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Exploration & Production

Report and Accounts 2008Year Ended 31 December

Hardy Oil and Gas plcHardy Oil and Gas plcLincoln House137-143 Hammersmith RoadLondonW14 0QL www.hardyoil.com

Hardy Oil and Gas plc

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39 Independent Auditors’ Report41 Consolidated Income Statement 42 Consolidated Statement of

Changes in Equity43 Consolidated Balance Sheet44 Consolidated Statement of

Cash Flows 45 Notes to the Consolidated

Financial Statements63 Parent Company Statement of

Changes in Equity64 Parent Company Balance Sheet65 Parent Company Statement of

Cash Flow 66 Notes to the Parent Company

Financial Statements

73 Group Reserves and Resources76 Company InformationIBC Definitions and Glossary of Terms

IFC Who We Are1 Highlights2 Hardy at a Glance 4 Chairman and

Chief Executive’s Statement8 Corporate Strategy

10 Review of Operations16 Financial Review 20 Corporate Social Responsibility22 Risk and Uncertainties

24 Board of Directors 26 Corporate Governance Statement31 Directors’ Report34 Directors’ Remuneration Report

Who We Are

Group Overview Financial Statements

Business Review

Governance

Hardy Oil and Gas plc is an upstream international oil and gas company whose assets are principally in India. Its portfolio includes a blend of exploration, appraisal, development, and production assets.

Hardy’s goal is to evaluate and exploit its asset base with a view to creating significant value for its shareholders.

Definitions:AFE: Authority for expenditure

AIM: The market of that name operated by the London Stock Exchange

Assam block: Licence AS-ONN-2000/1

Bayelsa: Bayelsa Oil Company Limited

Board: The Board of Directors of Hardy Oil and Gas plc

the Company: Hardy Oil and Gas plc

CPCL: Chennai Petroleum Company Limited, formerly known as Madras Refinery Limited

CPR: Competent persons report

D3: Licence KG-DWN-2003/1 awarded in NELP V

D9: licence KG-DWN-2001/1 awarded in NELP III

Deepwater Expedition: Operated by Transocean Inc, the Deepwater Expedition is a self-propelled dynamically positioned drillship capable of drilling in water depths up to 10,000 feet

DGH: Directorate General of Hydrocarbons

Dhirubhai 33: Gas discovery on GS-01-B1 well

Dhirubhai 39: Gas discovery on KGV-D3-A1 well

Dhirubhai 41: Gas discovery on KGV-D3-B1 well

DPR: Nigerian Department of Petroleum Resources

Emerald: Emerald Energy Resources Limited

FCA: Fellow of the Institute of Chartered Accountants

FDP: Field development plan

FEED: Front end engineering study

FSO: Floating storage and offloading vessel

GAIL: Gas Authority of India Limited

Ganesha: Gas discovery on Fan-A1 well located in CY-OS/2

GCA: Gaffney, Cline & Associates Ltd.

GOR: Gas to oil ratio

Group: The Company and its subsidiaries

GS-01: Licence GS-OSN-2000/1 awarded under NELP II

GXT ION: GX Technology Corporation

H2: Second half of the year

Hardy: Hardy Oil and Gas plc

HEPI: Hardy Exploration & Production (India) Inc.

HOEC: Hindustan Oil Exploration Company Limited

HON: Hardy Oil Nigeria Limited

HSE: Health, safety and environment

IFRS: International Financial Reporting Standards

IPO: Initial public offering

KG Basin: Krishna Godavari sedimentary basin comprising an area on the southeast India continental shelf

London Stock Exchange: London Stock Exchange plc

LTA: Lost time accident

Main Market: Official List of the London Stock Exchange’s market for listed securities

Management Committee: As per India PSC’s the management committee comprises representatives of each participating interest holder, DGH and the Ministry of Petroleum and Natural Gas of India

Millenium: Millenium Oil and Gas Company Limited

MOU: Memorandum of understanding

NELP: New Exploration Licensing Policy of the Ministry of Petroleum and Natural Gas of India

Operating Committee: As per India PSC’s the operating committee comprises representatives of the various participating interest holders in the licence

OML: Oil mining licence

Ordinary Share: The ordinary share of US$ 0.01 each in the capital of the Company

PSC: Production sharing contract

PY-3: Licence CY-OS-90/1

Reliance: Reliance Industries Limited

SPDC: Shell Petroleum Development Company of Nigeria

UK: United Kingdom

US: United States of America

Glossary of terms:$: United States dollars

2D/3D: Two dimensional/three dimensional

2P: Proven plus probable

API°: American Petroleum Institute gravity

AVO: Amplitude variations with offset

BOP: Blow-out preventer

bwpd: Barrels of water per day

Contingent Resources: Those quantities of petroleum estimates, as of a given date, to be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable due to one or more contingencies

Prospective Resources: Prospective Resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations

DST: Drill stem test

DWT: Dead weight tonne


GIIP: Gas initially in place


km: Kilometre

km2: Kilometre squared

lkm: Line kilometre

m: Metre

MDRT: Measured depth from the rotary table

MDT: Modular formation dynamics tester

MMscfd: Million standard cubic feet per day

MMscmd: Million standard cubic metres per day

MMstbd: Million stock tank barrels per day

PSDM: Pre-stack depth migration

psi: Pounds per square inch

scf: Standard cubic feet

scfd: Standard cubic feet per day

SPM: Single point mooring

stb: Stock tank barrel

stbd: Stock tank barrel per day

TCF: Trillion cubic feet

TVD: Total vertical depth

TVDRT: Total vertical depth from rotary table

Definitions and Glossary of Terms

Supplementary Information

➜ Two gas discoveries (Dhirubhai 39 and 41) on the D3 exploration block

➜ Acquired additional 1,165 km2 of 3D seismic data on the GS-01 block

➜ Added the onshore petroleum exploration licence AS-OON-2000/1 located in Assam (10% PI) in partnership with Reliance

➜ Farmed out 20% working interest in Oza to fund the field initial development programme

➜ Hardy’s net participating interest average daily production for FY 2008 was 458 stbd (FY 2007: 747 stbd)

2008 ➜ Profit before taxation of $12.4 million* (2007: $10.6 million*)➜ Cash flow from operating activities $1.6 million† (2007: $2.6 million†)➜ Capital expenditure of $31.6 million (2007: $32.2 million)➜ Cash and short term investments at 31 December 2008

of $30.1 million (2007: $31.2 million)

* Including gain on sale of investment † Before changes in non-cash working capital

➜ D3: Drilling of third exploration well on the D3 block expected in H2 2009; completion of 3D seismic acquisition programme on the D3 block in Q1 2009

➜ Technical review: Publication of a third party technical review updating the Company’s D9, D3 and Assam exploration block potential is anticipated by the end of Q2 2009

➜ D9: The joint venture budget has provided for the drilling of one exploration well in the 2009 calendar year

2009 (to date)

➜ Commenced 3D seismic acquisition programme for D3 exploration block

➜ D3 appraisal programme submitted to DGH for review➜ PY3-PD4 re-entry – the well was completed with a gas lift valve

for future oil production once gas lift and compression facilities are installed

➜ Commenced 2D seismic acquisition programme for Assam exploration block

Highlights

The potential represented by our D3 discoveries is a major contributor

to significantly de-risking Hardy’s growth potential from its exploration blocks in the Krishna Godavari basin.

E.P. MortimerChairman

Operational Highlights Financial Highlights

Outlook

Commitment to our strategy and stated goals of organic growth, through exploration of our India assets, produced encouraging results in 2008.

Hardy Oil and Gas plc Annual Report 2008 1

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Hardy Oil and Gas plc has assembled an India focused exploration portfolio that offers the potential to transform shareholder value. The Company has two blocks in the prolific Krishna Godavari basin of which the Company carries multi-tcf resource potential. Hardy is a qualified offshore operator and is currently the operator of an offshore producing asset (PY-3) which is the primary contributor of Hardy’s annual revenue.

Assam Arakan BasinLocated in the northeast of India, the Assam Arakan basin is a proven oil province with many producing oil and gas fields.

Hardy’s block covers an underexplored area located north of the Brahmaputra river and southeast of the basin’s producing fields. Exploration is in the early stages with 2D seismic data being acquired.

Assam (AS-ONN-2000/1)➜ Onshore exploration licence (PI 10%)➜ Reliance operated /area 5,754 km2

(equivalent to 24 North sea blocks)

➜ Minimum work programme should be completed during 2009

See page 13

Cauvery BasinThe Cauvery basin is located in the southeast of India. The basin is a proven oil and gas province with the PY-3 (Oil) and PY-1 (Gas) fields.

Early in 2007 the Company announced its Ganesha gas discovery, which Hardy is currently appraising to determine commerciality.

PY-3 field optimisation is ongoing, the field has been producing since 1997.

PY-3 (CY-OS-90/1)➜ Offshore oil field (PI 18%)➜ Hardy operated/secondary recovery

with water-flood➜ Current production ~ 3,000 stbd (Gross)

CY-OS/2➜ Hardy operated/area 859 km2

➜ Offshore exploration licence (PI 75%)➜ Ganesha non-associated gas discovery➜ Appraisal programme ongoing See page 13

Located on the east coast of India, the KG basin has proven to be a prolific hydrocarbon province with many world class discoveries. D6 gas production is expected to reach 80 MMscmd in 2010, essentially doubling India’s domestic production. Hardy is waiting to drill its first exploration well on the D9 block.

Two exploration wells on Hardy’s D3 block have resulted in consecutive discoveries. The results significantly enhanced the overall prospectivity of the block.

D3 (KG-DWN-2003/1)➜ Reliance operated/area 3,288 km2


➜ Offshore exploration licence (PI 10%) ➜ 2008 Dhirubhai 39 & 41 gas discoveries➜ Dhirubhai 39 tested at 38 MMscfd

D9 (KG-DWN-2001/1)➜ Reliance operated/area 11,605 km2


➜ Offshore exploration licence (PI 10%)➜ First well expected in 2009

Krishna Godavari Basin

See page 12

Group Overview:

Hardy at a Glance

2 Hardy Oil and Gas plc Annual Report 2008

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The goal of Hardy’s India focused exploration activity is to discover commercial quantities of hydrocarbons (oil and gas). The Company creates value for its shareholders by undertaking activities that reduce the overall risk of the exploration cycle.This is accomplished by conducting extensive geological and geophysical studies, acquiring seismic and other data, and the implementation of robust, modern technology and scientific analysis to identify prospects and select optimal drilling locations.

Hardy also leverages its experience as a qualified offshore operator to mitigate the level of risked capital incurred in exploration activities.

Located in south Nigeria, the Delta is a prolific oil bearing basin with significant onshore production. The onshore basin is predominantly a mangrove swamp environment.

Hardy’s assets are part of the Nigerian Government’s initiative to develop Nigerian content and expertise in the exploration and development of oil and gas deposits.

Robust community relations are integral to the operational sustainability of Hardy’s fields.

Oza (within OML 11)➜ Development field (WI 20%)➜ Millennium operated/area 23 km2

➜ 2008 Hardy farmed-out its obligation to fund the initial development programme

Atala (within OML 46)➜ Development field (WI 20%)➜ Bayelsa operated/area 34 km2

➜ The field offers substantial oil and gas resource potential

Niger Delta Basin

See page 15

Saurashtra BasinLocated in the relatively shallow waters off the west coast of India, the Saurashtra basin has many significant producing oil and gas fields. Of note is the giant Bombay High oil field.

The Dhirubhai 31 gas discovery is currently under appraisal to establish commerciality. The licence is in relatively close proximity to existing infrastructure that leads to established gas markets in the state of Gujarat with growing energy demand.

GS-01 (GS-OSN-2000/1)➜ Offshore exploration licence (PI 10%)➜ Reliance operated/appraisal area

5,890 km2 (equivalent to 24 North sea blocks)

➜ Dhirubhai 31 gas discovery (tested at 18.6 MMscfd and 415 stbd)

➜ G&G studies for appraisal of discovery is ongoing

See page 12

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3Hardy Oil and Gas plc Annual Report 2008

Overview

The current economic downturn, and fall in oil prices, presents a challenging outlook for the upstream oil and gas industry. Despite these conditions we are pleased to recognise 2008 as another positive year for Hardy. We anticipate 2009 to be an important year for Hardy, with further drilling planned on our Krishna Godavari basin exploration blocks.

The Group achieved several major milestones through the year with positive exploration results, expansion of our board and the move of our share listing to the Main Market. Of particular note are the Dhirubhai 39 and 41 gas discoveries on the Company’s D3 block in the KG basin, and the recent submission of an appraisal programme for the D3 discoveries. The discoveries have reduced the overall geological risk of the block and are an encouraging start to a six-well exploration programme.

Key Financial ResultsDuring 2008 the Company increased revenues due to higher oil prices (despite reduced production), derived positive cash flow from operations (before non-cash working capital changes), and realised a significant infusion of capital through liquidation of its investment in HOEC, resulting in another profitable year. The Company completed the year with cash and short term investments of approximately $30 million and no long term debt.

Revenue (after profit oil) for the year ended 31 December 2008 amounted to $17.3 million compared with $11.8 million for 2007. Sales oil of 179,524 stb was realised for the year ended 31 December 2008 (2007: 232,870 stb); the average price realised was $104.44 per stb (2007: $66.65 per stb).

Group Overview:

Chairman and Chief Executive’s Statement

$17.3 mRevenue (2007: $11.8 million)

Commitment to our strategy and stated goals of organic growth through exploration of our India assets produced encouraging results in 2008.E.P. MortimerChairman

The Company’s two key exploration assets are located in the Krishna Godavari basin, a prolific proven hydrocarbon province, with world class discoveries.Sastry KarraChief Executive

Hardy Oil and Gas plc Annual Report 20084

The drilling of an additional lateral well, via the re-entry of the producing PY-3-PD4 well was completed in February 2009. With the assistance of nitrogen lift, the well flowed at 700 stbd of oil with 30% water-cut, however, the well was unable to be reactivated as a self flowing well. The well has been completed with a gas lift valve to allow for future oil production when gas lift compression facilities are installed on the FPU.

CY-OS/2

The Company submitted a proposal to revise the appraisal programme, for the CY-OS/2 block’s Ganesha gas discovery, to reduce three firm and two contingent wells to one firm and one contingent well. The revised work programme was approved by the CY-OS/2 Operating Committee and reviewed by the Management Committee in October 2008. The CY-OS/2 joint venture is working with the Ministry of Petroleum and Natural Gas of the Government of India and DGH for an extension of the exploration licence to January 2012 to establish commerciality.

India – (Non-operated)Results on our non-operated exploration assets have been encouraging as we continue to pursue our strategy of de-risking this portfolio.

KG Basin

The Company’s two key exploration assets are located in the Krishna Godavari basin, a prolific proven hydrocarbon province, with world class discoveries since the introduction of India’s New Exploration Licensing Policy. Subsequent substantial private sector capital investment in offshore field development and onshore infrastructure is facilitating further exploration and development. The Reliance operated D6 block is a current example with production expected to reach 80 MMcmd by 2010, effectively doubling India’s domestic natural gas production capacity. Continued investment in the basin promises to unlock the substantial resource potential of this prolific basin.

The Company liquidated its entire holding in HOEC during 2008 and 2007, realising cash proceeds of $41.4 million and a pre-tax gain of $13.0 million and $10.2 million for 2008 and 2007 respectively.

Profit before taxation amounted to $12.4 million in 2008 compared to $10.6 million in 2007. The Company’s fully diluted earnings per share amounted to $0.11 in 2008 (2007: $0.13).

Cash flow from operating activities (before changes in non-cash working capital) amounted to $1.6 million in 2008 compared to $2.6 million in 2007.

Total capital expenditure amounted to $31.6 million (2007: $32.2 million), principally on the drilling of four wells on the D3 and GS-01 blocks, the acquisition of 3D seismic data and partial drilling of a development well on the PY-3 field, which was completed in February 2009.

Operational OverviewWe completed the majority of our planned programme for 2008. Our activity was focused on our exploration blocks in India with the drilling of four exploration wells and the acquisition of over 1,100 km2 of additional 3D seismic data on one of our exploration blocks in India.

India (Operated)PY-3 – The field’s production for 2008 was 0.93 MMstb of oil (2007: 1.51 MMstb). Hardy is the operator and holds an 18% participating interest. The daily net average production on a participating interest basis was 458 stbd (2007: 747 stbd). The fall in production is attributed to the suspension of well PD-3-RL (which was converted into a water injector), natural decline, and shut-in of the field for unplanned maintenance due to cyclonic weather conditions. The gross average daily production of the field for January and February of 2009 was 2,846 stbd and 2,797 stbd respectively. Hardy anticipates PY-3’s gross daily production for 2009 to average 3,000 stbd.

$30.1 mCash and short term investments (2007: $31.2m)

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Annual Report 2008 5

D3

Exploration drilling commenced on this block in December 2007 and we were pleased to announce two successive gas discoveries on the block, with encouraging initial testing results including an observed flow rate of 38.1 MMscfd from the KDVD3-A1 well (Dhirubhai 39). An appraisal programme for the Dhirubhai 39 and 41 discoveries has been approved by the Operating Committee and is under consideration by the DGH.

The operator recently commenced the final 3D seismic acquisition programme on the block. Upon completion, the entire block will be covered by 3D seismic data. The block was acquired with 210 km2 of which the first two well locations were selected. In 2007, the operator acquired 1,900 km2 of 3D seismic data.

D3 is an important block within Hardy’s asset portfolio, representing a significant proportion of Hardy’s overall resource potential. The drilling of the third well on the block is expected in the second half of 2009 with further drilling expected in 2010.

D9

Due to the industry-wide shortage of drill ships capable of operating in water depths greater than 2,000 m, delays have been experienced on the D9 exploration licence. An ultra deepwater drill ship, Deepwater Expedition, arrived in Indian waters in August 2008 and is currently operating on the adjacent D6 block. Reliance has issued an authority for expenditure and the joint venture has provided for the drilling of one well in the 2009 calendar year. Timing will continue to be dependent on Reliance’s scheduled operations and commitments.

