Tanganyika Oil Company Ltd.
TSX VENTURE : TYK

Tanganyika Oil Company Ltd.

November 14, 2006 02:00 ET

Tanganyika Announces Third Quarter 2006 Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 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 nine months ended September 30, 2006. Unless otherwise stated, all figures contained in this report are in United States dollars.



Three Four Nine Ten
months months months months
ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30,
2006 2005 2006 2005
Financial Highlights
Revenue 10,562 7,558 25,347 14,116
Net profit (loss) (4,115) 3,526 (7,790) 4,697
Per share (basic) (0.084) 0.083 (0.167) 0.116
Per share (diluted) (0.084) 0.080 (0.167) 0.114
Cash Flow from Operations(i) (1,993) 5,028 (2,206) 8,248
Per share (basic) (0.040) 0.11 (0.05) 0.20
Per share (diluted) (0.040) 0.11 (0.05) 0.20
Total Assets 140,768 78,655 140,768 78,655
Working Capital, including cash 44,210 47,807 44,210 47,807
Working Capital, excluding cash 5,951 3,579 5,951 3,579
Weighted Average shares
outstanding (basic) 49,209 42,577 46,613 40,508
Weighted Average shares
outstanding (diluted) 49,766 43,893 47,147 41,035

Operational Highlights

Average daily production
- Company share (bbl/d)
Egypt 728 677 740 625
Syria - Oudeh 860 687 873 670
Syria - Tishrine-Sheikh Mansour 596 - 200 -
Total Company 2,184 1,364 1,813 1,295
Average sales price($)
Egypt 50.28 41.95 46.60 33.02
Syria 50.93 46.95 51.19 37.46
Operating costs (bbl)
Egypt 3.52 2.95 3.64 3.92
Syria 10.54 7.93 8.50 5.65

(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 third quarter of 2006, the Company's focus on development drilling in both Syria and Egypt resulted in a 38% increase in the Company's share of production compared to the previous quarter. Daily production averaged 2,184 barrels compared to 1,583 barrels in the previous quarter.

In Syria, the Company drilled six infill wells and conducted eight major workovers and submersible pump installations in the Tishrine field. As of August, Tishrine's production level has surpassed the base crude production levels, which has contributed significantly towards the increase in daily production over the second quarter. The Company's share of production in Syria increased 72% from an average of 846 barrels per day in the second quarter to an average of 1,456 barrels per day in the third quarter. The successful Tishrine drilling and workover programs increased the Company's share of production by an average of 596 barrels per day over the second quarter, and have also resulted in the potential for additional reserves from infill drilling and field extensions. At the Oudeh field, several of the new wells drilled in the Shiranish formation have added positive results, extending new oil in place to areas previously unrecognized as having reserves potential, and increasing the Company share of production by an average of 14 barrels per day over the second quarter. Drilling costs per well at both Oudeh and Tishrine are approaching the Company's target costs of $1 million per well and $0.5 million per well, respectively.

In Egypt, the Minister of Petroleum has now approved development licenses for four new oil fields discovered by the Company including Arta, North Hoshia, West Hoshia and South Rahmi. The daily production levels in Egypt were about 1% lower than the previous quarter averaging 728 barrels compared to 737 barrels. Subject to the degree of success in stimulating the reservoirs in the new fields using hydraulic and proppant fracturing, the new fields are expected to increase the Company's share of production in the range of 200 to 600 barrels per day.

The enhanced oil recovery steam pilots in Syria began during the third quarter. The first test wells at Oudeh and Tishrine have had one injection cycle completed, and the second test wells are currently undergoing their first steam injection cycle. At Oudeh, production at the first test well, OD-147, increased 1.4 times over cold production, and at Tishrine, production at the first test well, WT-207, increased 2.1 times over cold production. These are very encouraging results considering that the Company used a reduced volume steam slug on the first test wells to ensure operational success. The Company has increased the steam injection slug volumes for subsequent wells at both Tishrine and Oudeh.

The Company continues to face operational challenges in Syria, primarily related to existing infrastructure. At both Oudeh and Tishrine, unreliable electric power supplied from the National Syrian power grid has become a serious challenge. Power outages have required workovers to resume production which has increased operating costs and deferred production performance. In addition, the increased oil volumes at Tishrine have resulted in pipeline and gathering system failures. A long-term solution for the pipeline and gathering system issues, along with more reliable power, is being considered in the long range planning process currently underway.

The Company is currently negotiating Oil Marketing Contracts for both Oudeh and Tishrine. The Government of Syria has requested a third party re-evaluation of the pricing differential formula for Oudeh, and will use a similar formula for the new production from Tishrine which now exceeds the base crude level. In the interim, the Company and the Syrian Petroleum Company ("SPC") have agreed that oil revenues for both Oudeh and Tishrine will be based on the existing Oudeh marketing formula and that SPC will hold back 20% until the new Oil Marketing Contracts are in place over the next 30 to 60 days.

Overall, the Company is pleased with the results from the steam pilots and the production increases at Tishrine and anticipates further positive results over the coming months.

Gary S. Guidry, President and CEO

MANAGEMENT'S DISCUSSION AND ANALYSIS

(Amounts in United States Dollars unless otherwise indicated)

Three and nine months ended September 30, 2006 and four and ten months ended September 30, 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 nine month periods ended September 30, 2006 and four and ten months ended September 30, 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 November 9, 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. Fields within the block include: Hana, Hoshia, West Hoshia, North Hoshia, Fadl, Rahmi, South Rahmi and Arta. The Company received development permits for Arta, North and West Hoshia and South Rahmi in the third quarter of 2006 and had one potential discovery at Saad-1.

