Tanganyika Oil Company Ltd.
TSX VENTURE : TYK

Tanganyika Oil Company Ltd.

August 14, 2006 09:30 ET

Tanganyika Announces Second Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 14, 2006) - Tanganyika Oil Company Ltd. (the "Company") (TSX VENTURE:TYK)(FIRST NORTH:TYKS) today announces interim operating and financial results for the three and six months ended June 30, 2006 and May 31, 2005. Unless otherwise stated, all figures contained in this report are in United States dollars.



Three months Three months Six months Six months
ended ended ended ended
Financial June 30, May 31, June 30, May 31,
Highlights 2006 2005 2006 2005

Revenue 7,478,589 3,730,744 14,785,671 6,557,529
Cash Flow from
Operations(i) (2,196,231) 1,595,385 (213,657) 3,931,717
Per share
(diluted) (0.047) 0.041 (0.005) 0.10
Net profit
(loss) (4,208,032) (258,234) (3,675,623) 1,170,926
Per share
(diluted) (0.091) (0.007) (0.081) 0.030
Total Assets 137,934,795 42,403,737 137,934,795 42,403,737
Working
Capital 64,619,814 19,158,421 64,619,814 19,158,421
Weighted
Average
shares
outstanding
(diluted) 46,862,021 39,378,867 45,830,308 39,370,370


Operational Highlights

Average daily
production -
Company share
(bbl/d)
Egypt 737 520 747 591
Syria 846 662 880 658

Average sales
price ($)
Egypt 48.68 31.46 44.78 25.80
Syria 56.79 35.85 51.42 31.05

Operating
costs (bbl)
Egypt 4.97 7.38 3.70 4.68
Syria 10.26 5.42 7.31 4.14

(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.

MANAGEMENT'S DISCUSSION AND ANALYSIS

(Amounts in United States Dollars unless otherwise indicated)

Three and six months ended June 30, 2006 and May 31, 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 and six month periods ended June 30, 2006 and May 31, 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 August 10, 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 First North (formerly 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

Drilling activity in the quarter ending June 30, 2006 was focused on exploration and appraisal wells. A total of six wells were drilled comprising of one appraisal well and five exploration wells. The Arta-2 appraisal well was drilled 312 metres up-dip of the Arta-1 oil discovery and cased as a Nukhul oil well. Five exploration wells in total were drilled at Had-1, Ghanam-1, West Rahmi-2, West Rahmi-3 and North Hoshia-1. All were plugged and abandoned except for the North Hoshia-1 well which was cased for Rudeis oil.

Drilling activity will continue in the third quarter at Arta-3, East Arta-1, East Hoshia-1, Hana-12 and Saad-1.

The Arta-1 well, which was drilled in the last quarter, was production tested in April with rates ranging from 72 bopd to 149 bopd of 16 degrees API oil. The South Rahmi-1 well, also drilled in the last quarter, was completed during June and a three-day production test averaged 133 barrels of fluid per day at 53% water-cut yielding 62 bopd. The North Hoshia-1 was also completed and tested oil 12.3 degrees API at rates as high as 95 barrels oil during a seven hour period. Hana-8 was re-completed in April and is contributing at rates of 240 bopd. The Arta-1, South Rahmi-1 and North Hoshia-1 wells are waiting for development permit approval prior to full production.

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 contract was ratified in July 2003. The objective of the contract, which has a term of 20 years (from contract ratification date) 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) 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 contract was ratified in February 2005. The objective of the contract, which has a term of 20 years (from contract ratification date) 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.

(c) Syria - Update on Current Activities

During the first six months of 2006, the Company has successfully drilled four wells at the Oudeh field, four wells at the Tishrine field and one well at the Sheikh Mansour field in addition to key work-overs conducted at Tishrine West and Sheikh Suleiman. The Company has made significant progress this year in reducing the time and cost for drilling wells in Syria. The average well in Tishrine is being drilled in 12 days at an average cost of $0.5 million. In Oudeh, 18 days are needed to drill a well at a cost of approximately $1.25 million.

The Company currently has one drilling rig operating full-time in Tishrine-Sheikh Mansour and has signed a letter of intent for an additional drilling rig which is expected to commence operations in early September. This additional drilling rig will be capable of use at either Oudeh or Tishrine-Sheikh Mansour. The Company also has three work-over rigs operating in Tishrine and is negotiating to add an additional work-over rig this year. The Company plans to perform 53 work-overs during the remainder of 2006 in both Oudeh and Tishrine-Sheikh Mansour.

During June, the Company drilled the first Oudeh well, OD-146H, in the thicker grainstone area of the Shiranish formation with encouraging results. A total of 64.2 metres of net hydrocarbon pore volume was encountered in the 400 metre horizontal borehole within the Shiranish B reservoir. The well was completed in July and tested at production rates of 180 bopd of 12 degrees API oil. In addition, production rates for the most recently drilled Tishrine wells are meeting expectations. As a result of the drilling and work-over activities in Tishrine, the Tishrine field's gross oil production has now surpassed the base crude production levels. Oudeh's production continues to be above base crude production levels. The Company's share of incremental production will generate additional oil revenues beginning in the third quarter of 2006.