GS-01

Results on the GS-01 block were disappointing for 2008 with two wells (M1 and S1) being plugged and abandoned. However, the GS-01 Management Committee reviewed and adopted an appraisal programme for the GS01-B1 gas and condensate discovery (Dhirubhai – 33). With an effective term through to May 2010, the appraisal area comprises 5,890 km2. The GS-01 joint venture will be making a decision on further appraisal drilling, after completion of a planned geological and geophysical review, in a few months time.

Assam

Early in 2008, the company was issued (jointly with Reliance) the onshore petroleum exploration licence AS-ONN-2000/1 in Assam. We are delighted with the Company’s continued partnership with Reliance. This is the fourth block that Hardy holds in partnership with Reliance and the Company’s only onshore asset in India. A 2D seismic acquisition programme commenced prior to the end of 2008 and is expected to be complete in the first half of 2009.

NigeriaOza

In April 2008, the Company announced that it had entered into an agreement to farm-out a 20% interest in the Oza block to a local Nigerian company, which has agreed to assume Hardy’s financial obligations in the funding of the Oza field initial development programme. The Company retains a 20% working interest in the block.

Atala

Securing the necessary drilling equipment for the planned re-entry and testing of Atala-1 continues to be challenging. We will continue to work closely with the operator to source the necessary equipment.

CorporateOn 20 February 2008, the Company’s shares began trading on the London Stock Exchange’s market for listed securities (‘Main Market’). The decision to admit Hardy’s shares to the Main Market was taken to increase the Company’s profile and liquidity of its Ordinary Shares while increasing access to capital to fund its future exploration and development expenditures.

With our commitment to continually enhance our corporate governance practices, on 24 October 2008, the Company was pleased to appoint Mr Ian Bruce FCA as an independent non executive director. His strong financial background and extensive industry experience are a valuable and timely addition to our Board as we experience a challenging economic environment.

We also made a number of changes to the composition of the Board committees. Mr Pradip Shah has been appointed to chair the remuneration committee; Mr Ian Bruce has been appointed to the audit committee; Dr. Carol Bell has been appointed to the remuneration committee; and Mr Mortimer and Mr Karra are no longer members of the audit and remuneration committees respectively.

Group Overview:

Chairman and Chief Executive’s Statement continued


The appraisal programme for the Company’s D3 block, also in the KG basin, has been submitted to the joint venture Management Committee for consideration.

With the main D6 gas field producing, we anticipate the operator’s focus, more importantly the ultra-deepwater drill ship ‘Deepwater Expedition’, to become available to commence exploration drilling on several other, Reliance operated, deep water blocks in the KG basin. We will be watching with great anticipation the commencement of the first exploration well on the Company’s D9 block where we carry significant resource potential.

With the KG basin activity in mind, we have commissioned a technical review, by Gaffney, Cline & Associates Ltd, for our D3, D9 and Assam exploration blocks, and we look forward to publishing the results by the end of the second quarter of 2009.

The Company has adequate resources to enable it to undertake its planned work programme over the next twelve months. The Company also has the ability to raise additional capital, if required, to fund its ongoing work programmes.

The Board looks to the balance of 2009 with a renewed focus on activities that have the potential to significantly de-risk our exploration portfolio in the KG basin in India. We are confident that cash conservation and disciplined investment will see our company through this challenging economic environment. We are optimistic of the potential of the Company’s asset portfolio and anticipate that exploration drilling will be the catalyst for a step change in shareholder value through 2010. The Company is well positioned to see itself through the key exploration activities.

E.P. Mortimer Sastry KarraChairman Chief Executive18 March 2009

2009 ProgrammeIn 2009, the Company will continue to focus on organic growth as our primary strategy to create shareholder value. The majority of our activity will be focused on enhancing development plans for 2010 and non-operated exploration. We are looking forward to an active 2009 with the following plan of work:

Activity

Block Timing 2009

D3 Complete acquisition of 1,150 km2 of 3D seismic 1st Quarter

Drilling of third exploration well 2nd Half

D9 Drilling of one exploration well During the year

GS-01 Contingent appraisal well for Dhuribhai 33 gas discovery TBD

Assam Complete acquisition of 450 lkm of 2D seismic 2nd Quarter

CY-OS/2 Finalisation of extension for appraisal of Ganesha gas discovery 3rd Quarter

PY-3 Production/Geoscience and Engineering studies Ongoing

Oza Commencement of field tie-in 3rd Quarter

Atala Re-entry and testing of Atala-1 TBD

The Company has commissioned a third party technical report for our KG basin blocks (D9 and D3) and the recently added Assam block. The report is expected to be completed by the end of the second quarter of 2009.

Current Trading and OutlookThe global economic downturn and lower oil prices preset adverse conditions for the industry, and Hardy, in the coming year. We are able to defer non-committed capital projects to 2010 and are implementing measures with a focus on cash conservation through 2009 whilst maintaining high impact activities. Our conservative strategy will focus capital expenditure on high impact operations, such as exploration drilling on our two KG basin assets D3 and D9.

In 2009 the KG basin will mark a significant step forward in reducing India’s dependence on foreign energy supply to meet the needs of its growing economy, with approximately 40 MMscmd from the Reliance operated D6 block off the east coast of India, expected in the second quarter and ramping up to 80 MMscmd by 2010. As a result India’s domestic gas production capacity will be effectively doubled.

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The Company, initially funded through private equity, publicly listed its shares in June 2005. Since the IPO, the Company has accessed capital through successive private placings to fund its ongoing capital programmes. The Company graduated to the Main Market of the London Stock Exchange in 2008 to enhance liquidity and increase access to capital. Through a targeted investor relations strategy, the Company has developed a top tier shareholder base comprising several prominent investment funds with long term investment mandates.

The Company endeavours to mitigate its capital exposure by maintaining lower participating interest in higher risk exploration and appraisal activities and maintaining investment in low risk production and development blocks. The Company funds its exploration and appraisal activities through equity financing, free cash flow and farmouts. The Company presently has no debt. The Company will consider debt financing for low risk development and production projects in the future.

4. Access to Capital and Capital Allocation

Hardy was founded on the premise that India offers a unique investment case for oil and gas exploration and production companies. Large areas of underexplored basins are available for exploration. India’s New Exploration Licensing Policy (NELP) offers globally competitive fiscal terms and stability. As one of the world’s fastest growing economies, India presents growing domestic demand offering market proximity for monetisation of future hydrocarbon discoveries.

3. Growth Through Exploration

Group Overview:

Corporate Strategy

The Company has interests in exploration blocks that offer substantial Prospective Resources potential. Hardy focuses principally on organic growth mainly in India. This is derived by de-risking its existing portfolio, maximising recovery of its producing asset and adding new exploration assets selectively (by bidding under NELP rounds and other new ventures).

Our Strategy

To be a profitable independent exploration and production company in India and deliver step change growth in shareholder value through the discovery of hydrocarbons.

Our Vision

Knowledge and Relationships2.

With over ten years of experience as an operator in India, Hardy has developed an experienced technical team with in-depth knowledge of India’s prospective sedimentary basins.

The Company has developed key strategic relationships with governments in India to mitigate geopolitical risks. Hardy continues to build relationships with national oil companies, local service providers, and peers to maintain a sustainable competitive advantage. Of note is the Company’s long standing relationship with Reliance Industries Limited in which the companies jointly hold interests in four of Hardy’s five exploration blocks. Reliance is the largest listed company in India and has had significant exploration success to date, particularly in the Krishna Godavari basin off the east coast of India.

The Company has committed to work closely with communities directly, or indirectly through joint venture mandates, to ensure our activities result in positive, tangible improvements to the communities we operate in and mitigate adverse environmental impact.

1. Geographic Focus


This composition provides the platform for sound corporate governance and robust leadership in implementing the Company’s strategy to meet its stated goals and objectives.

Hardy’s employees and consultants play an integral part in executing its strategy and the overall success and sustainability of the organisation. The Company has a highly skilled and dedicated workforce and places great emphasis on attracting and retaining quality staff. As part of our ongoing commitment to promote career development and enhance competencies, we offer our professional staff access to relevant training schemes and courses. We also encourage membership in appropriate professional bodies.

As an international oil and gas company, we facilitate the development of leadership from the communities in which we operate. There is a large pool of qualified upstream oil and gas exploration and production professionals in the areas in which we operate, and we are committed to building and developing our teams from these talent pools. This is particularly highlighted in India where the majority of our professional staff are citizens of India.

The Company holds its employees at all levels to a high standard and expects the conduct of its employees to reflect mutual respect, tolerance of cultural differences, adherence to corporate code of conduct and ambition to excel in their various disciplines.

Our People

Hardy’s Board of Directors comprises individuals with extensive direct industry experience balanced with strong technical and financial backgrounds.

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The Company’s operations in India are conducted through its wholly owned subsidiary Hardy Exploration & Production (India) Inc. (HEPI). The Company’s operations in Nigeria are conducted through its wholly owned subsidiary Hardy Oil Nigeria Limited (HON).

2008 PerformanceHardy had an excellent start to 2008 with two gas discoveries on our D3 block in the KG basin and had an active operations programme for the remainder of the year.

At the beginning of 2008 the Company planned to drill four exploration wells, one to three appraisal wells, acquire 2,100 km2 of 3D seismic data and acquire 500 lkm of 2D seismic data in India. During 2008, the Company had participated in the drilling of four exploration wells (KGV-D3-A1 and B1, GS01-S1 and M1), commenced the drilling of a development well (PY-3-D4-RL) and acquired over 1,100 km2 of 3D seismic data over the GS-01 exploration blocks.

In Nigeria the Company planned to conduct a work-over of one well and start installation of a pipeline. The Company now plans to initiate the installation of the pipeline in the second half of 2009.

The table below provides a brief comparison of our stated operational objectives for 2008 and our subsequent accomplishments through the year.

Block Projection Execution

D3 Drill two wells, processing Drilled two exploration wells and interpretation of 3D seismic programme acquired 1,200 km2 3D commenced Q1 2009 seismic data

D3 Submission of appraisal Appraisal programme was programme for submitted in February 2009 Dhirubhai 39 to DGH for review and 41 discoveries

D9 Commencement of Drilling deferred to 2009 exploration drilling due to rig shortage programme

GS-01 Drilling of three Drilled two exploration wells exploration wells. Acquired 1,165 km2 Acquire 1,000 km2 of 3D seismic data of 3D seismic data

PY-3 No operations planned Commenced re-entry of PD-4 well

CY-OS/2 Commencement of Revised appraisal appraisal drilling to programme and assess Ganesha applied for an extension discovery

Business Review:

Review of Operations

PY-3 ‘TAHARA’

Hardy had an excellent start to 2008 with two gas discoveries on our D3 block in the KG basin and had an active operations programme for the remainder of the year.Yogeshwar SharmaChief Operating Officer


Block Projection Execution

Assam Acquisition of 350 lkm 2D seismic acquisition of 2D seismic data programme of 450 lkm commenced in December 2008

Oza Commence field Long lead items ordered; development operations commencement of field operations expected in Q3 2009

Atala No operations planned Community consultation initiated

Competent Person’s Report UpdateThe Company recently commissioned Gaffney, Cline & Associates Ltd (GCA) to prepare an independent technical review report on the Company’s D9, D3, and Assam exploration blocks. We expect this report to be completed in the second quarter of 2009.

KGV-D3-B1: On 1 April 2008, the Company announced a second discovery on the D3 block (Dhirubhai 41). The well encountered good quality reservoirs in the Pleistocene and Pliocene formations. MDT tests were conducted over several intervals (1,814 m to 2,101 m MDRT and 2,119 m to 2,463 m MDRT) and confirmed the presence of hydrocarbons.

The evaluation and incorporation of the data recovered from the D3 discoveries is ongoing. The acquisition of a further 1,150 km2 of 3D seismic data has commenced and is expected to be complete in the first quarter of 2009. The drilling of the third well on the block is expected in the second half of 2009.

Appraisal: On 9 February 2009, the D3 joint venture Operating Committee reviewed and approved an appraisal programme for the evaluation of the Dhirubhai 39 and 41 gas discoveries. The proposed appraisal area comprises 750 km2 covering a large portion of the northwest corner of the block. The appraisal programme provides for the initial undertaking of various geological, geophysical and development concept studies, following which two appraisal wells could be drilled prior to February 2011. The proposed appraisal programme has been submitted to DGH for consideration.

BackgroundIn August 2005, Reliance and HEPI were awarded, under NELP V, a second licence in the deepwater Krishna Godavari Basin. The D3 licence encompasses an area of 3,288 km2, in water depths of 400 m to 2,100 m, and is located approximately 45 km from the east coast. Reliance is the operator.

The licence had approximately 210 km2 of existing 3D seismic data, which has been reprocessed. The A-1 and B-1 locations were identified after this data was interpreted and mapped. Under Phase – I of exploration programme, 1,930 km2 of 3D data was acquired in the year 2007. Presently, depth migration and inversion processing is being carried out on this data at GXT ION.

The various play types envisaged in this block are:

hydrocarbon indicators within the Pleistocene/Pliocene stratigraphic sequence.

well preserved channel geometry within Middle Miocene/ Upper Miocene sequence.

sequence with concentration of high amplitude channellike depositional features at the crest.

unconformity which provides the top and lateral seal.

Pleistocene sequence.

Block KG-DWN-2003/1 (D3): Exploration (Hardy 10% interest)

OperationsThe highlight of Hardy’s exploration programme in 2008 was the two gas discoveries in the D3 block (Dhirubhai 39 and 41). The primary results are listed below:

KGV-D3-A1: On 13 February 2008, the Company announced the first discovery on this licence (Dhirubhai 39). The well was drilled to a depth of 1,937 m MDRT and encountered natural gas between 1,513 m and 1,597 m MDRT with a gross sand thickness of 84 m. One interval was selected for cased hole DST covering 1,565 m to 1,585 m MDRT and produced natural gas at a rate of 38.1 MMscfd through a 120/64 choke.

Block D3 Block D9Block

D6

Kakinada

Machilipatnam

Krishna Godavari Basin – Eastern India

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eviewHardy Oil and Gas plc


Business Review:

Review of Operations continued

Block KG-DWN-2001/1 (D9): Exploration (Hardy 10% interest)

OperationsThe ultra deep water drilling rig, ‘Deepwater Expedition’, which is capable of drilling in waters in excess of 3,000 m, arrived in Indian waters in August 2008 and is currently operating in the KG basin. The Company has received an AFE for the drilling of an exploration well which prescribes the use of the ‘Deepwater Expedition’ drilling rig (currently operating on the adjacent D6 block). The joint venture recently approved a budget for the fiscal year ended 31 March 2010, which provides for the drilling of one exploration well in the 2009 calendar year. The timing of commencement of drilling will remain dependent on the drilling schedule of the operator, Reliance.

Hardy has completed a review of the geological and geophysical data and interpretation completed to date and has subsequently commissioned an independent technical update of this block, which is expected to be completed in the second quarter of 2009.

BackgroundThe licence encompasses 11,605 km2 in the Bay of Bengal where water depths vary from 2,300 m to 3,100 m.

The joint venture has acquired over 4,188 km2 of 3D seismic data including infill, and subsequently leads at Upper Miocene, Middle Miocene, Oligocene and Cretaceous have been identified. These leads are aerially large structural closures located toward the relatively shallow northwestern corner of the concession, for which GIIP of multi TCF has been computed by the operator. A fourth lead is a Pleistocene channel in the south eastern part of the block, which is in ultra deep water with a prognosticated GIIP of a similar order of magnitude to the other leads.

Initial exploration will be focused upon amplitude anomalies within structural closure in the Miocene and Pliocene. There are many seismic anomalies within the block and, given its proximity to D6, exploration potential of this large block is regarded with considerable optimism.

Block GS-OSN-2000/1 (GS-01): Exploration (Hardy 10% interest)

OperationsIn 2008 the GS-01 joint venture drilled two exploration wells on the block and acquired additional 3D seismic data.

On 26 August 2008, the Company announced that the exploratory well GS01-S1 was drilled to a total depth of 3,985 m TVDRT on the western shelf edge of the block to explore the Miocene carbonate build-up, Miocene and Oligocene reefal carbonates. While there was porosity development in the reefal carbonates, no hydrocarbons were found. The well has been plugged and abandoned.

On 3 October 2008 the Company announced that the exploratory well GS01-M1 was drilled to a total depth of 4,326 m TVDRT to explore the Oligocene and Eocene carbonate targets. Porosity development was observed in the Oligocene target but no proper seal was present. Gas shows with heavier end hydrocarbons were recorded while drilling the mid-Eocene target zone over a 20 m interval. However, the middle Eocene carbonates could not be drilled in its entirety due to BOP pressure limitations of the rig. Well logs showed reservoir development but the MDT tests were inconclusive and a conventional DST was not conducted. The well was plugged and abandoned.

Operator acquired 1,166 km2 of 3D seismic data including in fill in the northwestern part of the block and subsequent interpretation led to the drilling of M1 well.

The GS-01 Management Committee reviewed and adopted an appraisal programme and budget for the GS01-B1 gas and condensate discovery (Dhirubhai – 33). With an effective term through to May 2010, the appraisal area comprises 5,890 km2. The GS-01 joint venture will be making a decision on further appraisal drilling, after completion of a planned geological and geophysical review, in a few months time.

BackgroundThe GS-01 exploration licence is located in the Gujarat-Saurashtra offshore basin off the west coast of India, NW of prolific Bombay High oil field. The original licence encompassed 8,841 km2 (5,890 km2 post relinquishment) and water depths vary between 80 m and 150 m. The joint venture has previously acquired 1,216 km2 of 3D seismic data.

As announced on 15 May 2007, the Dhirubhai – 33 discovery (GS01-B1) flow-tested at a rate of 18.6 MMscfd gas with 415 stbd of condensate through a 56/64 choke at flowing tubing head pressure of 1,346 psi.