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

For the third quarter ending September 30, 2006 drilling activity included three exploration wells and five appraisal wells. The five appraisal wells were drilled to evaluate the size of the Arta-1 oil discovery. All five are being completed as oil wells. The three exploration wells were drilled at East Hoshia-1, Hana-12 and Saad-1. The East Hoshia-1 was drilled to 7,480 ft total depth to test a fault block trap in the Eocene and Nukhul formations. The well encountered drilling problems resulting in plug-back to 6,248 ft and will require sidetrack drilling to evaluate the oil shows found in the well. The Hana-12 well tested the structural extension of the Hana field. Well results indicate the Kareem sandstone to be wet. Saad-1 was drilled on a fault block trap to a total depth of 6,370 ft and is being tested to prove commercial production capacity. The well is cased for Nukhul oil potential and will be production tested in October.

Drilling activity will continue in the fourth quarter at East Hoshia-1 sidetrack.

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 third quarter of 2006, the Company successfully drilled four wells at the Oudeh field and six wells at the Tishrine field in addition to key workovers conducted at Tishrine West. The Company 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 added a second full-time rig during the quarter and now has one drilling rig operating full-time in Tishrine-Sheikh Mansour and one in Oudeh. A third drilling rig has been contracted and is expected to spud its first well in Tishrine in late October. The Company also continues to have three workover rigs operating in Tishrine.

The most recently drilled Tishrine wells are successful infill wells. In addition to drilling, the Company conducted eight major workovers and two ESP installations during the quarter. The two ESP installations generated average incremental production of 650 BOPD. Overall, the average production increase for all workovers and ESP installations was 180 BOPD. As a result of the drilling and workover activities in Tishrine, gross oil production has now surpassed the base crude production levels. Oudeh's production continues to be above base crude production levels.

Data acquisition for a 3D seismic program that commenced in July 2006 and covered 300 square kilometers at the Tishrine field and 180 square kilometers at the Sheikh Mansour and Sheikh Suleiman fields has been completed. Processing of the 3D seismic data has started and will be completed prior to year-end 2006.

In September, the steam pilot projects began in both Oudeh and Tishrine. Steam injection started with one well in each field, and the first steam cycle was completed. Production from both wells after the first steam cycle indicated positive results with significantly increased production levels. This was the first application of cyclic steam stimulation in deep carbonate reservoirs, and has proved the viability of enhancing production from the deep Shiranish carbonate reservoir. The first cycle of steam injection on a second well in each field is now underway.

The Company share of oil production from Oudeh averaged 860 barrels per day for the third quarter and Tishrine's share of production averaged 596 barrels per day.

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, which has been completed. The Company has an option to acquire the remaining 50% interest in the private entity within 60 days after the date a Development License is issued in respect of the oil and gas properties. There is some uncertainty as to whether the Development License will be issued. The Company is currently in discussions with the government regarding the Development License and hopes to resolve the matter before the end of the first quarter of 2007.



Selected Quarterly Information

Three Months Ended: (1)
-------------------------------------------------------------
($000s,
except
per share &
production Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 May 31 Feb 28 Nov 30
data) 2006 2006 2006 2005 2005 2005 2005 2004
--------------------------------------------------------------------------
Total
revenues 10,562 7,479 7,307 5,852 7,558 3,730 2,826 3,988
Earnings
(loss) (4,115) (4,208) 532 (2,615) 3,526 (258) 1,429 (1,261)
Per share
basic (0.084) (0.091) 0.012 (0.059) 0.083 (0.007) 0.038 (0.034)
Per share
diluted (0.084) (0.091) 0.012 (0.059) 0.080 (0.007) 0.037 (0.034)
Cash flow (1,993) (2,196) 1,983 (1,071) 5,029 1,540 2,336 16
Per share
basic (0.040) (0.048) 0.045 (0.024) 0.118 0.040 0.062 0
Per share
diluted (0.040) (0.048) 0.044 (0.024) 0.115 0.039 0.061 0
Average
production
(bopd) 2,184 1,583 1,670 1,522 1,382 1,182 1,322 1,220
Total
production
(barrels) 201,000 144,000 150,000 140,000 169,000 109,000 119,000 111,000

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


The total revenue for the quarter ended September 30, 2006 has increased over the prior quarters. In Egypt, production was unchanged over the prior quarter but oil prices were higher. In Syria, oil prices were down but production volumes were higher as the Tishrine field's production volumes now exceed base crude levels. The decrease in the oil price received in Syria is the result of a decrease in the API level for crude production. As more heavy oil has been brought on production, the overall API level has decreased. For the current quarter, the Company had a loss of $4,115,000 compared to a loss of $4,208,000 for the prior quarter. The losses in the last two quarters are mainly due to an increase in production costs, primarily as a result of workover and stimulation costs plus the addition of office and field staff to manage operating and capital programs to appraise and develop production and reserves potential, and pilot test enhanced oil recovery through steam injection.