A 3D seismic program commenced in July 2006 and will cover 300 square kilometers at the Tishrine field and 180 square kilometers at the Sheikh Mansour and Sheikh Suleiman fields. The 3D seismic program will be completed prior to year-end 2006.

The steam pilot project is on track and expected to begin in August 2006. The steam generators will arrive in early August; all of the other required equipment is on-site in Syria. Currently, the Company has completed two wells at Oudeh and two wells at Tishrine for steam injection.

North Africa

During the second quarter of 2006, the Company acquired a 50% interest in a private entity which holds certain rights associated with the development of oil and gas properties located in northern Africa in exchange for 372,954 common shares having a deemed value of approximately $3.5 million. As part of the acquisition, the Company agreed to fund 100% of the private entity's work program obligations to a maximum of $2 million. The Company has an option to acquire the remaining 50% interest in the private entity within 60 days after the date a development lease is issued in respect of the oil and gas properties. The work program is currently underway and an application for a development lease is expected to be submitted during the third quarter of 2006.

Selected Quarterly Information



($000s,
except
per
share & Three Months Ended: (1)
product --------------------------------------------------------------
ion Jun 30 Mar 31 Dec 31 Sept 30 May 31 Feb 28 Nov 30 Aug 31
data) 2006 2006 2005 2005 2005 2005 2004 2004
-----------------------------------------------------------------------
Total
revenues 7,479 7,307 5,852 7,558 3,730 2,826 3,988 2,222
Earnings
(loss) (4,208) 532 (2,615) 3,526 (258) 1,429 (1,261) (1,761)
Per share
basic (0.091) 0.012 (0.059) 0.083 (0.007) 0.038 (0.034) (0.048)
Per share
diluted (0.091) 0.012 (0.059) 0.080 (0.007) 0.037 (0.034) (0.048)
Cash
flow (2,196) 1,983 (1,071) 5,029 1,540 2,336 16 (456)
Per share
basic (0.048) 0.045 (0.024) 0.118 0.040 0.062 0 (0.012)
Per share
diluted (0.048) 0.044 (0.024) 0.115 0.039 0.061 0 (0.012)
Average
product-
ion
(bopd) 1,583 1,670 1,522 1,382 1,182 1,322 1,220 804
Total
product-
ion
(barr-
els) 144,000 150,000 140,000 169,000 109,000 119,000 111,000 74,000

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


The total revenue for the quarter ended June 30, 2006 is slightly higher than the revenues for the prior quarter. Oil prices were higher however production volumes were lower. For the current quarter, the Company had a loss of $4,208,000 compared to earnings of $532,000 for the prior quarter. The loss is mainly due to an increase in production costs, primarily as a result of work-over and stimulation costs plus the addition of field operating staff.

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. The sales price for crude oil has risen over the prior periods, and production volumes have increased, other than in the latest quarter, from both the addition of oil and gas production sharing contracts and development activities.

Results of Operations

The Company had a consolidated net loss for the three month period ended June 30, 2006 of $4,208,000 ($0.091 per share) compared to a consolidated net loss of $258,000 ($0.007 per share) for the three month period ended May 31, 2005. The Company had a consolidated net loss of $3,676,000 for the six month period ended June 30, 2006 compared to a consolidated net profit of $1,171,000 for the six month period ended May 31, 2005. For the current year periods, increases in oil production and oil prices have been offset by higher production costs and general and administration costs resulting in net losses. An in-depth analysis of the results of operations is provided below.

Oil Sales and Production Costs



Three months Three months Six months Six months
ending ending ending ending
June 30, 2006 May 31, 2005 June 30, 2006 May 31, 2005
----------------------------------------------------------------------
Sales of oil:
----------------------------------------------------------------------
Egypt(9) $ 2,660,000 $ 1,510,000 $ 6,045,000 $ 2,761,000
----------------------------------------------------------------------
Syria $ 4,373,000 $ 2,187,000 $ 8,175,000 $ 3,726,000
----------------------------------------------------------------------
Total $ 7,033,000 $ 3,697,000 $ 14,220,000 $ 6,487,000
----------------------------------------------------------------------
Average oil
sales price
($ per bbl):
----------------------------------------------------------------------
Egypt $ 48.68 $ 31.46 $ 44.78 $ 25.80
----------------------------------------------------------------------
Syria $ 56.79 $ 35.85 $ 51.42 $ 31.05
----------------------------------------------------------------------
Production:
----------------------------------------------------------------------
Egypt:
----------------------------------------------------------------------
Gross
production(1) 228,000 134,000 460,000 301,000
----------------------------------------------------------------------
Gross
production net
of partners'
share(2) 116,000 68,000 234,000 154,000
----------------------------------------------------------------------
Company
share(3) 67,000 48,000 135,000 107,000
----------------------------------------------------------------------
Company
share bbl/day 737 520 747 591
----------------------------------------------------------------------
Syria:
----------------------------------------------------------------------
Gross
production 736,000 178,000 1,471,000 355,000
----------------------------------------------------------------------
Company
share(4) 77,000 61,000 159,000 120,000
----------------------------------------------------------------------
Company share
bbl/day 846 662 880 658
----------------------------------------------------------------------
Total:
----------------------------------------------------------------------
Total Company
share for
Egypt and Syria 144,000 109,000 294,000 227,000
----------------------------------------------------------------------
Total Company
share for
Egypt and Syria
bbl/day 1,583 1,182 1,627 1,249
----------------------------------------------------------------------
Operating costs:
----------------------------------------------------------------------
Egypt(5) $ 577,000 $ 502,000 $ 865,000 $ 720,000
----------------------------------------------------------------------
Egypt per
bbl(6) $ 4.97 $ 7.38 $ 3.70 $ 4.68
----------------------------------------------------------------------
Syria(7) $ 7,555,000 $ 964,000 $ 10,760,000 $ 1,468,000
----------------------------------------------------------------------
Syria per
bbl(8) $ 10.26 $ 5.42 $ 7.31 $ 4.14
----------------------------------------------------------------------