Block GS-01

Mumbai

Bombay High Oil Field

Gujarat-Saurashtra Basin – Western IndiaKrishna Godavari Basin – Eastern India

Block D3 Block D9Block

D6

Kakinada

Machilipatnam


Block CY-OS 90/1 (PY-3): Producing Oil Field (Hardy 18% interest – Operator)

ProductionActual gross field production for the year ended 31 December 2008 was 2,550 stbd (2007: 4,150 stbd). The production facilities’ uptime performance was 88.2% (2007: 96.8%). The decrease in production is due to the conversion of well PY3-3RL into a water injection well (as the well ceased to produce due to water loading), unplanned maintenance and natural decline. In addition, work on well PD-4 commenced on 15 October 2008 to drill a lateral well from the existing surface location.

Production for January and February 2009 was 2,846 stbd and 2,787 stbd respectively. We anticipate that the PY-3 field will average gross daily production of 3,000 stbd for 2009. Currently the field is producing at a gross rate of 3,200 stbd.

For the year ended 31 December 2008, the average water injection rate was 7,139 bwpd (2007: 5,800 bwpd) which, at current production levels, is sufficient to maintain voidage replacement. Voidage replacement is important for maintaining pressure levels in the field that should ultimately enhance overall recovery of oil from the field. Injection facilities’ uptime performance was 84.5% (2007: 86.8%).

The PY-3 field was shut down twice in 2008. The first shut-down occurred between the 3rd to 12th of February 2008, due to Normor Buoy inspection and the renewal of jumper hose as per ABS requirements. The field was again shut down from 26 November to 29 December 2008, due to the FSO loading hose, mooring hawser back-up rope failure during tropical cyclone Nisha.

OperationsThe PY3-3RL well was converted to a water injector on 23 July 2008. The current injection rate of the well is 11,350 bwpd.

As announced on 17 February 2009, the Company completed the re-entry and drilling of the PY3-PD4RL well. The PD4 vertical well was re-entered and side-tracked from 2,916 m MD (2,890 m TVDSS) and drilled down to 4,375 m MD (3,525 m TVDSS). The lateral (PR4-RL) well was drilled to increase the field production and the reservoir was expected to be encountered at 3,440 m TVDSS; however the reservoir came 25 m down from the prognosis at 3,465 m TVDSS due to thickening of the overlying shale coupled with anomalous velocity variation, which is a common problem in the field. The well drilled a gross reservoir pack of 173 m MD (60 m TVD) within the reservoir section.

Block AS-ONN-2000/1: Exploration (Hardy 10% interest)

OperationsOn 2 April 2008, Hardy announced the award of a 10% interest in the exploration licence AS-ONN-2000/1. This is the Group’s first onshore block and fourth licence in partnership with Reliance. This block was offered in NELP II but commencement of operations had been delayed due to the outstanding grant of an onshore petroleum exploration licence from the appropriate state agencies.

The acquisition of 450 lkm of 2D data commenced in December 2008 and is scheduled to be completed during the second quarter of 2009. The joint venture is expected to complete the reprocessing of the existing 124 lkm 2D seismic data in 2009. Upon completion of the reprocessing and acquisition of 2D data, the phase I minimum work programme commitment for the block will be complete.

BackgroundThe AS-ONN-2000/1 exploration licence is located in the northeastern state of Assam, India, and north of Brahmaputra River. The exploration licence covers an area of 5,754 km2 and falls within the districts of Darrang and Sonitpur. The block is in phase I of the three-phase exploration licence. Phase I will expire in January 2011.

The topography of the area is primarily a plain of low relief and there is a reasonably established road network across the block. A national highway runs parallel to the Brahmaputra River and passes through the block. Different play types expected are anticlinal structures within Paleocene – Eocene and Gondwana, Fault closures, Pinchout/wedgeout, Fractured/weathered basement.

Block

Bhareli R

iver

AS-ONN-2000/1

Brahmaputra River

Assam Arakan Basin – Northeastern India

Mahendrapalli

PY-3 Field

PY-1 Field

Cauvery Basin – Southeastern India

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Pondicherry

Cauvery Basin – Southeastern India

With the assistance of nitrogen lift, the well flowed at 700 stbd of oil with 30% water-cut, however, the well was unable to be reactivated as a self flowing well. The well has been completed with a gas lift valve to allow for future oil production when gas lift compression facilities are installed on the FPU.

Further drilling on PY-3 will be determined after remapping of the field has been completed incorporating the results of the PD4-RL well.

BackgroundThe PY-3 field is located off the East Coast of India 80 km south of Pondicherry in water depths of between 40 m and 400 m. The Cauvery basin was developed in the late Jurassic/early Cretaceous period and straddles the present-day east coast of India.

The licence, which covers 81 km2, produces oil of high quality light crude (49° API). The field was developed using floating production facilities and subsea wellheads, a first for an offshore field in India.

The facility at PY-3 consists of the floating production unit, ‘Tahara’, and a 65,000 DWT tanker, ‘Endeavor’, which acts as a floating storage and offloading unit. There are four sub-sea wells tied back to Tahara. Tahara has a three-stage crude oil separation system, with the first two stages being three-phase separators and the third stage a two-phase separator. Actual liquid processing capacity on Tahara is 20,000 stbd with 17 MMscfd of gas handling capacity.

The field currently produces associated gas in the range of 3.5 MMscfd. This produced gas is used as fuel gas with excess gas being flared. The stabilised crude oil is pumped from Tahara to Endeavor for storage and offloading to shuttle tankers. Crude oil from the PY-3 field is sold to CPCL at its refinery in Nagapattinam, approximately 70 km south of the PY-3 field.

The resulting reprocessing and interpretation assessment has led the Operating Committee to recommend a revision of the appraisal programme from three firm and two contingent wells to one firm well and one contingent well. The amended programme has been approved by the joint venture and reviewed by the Management Committee. The joint venture has applied for the extension of the appraisal period to January 2012. The approval is awaited from the Government of India to establish the commerciality of the non-associated gas discovery.

The joint venture has applied to the Ministry of Petroleum and Natural Gas of the Government of India to establish commerciality of the Ganesha gas discovery during an appraisal period to January 2012 as per the PSC. On 20 February 2009 HEPI received a communication from DGH to establish commerciality within 15 days or relinquish the block. We believe that this action was taken by DGH on the assumption that the Ganesha discovery was an oil discovery. As Ganesha is a non-associated gas discovery, the CY-OS/2 PSC provides for an appraisal programme to establish commerciality to January 2012. The Company is working with the Ministry and DGH to finalise the extension period.

The Company is actively considering farming out a significant portion of its participating interest in the licence.

BackgroundThe CY-OS/2 block is located in the northern part of the Cauvery Basin immediately offshore from Pondicherry and covers approximately 859 km2. HEPI is the operator of this block.

The CY-OS/2 licence comprises two retained areas. The northern area includes the Ganesha (Fan A -1) discovery. The southern area lies immediately adjacent to the HEPI-operated PY-3 field. Another commercial gas field (PY-1) lies within the southern part of the acreage. The PY-1 field is owned by Hindustan Oil Exploration Company Limited and is expected to begin production in 2009.

Ganesha gas discovery (Fan A-1 well): On 8 January 2007 the Company announced that the Fan A-1 well had discovered hydrocarbons. On 10 August 2007, the Company announced that it would proceed with an appraisal programme to delineate the Cretaceous Fan A -1 gas discovery to establish the potential commerciality of the discovery. In the event of a commercial discovery, ONGC has the option to back into the block at an interest of 30%.

Business Review:

Review of Operations continued

Block CY-OS/2: Exploration (Hardy 75% interest – Operator)

OperationsAs part of the Ganesha appraisal programme, a number of geological and geophysical studies have been undertaken, including reprocessing of the 3D seismic data covering the block to improve subsurface understanding.

Block CY-OS/2


Block Atala (within OML 46): Development (Hardy 20% interest)

OperationsThe Atala joint venture submitted the Atala Field Development Report to the Federal Government for its review and approval. The development focuses on initially developing oil reserves whilst exploring viable options to monetise the field’s substantial natural gas potential. The operator has been in discussions with other companies in the area to jointly evolve an approach for gas development.

The joint venture continued efforts to lease a suitable swamp barge for Atala-1 well re-entry. Preparatory work at the field location was undertaken including the completion of hydrographic survey in and around the field, tendering for dredging of well locations and engagement with the local communities for execution of MOU. The Federal government has approved the planned re-entry programme including the environmental impact assessment report. Commencement of operations will be subject to securing an appropriate swamp-barge drilling rig.

BackgroundAtala is located within OML 46 which is situated within a mangrove swamp on the Dodo River, a coastal area of NW Bayelsa State. The concession area is 34 km2. The Atala field was discovered in 1982 with the drilling of the Atala-1 well to a total depth of 4,058 m. Hydrocarbons were encountered and the well was cased but not tested or completed.

The Atala field is subject to a farm-out agreement between NNPC, SPDC, Elf Petroleum Nigeria Limited and Nigerian AGIP Oil Company Limited as farmor and Bayelsa as farmee. The terms of this agreement are for an initial five-year period from 27 April 2004, subject to an extension of the term of the Atala Farm-out Agreement if approved by the Nigerian Department of Petroleum Resources.

Yogeshwar SharmaChief Operating Officer 18 March 2009

Block Oza (within OML 11): Development (Hardy 20% interest)

OperationsIn 2008, the Oza joint venture continued to work jointly with SPDC towards implementing a solution on meeting applicable statutory Federal Government norms on cessation of gas flaring, which is scheduled to come into force in 2010.

In February 2008, Hardy Oil Nigeria Limited farmed out 20 percent of its participating interest in Oza Field to another Nigerian oil company, which has agreed to assume the responsibility of financing the first phase of the Oza Field development. The assignment was duly approved by Nigerian Federal Government on 1 August 2008.

During the year, line pipe has been acquired and arrived in Nigeria in February 2009. Front end engineering study (FEED) and pipeline route survey commenced and final reports will be available in the first quarter of 2009. It is anticipated that pipeline construction and installation will commence in the third quarter of 2009. The Operator also successfully concluded discussions with the Oza community, which culminated in the execution of an MOU.

Millenium Oil and Gas Limited, the operator for Oza field, with inputs from HON, continued efforts to obtain additional data in the field and to conclude agreements for crude handling and purchase of Oza 3D seismic with SPDC.

BackgroundThe Oza Field is located onland in the northwestern part of OML 11, near Port Harcourt and covers an area of 20 km2.

The Oza field is subject to a farm-out agreement between NNPC, SPDC, Elf Petroleum Nigeria Limited and AGIP as farmor and Milennium as farmee. The terms of this agreement are for an initial five year period from 27 April 2004 subject to an extension of the Oza farm-out agreement if approved by the Nigerian Department of Petroleum Resources (DPR).

The field has cumulatively produced approximately 1.0 MMstb from four open zones of three wells targeting three reservoirs, M5.0, L9.0 and M2.1, with the principal reservoir being M5.0. At present, Oza has three suspended wells in the field. In November 2007 the Oza joint venture successfully executed a flow test of the Oza 4 well. The flow rates averaged approximately 600 stbd of oil with a GOR of 5,466 scf/stb.

Block OML 11

Port Harcourt

Oza

Niger Delta Basin – Nigeria

Block OML 46

Clough Creek

Atala

Niger Delta Basin – Nigeria

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The Company has adequate resources to enable it to undertake its planned work programme over the next twelve months. The Company also has the ability to raise additional capital, if required, to fund its ongoing work programmes.Dinesh DattaniFinance Director

Business Review:

Financial Review

During 2008, the Company has increased revenues, derived positive cash flow from operations (before changes in non cash working capital) and realised a significant infusion of capital through liquidation of its investment in HOEC. The Company completed the year with cash and short term investments of approximately $30 million and no long term debt.

Key Performance Indicators Year ended 31 December 2008 2007

Production (barrels of oil per day – net entitlement basis) 397 573

Average realised price per barrel – $ 104.44 66.65Average cost per barrel – $ 54.91 21.19 Revenue (thousands of $) 17,306 11,830Net profit (thousands of $) 7,472 8,316Cash flow from operating activities* (thousands of $) 1,648 2,588 Diluted earnings per share – $ 0.11 0.13Wells drilled 4 2

*Before changes in non-cash working capital

17.3 2008

21.3 2006

Revenue ($m)

200711.8


Operating Results(Thousands of dollars, Year ended 31 Decemberunless otherwise indicated) 2008 2007

Production (barrels of oil per day) Gross field 2,542 4,150Participating interest 458 747Net entitlement interest 397 573 Sales (barrels of oil per day) Gross field 2,725 3,547Participating interest 491 638Average realised price per barrel – $ 104.44 66.65

Production, Sales and RevenueThe Company operates the PY-3 field in the Cauvery Basin with an 18% participating interest. Actual gross field production for the year ended 31 December 2008 amounted to 2,542 stbd compared with 4,150 stbd for 2007. The decrease in production is due to the conversion of PY3-3RL as a water injection well, the shutdown of the field for 42 days due to equipment failure and renewal of a jumper hose, and natural decline.

Hardy’s net entitlement interest in production is after the Government of India’s share of profit oil of $2.3 million (2007: $4.3 million).

Revenue from oil sales (after profit oil) increased from $11.3 million in 2007 to $16.4 million in 2008. The average price realised per barrel increased significantly from $66.65 during 2007 to $104.44 per barrel. Average daily sales amounted to 491 barrels of oil per day compared with 638 barrels of oil per day reflecting lower production volumes, offset by partial liquidation of inventory during the year. Other revenue increased from $0.6 million to $0.8 million, reflecting additional overhead recovery.

Cost of SalesCost of sales for 2007 increased from $5.8 million in 2007 to $9.2 million in 2008. This reflects the full year impact of higher costs of operating the PY-3 field. The contract for the floating processing and storage systems was renegotiated effective July 2007, resulting in a substantial increase in day rates. The contract expires in July 2009 with renewal expected to result in a substantial reduction in day rates in the future.

Gross ProfitGross profit increased from $6.1 million in 2007 to $8.1 million in 2008. The increase arises principally from higher revenues as a result of higher average crude price in 2008, offset by a substantial increase in operating cost of running the PY-3 field.

Administrative ExpensesAdministrative expenses increased from $6.9 million in 2007 to $9.8 million in 2008. The increase principally results from exchange losses on cash, short term investments and site restoration deposits of $2.4 million, and cost of the move of the listing of the Company’s shares to the Main Market of the London Stock Exchange.

Operating LossThe Company is reporting an operating loss of $1.7 million in 2008 compared with $0.8 million in 2007.

Gain on Sale of InvestmentIn December 2007 and during 2008, the Company sold 3,010,000 and 8,086,156 shares in HOEC for net cash consideration of $12.5 million and $28.9 million respectively. As a result, the Company recorded a pre-tax gain on sale of its investment in HOEC of $13.0 million in 2008 and $10.2 million in 2007.

Interest and Investment IncomeInvestment and other income in 2008 amounted to $1.3 million compared with $1.4 million in 2007.

Finance CostsFinance costs principally include the cost of providing bank guarantees to the Government of India required in accordance with the provisions of Production Sharing Contracts and are based on the agreed annual work programme on blocks in India.

Profit Before TaxationProfit before taxation increased from $12.4 million in 2008 compared with $10.6 million in 2007.

The Company made the strategic decision to liquidate its investment

in HOEC resulting in aggregate proceeds of $41.4 million.

Dinesh DattaniFinance Director

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TaxationCurrent taxes amounting to $1.6 million reflect the liability for Minimum Alternate Tax in India of $0.8 million, and on short term capital gains on the sale of HOEC shares of $0.8 million on the shares that were purchased under the rights issue in January 2008 that were disposed of in May and August 2008.

Most of the provision for taxation is with respect to deferred income taxes since the Company’s capital expenditure programme is sufficient to shield the Company from a large portion of current tax liabilities.

Tax rate, as a percentage of pre-tax income, amounted to 39.9% in 2008 compared to 21.8% in 2007. This increase is mainly on account of short term capital gains tax of $0.8 million paid on sale of HOEC shares in 2008 as well as the impact of Minimum Alternate Tax in India. In 2007, the tax provision was reduced as a result of the benefit arising from carry forward capital losses of earlier years against capital gain on sale of HOEC shares.

Net ProfitAs a result, net profit declined from $8.3 million in 2007 to $7.5 million in 2008.

Cash Flow from Operating ActivitiesThe Company’s cash flow from operating activities, before changes in non-cash working capital, amounted to $1.6 million in 2008. This compares with $2.6 million for 2007. The decline principally results from higher operating costs and general and administrative costs in 2008 compared to 2007.

Capital ExpenditureCapital expenditure amounted to $31.7 million during 2008, compared to $32.2 million incurred during 2007. Capital expenditure amounting to $14.1 million was incurred on the GS-01 block with the drilling of two exploration wells and the acquisition of 1,166 km2 of 3D seismic data. Approximately $7.6 million was incurred in the drilling of two successful exploration wells on the D3 block in the Krishna Godavari basin. As part of the Ganesha appraisal programme, the Company incurred $1.8 million on the CY-OS/2 block, on a number of geological and geophysical studies including reprocessing of the 3D seismic data covering the block to improve subsurface understanding. Minimal expenditure was incurred on the D-9 block and $0.6 million was spent on the Oza operations in Nigeria.

Investment in HOECIn early January 2008, HOEC completed a rights offering with Hardy participating in the rights offering to the extent of its pro rata share of 8.5%, investing an additional $13.2 million.

During 2007, the Company made a strategic decision to liquidate its investment in HOEC. As a result, during December 2007 and during 2008, the Company sold 3,010,000 and 8,086,156 shares for net cash consideration of $12.5 million and $28.9 million respectively. Aggregate proceeds of $41.4 million were received in 2008.

Site Restoration DepositsThese represent deposits for site restoration for the PY-3 field. At 31 December 2008, the Company had invested $3.2 million in site restoration deposits.

Business Review:

Financial Review continued

UK 71.1% Directors 20.7% Europe 3.8% North America 3.0% Asia 1.4%

Institutional 45.0% Retail 34.3% Directors 20.7%

Geographic Segment Holder CategoryShareholder Analysis (as of 18 March, 2009)

Geographic Segment Holder Type


Cash and Short Term InvestmentsThe Company’s cash and short term investments declined from $31.2 million at the end of 2007 to $30.1 million at the end of 2008. The Company’s capital expenditures were principally funded by proceeds from the liquidation of HOEC holdings during 2008.