Earnings fluctuate 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. Production volumes have increased, other than in the previous 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 September 30, 2006 of $4,115,000 ($0.084 per share) compared to a consolidated net profit of $3,526,000 ($0.083 per share) for the four month period ended September 30, 2005. The Company had a consolidated net loss of $7,790,000 for the nine month period ended September 30, 2006 compared to a consolidated net profit of $4,697,000 for the ten month period ended September 30, 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 Four Nine Ten
months ending months ending months ending months ending
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
--------------------------------------------------------------------------
Sales of oil:
--------------------------------------------------------------------------
Egypt $ 3,369,000 $ 3,482,000 $ 9,414,000 $ 6,273,000
--------------------------------------------------------------------------
Syria $ 6,825,000 $ 3,944,000 $15,000,000 $ 7,641,000
--------------------------------------------------------------------------
Total $10,194,000 $ 7,426,000 $24,414,000 $13,914,000
--------------------------------------------------------------------------
Average oil
sales price
($ per bbl):
--------------------------------------------------------------------------
Egypt $ 50.28 $ 41.95 $ 46.60 $ 33.02
--------------------------------------------------------------------------
Syria $ 50.93 $ 46.95 $ 51.19 $ 37.46
--------------------------------------------------------------------------
Production:
--------------------------------------------------------------------------
Egypt:
--------------------------------------------------------------------------
Gross
production (1) 225,000 259,000 685,000 560,000
--------------------------------------------------------------------------
Gross production
net of partners'
share (2) 115,000 132,000 349,000 285,000
--------------------------------------------------------------------------
Company share (3) 67,000 83,000 202,000 190,000
--------------------------------------------------------------------------
Company share
bbl/day 728 677 740 625
--------------------------------------------------------------------------
Syria:
--------------------------------------------------------------------------
Gross production 857,000 240,000 2,329,000 595,000
--------------------------------------------------------------------------
Company share (4) 134,000 84,000 293,000 204,000
--------------------------------------------------------------------------
Company share
bbl/day 1,456 687 1,073 670
--------------------------------------------------------------------------
Total:
--------------------------------------------------------------------------
Total Company
share for Egypt
and Syria 201,000 167,000 495,000 394,000
--------------------------------------------------------------------------
Total Company
share for Egypt
and Syria bbl/day 2,184 1,364 1,813 1,295
--------------------------------------------------------------------------
Operating costs:
--------------------------------------------------------------------------
Egypt (5) $ 405,000 $ 389,000 $ 1,270,000 $ 1,118,000
--------------------------------------------------------------------------
Egypt per bbl (6) $ 3.52 $ 2.95 $ 3.64 $ 3.92
--------------------------------------------------------------------------
Syria (7) $ 9,036,000 $ 1,903,000 $19,796,000 $ 3,363,000
--------------------------------------------------------------------------
Syria per bbl (8) $ 10.54 $ 7.93 $ 8.50 $ 5.65
--------------------------------------------------------------------------

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.


Oil Sales:

In both Egypt and Syria, the increase in revenue from oil sales for the three and nine month periods ended September 30, 2006 compared to the four and ten month periods ended September 30, 2005 is due to significantly higher oil prices as well as volume increases. The Company's share of daily oil production in Egypt for the three and nine month periods ended September 30, 2006 has increased by approximately 7% and 18% over the prior year. Oil production increases are the result of drilling activities. In Syria, the Company's share of daily oil production for the three and nine month periods ended September 30, 2006 has increased by approximately 112% and 60% over the prior year. The production increases in Syria are largely the result of drilling and workover activities and production in the Tishrine field now exceeding base crude levels.

The average oil prices received in Egypt for the three and nine month periods ended September 30, 2006 have increased by approximately 20% and 41% over the four and ten month periods for the prior year. The average prices for the three and nine month periods ended September 30, 2006 were $50.28 and $46.60 compared to $41.95 and $33.02 for the prior year periods.

The average oil prices received in Syria for the three and nine month periods ended September 30, 2006 have increased by approximately 8% and 37% over the prior year periods. The average prices for the three and nine month periods ended September 30, 2006 were $50.93 and $51.19 compared to $46.95 and $37.46 for the four and ten month periods ended September 30, 2005.

Historically, the price received by the Company for Egypt's crude production was lower than the price received by the Company for Syria's crude production due to Egypt's lower API level. As additional heavy crude production has been added in Syria, the API level in Syria has decreased and subsequently the price differential between the two countries has narrowed.

The Company is currently in the process of renegotiating the Oil Marketing Contract for Oudeh due to the decrease of the API factor in the produced crude. The existing Oil Marketing Contract provided for the contract to be renegotiated in the event the API differential increased above a specified level. The Company is also in the process of negotiating an Oil Marketing Contract for Tishrine as Tishrine's production now exceeds the base crude level and the Company is entitled to its share of revenues for the production above the base level.

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 the partners' share of costs, must be divided by production volumes net of the partners' share. Operating costs, on a per barrel basis, for the three month period ended September 30, 2006 were $3.52 or 19% higher compared to $2.95 for the four month period in the prior year. Operating costs, on a per barrel basis, for the nine month period ended September 30, 2006 were $3.64 or 7% lower compared to $3.92 for the ten month period in the prior year.

Under the terms of the Syrian production sharing contracts 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 production sharing contracts, the Company is entitled to claim for reimbursement of the portion of costs directly attributable to base crude production ("BCP"). SPC has now agreed to the allocation method proposed by the Company. The Company is currently in the process of obtaining SPC approval of the invoices and anticipates payment by the end of November 2006. The Company has invoiced SPC $4.5 million for BCP costs relating to 2004 and 2005. The Company has estimated that approximately $2.8 million of operating costs for the nine month period ended September 30, 2006 are also recoverable from SPC. The 2006 BCP recovery amount has not yet been invoiced to SPC as the current year cost audits are still underway.

The Company has not reflected any potential recoveries in its results of operations or receivables balance as the likelihood of collection is not assured. Any amounts ultimately recovered will reduce the total operating costs reflected in the Company's results of operations.

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 nine month periods ended September 30, 2006 were $10.54 and $8.50 per barrel compared to $7.93 and $5.65 per barrel for the four and ten month periods ended September 30, 2005. Syria's operating costs have increased in 2006 mainly as a result of workover and stimulation costs and the increase in the number of field staff to manage operating and capital programs. The critical mass of staffing is now in place, and unit operating costs are expected to decline as production continues to increase with further development.