1) Gross production for Egypt includes production from both
development and exploration fields. However, any 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 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.
9) Egypt's total oil sales for the quarter ended June 30, 2006 include
an accrual adjustment of $606,000 relating to the prior quarter.


Oil Sales:

World oil prices have increased significantly over the past year as can be seen by the prices being received in both Egypt and Syria.

In both Egypt and Syria, the increase in oil sales for the three and six month periods ended June 30, 2006 compared to the three and six month periods ended May 31, 2005 is due to significantly higher oil prices as well as volume increases. The Company's share of oil production in Egypt for the three and six month periods ended June 30, 2006 has increased by approximately 40% and 26% over the comparable periods for the prior year. Oil production increases are the result of drilling activities. In Syria, the Company's share of oil production for the three and six month periods ended June 30, 2006 has increased by approximately 26% and 33% over the prior year periods. The production increases in Syria are largely the result of drilling activities in the Oudeh field.

The average oil prices received in Egypt for the three and six month periods ended June 30, 2006 have increased by approximately 55% and 74% over the comparable periods for the prior year. The average prices for the three and six month periods ended June 30, 2006 were $48.68 and $44.78 compared to $31.46 and $25.80 for the prior year periods. Egypt's oil prices for the current and prior year periods have ranged from 83% to 87% of the oil prices received in Syria as Egyptian heavy oil is subject to higher price differentials.

The average oil prices received in Syria for the three and six month periods ended June 30, 2006 have increased by approximately 58% and 66% over the comparable periods for the prior year. The average prices for the three and six month periods ended June 30, 2006 were $56.79 and $51.42 compared to $35.85 and $31.05 for the prior year periods.

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 and six month periods ended June 30, 2006 were $4.97 and $3.70 per barrel, representing decreases of approximately 33% and 21% compared to the prior year periods' costs of $7.38 and $4.68 per barrel. Gross production, net of partners' share, has increased approximately 71% and 52% compared to the prior year periods 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 directly attributable to BCP. The Company has estimated that approximately $2.2 million of operating costs for the six month period ended June 30, 2006 are recoverable from SPC in relation to BCP. This is in addition to the $3.6 million that the Company estimates 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. Operating costs on a per barrel basis for Syria for the three month and six month periods ended June 30, 2006 were $10.26 and $7.31 per barrel compared to $5.42 and $4.14 per barrel for the prior year periods. Syria's operating costs have increased in 2006 mainly as a result of work-over and stimulation costs plus the addition of field operating staff. The work-over and stimulation costs incurred will increase production in the third quarter and should result in lower operating costs on a per barrel basis.

Depletion

Depletion for the three and six month periods ended June 30, 2006 was $1,426,000 and $2,334,000 compared to $923,000 and $1,572,000 for the prior year periods. 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 second quarter, on a per-unit basis, was approximately $2.58 per barrel for Egypt and $1.01 per barrel for Syria. Egypt's depletion rate has increased this quarter as a result of an increase in costs to be depleted with no change in proved reserves. 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 $405,000 and $469,000 for the three and six month periods ended June 30, 2006 compared to $14,000 and $36,000 for the prior year periods. Interest income represents interest earned on bank deposit balances during the period. For the current year periods, the Company has a higher cash balance as a result of a private placement in May 2006.

Service income was $41,000 and $97,000 for the three and six month periods ended June 30, 2006 compared to $19,000 and $34,000 for the prior year periods. Service income represents the overhead provision Egypt is entitled to as operator. The service income is based on monthly expenditures which have increased over the prior year periods.

General and Administrative and Other Expenses

For the three and six month periods ended June 30, 2006 total expenses, excluding the impact of foreign exchange gains and losses, were $3,671,000 and $6,120,000 compared to $1,973,000 and $2,897,000 for the prior year periods.

The exchange gains for the three and six month periods ended June 30, 2006 were $1,544,000 and $1,619,000 compared to $373,000 and $1,271,000 for the prior year periods. The exchange gains 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 current year periods compared to the prior year periods.