During 2008, the Company commenced investing its surplus funds in HSBC Sterling and US Dollar Liquidity Funds that invest in a diversified portfolio of money market instruments that seek to provide security of capital, a competitive return and same day liquidity. At 31 December 2008, the Company had invested £2.9 million and $17.8 million in Sterling and US Dollar Liquidity Funds with an average underlying maturity of 21 and 20 days respectively.

Summary Balance SheetHardy’s non-current assets have increased from $121.4 million at the end of 2007 to $135.8 million at the end of 2008. This results largely from the capital expenditure programme on exploration, principally on the drilling of wells and seismic acquisition on GS-01 and D3 blocks.

Current assets represent the Group’s cash and short term investments, trade and other receivables and inventory. At the end of 2008, of the $38.0 million of current assets, $30.1 million are represented by cash and short term investments.

Current liabilities are principally trade and other accounts payable. The level of current liabilities is $13.8 million at the end of 2008 compared with $9.9 million in 2007, reflecting the impact of the re-entry operations on the PD-4 well in the PY-3 field that were in progress.

The Company issued minimal equity during 2008 of $0.2 million upon exercise of stock options. Consequently, raising the Company’s net assets remained at approximately the same level in 2008 as in 2007 of $144 million.

Liquidity and Capital ResourcesHardy has been funding its cash requirements from internally generated cash flows and equity capital, principally from institutional investors, in each of the years 2005, 2006 and 2007. The Company continues to be an emerging company with limited cash flows and significant exploration assets, and as a result has been principally relying upon equity capital markets to build and grow its asset base.

At 31 December 2008, the Company had cash resources of approximately $30.1 million that were available to meet future capital expenditures and to fund operating deficiencies. The Company does not have any long term debt.

The Company’s present 2009 planned work programme includes drilling of a well on block D9, one well on block D3, the acquisition of seismic data on block D3 and Assam and ongoing planning and studies on remaining blocks in India and the tie-in of Oza to bring it into production.

The Company has adequate resources to enable it to undertake its planned work programme over the next twelve months. The Company also has the ability to raise additional capital, if required, to fund its ongoing work programmes.

DividendsThe Company has limited internally generated cash flows and has a planned capital expenditure programme. In the circumstances, the Directors have chosen to reinvest cash flows and does not recommend the payment of a dividend in the foreseeable future.

The Company’s Chairman and Chief Executive Statement, Review of Operations, Financial Review, Corporate Social Responsibility and Risk and Uncertainties have been prepared to substantially comply with the Accounting Standards Board Operating and Financial Review Reporting Statement issued in January 2006.

Dinesh DattaniFinance Director 18 March 2009

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Business Review:

Corporate Social Responsibility

The Group’s guiding principles are to be ethical and act with integrity in the communities where it works, and to respect cultural, national and religious diversity. Based on mutual respect and understanding, the Group has built enduring relationships with the Indian Government, local authorities, partners and business associates. Respecting the rich cultural diversity of the regions in which we engage in business, the Group strives to minimise our impact on the environment, taking into consideration the unique requirements of the region and local working practices to achieve optimum performance and timely delivery of projects.

Corporate social responsibility is a fundamental part of implementing the Group’s corporate strategy and has both practical and ethical dimensions. It includes managing business concerns, such as risk; enhancing reputation in conjunction with investing in the community, and creating a place where people feel good about working.

The Group contributes to community and social development by carrying out its business activities in such a manner that provide energy and infrastructure, employment, skills development and trade to the areas in which the Group operates. The Group will consider monetary and human resource contributions to local social programmes which the Company deems contribute or improve the overall well being of the communities in which we operate.

In 2008 the Company contributed a cash donation to several charities in India and Nigeria. In the past we have supported various programmes to increase access to fresh water for agriculture and consumption in underdeveloped areas of southern India.

Health, Safety & Environment ActivitiesThe Board has tailored the Group’s HSE policy and management system taking reference from world class operations to suit Indian conditions. Safety, security and emergency procedures have been incorporated into the weave of the Group’s operations. The central HSE Committee and Environment Management Committees meet on a monthly basis to assess and monitor compliance. The Group regularly undertakes internal and external HSE audits, including pre-mobilisation HSE audit of rigs and vessels. The Group undertakes periodical environmental marine monitoring around production facilities and around the drilling locations. Prompt compliance with applicable regulations by the Group has been recognised by concerned agencies.

All statutory requirements and certification for the operating facilities at PY-3 field were maintained. Compliance to ministerial and regulatory bodies such as DGH, MOEF, DGMS, ODAG, Coast Guard, Navy and others are maintained by forwarding necessary reports as required. Hardy participates in different meetings convened by these agencies. Senior officials from these agencies also visited our offshore facilities and appreciate our HSE management system.

The CHSE Committee, the Company’s apex body on HSE activities, meet every month and review the HSE plans, activities, accidents/incidents pertaining to the month. Representatives from contractors are also invited for these meetings. Regular HSE audits, drills and emergency exercises are carried out in all facilities offshore.

2008 HSE PerformanceThere were two lost time accidents (LTA) during the year. The PY-3 floating production unit, Tahara, has operated for over six years without LTA. During the year the offshore drilling rig ‘Actinia’ from Transocean was at PY-3 field and performed safe operations during the re-entry of the PY3-PD4 well and drilled a lateral well. The Company is pleased to report that there was no LTA during the re-entry operation. There were no field operations undertaken in Nigeria through 2008.

Safety Performance at a Glance: Accident free since last LTA*Facility Date of last LTA* (as on 01-03-2009)

FPU – Tahara 29-04-2008 307FSO – Endeavor 17-02-2007 742OSV – Gal Beaufort Sea 29-05-2003 2003OSV – Ocean Jade 31-12-2008 59

*LTA – Lost Time Accident

Accident Statistics at a Glance: 2008 2007 2006

Lost Time Accidents 2 2 0Lost Time Incident Frequency Rate 2.43 1.52 0.0Non Lost Time Accidents 4 11 12Non Injurious Accidents 16 10 5No Loss Incidents 1 3 6Total Accidents/Incidents 25 23 23


2,5212006

9742008

Flared Gas (MMscf)

20071,817

Environmental Impact Policy and PerformanceOffshore petroleum operations interact with marine environment which can lead to short and long term physical, chemical and biological changes to the area.

Hardy maintains an Environmental Management System that is intended to mitigate the risk of marine pollution due to routine and accidental discharges of wastes and consequent adverse impacts on the marine environment. The Environment Management System outlines specific control measures for routine discharges (produced water, drilling fluids, drilling cutting, deck drainage, sanitary waste) as well as a detailed oil spill contingency plan.

MarineAs a part of the commitment for environmental protection and towards compliance to the conditions imposed by Ministry of Environment and Forests, Hardy has been regularly carrying out an environmental marine monitoring programme to assess the quality of the marine environment since 1998. For the year 2008, a marine environmental survey was carried out by Onshore & Offshore Environmental Consultants in collaboration with the Advanced Centre for Marine Biology, Annamalai University during the month of July 2008. We are please to report that the study concludes that the marine environment in and around PY-3 oil field has not been altered or affected by the ongoing production activities.

Air QualityOn evaluation of environment impacts regular ambient air quality studies have confirmed that the air quality is not affected by offshore operations and the main focus of monitoring is of the impact on the immediate marine ecological system.

Flaring

Gas produced from the PY-3 field is associated gas which is separated from the crude oil through conventional processing at the Tahara. Currently the field produces approximately 3.8 MMscfd. The current method of disposal is via power generation and flaring offshore. The flaring practice will continue until some viable alternative emerges. Close to PY-3 field, PY-1 gas field is anticipated to commence production in 2009 and the PY-3 joint venture is evaluating the possibility of routing a pipeline to shore along with PY-1 gas. The viability of several other alternatives are also being evaluated.

The Nigerian Government has mandated an end to the pervasive flaring practice in the Niger Delta. The development plans for the Oza and Atala fields provide for the monetisation or reinjection of produced gas.

OutlookThe Board believes that prevention of accidents, ill health and protection of the environment are essential to the efficient operation of its business. The Board is committed to high standards of health, safety and environmental protection. These aspects command equal prominence with other business considerations in the decision making process. Health, safety and environmental protection are responsibilities shared by everyone working for the Company and the full support of all the Company’s staff, corporate partners, and contractors is vital to the successful implementation of this policy. The Board ensures that personnel are aware of their delegated health, safety and environmental responsibilities and are properly trained to undertake them diligently. The Board aims to ensure that the necessary resources are provided to support this policy fully and to seek continuous improvement in performance.

High corporate social responsibility standards and constant grass roots level interaction give the Group the awareness of local communities’ sensibilities and needs. With an awareness driving the commitment, the Group provides its expertise and resources, wherever required, to be a responsible Company.

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As an oil and gas exploration and production company with operations concentrated in India, Hardy is subject to a variety of business risks. Outlined below is a description of the principal risk factors that may affect the Group’s business. Such risk factors are not intended to be presented in any assumed order of priority. Any of the risks, as well as the other risks and uncertainties discussed in this document, could have a material adverse effect on our business. In addition, the risks set out below may not be exhaustive and additional risks and uncertainties, not presently known to the Company, or which the Company currently deems immaterial, may arise or become material in the future. In particular, the Company’s performance might be affected by changes in market and/or economic conditions and in legal, regulatory and tax requirements.

General Exploration, Development and Production RisksThe Group’s strategy is predominantly driven by the exploration, exploitation, appraisal, development and production of its existing assets. There are risks inherent in the exploration, exploitation, appraisal, development and production of oil and gas reserves and resources. Whilst the rewards can be substantial, there is no guarantee that exploration will lead to commercial discoveries. Exploration and production activities by their nature involve significant risks. Risks such as delays in the construction and commissioning of drilling platforms or other technical difficulties, lack of access

to key infrastructure, adverse weather conditions, environmental hazards, industrial accidents, occupational and health hazards, technical failures, labour disputes, unusual or unexpected geological formations, explosions and other acts of God are inherent to the business. Although in some cases these represent insurable risks, the Group may also become subject to other hazards (including pollution and oil seepage liability) against which it is not insured or is under insured. The occurrence of any of these incidents can result in the Group’s current or future project target dates for drilling or production being delayed or interrupted, increased capital expenditure and production costs and result in liability to the Contractor or Operator of the field.

Clear Risk IdentificationThe table below sets out the key risks facing Hardy, their potential impact and mitigation strategies developed. Risks are grouped into four main categories: strategic; financial; operational; and external. Effective risk management is critical to achieving our strategic objectives and protecting our people and reputation. Hardy manages and mitigates its risks by maintaining a balanced portfolio, through compliance with the terms of its licences and application of policies and procedures appropriate for an international oil and gas company of its size and scale and through the recruitment and retention of skilled personnel throughout its business.

Risk Category Mitigation

Strategic risk Ineffective or poorly executed strategy fails to create shareholder value

Ineffective mix of oil and gas interests Geographical focus on single region (India) with interests in several autonomous sedimentary basins representing similar peer portfolios that comprise interests in different geographical regions.

Organic and acquisition-led growth Regular review of capital investment programmes and limiting allocation to high impact exploration. Board approval required for all annual exploration programmes, acquisitions and divestitures.

Inefficient capital allocation Comprehensive annual budgeting process covering all material expenditures. Annual budget approved by the Board.

Ineffective management processes Policies and procedures appropriate for an exploration and production company of Hardy’s scale and size.

Loss of key staff/succession planning Remuneration policies to attract and retain staff (employee stock options, annual review, etc), and specific development and training policies implemented.

Financial risk Assets performance and excessive leverage results in the Group unable to meet its financial obligations

Industry cost inflation Asset joint operating agreement mandates rigorous contracting procedures with competitive tendering. Inflationary pressures will persist in high commodity price environment.

Capital structure Conservative approach to debt/equity financing of development projects. Exploration and appraisal activities strictly equity financed.

Uninsured events Comprehensive insurance programme.

Underperforming assets Conservative forecasting in the budgeting process. Development of the additional fields (Oza) to reduce dependence on PY-3.

Cost overrun Main capital expenditures incurred via drilling offshore exploration wells. Lower working interest and maintaining excess working capital mitigate against operations exceeding budgeted number of drilling days.


Business Review:

Risk and Uncertainties

Risk Category Mitigation

Operational risk Operational event impacts staff, contractors, communities or the environment leading to loss of reputation and/or revenue

HSE incident HSE standards set and monitored regularly across the Group (policies, procedures and performance discussed further in CPR section of report).

Security incident Ongoing collaboration with Navy & Coast Guard Services, Ministry of Shipping, Ministry of Home Affairs, Ministry of Defence. Periodic offshore security incident simulation exercises.

Key development failure Technical, financial and Board approval for all projects and quarterly progress reports provided to the Board.

Failure to secure equipment, Rigorous contract and procurement procedures implemented internally and required services and resources by joint operating agreements. Long-term planning required to resource projects on a

timely basis. The Company has limited influence on procurement of equipment services and resources for non-operator assets. As a result of falling commodity price, improved supply of equipment and services is anticipated in the short-term.

Corruption or reputation risk Consistent ethical standards communicated across the Group. Documentation under review.

Sustained exploration failure Effective portfolio management (low interest, many assets) comprised with rigorous review and implementation of best practice exploration processes and techniques. Internal expertise review process prior to Board approval.

Hostile acquisition Robust defence strategies against hostile acquisitions. Effective and continuous communication with shareholders.

Corporate and social responsibility Sustainable social and community programmes. Currently developing social and ethical policies.

External riskThe overall external political, industry or market environment may negatively impact the Company’s ability to independently manage and grow its business

Political risk and fiscal change Develop sustainable relationships with governments and communities. Indian PSC include fiscal stability clauses. Actively collaborate with industry groups to formulate and communicate interests to government authorities.

Lack of control of key assets Joint venturing with partners and governments. Proactive formal and informal communications to convey corporate interests and mandates.

Corporate governance failings Regular review of compliance requirements and ongoing consultation with legal and financial advisors and audit committee.

Shareholder sentiment Communicate with investors on a regular basis, providing transparent and timely information. Effectively convey and execute corporate strategy.

Oil and gas price volatility Conservative planning and forecasting of future oil prices. The Company’s single producing asset and PSC terms limit the practicality to implement financial instruments to mitigate volatility.

Global capital market environment The Board regularly reviews 24 month capital requirement forecasts. Deferral of non-essential programmes and implementation of cash conservation strategies. Develop long term relationships with financial institutions.

Business R




Governance:

Board of Directors

1. 2. 3. 4.

1. E.P. Mortimer (aged 76)Non Executive Chairman

Mr E. P. Mortimer has diverse board level experience and over 30 years’ experience in the oil, gas and mining industries. Mr Mortimer held various senior management roles through his 23 year career with Exxon Corporation including Senior Vice President of Exxon Minerals, New York, and Director and Vice President of Esso Argentina, Buenos Aires. After Exxon, he was responsible for Corporate Development and Coal at Newmont Mining Corporation in New York and was a Director of Peabody Coal. He has acted as a consultant to Morgan Stanley and a number of gold mining companies. Mr Mortimer has a degree in mining engineering from the University of South Africa, was awarded a Rhodes scholarship in 1957 and read Politics, Philosophy and Economics at Oxford. He also holds an MBA from the Harvard Business School.

Mr Mortimer has been a member of Hardy’s Board for ten years. He was appointed Non Executive Director on 10 December 1998 and appointed Chairman prior to the Company’s IPO in June 2005. Mr Mortimer was a member of the Audit committee until 3 November 2008 and is currently a member of the Remuneration and Nomination committees.

2. Sastry Karra, P.ENG (aged 66)Chief Executive

Mr Sastry Karra is a founding director and a major shareholder of Hardy since 1997. Mr Karra has over 40 years’ oil and gas industry experience. He has held senior management roles at Occidental Petroleum Corporation and Petronas as well as earlier experience with Gulf Canada, Husky and Ashland. Mr Karra has held various consulting roles with the Boston Consulting Group and Santa Fe Resources. He was a Senior lecturer at the University of IBADAN from 1973 to 1976. Mr Karra is presently the Founder and Chairman of the Association of Oil and Gas Operators of India and the Vice Chairman of the National Council of the Society of Petroleum Engineers of India. In 2008, Sastry Karra has been conferred a Chieftaincy title in recognition of his professional and philanthropic contribution to Nigeria over the span of 35 years.

Mr Karra was appointed an Executive Director of the Company on 22 October 1997. He is also a member of the Company’s Nomination Committee.

3. Yogeshwar Sharma, P.ENG (aged 57)Chief Operating Officer

Mr Yogeswhar Sharma is a founding director and a major shareholder of Hardy since 1997. Mr Sharma has over 30 years’ of international oil and gas industry experience. He has previously worked with Energy Resources Conservation Board and Pan Canadian Petroleums Limited in Calgary, Canada and ARAMCO in Saudi Arabia. He has held senior technical positions at Schlumberger and Elf International, where he helped found the Elf Geoscience Research centre in London in 1991. Mr Sharma was an external examiner at Heriot Watt University for three years. Mr. Sharma was also responsible for the Group’s finance and administrative functions until 1 July 2007.

Mr Sharma was appointed an Executive Director of Hardy on 22 October 1997. Currently, Mr Sharma is the President and Chief Executive of Hardy Exploration & Production (India) Inc. in addition to being the Chief Operating Officer of Hardy.

4. Dinesh Dattani, CA (aged 58)Finance Director

Mr Dinesh Dattani is a Chartered Accountant with over 30 years of industry and corporate experience principally with international upstream oil and gas companies. Prior to joining Hardy, Mr Dattani has served in senior finance capacities with companies including Canoro Resources Ltd., Bow Valley Energy Ltd., Sherritt International Corporation, and Home Oil Company Ltd, all of which are/were listed in either Canada and/or the United States of America.