Depletion

Depletion for the three and nine month periods ended September 30, 2006 was $1,518,000 and $3,852,000 compared to $1,035,000 and $2,607,000 for the four and ten month periods ended September 30, 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. The current depletion rate for Egypt is $2.09 per barrel, and for Syria is $1.36 per barrel.

Interest and Service Income

Interest income was $415,000 and $884,000 for the three and nine month periods ended September 30, 2006 compared to $107,000 and $142,000 for the four and ten month periods ended September 30, 2005. 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 ($47,000) and $50,000 for the three and nine month periods ended September 30, 2006 compared to $22,000 and $56,000 for the four and ten month periods ended September 30, 2005. Service income represents the overhead provision Egypt is entitled to as operator. The service income for the three months ended September 30, 2006 is negative as a result of an adjustment to amounts previously booked as service income during the year.

General and Administrative and Other Expenses

For the three and nine month periods ended September 30, 2006 total expenses, excluding the impact of foreign exchange gains and losses, were $3,608,000 and $9,729,000 compared to $2,314,000 and $5,211,000 for the four and ten month periods ended September 30, 2005.

The exchange gains (losses) for the three and nine month periods ended September 30, 2006 were ($109,000) and $1,510,000 compared to $1,609,000 and $2,880,000 for the four and ten month periods ended September 30, 2005. The exchange gains (losses) relate mainly to the translation of the Canadian dollar denominated cash balance to U.S. dollars.

Salaries and benefits for the three and nine month periods ended September 30, 2006 were $1,550,000 and $3,300,000 compared to $979,000 and $1,942,000 for the four and ten month periods ended September 30, 2005. 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 nine month periods ended September 30, 2006 were $387,000 and $912,000 compared to $180,000 and $231,000 for the four and ten month periods ended September 30, 2005. 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 and capital programs.

General and administration costs for the three and nine month periods ended September 30, 2006 were $816,000 and $2,945,000 compared to $461,000 and $741,000 for the four and ten month periods ended September 30, 2005. 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.

Management fees for the three and nine month periods ended September 30, 2006 were $46,000 and $203,000 compared to $59,000 and $142,000 for the four and ten month periods ended September 30, 2005. 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 nine month periods ended September 30, 2006 were $32,000 and $166,000 compared to $68,000 and $377,000 for the four and ten month periods ended September 30, 2005.

Interest and bank charges for the three and nine month periods ended September 30, 2006 were $32,000 and $129,000 compared to $13,000 and $155,000 for the four and ten month periods ended September 30, 2005. The interest charges relate to interest paid on outstanding letters of credit.

Shareholder information and transfer agent costs were $141,000 and $341,000 for the three and nine month periods ended September 30, 2006 compared to $87,000 and $214,000 for the four and ten month periods ended September 30, 2005.

Depreciation for the three and nine month periods ended September 30, 2006 was $160,000 and $427,000 compared to $114,000 and $140,000 for the four and ten month periods ended September 30, 2005. The increase in depreciation for the current year periods is the result of the addition of vehicles, office furniture and equipment for the setup of the Damascus, Syria office and the Calgary, Canada office.

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 nine month periods ended September 30, 2006 was $444,000 and $1,305,000 compared to $353,000 and $1,269,000 for the four and ten month periods ended September 30, 2005. For the three months ended September 30, 2006, the Company issued 125,000 options at CDN $11.00.

Financial Condition

At September 30, 2006, total assets were $140,768,000 compared to $82,915,000 at December 31, 2005. The increase of approximately $58.0 million is mainly due to an increase in the oil and gas interests. Inventory, cash and amounts receivable have also increased since December 31, 2005.

The restricted cash in the amount of $7,850,000 at September 30, 2006 represents pledged amounts against the issuance of a letter of guarantee. The letter of guarantee was issued in favour of SPC for the Tishrine-Sheikh Mansour work program. As work is completed, funds are released from the letter of guarantee. The Company is currently in the process of obtaining the release of $4,950,000 for work that was completed for the work program, and has applied for an additional release letter from SPC for $2,000,000 relating to work just completed.



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

September 30, 2006 December 31, 2005
Egypt $13,397,000 $ 7,976,000
Syria $55,610,000 $27,820,000
North Africa $ 4,233,000 $ -
Total $73,240,000 $35,796,000


Since December 31, 2005, Egypt's net oil and gas assets have increased $5,421,000 as a result of exploration and development drilling. Syria's oil and gas assets have increased $27,790,000 as a result of development drilling. In accordance with the production sharing contracts, 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 nine month period ended September 30, 2006 was $37,444,000.

Net property, plant and equipment increased from $1,077,000 at December 31, 2005 to $1,214,000 at September 30, 2006. The increase in net property, plant and equipment is due to the addition and replacement of office equipment and field vehicles in Syria and Egypt.

The advances to contractors increased from $1,121,000 at December 31, 2005 to $4,027,000 at September 30, 2006. This represents advances made by the Company to contractors in Syria for services and equipment relating to drilling and workover programs. The Company has replaced the letters of credit issued to suppliers and contractors with cash advances in order to reduce its interest costs.

The amounts receivable and other assets increased from $7,981,000 at December 31, 2005 to $12,823,000 at September 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 addition, as of the third quarter of 2006, Tishrine's accrued oil sales have been added to amounts receivable. 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 $10,516,000 at September 30, 2006. The inventory balance is predominantly equipment and supplies for the drilling and workover programs in Syria.

Prepaid expenses increased from $254,000 at December 31, 2005 to $689,000 at September 30, 2006. The main prepaid expenses at September 30, 2006 are: (i) $570,000 for prepaid accommodation and insurance costs in Syria, (ii) $119,000 for prepaid rent in Calgary and Egypt.