Salaries and benefits for the three and six month periods ended June 30, 2006 were $1,109,000 and $1,750,000 compared to $554,000 and $963,000 for the prior year periods. The salaries and benefits increases over the prior periods are the result of the addition of staff for the Syria and Calgary offices starting in June 2005.

Travel expenses for the three and six month periods ended June 30, 2006 were $303,000 and $525,000 compared to $38,000 and $51,000 for the prior year periods. Higher travel costs in the current year periods are mainly due to the increase in the rotation of field staff working in Syria, as well as additional travel between Canada and Syria to oversee operations.

General and administration costs for the three and six month periods ended June 30, 2006 were $1,318,000 and $2,129,000 compared to $101,000 and $280,000 for the prior year periods. The increase in general and administration costs for the current year periods is the result of higher costs incurred in Syria and Calgary. The Calgary corporate office was established in June 2005, and the Syria office has added additional staff since May 31, 2005.

Management fees for the three and six month periods ended June 30, 2006 were $52,000 and $157,000 compared to $44,000 and $83,000 for the prior year periods. The monthly fee was increased in 2006 plus some additional fees were paid during the first quarter of 2006, all in accordance with the terms of the management agreement with Namdo Management Services Ltd., a related party.

Legal and accounting fees for the three and six month periods ended June 30, 2006 were $120,000 and $134,000 compared to $200,000 and $309,000 for the prior year periods.

Interest and bank charges for the three and six month periods ended June 30, 2006 were $45,000 and $97,000 compared to $138,000 and $142,000 for the prior year periods. The interest charges relate to interest paid on outstanding letters of credit.

Shareholder information and transfer agent costs were $141,000 and $200,000 for the three and six month periods ended June 30, 2006 compared to $40,000 and $127,000 for the prior year periods.

Depreciation for the three and six month periods ended June 30, 2006 was $131,000 and $267,000 compared to $(57,000) and $26,000 for the prior year periods. The negative amount for the three month period ended May 31, 2005 is a result of a fourth quarter adjustment to depreciation. May 31, 2005 was the Company's previous financial reporting year end and an adjustment was made at year end in order to agree total depreciation recorded for the year to the annual depreciation calculation. The increase in depreciation for the current year periods 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 and six month periods ended June 30, 2006 was $454,000 and $861,000 compared to $916,000 and $916,000 for the prior year periods. For the three months ended June 30, 2006, the Company issued 130,000 options at prices ranging from CDN $10.65 to CDN $15.60.

Financial Condition

At June 30, 2006, total assets were $137,935,000 compared to $82,915,000 at December 31, 2005. The increase of approximately $55.0 million is mainly due to an increase in the cash balances and oil and gas interests. Other non-cash working capital balances such as inventory and receivables also increased since December 31, 2005.

The restricted cash in the amount of $9,577,000 at June 30, 2006 represents pledged amounts against the issuance of a letter 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. As work is completed, funds are released from the letter of guarantee. In July 2006, $1,150,000 was released and became part of the Company's unrestricted cash balance. In addition to the letter of guarantee, the Company has issued letters of credit in the amount of $577,000 relating to Syria and Egypt operations.



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

June 30, December 31,
2006 2005
Egypt $ 11,833,000 $ 7,976,000
Syria $ 40,322,000 $ 27,820,000
North Africa $ 4,244,000 $ -
Total $ 56,399,000 $ 35,796,000


Since December 31, 2005, Egypt's net oil and gas assets have increased $3,857,000 as a result of exploration and development drilling. Syria's oil and gas assets have increased $12,502,000 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. During the second quarter of 2006, the Company acquired additional oil and gas interests in North Africa. The net increase, after depletion, in oil and gas interests for the six month period ended June 30, 2006 was $20,603,000.

Net property, plant and equipment increased from $1,077,000 at December 31, 2005 to $1,234,000 at June 30, 2006. The increase in net property, plant and equipment is due to the addition and replacement of field vehicles in Syria and Egypt.

The advances to contractors increased from $1,121,000 at December 31, 2005 to $5,207,000 at June 30, 2006. This represents advances made by the Company to contractors in Syria for services and equipment relating to drilling and work-over programs. The Company has replaced many of the letters of credit issued to suppliers and contractors with cash advances in order to reduce its costs.

The amounts receivable and other assets increased from $7,981,000 at December 31, 2005 to $10,674,000 at June 30, 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 $10,986,000 at June 30, 2006. The inventory balance is predominantly equipment and supplies for the drilling and work-over programs in Syria.

Prepaid expenses increased from $254,000 at December 31, 2005 to $742,000 at June 30, 2006. The main prepaid expenses at June 30, 2006 are: (i) $550,000 for prepaid accommodation costs in Syria, (ii) $126,000 for prepaid rent in Calgary and Egypt, and (iii) $15,000 for prepaid geological software maintenance costs.

The Company had total liabilities of $15,682,000 at June 30, 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 June 30, 2006 the Company held a free cash amount of $43,116,000 compared to $16,678,000 at December 31, 2005. The increase is due to the private placement completed in May 2006.