Mr Dattani has served as the Chairman of the Canadian Petroleum Association’s Income Tax Committee and was a recipient of an Award of Merit in 1987. He was the Chair of the Board of Directors of the United Way of Calgary for the year 2004/2005 and served as the Chair of the Finance Committee for three years. In 2005, he received an Immigrants of Distinction Award for Community Service and a Distinguished Service Award from the Institute of Chartered Accountants of Alberta.

Mr Dattani was appointed to the Board as an Executive Director in July 2007.

Governance


5. 6. 7.

5. Dr Carol Bell (aged 50)Senior Non Executive Director

Dr Carol Bell has over 20 years’ experience in the oil and gas sector, most recently as the Managing Director of Chase Manhattan’s Investment Bank with responsibility for oil and gas. Prior thereto she was the Global Head of J.P. Morgan’s Energy team in Equity Research. Dr Bell began her career in corporate planning and development with RTZ Oil and Gas and subsequently worked with Charterhouse Petroleum plc. She was awarded a PhD in the archaeology of ancient trade in May 2005. Dr Bell is a member of the Investment Advisory Committee of Gemini Oil and Gas (an oil and gas royalty fund). Dr Bell was also a Non-Executive Director of Revus Energy ASA through 2008.

Dr Bell was appointed to the Board on 16 December 2005 and was appointed the Senior Non Executive Director in 2007. She is currently the chair of the Audit Committee and a member of the Remuneration Committee.

6. Pradip Shah, CA (aged 56)Non Executive Director

Mr Pradip Shah is the founder and chairman of IndAsia Fund Advisors Private Limited. He established Indocean Fund in October 1994 with affiliates of Soros Fund Management and Chemical Venture Partners and founded and managed CRISIL, India’s first and largest credit rating agency, in 1988. Mr Shah also assisted in setting up Housing Development Finance Company in 1977 and acted as consultant to USAID, the World Bank and the Asian Development Bank. Mr Shah holds an MBA from the Harvard Business School and is a Chartered Accountant and Cost Accountant.

Mr Shah was appointed to the Board as a Non Executive Director on 22 July 1999. He is currently the chair of the Remuneration Committee and serves as a member on the Audit and Nomination committees.

7. Ian Bruce, FCA (aged 55)Non Executive Director

Mr Ian Bruce is currently the Chief Executive Officer of Peters & Co. Limited, an independent, fully integrated investment dealer in the Canadian energy sector. Mr Bruce spent six years with a major Canadian chartered accountancy firm prior to starting in the investment business in 1983. He joined Peters & Co. Limited in 1998, following senior roles with RBC Dominion Securities (1985-1994) and Scotia Capital Markets (1994-1998). Mr. Bruce is currently Vice Chair and Director of the Investment Industry Association of Canada (2006), is past Chairman, Director and Executive Committee Member of Alberta Children’s Hospital Foundation (1989 to 2004), and past Director and Executive Committee Member of the Investment Dealers Association of Canada. Mr Bruce holds an undergraduate degree from Queen’s University; an MBA from the Richard Ivey School of Business at the University of Western Ontario; and the designations of Chartered Accountant, Chartered Business Valuator and CF (Corporate Finance Qualification). In 2004, he became a Fellow of the Institute of Chartered Accountants of Canada.

Mr Bruce was appointed to Hardy’s Board on 24 October 2008. In addition, Mr. Bruce serves on the Company’s Audit Committee.

Corporate Governance Statement

IntroductionHardy Oil and Gas plc is incorporated in the Isle of Man. The Company is not subject to any corporate governance regime in its place of incorporation. The Company substantially complies with the Combined Code on Corporate Governance and supports high standards of corporate governance. Set out below are Hardy’s corporate governance practices for the year ended 31 December 2008. Disclosures below include matters where Hardy has not fully complied during 2008 and its plans for compliance during 2009.

Board of DirectorsCompositionThe Company presently has seven directors, comprised of three executive directors and four non executive directors. On 24 October 2008, the size of the Board was increased to seven with the appointment of Ian Bruce as an independent non executive director.

Each of the executive directors has extensive knowledge of the oil and gas industry with combined experience of around 100 years. The non executive directors have either held senior appointments in oil and gas companies, companies with interests in the energy sector or have significant corporate and financial experience. The non executive directors bring a broad range of business and commercial experience to the Board. The Board believes it is an effective board that is collectively responsible for the success of the Company and that its composition has been suitable, providing a balance of skill sets to run an effective international junior oil and gas company.

Role and Operations of the BoardThe Board is accountable to the shareholders for the creation of long-term shareholder value and delivery of strong, sustainable operating and financial performance. In order to accomplish its objectives, the Board directs and monitors the Group’s affairs on an ongoing basis. It provides the Company with its overall strategic direction, ensures that the Company has the necessary financial and human resources in place, monitors performance of the Company and its management on an ongoing basis and adheres to strong corporate governance practices.

Board and Committee MeetingsSet out below is a table showing attendance at Board and committee meetings by the directors during 2008.

Audit Nomination RemunerationDirector Board Committee Committee Committee

Paul Mortimer 7/8 2/2 2/2 4/5Sastry Karra 8/8 2/2 3/3Yogeshwar Sharma 8/8 Dinesh Dattani 8/8 Carol Bell 7/8 3/3 2/2Pradip Shah 8/8 3/3 2/2 5/5Ian Bruce 1/2 1/1

In addition to the formal meetings of the Board, the executive directors maintain frequent verbal and written contact with the non executive directors to discuss various issues affecting the Company and its business. In addition, the Board executes a number of resolutions in writing to conduct Company business.

Information FlowThe Chairman establishes the agenda for each Board meeting. Business set out on Board agendas is discussed at each meeting with sufficient information provided to all the directors. Board meeting agendas and supporting information are circulated to each director prior to each meeting. Directors are provided sufficient information on the basis of which to discuss relevant matters in order to make informed decisions.

At each Board meeting, the Board reviews future cash flows and historical financial information with respect to the business and affairs of the Company. In addition, the directors are provided a status report on each of its exploration, development and production assets and a meaningful dialogue takes place. The Board receives reports of its various committees – Audit, Remuneration and Nomination – and takes appropriate action. Matters requiring resolutions are voted upon and approved if appropriate. Matters reserved specifically for Board approval are discussed and evaluated prior to approval. Decisions requiring Board approval in between scheduled Board meetings are made by circulating supporting information and approved unanimously in writing by the directors.


Independent Professional AdviceAll of the directors are aware that independent professional advice is available to each director in order to properly discharge his or her duties as a director. In addition, each director and committee has access to the advice of the Company Secretary.

Matters Specifically Reserved by the BoardA formal schedule of matters is reserved for consideration by the Board. The matters reserved include management structure including appointments and remuneration, consideration of strategic policies and corporate direction, approval of annual and interim results, acquisitions and disposals, material contracts, major capital expenditure projects and budgets, approval of capital structure, debt and equity financing, dividends, and other matters. Subject to those reserved matters, the Board delegates authority for the management of the business primarily to the executive directors and certain other matters are delegated to the Board committees, namely the Audit, Remuneration and Nominations Committees.

Performance EvaluationEach director’s position is subject to satisfactory performance of their responsibilities and is subject to re-appointment by shareholders at the Annual General Meeting. During 2008, no formal evaluation of the Board, its committees and directors (including the Chairman) was carried out although the performance of the directors is discussed on an informal basis. The Board of directors is pleased with the attendance of all directors at Board and committee meetings, despite significant travel and time requirements. The Board of directors is also satisfied with the participation by all the directors in formulating corporate strategies and for their engagement in meaningful dialogue and discussions at Board and committee meetings. The Board intends to formally undertake performance evaluations of individual directors and committees during 2009.

Chairman and Chief ExecutiveThere is a clear division of duties and responsibilities between the Non Executive Chairman and the Chief Executive of the Company. The Chairman provides leadership to the Board and ensures its effectiveness of its role and setting the agenda. The Chairman is also responsible in ensuring that the Board is provided with accurate, timely, and clear information in relation to the Group and its business. He is in regular communication with each of the executive and non executive directors on an ongoing basis. The Chief Executive is responsible for the running of the organisation and the execution of the Company’s strategies, goals and objectives. The roles of Chairman and Chief Executive are exercised by different individuals.

Paul Mortimer is the Non Executive Chairman of the Company. In addition to Hardy, he is also a director of African Highlands Limited, Baobab Limited, Digital Ventures II Limited, Gemini Oil & Gas Limited, Gemini Oil and Gas Management Limited, Rift Valley Holdings Limited, and Streamcourse Limited. In addition, he was a director of Arts Alliance Digital Ventures III, Limited, Digital Ventures Holdings Limited, Hoegh Capital Partners Advisors (BVI), Inc., and Hoegh Capital Partners PE (US) Limited until 7th July 2008 and Alliance Energy, Inc., Arts Alliance Labs, Inc., Gadus America, Inc., Gadus (PE) II, Inc., HCP (PE) I, Inc., HCP (PE) II, Inc., HCP (PE) III, Inc., HCP (PE) IV, Inc., HCP (PE) V, Inc., and Hoegh Capital Partners, Inc. until 15th September 2008.

Non Executive DirectorsThe Board has determined that Mr E.P. Mortimer (Chairman), Mr Pradip Shah, Dr Carol Bell and Mr Ian Bruce are independent non executive directors.

The Board considers that independence is a matter of judgment and therefore it believes that the non executive directors should be free from any business or other relationships that could materially interfere in the exercise of their independent judgment. It is the Board’s policy to provide its non executive directors fair remuneration for the contribution they make with respect to the business and affairs of the Company and the responsibilities they undertake in performing their duties as non executive directors.

Each of Messrs Mortimer and Shah was granted 260,333 options to purchase Ordinary Shares in the Company on the admission of Ordinary Shares of the Company on AIM in June 2005. Dr. Bell was granted a similar award on her appointment as a non executive director in December 2005.

Each of Messrs Mortimer and Shah has served as a non executive director for a period of more than nine years and continue to provide invaluable services to the Board, its committees and to the Company.

Governance


The Board acknowledges that Messrs Mortimer, Shah and Bruce have shareholdings in the Company thus expressing their confidence in the Company and its future.

Notwithstanding non executive directors’ interest in Ordinary Shares or options of the Company, or their long standing service as directors of the Company, the Board considers that their independence is not prejudiced or compromised as a result of such positions.

Board CommitteesThe Board has established Audit, Remuneration and Nomination Committees, each of which has terms of reference (approved by the Board) setting out its authority and duties. The Board considered various issues that would normally fall within the terms of reference of the various Committees. All members of the Audit Committee are non executive directors. All members of the Remuneration Committee are non executive directors although until 3 November 2008, Mr Sastry Karra, executive director and chief executive, was also a member of the Committee. Both executive and non executive directors are members of Nomination Committee although the majority of committee members are independent non executive directors.

The Nomination Committee and Remuneration Committee meet as and when required, but at least once a year. The Audit Committee meets at least three times a year to review, among other things, financial reporting with respect to interim and annual results and for audit planning purposes. The Company’s auditors attend at least two of these meetings to discuss any audit related issues and to review formally with committee members reports issued to the Company by the auditors. The Audit Committee ensures that any non-audit services conform to the ethical standards for auditors issued by the UK Auditing Practices Board.

Nomination CommitteeThe Nomination Committee comprises two non executive directors – Mr E.P. Mortimer (Chairman) and Mr Pradip Shah – and one executive director, Mr Sastry Karra. The Nomination Committee considers the structure, size and composition of the Board, retirements, replacements and appointments of additional directors, reviews succession plans for the directors and makes recommendations to the Board on membership of the Board, its committees and other matters within its remit.

There were two meetings of Nomination Committee held during 2008 with 100% attendance by the Committee members. Any new appointments to the Board are considered by the Nomination Committee and made after Board approval. Following appointment, a new director is given a detailed presentation of the activities of the Company. If an appointment is made without using an external search agency or open advertisement, the entire Board selects a new director.

During 2008, the Board appointed Mr Ian Bruce as a non executive director based on the recommendation of the Nomination Committee. The Committee was assisted by an external search firm in the selection process and the undertaking of due diligence on prospective candidates.

Remuneration CommitteeUntil 3 November 2008, the Company’s Remuneration Committee comprised two non executive directors, Mr E.P. Mortimer and Mr Pradip Shah, and one executive director, Mr Sastry Karra. Mr E.P. Mortimer was the Chairman of the Remuneration Committee. On 3 November 2008, Dr Carol Bell joined the Committee, replacing Mr Sastry Karra. In addition, Mr Pradip Shah became Chairman of the Remuneration Committee. Hardy’s Remuneration Committee operates within the terms of reference approved by the Board. There were five meetings of the Remuneration Committee held during 2008.

The Remuneration Committee considers remuneration policy, employment terms and remuneration of the executive directors and in future will also review the remuneration of senior management. The Remuneration Committee’s role is advisory in nature and makes recommendations to the Board on the overall remuneration packages for executive directors in order to attract, retain and motivate high quality executives capable of achieving the Group’s objectives. The Remuneration Committee also reviews proposals for the share option plans and other incentive plans, makes recommendations for the grant of awards under such plans as well as approving the terms of any performance related pay schemes. None of the directors participates in any discussion or votes on any proposal relating to his or her own remuneration. The Board’s policy is to remunerate the Group’s senior executives fairly and in such a manner as to facilitate the recruitment, retention and motivation of suitably qualified personnel. The Remuneration Committee, while considering remuneration packages of Hardy executives, has reviewed the policies of comparable groups in the industry. During 2008, the Committee retained the services of Mr Simon Patterson of Patterson and Associates who provided consulting services to the Committee with respect to a review of compensation practices of executive and non executive directors.

The remuneration of the non executive directors is determined by the Chairman and the executive directors outside the framework of the Remuneration Committee.

Corporate Governance Statement continued


Audit CommitteeThe Audit Committee is chaired by Dr Carol Bell and until 3 November 2008 its other members were Mr E. P. Mortimer and Mr Pradip Shah. On 3 November 2008, Mr E. P. Mortimer was replaced by Mr Ian Bruce. All of the committee members are independent non executive directors. Dr Carol Bell, Mr Pradip Shah and Mr Ian Bruce have extensive corporate, financing and banking experience. The Board is satisfied that the Audit Committee has recent and relevant financial experience. The Audit Committee is responsible for a wide range of financial matters and meets at least three times a year. There were three meetings of the Audit Committee in 2008 with 100% attendance by committee members and external auditors. It monitors the controls that are in place to ensure the integrity of the financial information reported to shareholders. The Audit Committee also oversees the relationship with the external auditor, reviews the scope and results of audits and provides a forum for reporting by the Group’s auditors. The Company has a policy in place for the award of non audit services provided by external auditors, which requires approval of the Audit Committee. The Audit Committee ensures that the independence and objectivity of the external auditors is safeguarded when securing non-audit services from the auditors. The Audit Committee also focuses on compliance with legal requirements, accounting standards and the Listing Rules and the Disclosure and Transparency Rules and ensures that an effective system of internal control and risk management systems are maintained. The ultimate responsibility for reviewing and approving the annual report and accounts and the half yearly reports remains with the Board. Some or all executive directors attend meetings of the Audit Committee upon invitation.

Shareholder RelationsCommunication with shareholders is given high priority and there is regular dialogue with institutional investors, as well as general presentations made at the time of the release of the annual and interim results. All directors are kept aware of changes in major shareholders in the Company and are available to meet with shareholders who have specific interests or concerns. The Company issues its results promptly to individual shareholders and also publishes them on the Company’s website – www.hardyoil.com. Regular updates to record news in relation to the Company and the status of its exploration and development programmes are included on the Company’s website. Shareholders and other interested parties can subscribe to receive these news updates by email by registering on line on the website free of charge.

The Chairman and all executive directors are available to meet with institutional shareholders to discuss any issues and gain an understanding of the Company’s business, its strategies and governance. Dr Carol Bell serves in the capacity as the senior independent non executive director of the Company and is available to shareholders if they have concerns that have not been resolved through the normal channels of Chairman or executive directors.

Internal ControlsThe Board of directors reviews the effectiveness of the Company’s system of internal controls in line with the requirement of the Combined Code. The internal control system is designed to manage the risk of failure to achieve its business objectives. This covers internal financial and operational controls, compliances and risk management. The Board considers it necessary to comply with the provisions of Section 1 of the Combined Code and to implement the guidance. The Company has necessary procedures in place for the year under review and up to the date of approval of the annual report and accounts.

The directors acknowledge their responsibility for the Company’s system of internal controls and for reviewing its effectiveness. The Board confirms the need for an ongoing process for identification, evaluation and management of significant risks faced by the Company.

A risk assessment for each project is carried out by a team consisting of the executive directors and senior management before making any commitments. This team meets as and when required. Internal and external risks, including exploration and development risks, regulatory and compliance obligations under various production sharing contracts, economics including oil price, interest rate and currency exposure, as well as natural catastrophes are continuously assessed.

During 2008, the Board reviewed the effectiveness of the system of internal control through detailed consideration of the financial control procedures in place. Given the size of the Company, the relative simplicity of the systems and the close involvement of senior management, the Board considers that there is no current requirement for an internal audit function. The procedures that have been established to provide internal financial control are considered appropriate for a company of its size and include controls over expenditure, regular reconciliations and management accounts. Most of the assets are owned jointly with others, budgets and expenditures are rigorously reviewed and approvals as well as project audits take place with respect to capital and operating expenditures on a regular basis.

The directors are responsible for taking such steps as are reasonably available to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.


Governance

Going ConcernThe directors, having made due and careful enquiry, are of the opinion that the Company has adequate working capital to execute its operations and has the ability access additional financing, if required, over the next twelve months and therefore believe the going concern basis to be appropriate in preparing its annual financial statements.

Share OptionsThe directors believe that equity incentives are and will continue to be an important means of retaining, attracting and motivating directors, senior management and key employees. Accordingly, in June 2005, the Board adopted the share option scheme entitling the Company to award options to directors and employees. The Company’s share option scheme has been considered and approved by the shareholders in 2006. Options are not granted at a discount to the market value. Under the scheme, options are exercisable between the first and tenth anniversaries of the date of grant.