The Company had total liabilities of $22,104,000 at September 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 September 30, 2006 the Company held a free cash amount of $30,409,000 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 including cash was $44,210,000 at September 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, amounts receivable and other assets and inventory. The Company's working capital excluding cash was $5,951,000 at September 30, 2006 compared to $214,000 at December 31, 2005. The increase was mainly due to the increase of amounts receivable and other assets and inventory from December 2005.

Funds used in operations were $1,993,000 and $2,206,000 for the three and nine month periods ended September 30, 2006. For the four and ten month periods ended September 30, 2005, funds generated from operations were $5,029,000 and $8,248,000. 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 $3,538,000 and $15,465,000 for the three and nine month periods ended September 30, 2006 compared to net cash flow used in operating activities of $1,082,000 for the four month period ending September 30, 2005 and the net cash flow generated from operating activities of $298,000 for the ten month period ending September 30, 2005.

Net cash used in investing activities was $9,250,000 and $25,461,000 for the three and nine month periods ended September 30, 2006 compared to $694,000 and $4,757,000 for the four and ten month periods ended September 30, 2005. The gross investment in oil and gas interests for the three and nine month periods ended September 30, 2006 was $18,358,000 and $41,295,000.

At September 30, 2006, share capital was $144,982,000 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 $887,000 is due to the net stock based compensation for the nine month period to September 30, 2006. Contributed surplus was credited in the amount of $1,305,000 for stock compensation expense for the nine month period ended September 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 nine month period ended September 30, 2006, contributed surplus was reduced by an amount of $418,000 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 November 8, 2006 the Company had 49,579,696 common shares outstanding and 1,467,000 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 nine month period ended September 30, 2006, the Company paid $203,000 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 September 30, 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 appraisal and development of its oil and gas interests and new discoveries in the West Gharib block in the Egypt concession, and the Oudeh block and Tishrine-Sheikh Mansour fields in Syria. The thermal enhanced oil recovery pilot tests in Syria commenced during the third quarter of 2006. Initial results have been encouraging, and the pilot tests will continue during the fourth quarter. In Egypt, the Company is completing the drilling of the final exploration targets allowed under the exploration license, which will be completed by the end of 2006. Cash flow from the Egypt operations will continue to fund Egypt's exploration, appraisal and development program. The Company's strategy continues to be to execute an aggressive capital development program of the oil and gas interests in both Syria and Egypt.



Key Data
--------

Three Four Nine Ten Seven
months months months months months
ended ended ended ended ended
September September September September December
30, 2006 30, 2005 30, 2006 30, 2005 31, 2005
--------- --------- --------- --------- --------
Return on equity,
% (1) -3.42% 6.39% -6.47% 8.52% 1.77%
Return on capital
employed, % (2) -3.48% 6.56% -6.53% 8.61% -0.90%
Debt/equity ratio,
%(3) 0% 0% 0% 0% 0%
Equity ratio, %(4) 84% 92% 86% 92% 87%
Share of risk
capital, %(5) 84% 92% 86% 92% 87%
Interest coverage
ratio, %(6) -12794% 27312% -5925% 3136% 4482%
Operating cash
flow/interest
expense, % (7) 2211% 39792% 2627% 6133% 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 Four Nine Ten Seven
months months months months months
ended ended ended ended ended
Sep. 30 Sep. 30 Sep. 30 Sep. 30 Dec. 31
2006 2005 2006 2005 2005
------- -------- ------- ------- -------

Shareholders' equity,
USD(1) 2.41 1.63 2.41 1.63 1.59
Operating cash flow,
USD(2) (0.01) 0.12 0.07 0.23 0.14
Cash flow from
operations (3) (0.04) 0.12 (0.05) 0.20 0.09
Earnings(4) (0.084) 0.083 (0.17) 0.116 0.02
Earnings
(fully diluted)(5) (0.084) 0.083 (0.17) 0.114 0.02
Dividend 0 0 0 0 0
Quoted price at the
end of the financial
period 13.00 10.25 13.00 10.25 8.71
P/E-ratio(6) (155.5) 123.8 (77.8) 88.4 390.6
Number of shares
at financial
period end 49,231,196 44,263,975 49,231,196 44,263,975 44,347,475
Weighted average
number of shares
for the
financial
period(7) 49,208,979 42,576,590 46,612,810 40,508,421 43,271,237
Weighted average
number of shares
for the
financial
period
(fully
diluted)
(5,7) 49,765,503 43,892,508 47,147,254 41,034,788 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 September 30, 2006 and December 31, 2005
(expressed in U.S. dollars)
(Unaudited)
September 30, 2006 December 31, 2005
$ $
Assets
Current Assets
Cash and short-term deposits 30,409,137 16,678,492
Restricted cash (note 2) 7,850,000 16,726,382
Advances to contractor 4,026,813 1,120,717
Amounts receivable and other assets 12,823,117 7,981,340
Inventory 10,515,853 3,280,715
Prepaid expenses 689,462 254,280
--------------------------------------

66,314,382 46,041,926
Oil and gas interests (note 3) 73,239,540 35,796,451

Property, plant and equipment 1,213,941 1,076,578
--------------------------------------

140,767,863 82,914,955
--------------------------------------
--------------------------------------

Liabilities
Current liabilities
Amounts payable and accrued
liabilities 22,069,039 12,423,390
Amounts due to joint venture
partners 35,270 -
--------------------------------------

22,104,309 12,423,390
Shareholders' Equity
Capital stock (note 4) 144,981,507 89,905,794

Contributed surplus (note 4) 6,669,479 5,782,777

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

Deficit (32,811,687) (25,021,261)
--------------------------------------

118,663,554 70,491,565
--------------------------------------

140,767,863 82,914,955
--------------------------------------
--------------------------------------

Approved by the Directors:

William A. Rand Keith Hill
Director Director


Tanganyika Oil Company Ltd.
Consolidated Statements of Changes in Shareholders' Equity
(expressed in U.S. dollars)
(Unaudited)

September 30, Share Tran-
2005 Capital Surplus Deficit slation Total
--------------------------------------------------------------------------

As at June 1,
2005 59,302,193 5,060,385 (25,932,385) (175,745) 38,254,448
Issue of
shares 29,922,455 - - - 29,922,455
Stock based
compensation 180,190 173,296 - - 353,486
Profit for
the period - - 3,526,108 - 3,526,108
----------------------------------------------------------
As at
September
30, 2005 89,404,838 5,233,681 (22,406,277) (175,745) 75,056,497
-----------------------------------------------------------
-----------------------------------------------------------

September 30, Share Tran-
2006 Capital Surplus Deficit slation Total
--------------------------------------------------------------------------

As at
January 1,
2006 89,905,794 5,782,777 (25,021,261) (175,745) 70,491,565
Issue of
shares 54,657,222 - - - 54,657,222
Stock based
compensation 418,491 886,702 - - 1,305,193
Loss for the
period - - (7,790,426) - (7,790,426)
-----------------------------------------------------------
As at
September
30, 2006 144,981,507 6,669,479 (32,811,687) (175,745) 118,663,554
-----------------------------------------------------------
-----------------------------------------------------------


Tanganyika Oil Company Ltd.
Consolidated Statements of Operations and Deficit
(expressed in U.S. dollars)
(Unaudited)

Three Four Nine Ten Seven
months months months months months
ended ended ended ended ended
Sep. 30, Sep. 30, Sep. 30, Sep. 30, Dec. 31,
2006 2005 2006 2005 2005
$ $ $ $ $
Revenue
Sale of
oil 10,193,640 7,426,488 24,413,140 13,914,029 13,009,695
Interest
income 415,253 106,698 884,463 142,498 358,574
Service
income (47,349) 21,743 49,612 55,931 38,302
Other
income - 3,171 - 3,171 3,171
---------- ---------- ---------- ---------- ----------

10,561,544 7,558,100 25,347,215 14,115,629 13,409,742
---------- ---------- ---------- ---------- ----------

Expenses
Production
costs 9,440,654 2,292,001 21,065,895 4,480,537 6,802,305
Depletion 1,518,013 1,034,826 3,852,288 2,607,011 1,750,004
Salaries
and other
benefits 1,549,875 979,044 3,299,905 1,942,457 1,896,902
Travel 387,182 180,342 912,471 231,023 256,655
General
and
adminis-
tration 816,253 460,515 2,945,031 740,897 1,147,428
Management
fees 46,075 58,869 203,268 141,499 104,868
Legal and
accounting 31,801 67,650 166,054 376,508 300,011
Stock-based
compensation 444,165 353,486 1,305,192 1,269,463 1,046,168
Interest and
bank charges 31,913 12,958 129,299 154,726 55,912
Shareholder
information
and transfer
agent 141,339 87,458 341,159 214,496 373,140
Depreciation 160,097 114,106 426,761 140,141 250,637
Foreign
exchange
(gain)
loss 108,980 (1,609,263) (1,509,682) (2,880,163) (1,485,412)
---------- ---------- ---------- ---------- ----------

14,676,347 4,031,992 33,137,641 9,418,595 12,498,618
---------- ---------- ---------- ---------- ----------

Profit (loss)
for the
period (4,114,803) 3,526,108 (7,790,426) 4,697,034 911,124

Deficit -
beginning
of period (28,696,884) (26,028,187) (25,021,261) (27,199,113) (25,932,385)
---------- ---------- ---------- ---------- ----------
Deficit -
end of
period (32,811,687) (22,502,079) (32,811,687) (22,502,079) (25,021,261)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Profit
(loss) per
share
Basic (0.084) 0.083 (0.167) 0.116 0.021
Diluted (0.084) 0.080 (0.167) 0.114 0.021

Weighted
average
number of
shares
outstanding

Basic 49,208,979 42,576,590 46,612,810 40,508,421 43,271,237
Diluted 49,765,503 43,892,508 47,147,254 41,034,788 43,624,537


Tanganyika Oil Company Ltd.
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
(Unaudited)
Three months Four months Nine months Ten months
ended ended ended ended
Sep. 30, 2006 Sep. 30, 2005 Sep. 30, 2006 Sep. 30, 2005
$ $ $ $
Cash flows
from operating
activities
Profit (loss)
for the
period (4,114,803) 3,526,108 (7,790,426) 4,697,034
Items not
affecting
cash:
Stock-based
compensation 444,165 353,486 1,305,192 1,269,463
Interest expense - - - 122,382
Depreciation 160,097 114,106 426,761 140,141
Depletion 1,518,013 1,034,826 3,852,288 2,607,011
Unrealized
foreign
exchange loss - - - (164,270)
Effect of
changes in
exchange
rates - - - (423,386)
---------- ---------- ---------- ----------

Funds from
operations (1,992,528) 5,028,526 (2,206,185) 8,248,375
Changes in
non-cash
operating
working
capital:
Changes in
non-cash
balances
related to
operations (1,545,273) (6,111,007) (13,258,923) (7,950,383)
---------- ---------- ---------- ----------

(3,537,801) (1,082,481) (15,465,108) 297,992
---------- ---------- ---------- ----------