The Company's working capital was $64,620,000 at June 30, 2006 compared to $33,619,000 at December 31, 2005. The increase in the working capital is mainly due to the increase in the cash balance as a result of the private placement completed in May 2006.

Funds used in operations were $2,196,000 and $214,000 for the three and six month periods ended June 30, 2006. For the prior year periods, funds generated from operations were $1,595,000 and $3,932,000. The current year periods have operating losses which result in the use of funds. Net cash flow used in operating activities, after taking into consideration non-cash working capital, was $16,001,000 and $17,772,000 for the three and six month periods ended June 30, 2006 compared to net cash flow generated from operating activities of $677,000 and $2,092,000 for the prior year periods. The current year periods have increases in amounts receivable, advances to contractors and inventory compared to the prior year periods.

Net cash used in investing activities was $2,690,000 and $10,367,000 for the three and six month periods ended June 30, 2006 compared to $2,088,000 and $4,036,000 for the prior year periods. The gross investment in oil and gas interests for the three and six month periods ended June 30, 2006 was $11,980,000 and $22,937,000.

At June 30, 2006, share capital was $144,813,000 compared to $89,906,000 at December 31, 2005. The increase in share capital is mainly the result of the private placement completed in May 2006 whereby the Company issued 4.3 million shares for gross proceeds of approximately $51 million (approximately CDN $60 million). The net proceeds of the private placement are being used towards the development of the Company's oil and gas assets in Syria as well as for general corporate purposes. The Company also issued 372,954 shares, with a value of approximately $3.5 million as consideration for the North Africa acquisition.

The increase in the contributed surplus of $530,000 is due to the net stock based compensation for the six month period to June 30, 2006. Contributed surplus was credited in the amount of $861,000, the stock compensation expense for the six month period ended June 30, 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 six month period ended June 30, 2006, contributed surplus was reduced by an amount of $331,000 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 August 10, 2006 the Company had 49,207,696 common shares outstanding and 1,643,000 stock options outstanding under its stock-based compensation plan.

Related Party Transactions

The Company has entered into transactions with related parties, which were measured at the exchange amounts. For the six month period ended June 30, 2006, the Company paid $157,000 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 have 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 June 30, 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 private placement has provided approximately $51 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 continues to be to execute an aggressive, but paced, capital development program of the oil and gas interests in both Syria and Egypt.



Key Data

Three Three Six Six Seven
months months months months months
ended ended ended ended ended
June 30 May 31 June 30 May 31 December 31
2006 2005 2006 2005 2005
----------- ----------- ----------- ----------- -----------
Return on
equity, %(1) -4.34% 0.70% -3.81% 3.21% 1.77%
Return on
capital
employed,
%(2) -4.34% 0.93% -3.77% 4.84% -0.90%
Debt/equity
ratio, %(3) 0% 0% 0% 0% 0%
Equity
ratio, %(4) 89% 90% 89% 90% 87%
Share of
risk capital,
%(5) 89% 90% 89% 90% 87%
Interest
coverage
ratio, %(6) -9325% -420% -3674% 603% 4482%
Operating cash
flow/interest
expense, %(7) -2374% 1633% 2763% 3057% 11034%
Yield, %(8) 0% 0% 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 Six Six Seven
months months months months months
ended ended ended ended ended
June 30 May 31 June 30 May 31 December 31
2006 2005 2006 2005 2005
----------- ----------- ----------- ----------- -----------

Shareholders'
equity,
USD(1) 2.48 0.98 2.48 0.98 1.59
Operating
cash flow,
USD(2) (0.02) 0.06 0.06 0.11 0.14
Cash flow from
operations(3) (0.05) 0.04 0.00 0.10 0.09
Earnings(4) (0.091) (0.007) (0.081) 0.030 0.02
Earnings
(fully
diluted)(5) (0.091) (0.007) (0.081) 0.030 0.02
Dividend 0 0 0 0 0
Quoted price
at the end
of the
financial
period 11.05 6.70 11.05 6.70 8.71
P/E-ratio(6) (121.3) (1,015.1) (136.2) 223.8 390.6
Number of
shares at
financial
period end 49,197,696 39,129,641 49,197,696 39,129,641 44,347,475
Weighted
average
number of
shares
for the
financial
period(7) 46,194,769 39,123,296 45,293,211 39,114,799 43,271,237
Weighted
average
number of
shares
for the
financial
period
(fully
diluted)
(5,7) 46,862,021 39,378,867 45,830,308 39,370,370 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 June 30, 2006 and December 31, 2005
(expressed in U.S. dollars)
June 30, December 31,
2006 2005
$ $

Assets
Current Assets
Cash and short-term deposits 43,115,517 16,678,492
Restricted cash (note 2) 9,576,984 16,726,382
Advances to contractor 5,207,314 1,120,717
Amounts receivable and other assets 10,673,879 7,981,340
Inventory 10,985,626 3,280,715
Prepaid expenses 742,204 254,280
-----------------------------

80,301,524 46,041,926

Oil and gas interests (note 3) 56,399,201 35,796,451

Property, plant and equipment 1,234,070 1,076,578
-----------------------------

137,934,795 82,914,955
-----------------------------
-----------------------------