Options granted in June 2005 were subject to performance conditions whereby the share price of Hardy would need to rise by 20%, 45% and 70% of the price at which the Hardy IPO was undertaken. In first year of performance period, one third of the options will become exercisable at or after 12 months following the date of grant. One third of the options will become exercisable at or after 24 months following the date of grant. The remaining one third of the options will become exercisable at or after 36 months following the date of grant. All of such performance conditions have been met.

No options were granted to any directors during 2008. No options were granted to non executive directors during 2006, 2007 or 2008.

In the future, it is intended to grant options under the share option scheme, which will generally vest after three years from date of grant and (due to the nature of the Group’s business) will not be subject to any other performance conditions. No options will be granted to non executive directors.

Non Compliance with Combined CodeThe Company did not comply with the Combined Code with the following matters during 2008.

Code Provision Subject Matter Discussion

A1.3 Performance appraisal of chairman by A formal performance evaluation was not carried out of non executive directors the chairman during 2008. Non executive directors are planning

for such an appraisal during 2009.

A3.1 Non executive directors meeting Paul Mortimer and Pradip Shah have served for more than nine years. independence requirements As a result, both directors are subject to annual re-election.

Paul Mortimer, Pradip Shah and Carol Bell were granted share options in 2005 when the Company’s ordinary shares were listed on AIM.

The Board has confirmed, notwithstanding the above, that all of the non executive directors are independent.

A6.1 Performance evaluation of the Board, No formal evaluation of the Board, its committees, or individual directors committees and its individual directors was undertaken during 2008. It is noted that the Company’s ordinary

shares were listed on the Main Market only in February 2008. The directors fully intend to conduct such evaluations during 2009.

B1.3 Remuneration of non executive directors Share options were granted in 2005 to non executive directors when should not include share options the Company was listed on AIM and not subject to the Combined Code.

During 2008, the Company has changed its policies whereby no share options are granted to non executive directors in the future.


Corporate Governance Statement continued

The Directors of Hardy Oil and Gas plc present their annual report together with the audited financial statements for the year ended 31 December 2008. Their reports will be presented before the shareholders at the Annual General Meeting scheduled to be held on 7 May 2009.

Business Review and Future DevelopmentsHardy is an international upstream oil and gas company whose assets are principally in India and to a lesser extent in Nigeria. Hardy’s objective is to be a leading independent exploration and production company in India and deliver consistent step change growth in shareholder value through exploration of hydrocarbons. A full review of the Company’s activities during 2008 and plans for 2009 can be found in the Chairman’s and Chief Executive’s Review, Review of Operations, Financial Review, Corporate Responsibility Statement, Directors’ Remuneration Report and the Risk and Uncertainties section of the Annual Report, which are incorporated herein by reference.

DirectorsDirectors that served in office during 2008 are as follows:

Paul Mortimer, Sastry Karra, Yogeshwar Sharma, Dinesh Dattani, Dr Carol Bell, Pradip Shah, Ian Bruce (since 24 October 2008)

Indemnity Provision for DirectorsSubject to the Isle of Man Companies Acts 1931 to 2004, but without prejudice to any indemnity to which a director may otherwise be entitled, every director shall be entitled to be indemnified out of the assets of the Company against all costs, charges, losses, damages and liabilities incurred by the director in the actual or purported execution of his duties. The Company has a directors and officers insurance policy in place.

Results and DividendsThe Group is reporting a net profit of $7,472,356 for 2008 compared to $8,315,978 for 2007. The Directors do not recommend the payment of a dividend for 2008.

Election and Re-election of DirectorsAt the next Annual General Meeting of the Company to be held on 7 May 2009, Mr E. Paul Mortimer, Mr Sastry Karra, Mr Yogeshwar Sharma and Mr Pradip Shah will offer themselves for re-election. In addition, Mr Ian Bruce will be proposed to be re-appointed as a director.

Biographical details for Mr E. Paul Mortimer, Mr Sastry Karra, Mr Yogeshwar Sharma and Mr Pradip Shah and Mr Ian Bruce are set out on pages 24 and 25.

Mr Karra and Mr Sharma entered into parallel service agreements with the Company and HEPI. The appointments are subject to termination upon 6 months’ notice by either party.

Mr Mortimer, Mr Shah and Mr Bruce have entered into engagement letters with the Company in respect of their appointments as Non Executive Directors of the Company. The appointments are subject to termination upon at least 3 months’ notice by either party.

Both Mr. Mortimer and Mr Shah have served as Directors for more than nine years. The Company had remained unlisted until June 2005 when Ordinary Shares of the Company were listed on the Alternative Investment Market of the London Stock Exchange. Mr Mortimer is the Company’s Non Executive chairman and Mr Shah chairs the Company’s Remuneration Committee and is a Non Executive director. The Board of Directors believe that the contribution being made by both Directors continue to be invaluable and are satisfied that they conduct themselves in an independent manner in the best interest of shareholders.

Mr Ian Bruce was appointed to the Board of Directors on 24 October 2008 and is an independent Non Executive Director. Mr Bruce has considerable depth as an investment banker in the energy sector at the most senior levels and brings extensive and valuable experience in the investment, energy and finance sectors. The Directors believe his re-appointment will continue to strengthen the functioning of the Board and recommends his re-appointment.

The Board of Directors is satisfied that the performance of all of the Directors proposed for re-election or re-appointment continues to be effective and are also satisfied as to their commitment to the role as Directors.


Directors’ Report

Governance

Capital Structure and Significant ShareholdersThe Company’s authorised and issued share capital and changes thereto are disclosed in note 23 to the financial statements. Disclosures with respect to share options are provided in note 7 to the consolidated financial statements and in the Directors’ Remuneration Report.

At 31 December 2008 and at the date of this report, there were 62,321,047 Ordinary Shares of Hardy that were issued and fully paid. Major interests in share capital of the Company, in excess of 3%, as of 18 March 2009 are as follows:

Major Shareholder Shareholding % Shareholding

Sastry Karra 6,861,679 11.01Lloyds TSB Group plc 6,677,215 10.71Limpopo Investments Limited 4,874,162 7.82Aegon Asset Management 4,185,355 6.72Yogeshwar Sharma 4,129,400 6.63Grahame Whately 3,430,361 5.50Standard Life Investments Ltd 3,111,312 4.99Legal and General 2,479,938 3.98Universities Superannuation Scheme Limited 2,012,608 3.23

Annual General Meeting The Company’s next Annual General Meeting will be held at the offices of Buchanan Communications 45 Moorfields London EC2Y 9AE on 7 May 2009 at 10.00 am. The notice of meeting and the explanatory circular to shareholders setting out business to be conducted at the Annual General Meeting accompanies this annual report. The notice includes items of special business which are explained by the Chairman in his letter contained in the Circular. The items of special business concern proposals to authorise the Company to make market purchases of its own shares and to disapply the pre-emption rights set out in article 5.1 of the Company’s Articles of Association.

Statement of Directors’ ResponsibilitiesThe directors are responsible for preparing the financial statements in accordance with applicable law and International Financial Reporting Standards as adopted by the European Union. Under such requirements, the directors are required to prepare Consolidated and Parent Company financial statements of Hardy Oil and Gas plc for the year ended 31 December 2008, which comprise Consolidated Income Statement, Consolidated and Parent Company Balance Sheets, Consolidated and Parent Company Statements of Cash Flows, Consolidated and Parent Company Statements of Changes in Equity, and related notes. In preparing these financial statements, the Directors are required to:

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and of the Group and to enable them to ensure that the financial statements comply with the Isle of Man Companies Acts 1931 to 2004. The directors are responsible for ensuring the Directors’ Report and other information included in the annual report are prepared in accordance with company law of the Isle of Man and are also responsible for ensuring that the annual report includes information required by the rules of the London Stock Exchange.

In addition to the above, the directors are also responsible for safeguarding the assets of the Company and of the Group and hence for taking reasonable steps for the prevention and detection of fraud or other irregularities.


Directors’ Report continued

Directors Responsibility Statement pursuant to Disclosure and Transparency Rule 4.1.12The directors confirm that, to the best of their knowledge:

(a) The financial statements, which are prepared in accordance with International Financial Reporting Standards as adopted by the European

(b) The Directors’ Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face.

Charitable and Political DonationsDuring 2008, the Company made a payment to The Geological Society of £1,300 for an affiliate sponsorship for the year. Other than this payment, the Company did not make any charitable or political donations in the UK or in the European Union during the year.

Payment PolicyHardy’s policy with respect to payments to its vendors is to generally establish terms of payment when contracting for goods or services and to abide by those payment terms.

Disclosure of Information to AuditorsAs far as the directors are aware, there is no relevant audit information of which the Company’s auditors are unaware. In making this confirmation, the directors have taken appropriate steps to make them aware of any relevant audit information.

Re-appointment of AuditorsHorwath Clark Whitehill LLP has expressed their willingness to continue as auditors. In accordance with the Isle of Man Companies Acts 1931 to 2004, a resolution re-appointing Horwath Clark Whitehill LLP as auditors of the Company will be proposed at the next Annual General Meeting.

Going ConcernAfter making reasonable enquiries, the Directors have made an informed judgment, at the time of approving financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. As a result, the Directors have continued to adopt the going concern basis in preparing the financial statements.

Post Balance Sheet EventsThere have not been any material post balance sheet events that have occurred since 31 December 2008 to the date of this report.

Approved by the Board of Directors on 18 March 2009.

E. P. Mortimer Non Executive Chairman


Governance

Consideration by the Directors of Matters Relating to Directors’ RemunerationThe Company has a Remuneration Committee presently comprised of Mr Pradip Shah (Non Executive Director) as Chairman, Mr E.P. Mortimer (Non Executive Chairman of the Company), and Dr Carol Bell (Senior Non Executive Director). Prior to 3 November 2008, the Committee comprised of Mr E.P. Mortimer (Non Executive Chairman) as Chairman, Mr Sastry Karra (Executive Director and Chief Executive) and Mr Pradip Shah, Non Executive Director. All of the members of the Remuneration Committee have considered matters relating to directors’ remuneration for the year ended 31 December 2008 for the period they have been committee members.

In addition, the Remuneration Committee appointed Simon Patterson of Patterson Associates as a Remuneration Consultant to assist the Committee in setting the remuneration of Executive Directors and Non Executive Directors for the future.

Statement of Hardy’s Policy on Directors’ RemunerationThe Company has established levels of remuneration that are appropriate to attract, retain and motivate Executive Directors of the quality required to run its business successfully. A significant proportion of Executive Directors’ remuneration is structured so as to link rewards to corporate and individual performance, align their interests with those of shareholders and to incentivise them to perform at the highest levels.

The Remuneration Committee considers remuneration policy and the employment terms and remuneration of the Executive Directors. The Remuneration Committee’s role is advisory in nature and makes recommendations to the board of directors on the overall remuneration packages for Executive Directors in order to attract, retain and motivate high quality executives capable of achieving Hardy’s objectives. The main goals of the Hardy’s remuneration policy are to reward past performance, incentivise future performance, encourage teamwork, retain company talent and assure alignment with shareholders. These goals will be achieved by maintaining appropriate salaries, introducing annual cash bonuses and providing a systematic annual grant of options. All incentive compensation levels are subject to recommendations of the Remuneration Committee and approved by the Board.

Base salaries of Executive Directors are reviewed on an annual basis. No changes to base salaries were made during 2008 or to date.

The Company did not have the practice of awarding cash bonuses to the end of 2008. Effective 1 January 2009, the Remuneration Committee will recommend annual bonuses having regard to the cash requirement and overall performance of the Group. The size of the bonus will correspond to the salary of the Executive Director based upon performance targets, including corporate, team and individual performance measures.

The Remuneration Committee reviews proposals for the share option plans, makes recommendations for the grant of awards under such plans as well as approving the terms of any performance related pay schemes. The Company has adopted a policy of granting stock option awards on an annual basis. None of the directors participate in any discussion or votes on any proposal relating to his own remuneration. The policy of the board of directors is to remunerate Hardy’s Executive Directors fairly and in such a manner as to facilitate the recruitment, retention and motivation of suitably qualified personnel. The remuneration of the Non Executive Directors is determined by the Chairman and the Executive Directors outside the framework of the Remuneration Committee and approved by the board of directors.

All of the directors have been granted options to purchase Ordinary Shares of Hardy in the past. No options were granted to any of the Executive Directors during 2008. No options were granted to Non Executive Directors during 2006, 2007 or 2008.

In future, any new options granted will generally vest three years from the date of grant for the entire award thereby facilitating a longer period of retention. Previously, options were subject to vesting over a three-year period from date of grant. All of the options granted are at market prices based on the five-day average price prior to the date of grant. There will be no performance measures attached to the options with respect to vesting. The directors believe that share price appreciation is the best measure of performance and aligns the interest of directors with those of shareholders and has therefore chosen not to impose any performance conditions. Options will be forfeited if a director resigns before the options vest. In other circumstances, the vesting of options will be at the discretion of the Remuneration Committee and Board approval. In the event of a change of control, all of the unvested options will vest.

Options granted following the initial public offering in June 2005 were subject to performance conditions based upon appreciation in the price of Ordinary Shares of the Company. All of the performance conditions have been met. Subsequent options granted have been subject to vesting provisions over a three-year period, commencing from the anniversary of the date of grant.

All of the service contracts with directors are on an evergreen basis, subject to termination provisions. Under the terms of the service agreements of all Executive Directors, the Company may in lieu of notice terminate the executive’s employment with immediate effect and in such instance must pay the executive: a lump sum equal to basic salary at the rate prevailing at the date of termination for a period of

in the event of a change of control, the Company may be entitled to terminate the executive’s employment on payment of 12 months’ salary together with all benefits and bonuses. The appointments of Executive Directors are subject to termination of 12 months or less by either party. The appointments of Non Executive Directors are subject to termination upon at least 3 months’ notice.


Directors’ Remuneration Report

The main goals of the company’s remuneration policy for the Chairman and Non Executive Directors are to assure alignment with shareholders through independence, recognise time commitments devoted to corporate affairs and attract and retain outstanding candidates.

Effective 1 January 2009, restricted shares will be issued to the Chairman and each Non Executive Director on an annual basis. The number of restricted shares to be issued will be equivalent to 25% of their annual fee based on the market value of Hardy shares on 31 December or the last trading day of the calendar year. These shares will remain restricted for three years. The shares will become unrestricted and are delivered to the individual three years after the date of issue. The share award will be in addition to the annual cash fee.

In the event of change of control of Hardy and the participant is no longer a director going forward, all of the restricted shares will vest. In the event of death of a director, all shares will become fully vested. In all other circumstances, shares that will remain restricted are forfeited if the participant is no longer a director of Hardy. In addition, the board has discretion to accelerate vesting on a date determined by it.

A one-time restricted share award may be made to a new Non Executive Director on joining the Board. Such an award was made to Mr Ian Bruce upon his appointment as a Non Executive director on 2008. Such shares are held in trust and will be released to Mr Bruce after three years from the date of issue (subject to earlier release in certain circumstances) provided he remains a director of the Company provided for that period.

Performance Graph

Ordinary Shares of the Company were listed on the AIM exchange from 10 June 2005, and on the Official List of the London Stock Exchange’s market for listed securities (‘Main Market’) from 20 February 2008. In the circumstances, and since the Company’s principal business is upstream oil and gas exploration, development and production, the Company has chosen to compare its performance with the FTSE All Share Index and FTSE 350 Oil and Producers Index.

Directors’ Beneficial Interest in SharesThe directors who held office during 2008 and 2007 and their beneficial interests in the Ordinary Shares of the Company are as follows:

As at 31 DecemberName of Director Position 2008 2007

E. P. Mortimer Non Executive Chairman 870,051 870,051Sastry Karra Chief Executive 7,961,679 8,455,200Yogeshwar Sharma Chief Operating Officer 4,029,400 4,229,400Pradip Shah Non Executive Director 664,435 664,435Ian Bruce Non Executive Director 345,787* N/A

*Includes 11,146 Ordinary Shares beneficially held for his children. Also includes 20,182 ordinary shares issued on 24 October 2008, his date of appointment as a director which are held in escrow and will be released to him after three years (subject to acceleration in certain circumstances), provided he remains a director of the Company for a period of three years.

On 7 January 2009, Mr Karra sold 1.1 million Ordinary Shares of Hardy and Mr Sharma acquired 0.1 million Ordinary Shares of Hardy.

Other than above, the Directors do not have beneficial interest in the Ordinary Shares or any other securities of the Company, other than stock options (except for Mr Ian Bruce).


Hardy Oil and Gas FTSE All-Share FTSE 350 Index Oil and gas producers

Shareholder Return and Index Performance 05 June 2005 – 31 December 2008

(annual data points)

350%

300%

250%

200%

150%

100%

50%

0%

100%

193%

113%

111%

204%

129%

109%

324%

130%

130%122%109%

88%

June 2005 Dec 2007 Dec 2008Dec 2006Dec 2005

Governance

Service ContractsSastry Karra entered into parallel service agreements with the Company and HEPI (with the payment of salary and other individual terms being governed by the agreement with HEPI) dated 2 June 2005. His appointment is subject to termination upon 6 months’ notice by either party. The agreement provides for an annual salary of US$180,000, membership of a private medical scheme, permanent health insurance, life assurance cover and pension contributions of 4% of his salary. Effective 1 July 2007, Mr Karra’s salary was increased to £200,000 per annum.

Yogeshwar Sharma entered into parallel services agreements with the Company and HEPI (with the payment of salary and other individual terms being governed by the agreement with HEPI) dated 2 June 2005. His appointment is subject to termination upon 6 months’ notice by either party. The agreement provides for an annual salary of US$180,000, the use of a company car, membership of a private medical scheme, permanent health insurance, life assurance cover and pension contributions of 4% of his salary. Effective 1 July 2007, Mr Sharma’s salary was increased to £200,000 per annum.