Cash flows from
investing
activities
Investment
in oil and
gas interests (18,358,352) (3,500,330) (41,295,377) (4,880,258)
Investment
in property,
plant and
equipment (139,968) (253,850) (564,124) (491,370)
Releases
(pledges)
of bank
guarantees 1,726,984 (608,627) 8,876,381 (3,441,427)
Advance
relating to
exploration
commitment - - - (513,824)
Deposit in
lieu of
guarantee
for
exploration
license - - - 1,437,932
Release of
exploration
commitment - 1,120,000 - 584,064
Changes in
non-cash
balances
related to
investing
activities 7,521,650 2,548,359 7,521,650 2,548,359
---------- ---------- ---------- ----------

(9,249,686) (694,448) (25,461,470) (4,756,524)
---------- ---------- ---------- ----------

Cash flows from
financing
activities
Issuance of
common
shares and
special
warrants 81,107 29,922,455 54,657,223 30,020,505
Repayment of
loan from a
shareholder - - - 79,636
---------- ---------- ---------- ----------

81,107 29,922,455 54,657,223 30,100,141
---------- ---------- ---------- ----------

Increase
(decrease)
in cash and
short-term
deposits (12,706,380) 28,145,526 13,730,645 25,641,609

Cash and
short-term
deposits -
beginning
of period 43,115,517 4,220,427 16,678,492 6,724,344
---------- ---------- ---------- ----------

Cash and
short-term
deposits -
end of
period 30,409,137 32,365,953 30,409,137 32,365,953
---------- ---------- ---------- ----------


Tanganyika Oil Company Ltd.

Notes to the Consolidated Financial Statements

For the Three and Nine months ended September 30, 2006 and Four and Ten months ended September 30, 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 September 30, 2006, restricted cash represents a pledged amount of $7,850,000 against the issuance of a letter of guarantee in favour of the Syrian Petroleum Company (SPC) in connection with the production sharing contracts.



3. Oil and Gas Interests

September 30, 2006
-----------------------------------------
Accumulated
depletion &
Cost write-downs Net book value
-----------------------------------------
Arab Republic of Egypt
Producing oil and gas
properties 14,606,525 11,119,829 3,486,696
Exploration and development
properties 9,910,033 - 9,910,033
-----------------------------------------
24,516,558 11,119,829 13,396,729
-----------------------------------------
-----------------------------------------
North Africa
-----------------------------------------
Exploration and development
properties 4,233,259 - 4,233,259
-----------------------------------------
-----------------------------------------
Syrian Arab Republic
-----------------------------------------
Producing oil and gas
properties 60,260,340 4,650,788 55,609,552
-----------------------------------------
-----------------------------------------
Total 89,010,157 15,770,617 73,239,540
-----------------------------------------


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



September 30, 2006
-------------------------------------------
Number Amount
-------------------------------------------
Balance, beginning of period 49,197,696 $ 144,813,263
Private placements, net - (178,840)
Shares issued for North
Africa acquisition - -
Exercise of options 33,500 347,084
-------------------------------------------
Balance, end of period 49,231,196 $ 144,981,507
-------------------------------------------

(b) Contributed Surplus - Stock Based Compensation

September 30, 2006 December 31, 2005
-------------------------------------------
Balance, beginning of period $ 6,312,451 $ 5,060,385
Stock based compensation 444,165 1,046,168
Transfer to share capital on
exercise of options (87,137) (323,776)
-------------------------------------------
Balance, end of period $ 6,669,479 $ 5,782,777
-------------------------------------------

(c) Stock Options Continuity
-------------------------------------------
September 30, 2006
-------------------------------------------
Weighted Average
Number Exercise Price CDN $
-------------------------------------------
Balance, beginning of period 1,603,000 $ 7.84
Granted 125,000 $ 11.00
Exercised (33,500) $ 8.64
-------------------------------------------
Balance, end of period 1,694,500 $ 8.05
-------------------------------------------

At September 30, 2006 there were 1,609,500 exercisable options.

-----------------------
Three Months Ended
September 30, 2006
-----------------------
Weighted average fair value of stock options
granted (per option) CDN$ 3.34
Expected life of stock options (years) .93
Expected volatility (weighted average) 52.79%
Risk free rate of return (weighted average) 3.99%
Expected dividend yield 0


5. Related Party Transactions

The Company has entered into transactions with related parties, which were measured at the exchange amounts. For the nine month period ending September 30, 2006, the Company paid $203,268 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 September 30, 2006

Egypt and
Syria North Africa Corporate Total
-------------------------------------------------------
Sale of oil (6,824,654) (3,368,986) - (10,193,640)
Interest income (32,772) - (382,481) (415,253)
Service loss - 47,349 - 47,349
Production cost
and depletion 10,205,671 752,996 - 10,958,667
Depreciation 118,891 23,314 17,892 160,097
Foreign exchange
(gain)/loss (28,715) (315) 138,010 108,980
Other expenses 1,997,747 31,815 1,419,041 3,448,603
-------------------------------------------------------
Segment (profit)
loss 5,436,168 (2,513,827) 1,192,462 4,114,803
-------------------------------------------------------
Segment assets 42,696,377 24,989,539 73,081,947 140,767,863
-------------------------------------------------------
Segment
expenditures
Oil and gas
interests 16,457,321 1,901,031 - 18,358,352
Property, plant
and equipment 117,494 4,127 18,347 139,968
-------------------------------------------------------
16,574,815 1,905,158 18,347 18,498,320
-------------------------------------------------------

Four months ended September 30, 2005

Syria Egypt Corporate Total
-------------------------------------------------------
Sale of oil (3,944,399) (3,482,089) - (7,426,488)
Interest income (1,261) (5,333) (100,104) (106,698)
Service income - (21,743) - (21,743)
Other income - (3,171) - (3,171)
Production cost
and depletion 2,418,626 908,201 - 3,326,827
Depreciation 82,965 13,018 18,123 114,106
Foreign exchange
(gain) (13,867) (10,855) (1,584,541) (1,609,263)
Other expenses 811,893 91,092 1,297,337 2,200,322
-------------------------------------------------------
Segment (profit) (646,043) (2,510,880) (369,185) (3,526,108)
-------------------------------------------------------
Segment assets 33,005,941 15,281,041 30,368,490 78,655,472
-------------------------------------------------------
Segment expenditures
Oil and gas
interests 2,596,324 904,006 - 3,500,330
Property, plant
and equipment 73,400 52,336 128,114 253,850
-------------------------------------------------------
2,669,724 956,342 128,114 3,754,180
-------------------------------------------------------