Liabilities
Current liabilities
Amounts payable and accrued
liabilities 15,613,895 12,423,390
Amounts due to joint venture
partners 67,815 -
-----------------------------

15,681,710 12,423,390

Shareholders' Equity
Capital stock (note 4) 144,813,263 89,905,794

Contributed surplus (note 4) 6,312,451 5,782,777

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

Deficit (28,696,884) (25,021,261)
-----------------------------

122,253,085 70,491,565
-----------------------------

137,934,795 82,914,955
-----------------------------
-----------------------------

Approved by the Directors:

(signed) William A. Rand (signed) Keith Hill
Director Director


Tanganyika Oil Company Ltd.
Consolidated Statements of Operations and Deficit
Three and Six months ended June 30, 2006 and May 31, 2005
(expressed in U.S. dollars)

Three months Three months Six months Six months
ended ended ended ended
June 30, 2006 May 31, 2005 June 30, 2006 May 31, 2005
$ $ $ $
Revenue
Sale of oil 7,032,557 3,697,041 14,219,500 6,487,541
Interest
income 405,029 14,252 469,210 35,800
Service
income 41,003 19,451 96,961 34,188
------------- ------------ ------------- ------------

7,478,589 3,730,744 14,785,671 6,557,529
------------- ------------ ------------- ------------

Expenses
Production
costs 8,133,340 1,466,367 11,625,241 2,188,536
Depletion 1,426,449 922,986 2,334,275 1,572,185
Salaries
and other
benefits 1,108,882 554,283 1,750,030 963,413
Travel 302,653 37,878 525,289 50,681
General and
administration 1,317,794 101,101 2,128,778 280,382
Management
fees 51,501 43,478 157,193 82,630
Legal and
accounting 119,706 199,755 134,253 308,858
Stock-based
compensation 454,180 915,977 861,027 915,977
Interest and
bank charges 44,647 137,810 97,386 141,768
Shareholder
information
and transfer
agent 140,693 39,580 199,820 127,038
Depreciation 131,172 (57,286) 266,664 26,035
Foreign
exchange
gain (1,544,396) (372,951) (1,618,662) (1,270,900)
------------- ------------ ------------- ------------

11,686,621 3,988,978 18,461,294 5,386,603
------------- ------------ ------------- ------------

Profit (loss)
for the
period (4,208,032) (258,234) (3,675,623) 1,170,926

Deficit -
beginning
of period (24,488,852) (25,674,150) (25,021,261) (27,103,310)
------------- ------------ ------------- ------------

Deficit -
end of
period (28,696,884) (25,932,384) (28,696,884) (25,932,384)
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
Profit (loss)
per share
Basic (0.091) (0.007) (0.081) 0.030
Diluted (0.091) (0.007) (0.081) 0.030

Weighted
average
number of
shares
outstanding
Basic 46,194,769 39,123,296 45,293,211 39,114,799
Diluted 46,862,021 39,378,867 45,830,308 39,370,370


Tanganyika Oil Company Ltd.
Consolidated Statements of Cash Flows
Three and Six months ended June 30, 2006 and May 31, 2005
(expressed in U.S. dollars)

Three months Three months Six months Six months
ended ended ended ended
June 30, 2006 May 31, 2005 June 30, 2006 May 31, 2005
$ $ $ $
Cash flows from
operating
activities
Profit (loss)
for the
period (4,208,032) (258,234) (3,675,623) 1,170,926
Items not
affecting
cash:
Stock-based
compensation 454,180 915,977 861,027 915,977
Interest
expense - 122,383 122,383
Depreciation 131,172 (57,286) 266,664 26,035
Depletion 1,426,449 922,986 2,334,275 1,572,185
Unrealized
foreign
exchange
loss - (374,597) - (164,269)
Effect of
changes in
exchange
rates - 324,156 - 288,480
------------- ------------ ------------- ------------

Funds from
operations (2,196,231) 1,595,385 (213,657) 3,931,717
------------- ------------ ------------- ------------

Changes in
non-cash
operating
working capital:
Changes in
non-cash
balances
related to
operations
(note 7) (13,804,269) (918,854) (17,558,000) (1,839,376)
------------- ------------ ------------- ------------

(16,000,500) 676,531 (17,771,657) 2,092,341
------------- ------------ ------------- ------------

Cash flows
from investing
activities
Investment
in oil
and gas
interests (11,980,444) (1,960,773) (22,937,025) (3,157,224)
Investment
in property,
plant and
equipment (181,802) (105,311) (424,156) (237,520)
Releases
(pledges)
of bank
guarantees 3,627,398 (2,418,422) 7,149,398 (2,832,800)
Advance
relating to
exploration
commitment - (513,824) - (513,824)
Deposit in
lieu of
guarantee for
exploration
license - - - 317,932
Release of
exploration
commitment - 1,107,434 - 584,064
Changes in
non-cash
balances
related to
investing
activities
(note 7) 5,844,349 1,802,688 5,844,349 1,802,688
------------- ------------ ------------- ------------