Dinesh Dattani entered into a service agreement with the Company with an effective date of 1 July 2007, subject to termination upon 12 months notice by the Company and 90 days by Mr Dattani. The agreement provides for an annual salary of £191,250, membership of a private medical scheme, life assurance cover, travel costs and professional dues.

The services of Paul Mortimer, Pradip Shah and Carol Bell as Non Executive Directors are provided under the terms of agreements with the Company and each Non Executive Director dated 2 June 2005 (with respect to Messrs Mortimer and Shah) and 16 December 2005 with respect to Dr Bell). The appointments provide for an initial fee of US$30,000 per annum and are subject to termination upon at least three months’ notice. Effective 20 February 2008, the date Ordinary Shares of Hardy were listed on the Official List of the London Stock Exchange, the annual fees for Mr. Mortimer, the Non Executive Chairman, increased to £48,000 per annum. In addition, the annual fees for other Non Executive Directors Mr Shah and Dr Bell increased to £36,000 per annum.

On 24 October 2008, Ian Bruce was appointed a Non Executive Director of the Company. On that date, he was issued 20,182 Ordinary Shares of Hardy, with a value of £50,000 under a Restricted Shares Agreement. Such ordinary shares are held in escrow and will be released to him after three years (subject to acceleration in certain circumstances), provided he remains a director of the Company for a period of three years. In addition, his appointment is subject to termination upon at least 3 months’ notice and a director’s fee at the rate of £36,000 per annum from the date of his appointment as a director.

Under the terms of Executive Directors’ service agreements, the Company may terminate the executive’s employment with immediate effect. In such instance the Company must pay the executive a lump sum equal to basic salary at the rate prevailing at the date of termination for a period of 12 months, and a bonus to the extent earned and awarded by the Company at the date of termination in lieu of the notice period. In addition, in the event of a change of control, the Company may be entitled to terminate the executive’s employment on payment of 12 months’ salary together with all benefits and bonuses. In addition, Mr Dattani is entitled to travel costs and an allowance of two months’ salary for relocation.

Save as detailed above, there are no other service contracts between any of the Directors and the Company providing for benefit upon termination of employment.

Under the Articles of Association of the Company, one-third of the Directors, or if their number is not a multiple of 3, the number nearest to but not exceeding one third are obliged to retire by rotation at each Annual General Meeting. The retiring directors may be subject to re-election at the Annual General Meeting. In addition, in accordance with the Combined Code, any director who has served for a minimum of nine years will be subject to annual election at the Annual General Meeting.


Directors’ Remuneration Report continued

Information Subject to Audit Directors’ Emoluments and CompensationSet out below are the emoluments of the Directors for the years indicated:

Year ended Year ended 31 December 2008 31 December 2007

US Dollars Salaries/Fees Bonuses Benefits Total Total

Paul Mortimer 80,778 – – 80,778 30,000Sastry Karra 372,937 – 5,124 378,061 359,627Yogeshwar Sharma 377,920 – 3,056 380,976 329,122Dinesh Dattani 372,193 – 10,731 382,924 272,830Carol Bell 61,584 – – 61,584 34,006Pradip Shah 61,609 – – 61,609 30,000Ian Bruce (1) 10,050 – – 10,050 –

Total 1,337,071 – 18,911 1,355,982 1,055,585

Notes: (1) In addition, Ian Bruce was issued Ordinary Shares with a market value of $80,203 (£50,000) on his appointment as a Non Executive

Director effective 24 October 2008. These shares are escrowed and will be released after three years from the date of issue subject to Mr Bruce remaining a director (subject to acceleration under certain circumstances). During 2008, an amount of $4,455 was expensed in the income statement.

All of the directors’ remuneration stated above is without any performance conditions. No bonuses were paid to any of the Executive Directors during 2007 or 2008.

Share Options The Company has adopted a share option scheme which allows it to grant options to subscribe for Ordinary Shares at the discretion of the board of directors to directors and selected employees of Hardy and its subsidiary companies. The plan has not been approved by UK tax authorities.

Set out below is certain information pertaining to share options that have been granted to the directors of Hardy:

# of Options # of Options # of Options # of Options Exercise Beginning Granted End Vested at price perDirector of 2008 during 2008 of 2008 Date of grant End of 2008 Expiry date share (£)

Paul Mortimer 260,233 – 260,233 7 June 2005 260,233 6 June 2015 1.44

Sastry Karra 780,700 – 780,700 7 June 2005 780,700 6 June 2015 1.44 400,000 – 400,000 2 July 2007 133,333 1 July 2017 4.31

Yogeshwar Sharma 780,700 – 780,700 7 June 2005 780,700 6 June 2015 1.44 300,000 – 300,000 2 July 2007 100,000 1 July 2017 4.31

Dinesh Dattani 400,000 – 400,000 2 July 2007 133,333 21 Dec 2015 4.31

Carol Bell 260,333 – 260,333 22 Dec 2005 260,333 21 Dec 2015 2.76

Pradip Shah 260,333 – 260,333 7 June 2005 260,333 6 June 2015 1.44

Ian Bruce – – – – – – –

No options were granted to any directors during 2008.

No price was paid for any grant of options by the directors to the Company.

There were no variations made during the year in the terms and conditions with respect to any outstanding share options granted by the Company.


Governance

Options granted on 7 June 2005 are subject to performance criteria based upon appreciation in the market value of Ordinary Shares of the Company. All of such performance conditions have been met. All subsequent options granted to the end of 2008 are subject to vesting provisions whereby one third of the options granted vest on each of the three anniversaries from the date of grant. There are no additional performance criteria with respect to options granted subsequent to 7 June 2005. It is intended that future grant of options will be subject to vesting at the end of a three-year period for the entire award.

No share options were exercised by any of the directors of the Company during 2008.

On 31 December 2008, the market price of an Ordinary Share of Hardy was £1.72 per share. The highest and lowest market price of an Ordinary Share of Hardy during 2007 was £8.685 and £1.45 respectively.

Restricted SharesEffective 1 January 2009, the board of directors have adopted a policy whereby restricted shares will be issued to the Chairman and each Non Executive Director on an annual basis. The number of restricted shares to be issued will be equivalent to 25% of their annual fee based on the market value of Hardy shares on December 31 or the last trading day of the calendar year. These shares will remain restricted for three years. The share award will be in addition to the annual cash fee.

In the event of change of control of Hardy and the participant is no longer a director going forward, all of the restricted shares will vest. In the event of death of a director, all shares will become fully vested. In all other circumstances, shares that are still restricted are forfeited if the participant is no longer a director of Hardy.

Other Matters

however, no directors’ fees were paid to them during 2008. Mr Dattani has stock options from a private company.

The Company does not have any long-term incentive schemes in place for any of the directors.

The Company does not have any pension plans for any of the directors.

The Company has not paid out any excess retirement benefits to any directors or past directors.

The Company has not paid any compensation to past directors.

The Company has not paid any sums to third parties with respect to any services of directors.

Approved on behalf of the board of directors

Pradip Shah Chairman Remuneration Committee 18 March 2009


Directors’ Remuneration Report continued

Financial Statem

entsHardy Oil and Gas plc


We have audited the group and parent company financial statements (the ‘financial statements’) of Hardy Oil and Gas plc for the year ended 31 December 2008 which comprise the Group Income Statement, Group and Parent Company Balance Sheets, the Group and Parent Company Cash Flow Statements, the Group and Parent Company Statement of Changes in Equity, and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.

This report is made solely to the parent company’s members, as a body, in accordance with section 15 of the Isle of Man Companies Act 1982. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Isle of Man Companies Acts 1931 to 2004 and, as regards the group financial statements, Article 4 of the IAS Regulation.

We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. The information in the Directors’ Report includes that specific information presented in the Review of Operations and Financial Review that is cross referred from the Business Review section of the Directors’ Report.

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only the Chairman and Chief Executive’s Review, Review of Operations, Directors’ Report, the unaudited part of the Directors’ Remuneration Report, Financial Review, and the Corporate Governance Statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited.

Independent Auditors’ Report to the shareholders of Hardy Oil and Gas plc


OpinionIn our opinion:

4 of the IAS Regulation:

Horwath Clark Whitehill LLP Chartered Accountants Registered Auditors London 18 March 2009

Independent Auditors’ Report continued to the shareholders of Hardy Oil and Gas plc

Financial Statem



2008 2007 Notes US$ US$

Revenue 2 17,306,042 11,829,554

Cost of salesProduction costs (7,523,972) (4,216,138)Depletion (1,521,919) (1,344,101)Decommissioning charge (151,174) (217,397)

Gross profit 8,108,977 6,051,918Administrative expenses (9,847,526) (6,865,187)

Operating loss (1,738,549) (813,269)Gain on sale of investment 3 12,953,064 10,243,729Interest and investment income 9 1,320,189 1,381,121Finance costs 10 (91,204) (180,400)

Profit before taxation 12,443,500 10,631,181

Tax on profit 11 (4,971,144) (2,315,203)

Profit attributable to the equity shareholders of the parent company 7,472,356 8,315,978

Earnings per shareBasic 12 0.12 0.14Diluted 12 0.11 0.13

Consolidated Income Statementfor the year ended 31 December 2008


2008 2007 Notes US$ US$

Beginning of year 143,995,825 91,401,836

Profit for the year 7,472,356 8,315,978Available for sale investments:Unrealised valuation gain – 3,514,603Transferred to profit on sale from other reserves (12,354,477) –Deferred tax on valuation gain released on sale of investment 3,441,945 –Deferred tax liability on unrealised valuation gain – (966,780)

Total recognised (losses)/gains (1,440,176) 10,863,801New shares issued 24 250,944 40,168,691Share based payments 7 1,425,280 1,561,497

End of year 144,231,873 143,995,825

An analysis of the changes in equity by reserve is given in note 24.

Consolidated Statement of Changes in Equityfor the year ended 31 December 2008

Financial Statem



Consolidated Balance Sheetas at 31 December 2008

2008 2007 Notes US$ US$

Assets

Non-current assetsIntangible assets – exploration 13 124,013,261 99,284,534Intangible assets – others 14 111,640 246,572Property, plant and equipment 15 8,477,099 3,375,463Investments 16 – 15,092,311Site restoration deposit 26 3,211,830 3,369,820

135,813,830 121,368,700

Current assetsInventory 18 3,736,437 2,703,915Trade and other receivables 19 4,087,719 14,525,440Short term investments 20 22,010,291 –Cash and cash equivalents 25 8,139,314 31,157,048

37,973,761 48,386,403

Total assets 173,787,591 169,755,103

Liabilities

Current liabilitiesTrade and other payables 21 (13,758,099) (9,857,909)

Non-current liabilitiesProvision for decommissioning 22 (4,500,000) (4,500,000)Provision for deferred tax 11 (11,297,619) (11,401,369)

(15,797,619) (15,901,369)

Total liabilities (29,555,718) (25,759,278)

Net assets 144,231,873 143,995,825

EquityCalled-up share capital 23 623,210 622,625Share premium 24 93,351,938 93,101,579Shares to be issued 24 3,926,870 2,501,590Other reserves 24 – 8,912,532Retained earnings 24 46,329,855 38,857,499

Total equity attributable to equity holders of the parent 144,231,873 143,995,825

Approved and authorised for issue by the Board of Directors on 18 March 2009.

E.P. Mortimer Dinesh Dattani Chairman Finance Director


2008 2007 Notes US$ US$

Operating activities

Cash flow from operating activities 5 2,065,776 (1,844,914)Taxation paid (1,373,117) 63,235

Net cash from (used in) operating activities 692,659 (1,781,679)

Investing activitiesExpenditure on intangible assets – exploration (24,728,727) (32,068,253)Expenditure of property, plant and equipment (6,802,348) 5,856Purchase of intangible assets – others (3,841) (147,297)Purchase of other fixed assets (117,097) (38,753)Purchase of investment (13,184,387) –Sale of investment 41,378,216 –Site restoration deposit 157,990 (585,160)Short term investment (22,010,291) –

Net cash (used in) investing activities (25,310,485) (32,833,607)

Financing activitiesInterest and investment income 1,520,555 1,293,104Finance costs (91,204) (180,400)Issue of shares 170,741 40,168,691

Net cash from financing activities 1,600,092 41,281,395

Net (decrease)/increase in cash and cash equivalents (23,017,734) 6,666,109

Cash and cash equivalents at the beginning of the year 31,157,048 24,490,939

Cash and cash equivalents at the end of the year 8,139,314 31,157,048

Consolidated Statement of Cash Flowsfor the year ended 31 December 2008

Financial Statem



Notes to the Consolidated Financial Statementsfor the year ended 31 December 2008

1. Accounting policiesThe following accounting policies have been applied in preparation of consolidated financial statements of Hardy Oil and Gas plc (‘Hardy’ or the ‘Group’).

a) Basis of preparationHardy prepares its financial statements on a historical cost basis except as otherwise stated. Investment in a publicly traded company is restated at fair value.

b) Going concernThe Group has a history of profitable operations and has successfully raised financing in the past to provide funding for its ongoing exploration and development programs and to augment its working capital. Having regard to the Group’s existing working capital position and its ability to raise potential financing, if required, the Directors are of the opinion that the Group has adequate resources to enable it to undertake its planned work program of exploration, appraisal and development activities over the next twelve months.

c) Accounting standardsHardy prepares its financial statements in accordance with applicable International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting Standards Board as adopted by the European Union.

As at the date of approval of these financial statements, the following standards and interpretations were in issue but not yet effective:

IFRS 3 (revised) Consolidated financial statements IFRS 8 Operating segments IFRIC 13 Customer loyalty programmes IFRIC 15 Agreements for the construction of real estate IFRIC 16 Hedges of a net investment in a foreign operation IFRIC 17 Distribution of non-cash assets to owners IFRIC 18 Transfer of assets from customers IAS 1 (revised) Presentation of financial statements IAS 23 (revised) Borrowing costs IAS 27 (revised) Consolidated and separate financial statements

The Directors do not anticipate that the adoption of these standards and interpretations in future reporting periods will have a material impact on the Group’s results.

d) Basis of consolidationThe consolidated financial statements include the results of Hardy Oil and Gas plc and its subsidiary undertakings. The consolidated income statement and consolidated cash flow statements include the results and cash flows of subsidiary undertakings up to the date of disposal.

The Group conducts the majority of its exploration, development and production through unincorporated joint arrangements with other companies.

The consolidated financial statements reflect the Group’s share of production and costs attributable to its participating interests under the proportional consolidation method.

e) Revenue and other incomeRevenue represents the sale value of the Group’s share of oil which excludes the profit oil sold and paid to the Government as a part of profit sharing in the year, tariff, and income from technical services to third parties if any. Revenues are recognised when crude oil has been lifted and title has been passed to the buyer or when services are rendered.


f) Oil and gas assetsi) Exploration and evaluation assets

Hardy follows the full cost method of accounting for its oil and gas assets. Under this method, all expenditures incurred in connection with and directly attributable to the acquisition, exploration and appraisal having regard to the requirements of IFRS 6 ‘Exploration for and Evaluation of Mineral Resources are accumulated and capitalised in two geographical cost pools, which are not larger than a segment: India and Nigeria.

The capitalised exploration and evaluation costs are classified as Intangible assets – exploration which includes the license acquisition, exploration and appraisal costs relating either to unevaluated properties or properties awaiting further evaluation but do not include costs incurred prior to having obtained legal right to explore an area, which are expensed directly to the income statement as they are incurred.

Intangible exploration and evaluation cost relating to each license or block remain capitalised pending a determination of whether or not commercial reserves exists. Commercial reserves are defined as proven and probable on a net entitlement basis.

When a decision to develop these properties is taken or there is evidence of impairment, the costs are transferred to the cost pools within development/producing assets when the commercial reserves attributable to the underlying asset have been established.

ii) Oil and gas development and producing assets

Development and production assets are accumulated on a field by field basis. These comprise of the cost of developing commercial reserves discovered to put them on production and the exploration and evaluation costs transferred from intangible exploration and evaluation assets, as stated in policy above. In addition, interest payable and exchange differences incurred on borrowings directly attributable to development projects, if any, and assets in the production phase, as well as cost of recognizing provision for future restoration and decommissioning, are capitalised.

iii) Decommissioning

At the end of the producing life of a field, costs are incurred in removing and decommissioning facilities, plugging and abandoning wells. Future decommissioning costs are estimated and stated at an amount representing the costs which would be incurred should decommissioning occur at the balance sheet date and the estimates are reassessed each year. The provision is assessed at prices ruling at the balance sheet date and, accordingly, it is not appropriate to discount this provision. The decommissioning asset is included within the property, plant and equipment with the cost of the related assets installed and are adjusted for any revision to the decommissioning costs and the provision thereof. The amortization of the asset, calculated on a unit of production basis based on proved and probable reserves, is shown as ‘Decommissioning charge’ in the income statement.

iv) Disposal of assets

Proceeds from any disposal of assets are credited against the specific capitalised costs included in the relevant cost pool and any loss or gain on disposal is recognised in the income statement. Gain or loss arising on disposal of a subsidiary is recorded in the income statement.

g) Depletion and impairmenti) Depletion

The net book values of the producing assets are depreciated on a field by field basis using the unit of production method, based on proved and probable reserves taking into consideration future development expenditures necessary to bring the reserves into production. Hardy periodically obtains an independent third party assessment of reserves which is used as a basis for computing depletion.

ii) Impairment

Exploration assets are reviewed regularly for indications of impairment, if any, where circumstances indicate that the carrying value might not be recoverable. In such circumstances, if the exploration asset has a corresponding development/producing cost pool, then the exploration costs are transferred to the cost pool and depleted on unit of production. In cases where no such development/producing cost pool exists, the impairment of exploration costs is recognised in the income statement. Impairment reviews on development/producing oil and gas assets for each field are carried out on each year by comparing the net book value of the cost pool with the associated discounted future cash flows. If there is any impairment in a field representing a material component of the cost pool, an impairment test is carried out for the cost pool as a whole. If the net book value of the cost pool is higher, then the difference is recognised in the income statement as impairment.