Nine months ended September 30, 2006

Egypt and
Syria North Africa Corporate Total
-------------------------------------------------------
Sale of oil (14,999,639) (9,413,501) - (24,413,140)
Interest income (32,772) (860) (850,831) (884,463)
Service income - (49,612) - (49,612)
Production cost
and depletion 22,337,486 2,580,697 - 24,918,183
Depreciation 305,153 68,748 52,860 426,761
Foreign exchange
(gain) (20,231) (379) (1,489,072) (1,509,682)
Other expenses 4,963,643 289,059 4,049,677 9,302,379
-------------------------------------------------------
Segment (profit)
loss 12,553,640 (6,525,848) 1,762,634 7,790,426
-------------------------------------------------------
Segment assets 42,696,377 24,989,539 73,081,947 140,767,863
-------------------------------------------------------
Segment expenditures
Oil and gas
interests 30,330,624 10,964,753 - 41,295,377
Property, plant
and equipment 369,667 111,955 82,502 564,124
-------------------------------------------------------
30,700,291 11,076,708 82,502 41,859,501
-------------------------------------------------------

Ten months ended September 30, 2005

Syria Egypt Corporate Total
-------------------------------------------------------
Sale of oil (7,640,763) (6,273,266) - (13,914,029)
Interest income (2,722) (5,333) (134,443) (142,498)
Service income - (55,931) - (55,931)
Other income - (3,171) - (3,171)
Production cost
and depletion 4,613,690 2,473,858 - 7,087,548
Depreciation 85,192 36,826 18,123 140,141
Foreign exchange
(gain)/loss 693,764 (419,161) (3,154,764) (2,880,161)
Other expenses 1,621,598 198,068 3,251,401 5,071,067
-------------------------------------------------------
Segment (profit) (629,241) (4,048,110) (19,683) (4,697,034)
-------------------------------------------------------
Segment assets 33,005,941 15,281,041 30,368,490 78,655,472
-------------------------------------------------------
Segment expenditures
Oil and gas
interests 3,022,268 1,857,990 - 4,880,258
Property, plant
and equipment 223,090 140,167 128,113 491,370
-------------------------------------------------------
3,245,358 1,998,157 128,113 5,371,628
-------------------------------------------------------


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) (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 15,072,021 3,875,005 - 18,947,026
Property, plant
and equipment 493,355 126,722 210,540 830,617
-------------------------------------------------------
15,565,376 4,001,727 210,540 19,777,643
-------------------------------------------------------


7. Supplemental Cash Flow

Information

Three Four Nine Ten
months months months months
ending ending ending ending
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
--------------------------------------------------------------------------
Changes in non-cash
operating working
capital:
Amounts receivable
and other assets
and advances (968,737) (2,871,159) (7,747,872) (5,337,540)
Inventory 469,773 (421,634) (7,235,138) (552,992)
Due to (from)
joint venture
partners (32,545) (171,182) 35,270 (179,184)
Prepaid expenses 52,742 - (435,182) (5,133)
Amounts payable
and accrued
liabilities 6,455,144 (98,673) 9,645,649 682,990
Due to directors - - - (10,165)
-------------------------------------------------------
5,976,377 (3,562,648) (5,737,273) (5,402,024)

Changes in non-cash
working capital
relating to:
Operating
activities (1,545,273) (6,111,007) (13,258,923) (7,950,383)
Investing
activities 7,521,650 2,548,359 7,521,650 2,548,359
-------------------------------------------------------
5,976,377 (3,562,648) (5,737,273) (5,402,024)
-------------------------------------------------------


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

September 30, September 30,
2006 2005
--------------------------------------------------------------------------
Net result according to the financial
statements prepared under Canadian
GAAP (4,114,803) 4,697,034
Effect of assets impairment (23,153) (374,828)
--------------------------------------------------------------------------
Net result in accordance with IFRS (4,137,956) 4,322,206
--------------------------------------------------------------------------

Shareholders' equity according to the
financial statements prepared under
Canadian GAAP 118,663,554 72,056,497
--------------------------------------------------------------------------
Items increasing (decreasing) reported
shareholders' equity:
Effect of adjustment brought forward 1,654,096 2,008,192
Effect of asset impairment (23,153) (212,325)
--------------------------------------------------------------------------
Net adjustments 1,630,943 1,795,867
--------------------------------------------------------------------------
Shareholders' equity - IFRS 120,294,497 73,852,364
--------------------------------------------------------------------------


SUPPLEMENTARY INFORMATION

1. LIST OF DIRECTORS AND OFFICERS AT SEPTEMBER 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. FINANCIAL INFORMATION
The report for the fourth quarter 2006 will be published on February
27, 2007.

3. OTHER INFORMATION
Address (Corporate Office)
1400, 700 -- 4(th) Avenue S.W.
Calgary, Alberta T2P 3J4 Canada

Telephone: 1.403.663.2999
Fax: 1.403.261.1007

Website: www.tanganyikaoil.com

The corporate number of the Company is 318368-8



Contact Information

  • Tanganyika Oil Company Ltd.
    Sophia Shane
    (604) 689-7842
    (604) 689-4250 (FAX)
    Website: www.tanganyikaoil.com