(2,690,499) (2,088,208) (10,367,434) (4,036,684)
------------- ------------ ------------- ------------

Cash flows
from financing
activities
Issuance of
common shares
and special
warrants 54,256,501 59,347 54,576,116 98,050
Repayment of
loan from a
shareholder - 24,036 - 24,036
------------- ------------ ------------- ------------

54,256,501 83,383 54,576,116 122,086
------------- ------------ ------------- ------------

Increase
(decrease)
in cash and
short-term
deposits 35,565,502 (1,328,294) 26,437,025 (1,822,257)

Cash and
short-term
deposits -
beginning
of period 7,550,015 5,548,721 16,678,492 6,042,684
------------- ------------ ------------- ------------

Cash and
short-term
deposits -
end of
period 43,115,517 4,220,427 43,115,517 4,220,427
------------- ------------ ------------- ------------


Tanganyika Oil Company Ltd.

Notes to the Consolidated Financial Statements

For the Three and Six months ended June 30, 2006 and May 31, 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 June 30, 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 June 30, 2006, an amount of $576,984 is restricted as security for letters of credit.

3. Oil and Gas Interests



June 30, 2006
--------------------------------------
Accumulated
depletion & Net book
Cost writedowns value
--------------------------------------
Arab Republic of Egypt
Producing oil and gas
properties 14,606,525 10,771,600 3,834,925
Exploration and
development properties 7,998,014 - 7,998,014
--------------------------------------
22,604,539 10,771,600 11,832,939
--------------------------------------
North Africa
--------------------------------------
Exploration and
development properties 4,244,246 - 4,244,246
--------------------------------------
Syrian Arab Republic
--------------------------------------
Producing oil and gas
properties 43,803,020 3,481,004 40,322,016
--------------------------------------

--------------------------------------
Total 70,651,805 14,252,604 56,399,201
--------------------------------------


December 31, 2005
--------------------------------------
Accumulated
depletion & Net book
Cost writedowns 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:



-----------------------------
June 30, 2006
-----------------------------
Number Amount
-----------------------------
Balance, beginning of period 44,413,742 $ 90,339,604
Private placements, net 4,300,000 50,142,051
Shares issued for North Africa
acquisition 372,954 3,501,036
Exercise of options 111,000 830,572
-----------------------------
Balance, end of period 49,197,696 $ 144,813,263
-----------------------------


(b) Contributed Surplus - Stock Based Compensation



June 30, December 31,
2006 2005
-----------------------------
Balance, beginning of period $ 6,075,429 $ 5,060,385
Stock based compensation 454,180 1,046,168
Transfer to share capital on
exercise of options (217,158) (323,776)
-----------------------------
Balance, end of period $ 6,312,451 $ 5,782,777
-----------------------------


(c) Stock Options Continuity



-----------------------------
June 30, 2006
-----------------------------
Weighted
Average
Exercise
Number Price CDN $
-----------------------------
Balance, beginning of period 1,608,000 $ 7.30
Granted 130,000 $ 12.24
Exercised (111,000) $ 6.17
-----------------------------
Balance, end of period 1,627,000 $ 7.84
-----------------------------


At June 30, 2006 there were 1,137,500 exercisable options.



------------------
Three Months Ended
June 30, 2006
------------------
Weighted average fair value of stock
options granted (per option) CDN $ 3.78
Expected life of stock options (years) 1.11
Expected volatility (weighted average) 51.01%
Risk free rate of return (weighted average) 4.17%
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 $157,193 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



Three months ended June 30, 2006

Egypt and
Syria North Africa Corporate Total
--------------------------------------------------------
Sale of oil (4,372,578) (2,659,979) (7,032,557)
Interest
income - - (405,029) (405,029)
Service
income - (41,003) - (41,003)
Production
cost and
depletion 8,394,533 1,165,256 - 9,559,789
Depreciation 90,300 22,992 17,880 131,172
Foreign
exchange
(gain)/loss 1,790 148 (1,546,334) (1,544,396)
Other expenses 1,803,522 143,582 1,592,952 3,540,056
--------------------------------------------------------
Segment
(profit) loss 5,917,567 (1,369,004) (340,531) 4,208,032
--------------------------------------------------------
Segment assets 41,292,631 22,579,121 74,063,043 137,934,795
--------------------------------------------------------

Segment
expenditures
Oil and gas
interests 5,087,047 6,893,397 - 11,980,444
Property, plant
and equipment 146,827 7,156 27,819 181,802
--------------------------------------------------------
5,233,874 6,900,553 27,819 12,162,246
--------------------------------------------------------

Three months ended May 31, 2005

Syria Egypt Corporate Total
--------------------------------------------------------
Sale of oil (2,187,083) (1,509,958) - (3,697,041)
Interest
income (665) - (13,587) (14,252)
Service
income - (19,451) - (19,451)
Production
cost and
depletion 1,331,061 1,058,292 - 2,389,353
Depreciation (82,507) 25,221 - (57,286)
Foreign
exchange
(gain)/loss 306,894 (115,847) (563,998) (372,951)
Other expenses 514,384 50,656 1,464,822 2,029,862
--------------------------------------------------------
Segment
(profit) loss (117,916) (511,087) 887,237 258,234
--------------------------------------------------------
Segment assets 19,906,029 12,318,005 10,179,703 42,403,737
--------------------------------------------------------

