,574)
Service income - (38,302) - (38,302)
Other income (3,171) - - (3,171)
Production cost and
depletion 7,062,151 1,490,158 8,552,309
Depreciation 187,835 28,630 34,172 250,637
Foreign exchange
(gain)/loss (26,208) (18,838)(1,440,366) (1,485,412)
Other expenses 1,980,122 136,028 3,064,934 5,181,084
----------------------------------------------
Segment (profit) loss 2,265,185 (4,489,896) 1,313,587 (911,124)
----------------------------------------------


Segment assets 46,155,025 17,492,958 19,266,972 82,914,955
----------------------------------------------

Segment expenditures
Oil and gas
interests 8,720,421 6,255,204 - 14,975,625
Property, plant and
equipment 493,355 126,722 210,540 830,617
----------------------------------------------
9,213,776 6,381,926 210,540 15,806,242
----------------------------------------------


7. Subsequent Events

On March 31, 2006, the Company announced that it had agreed to sell on a non-brokered private placement basis up to 4.3 million common shares in Sweden at a price of SEK 92 per share (approximately CDN $13.83 per share) for gross proceeds of approximately $51 million (approximately CDN $60 million). The net proceeds of the private placement will be used towards the development of the Company's oil and gas assets in Syria as well as for general corporate purposes.

8. Reconciliations between net result and shareholders' equity determined under Canadian GAAP and IFRS



March 31, February 28,
2006 2005
--------------------------------------------------------------------
Net result according to the financial
statements prepared under Canadian GAAP 532,409 1,429,160
Effect of assets impairment (91,604) 98,295
--------------------------------------------------------------------
Net result in accordance with IFRS 440,805 1,527,455
--------------------------------------------------------------------

Shareholders' equity according to
the financial statements prepared
under Canadian GAAP 71,750,436 36,088,593
--------------------------------------------------------------------
Items increasing (decreasing)
reported shareholders' equity:
Effect of adjustment brought forward 1,901,287 1,650,468
Effect of asset impairment (91,604) 279,025
--------------------------------------------------------------------
Net adjustments 1,809,683 1,929,493
--------------------------------------------------------------------
Shareholders' equity - IFRS 73,560,119 38,018,086
--------------------------------------------------------------------


SUPPLEMENTARY INFORMATION



1. LIST OF DIRECTORS AND OFFICERS AT MARCH 31, 2006
a. Directors
Lukas H. Lundin
Gary S. Guidry
Bryan Benitz
John H. Craig
Keith Hill
Mamdouh Nagati
William A. Rand

b. Officers:
Lukas H. Lundin, Chairman
Gary S. Guidry, President and CEO
Mamdouh Nagati, Executive Vice President
Arlene E. Weatherdon, CFO
Diane Phillips, Corporate Secretary

2. OTHER INFORMATION
Address (Corporate Office)
#750, 736 - 7th Avenue S.W.
Calgary, Alberta T2P 3T7
Canada

Telephone: 1.403.663.2999
Fax: 1.403.261.1007

Website: www.tykoil.com

The corporate number of the Company is 318368-8


Contact Information