Segment
expenditures
Oil and gas
interests (368,179) 526,264 - 158,085
Property, plant
and equipment 21,929 83,382 - 105,311
--------------------------------------------------------
(346,250) 609,646 - 263,396
--------------------------------------------------------

Six months ended June 30, 2006

Egypt and
Syria North Africa Corporate Total
------------------------------------------------------
Sale of oil (8,174,985) (6,044,515) - (14,219,500)
Interest
income - (860) (468,350) (469,210)
Service
income - (96,961) - (96,961)
Production
cost and
depletion 12,131,815 1,827,701 - 13,959,516
Depreciation 186,262 45,434 34,968 266,664
Foreign
exchange
(gain)/loss 8,484 (64) (1,627,082) (1,618,662)
Other expenses 2,965,894 257,245 2,630,637 5,853,776
--------------------------------------------------------
Segment
(profit) loss 7,117,470 (4,012,020) 570,173 3,675,623
--------------------------------------------------------
Segment assets 41,292,631 22,579,121 74,063,043 137,934,795
--------------------------------------------------------

Segment
expenditures
Oil and gas
interests 13,873,303 9,063,722 - 22,937,025
Property, plant
and equipment 252,173 107,828 64,155 424,156
--------------------------------------------------------
14,125,476 9,171,550 64,155 23,361,181
--------------------------------------------------------

Six months ended May 31, 2005

Syria Egypt Corporate Total
--------------------------------------------------------
Sale of oil (3,726,988) (2,760,553) - (6,487,541)
Interest
income (1,529) - (34,271) (35,800)
Service
income - (34,188) - (34,188)
Production
cost and
depletion 2,204,337 1,556,384 - 3,760,721
Depreciation 814 25,221 - 26,035
Foreign
exchange
(gain)/loss 682,952 (392,592) (1,561,260) (1,270,900)
Other expenses 930,545 106,732 1,833,470 2,870,747
--------------------------------------------------------
Segment
(profit) loss 90,131 (1,498,996) 237,939 (1,170,926)
--------------------------------------------------------
Segment assets 19,906,029 12,318,005 10,179,703 42,403,737
--------------------------------------------------------

Segment
expenditures
Oil and gas
interests 175,147 1,179,389 - 1,354,536
Property, plant
and equipment 149,471 88,049 - 237,520
--------------------------------------------------------
324,618 1,267,438 - 1,592,056
--------------------------------------------------------

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. Supplemental Cash Flow Information



Three months Three months Six months Six months
ending ending ending ending
June 30, 2006 May 31, 2005 June 30, 2006 May 31, 2005
----------------------------------------------------------------------
Changes in
non-cash
operating
working capital:
Accounts
receivable
and other
assets and
advances (4,218,135) (2,068,892) (6,779,136) (2,466,381)
Inventory (6,238,649) 91,570 (7,704,911) (131,358)
Due to (from)
joint venture
partners 260,435 (1,649) 67,815 (8,003)
Prepaid
expenses (631,830) (23,188) (487,924) (5,133)
Accounts payable
and accrued
liabilities 2,868,259 2,896,158 3,190,505 2,584,352
Due to
directors - (10,165) - (10,165)
--------------------------------------------------------
(7,959,920) 883,834 (11,713,651) (36,688)
Changes in
non-cash
working capital
relating to:
Operating
activities (13,804,269) (918,854) (17,558,000) (1,839,376)
Investing
activities 5,844,349 1,802,688 5,844,349 1,802,688
--------------------------------------------------------
(7,959,920) 883,834 (11,713,651) (36,688)
--------------------------------------------------------


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



June 30, May 31,
2006 2005
-------------------------------------------------------------------
Net result according to the
financial statements prepared
under Canadian GAAP (3,675,623) 1,170,926
Effect of assets impairment (155,587) 457,390
-------------------------------------------------------------------
Net result in accordance with IFRS (3,831,210) 1,628,316
-------------------------------------------------------------------

Shareholders' equity according to
the financial statements prepared
under Canadian GAAP 122,253,085 38,254,448
-------------------------------------------------------------------
Items increasing (decreasing)
reported shareholders' equity:
Effect of adjustment brought forward 1,809,683 1,550,802
Effect of asset impairment (155,587) 457,390
-------------------------------------------------------------------
Net adjustments 1,654,096 2,008,192
-------------------------------------------------------------------
Shareholders' equity - IFRS 123,907,181 40,262,640
-------------------------------------------------------------------


SUPPLEMENTARY INFORMATION

1. LIST OF DIRECTORS AND OFFICERS AT JUNE 30, 2006
a. Directors
Lukas H. Lundin
Gary S. Guidry
Bryan Benitz
John H. Craig
Hakan Ehrenblad
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

The corporate number of the Company is 318368-8


Contact Information