Notes to the Consolidated Financial Statements continuedfor the year ended 31 December 2008

Financial Statem



h) Property, plant and equipmentProperty, plant and equipment other than oil and gas assets are measured at cost and depreciated over their expected useful economic lives as follows: Depreciation Annual Rate (%) Method

Leasehold improvements over lease period Straight lineFurniture and fixtures 20% Straight lineInformation technology and computers 33% Straight lineOther equipment 20% Straight line

i) Intangible assetsIntangible assets other than oil and gas assets are measured at cost and depreciated over their expected useful economic lives as follows: Depreciation Annual Rate (%) Method

Computer software 33 % Straight line

j) InvestmentsInvestments in publicly traded securities are treated as available for sale and are recognised at fair values based upon the quoted market prices on the balance sheet date. Unrealised gains and losses are recognised under equity – other reserves. On disposal of an investment, the cumulative gain or loss is recognised in the income statement.

k) Short term investmentsShort term investments are regarded as ‘financial assets at fair value through profit or loss’ and are carried at fair value. In practice, the nature of these investments are such that the fair value equates to the value of initial outlay and therefore in normal circumstances no fair value gain or loss is recognised in the income statement.

l) InventoryInventory of crude oil is valued at the lower of average cost and market value. Average cost is determined based on actual production cost for the year. Inventories of drilling stores are recorded at cost including taxes, duties and freight. Provision is made for obsolete or defective items where appropriate based on technical evaluation.

m) Financial instrumentsFinancial assets and financial liabilities are recognised at fair value in the Group’s balance sheet based on the contractual provisions of the instrument.

Trade receivables do not carry any interest and are stated at their nominal value as reduced by necessary provisions for estimated irrecoverable amounts.

Trade payables are not interest bearing and are stated at their nominal value.

n) EquityEquity instruments issued by Hardy and the Group are recorded at net proceeds after direct issue costs.


o) TaxationThe tax expense represents the sum of current tax and deferred tax.

Current tax is based on the taxable profit of the year. Taxable profit differs from net profit as reported in the income statement as it excludes certain items of income or expenses that are taxable or deductible in years other than the current year, and it further excludes items that are never taxable or deductible. The current tax liability is calculated using the tax rates that have been enacted or subsequently enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the liability method.

Deferred income tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

Deferred income tax liabilities are recognised for all temporary differences except in respect of taxable temporary differences associated with investment in subsidiaries, associates and interest in joint ventures where the timing of the reversal of the temporary differences can be controlled and it is possible that the temporary differences will not reverse in the foreseeable future.

Deferred tax is recognised in respect of all temporary differences that have originated but not reversed at the balance sheet date, where transactions or events have occurred at that date that will result in an obligation to pay more or a right to pay less or to receive more tax.

Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which temporary differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.

p) Foreign currenciesHardy maintains its accounts and the accounts of its subsidiary undertakings in US dollars. Foreign currency transactions are accounted for at the exchange rate prevailing on the date of the transaction. At the year end, all foreign currency assets are restated at the closing rate at the balance sheet date. Exchange difference arising out of actual payments/realisations and from the year end restatement are reflected in the income statement.

Rates of exchanges are as follows:

31 December 31 December 2008 2007

£ to US$ 1.4626 1.9828US$ to Indian Rupees 48.52 39.420

q) Estimation uncertainty(i) Decommissioning

The liability for decommissioning is based on estimates of the costs of decommissioning that will arise at some point in future. Significant changes in costs as a result of technical advancements can result in material change to this provision.

(ii) Depletion

Depletion calculations are based on the best estimate of commercial reserves existing as at the balance sheet date. The determination of commercial reserves is based on assumptions which include those relating to the future price of crude oil, capital expenditure plans and the cost of production. Any changes in these assumptions could result in a material change in the depletion charge or the carrying value of associated assets.

r) Leasing commitmentsRental charges or charter hire charges payable under operating leases are charged to the income statement as part of production cost over the lease term.


Financial Statem



s) Share based paymentsHardy issues share options to directors and employees, which are measured at fair value at the date of grant. The fair value of the equity settled options determined at the grant date is expensed on a straight line basis over the vesting period based on the actual number of shares vested in the accounting period. In performing the valuation of these options, only conditions other than the market conditions are taken into account. Fair value is derived by use of the binomial model. The expected life used in the model is based on management estimates and considers non-transferability, exercise restrictions and behavioral considerations.

2. Revenue and other income

2008 2007 US$ US$ India UK India UK

Oil sales 18,748,999 – 15,531,311 –Profit oil to government (2,311,862) – (4,268,322) –Other income – 868,905 – 566,565

16,437,137 868,905 11,262,989 566,565

The directors do not consider there to be more than one class of business or geographic segment for the purposes of reporting. The Group is engaged in one business activity, the production of and exploration for oil and gas. The revenue, segment result and assets of the geographic segments, other than India, are nil or less than 10% of the total for all segments. Other income relates to technical services to third parties, overhead recovery from joint venture operations and miscellaneous receipts if any. Revenue arises from the sale of oil produced from the contract area CY-OS-90/1 – India and the revenue by destination is not materially different from the revenue by origin. In the contract area CY-OS-90/1, an un-recovered development cost of US$2,868,277 is carried as at 31 December 2008. As a consequence, no profit oil is payable to Government of India until such cost is fully recovered from future revenue from this contract area.

3. Gain on sale of investmentDuring the year 8,086,156 equity shares of Hindustan Oil Exploration Company (‘HOEC’) were sold for a net consideration of US$28,085,047, which has resulted in a realised gain of US$12,953,064 and an amount US$790,238 has been paid as tax for short term capital gain in India.

4. Operating profitOperating profit is stated after charging:

2008 2007 US$ US$

Depletion charge of property, plant and equipment-producing 1,521,919 1,344,101Decommissioning charge of property, plant and equipment 151,174 217,397Depreciation charge of property, plant and equipment-others 283,489 277,929Movement in inventory of oil (711,161) (977,536)Operating lease costs – Plant and machinery 6,777,849 3,880,183 – Land and buildings 506,837 465,516External auditors’ remuneration – Fees payable to the Company’s auditors for the audit of group’s annual accounts 47,169 65,432 – Services relating to corporate finance transactions entered into or proposed

to be entered into by or on behalf of the Company or any of its associates 9,547 246,729 – All other services 12,543 38,665Exchange loss/(gain) 1,255,098 (302,986)

The Group has a policy in place for the award of non audit services to be provided by the auditors, which requires approval of the audit committee.


5. Reconciliation of operating profit to operating cash flows

2008 2007 US$ US$

Operating loss (1,738,549) (813,269)Depletion and depreciation 1,805,408 1,622,030Decommissioning charge 151,174 217,397Share based payments charges 1,429,736 1,561,497

1,647,769 2,587,655

(Increase)/decrease in inventory (1,032,522) 25,849(Increase)/decrease in trade and other receivables (2,676,392) 2,720,211Increase/(decrease) in trade and other payables 4,126,921 (7,178,629)

Net cash inflow/(outflow) from operating activities 2,065,776 (1,844,914)

The decrease in trade and other receivables reported above for 2007 for the Group excludes an amount of US$12,502,931 due from the sale of investment in Hindustan Oil Exploration Company (‘HOEC’) during the year 2007.

6. Staff costs

2008 2007 US$ US$

Wages and salaries 3,830,118 3,358,398Social security costs 214,537 144,105Other pension costs – 7,550Share based payments charge 2,632,812 1,297,654

6,677,467 4,807,707

Staff costs include executive directors’ salaries, fees, benefits and share based payments and are shown gross before amounts recharged to joint ventures.

The weighted average monthly number of employees, including executive directors and individuals employed by the group working on joint venture operations, are as follows:

2008 2007

Management and administration 27 23Operations 24 26

51 49

7. Share based paymentsShare options had been granted to subscribe for ordinary shares, which are exercisable between 2008 and 2019 at prices of £1.44 to £7.69. At 31 December 2008, there were 4,707,101 options outstanding.

Hardy has an unapproved share option scheme for the directors and employees of the group. Options are exercisable at the quoted market price of the Company’s shares on the date of grant. The vesting period is three years with a stipulation that the options are granted in proportion to the period of employment after the grant subject to a minimum of one year. The options are exercisable for a period of ten years from the date of grant.


Financial Statem



Details of the share options outstanding during the years are as follows:

2008 2007 Weighted Weighted average average Number price Number price of options £ of options £

Outstanding at beginning of the year 4,352,099 2.50 2,807,099 1.68Granted during the year 405,000 7.69 1,835,000 3.78Forfeited during the year (11,668) 3.16 (244,999) 2.98Exercised during the year (38,330) 2.25 (45,001) 2.71

Outstanding at the end of the year 4,707,101 2.94 4,352,099 2.50

Exercisable at the end of the year 3,190,433 2.01 1,652,940 1.54

The aggregate of the estimated fair values of the options granted outstanding as at 31 December 2008 is US$9,873,960. The inputs into the binomial model for computation of value of options are as follows:

Share price at grant date varies from £1.44 to £7.69Option exercise price at grant date varies from £1.44 to £7.69Expected volatility 8%-40%Expected life 6 years from grant dateRisk free rate 4.35%-4.70%Expected dividend Nil

Expected volatility was determined by calculating Hardy’s historical volatility. The expected life used has been adjusted based on management’s best estimate for the effects of non-transferability, exercise restrictions and behavioral considerations. Details of outstanding options at the end of the year with the weighted average exercise (WAEP) price are as follows:

2008 2007Exercisable between Number WAEP Number WAEP

2005-2016 2,617,099 £ 1.60 2,637,099 £1.602006-2017 35,000 £ 3.03 40,000 £3.112007-2018 1,650,002 £ 3.89 1,675,000 £3.892008-2019 405,000 £ 7.69 – –

On 24 October 2008, the Company issued 20,182 ordinary shares having a face value of £0.01 per share and an aggregate market value of US$80,203 (£50,000) to Mr Ian Bruce upon his appointment as a non executive director. Such shares are held in trust and will be released to Mr Bruce after three years from the date of issue (subject to earlier release in certain circumstances) provided he remains a director of the Company provided for that period. The cost of issuing such shares is charged to the income statement over a three-year period from the date of issue. During 2008, an amount of US$4,456 has been expensed with the remaining amount of US$75,747 transferred to prepayments.

The Group has recognised an expense of US$2,760,160 (2007: US$1,510,699) towards equity settled share based payments. Equity shares to be issued are revalued at the exchange rate as at 31 December 2008 and the revaluation gain for the year 2008 is US$1,330,424 and the revaluation loss for 2007 was US$50,798. The value of shares to be issued as at 31 December 2008 is US$3,926,870 (2007: US$2,501,590).

8. Directors’ emolumentsDetails of each director’s remuneration and share options are set out in the Directors’ Remuneration Report that forms part of the Company’s Annual Report. Directors’ emoluments are included within the remuneration of the key management personnel in note 31.


9. Interest and investment income

2008 2007 US$ US$

Bank interest 799,880 1,381,121Dividend 520,309 –

1,320,189 1,381,121

10. Finance costs

2008 2007 US$ US$

Bank guarantee charges 91,204 180,400

91,204 180,400

11. Taxation on profita) Analysis of taxation charge for the year

2008 2007 US$ US$

Current tax chargeUK corporation tax

Foreign Tax – IndiaMinimum alternate tax on profits for the year 842,711 226,731Short term capital gains tax 790,238 –

1,632,949 226,731

Foreign tax – USAAlternate Minimum Tax on profits for the year – (80,876)

Total current tax charge 1,632,949 145,855

Deferred tax charge 3,338,195 2,169,348

Tax on profit on ordinary activities 4,971,144 2,315,203

2008 2007 US$ US$

Deferred tax charge:Origination and reversal of temporary differences 3,338,195 2,169,348

Deferred tax charges 3,338,195 2,169,348

2008 2007 Deferred tax analysis: US$ US$

Differences between accumulated depletion, depreciation and amortization and capital allowances (12,940,411) (9,374,066)Other temporary differences 1,642,792 1,414,642Unrealised gain on investment – (3,441,945)

Deferred tax (liability) (11,297,619) (11,401,369)


Financial Statem



b) Factors affecting tax charge for the year

2008 2007 US$ US$

Profit on ordinary activities before tax 12,443,500 10,631,181Profit on ordinary activities before tax multiplied by the rate of tax in UK of 28% (2007 – 30%) 3,484,180 3,189,354Mineral extraction and research allowances in excess of depreciation and utilization of tax losses (3,484,180) (3,189,354)

Foreign tax on overseas income – current year 1,632,949 145,855

Indian operations of the Group are subject to a tax rate of 42.23% which is higher than UK and US corporations tax rates. To the extent that the Indian profits are taxable in the US and/or the UK, then those territories should provide relief for Indian taxes paid, principally under the provisions of double taxation avoidance agreements. Based on the current expenditure plans, the group anticipates that the tax allowances will continue to exceed the depletion charge of each year, though the timing of related tax relief is uncertain.

12. Earnings per shareEarnings per share are calculated on a profit of US$7,472,356 for the year 2008 (2007: US$8,315,978) on a weighted average of 62,287,526 ordinary shares for the year 2008 (2007: 60,117,416).

The diluted earnings per share are calculated on a profit of US$7,472,356 for the year 2008 (2007: US$8,315,978) on a weighted average of 66,994,627 ordinary shares for the year (2007: 64,469,515). The weighted average shares are calculated after giving impact to dilutive potential ordinary shares of 4,302,101 relating to share options after excluding 405,000 options wherein the strike price exceeds the average market price of the shares of the Company for 2008 (2007: 4,352,099).

13. Intangible assets – exploration

India Nigeria Total US$ US$ US$

Costs and net book valueAt 1 January 2007 65,789,828 1,426,453 67,216,281Additions 31,031,822 1,036,431 32,068,253

At 1 January 2008 96,821,650 2,462,884 99,284,534Additions 24,094,090 634,637 24,728,727

At 31 December 2008 120,915,740 3,097,521 124,013,261

During 2008, the Company entered into an agreement to farm out a 20 per cent interest in the OZA block to a local Nigerian company which has agreed to assume Hardy’s financial obligations in the funding of the OZA field initial development programme.


14. Intangible assets – others

US$

CostAt 1 January 2007 340,044Additions 147,298

At 1 January 2008 487,342Additions 3,841

At 31 December 2008 491,183

Accumulated depreciationAt 1 January 2007 122,846Charge for the period 117,924

At 1 January 2008 240,770Charge for the year 138,773

At 31 December 2008 379,543

Net book value at 31 December 2008 111,640


Intangible assets – others represent the cost of software used for various geological and geophysical studies and other software for normal business operations.

15. Property, plant and equipmentOil and gas assets represent interests in producing oil and gas assets falling under the India cost pool. There are no oil and gas assets currently in the Nigerian cost pool. Other fixed assets consist of office furniture, computers, workstations and office equipment.

Oil and gas Other fixed assets assets Total US$ US$ US$

CostAt 1 January 2007 26,002,175 2,533,953 28,536,128Additions (5,856) 38,753 32,897

At 1 January 2008 25,996,319 2,572,706 28,569,025Additions 6,802,348 117,097 6,919,445

At 31 December 2008 32,798,667 2,689,803 35,488,470

Depletion, depreciation and amortizationAt 1 January 2007 21,342,164 2,129,894 23,472,058Charge for the year 1,561,498 160,006 1,721,504

At 1 January 2008 22,903,662 2,289,900 25,193,562Charge for the year 1,673,093 144,716 1,817,809

At 31 December 2008 24,576,755 2,434,616 27,011,371

Net book value at 31 December 2008 8,221,912 255,187 8,477,099

Net book value at 31 December 2007 3,092,657 282,806 3,375,463


Financial Statem



16. Investments

US$

Carrying value at 1 January 2007 13,836,910Increase in unrealised valuation gain during the year 3,514,603Cost of investment sold during the year (2,259,202)

Carrying value at 1 January 2008 15,092,311Cost of investment purchased during the year 13,184,387Cost of investment sold during the year (15,922,221)Reversal of unrealised valuation gain of earlier years (12,354,477)

Carrying value at 31 December 2008 –

During 2008, 8,086,156 equity shares of HOEC held as investments were sold for a net consideration of US$28,085,048 resulting in a realised pre-tax gain on sale of investment of US$12,953,064, which has been reflected in the consolidated income statement.

17. Members of the GroupThe group comprises the parent company – Hardy Oil and Gas plc – and the following subsidiary companies, all of which are wholly owned:

All members of the group are engaged in the business of exploration and production of oil and gas and all are included in the consolidation.

18. Inventory

2008 2007 US$ US$

Crude oil 1,843,226 1,132,065Drilling and production stores and spares 1,893,211 1,571,850

3,736,437 2,703,915

19. Trade and other receivables

2008 2007 US$ US$

Other receivables 3,030,611 13,010,499Advance for purchase 422,465 –Advance tax paid in India 374,130 1,122,068Prepayments and accrued income 260,513 392,873

4,087,719 14,525,440

Other receivables at 31 December 2007 include an amount of US$12,502,931 due from the sale of investment in HOEC during 2007. Other receivables at 31 December 2008 include an amount of US$20,692 due from directors. These relate to personal travel expenses and were paid shortly after the year end.


20. Short term investments

2008 2007 US$ US$

HSBC US$ Liquidity Fund Class-A 17,795,890 –HSBC £ Liquidity Fund Class-A 4,214,401 –

22,010,291 –

The above investments are in liquid funds which can be converted into cash at short notice. There is no change in the fair value of these investments as at 31 December 2008.

21. Trade and other payables

2008 2007 US$ US$

Trade payables 3,778,024 4,255,542Other payables 4,076,244 1,503,442Accruals 5,903,831 4,098,925

13,758,099 9,857,909

Trade and other payables are unsecured, payable on demand and are outstanding for a period of less than 12 months. No interest costs are associated with the trade and other payables outstanding as at 31 December 2008. Trade payables, other payables and accruals are all expected to be settled within normal credit terms.

22. Provision for decommissioning

US$

At 1 January 2007 4,500,000Additional cost for decommissioning –

At 1 January 2008 4,500,000Additional cost for decommissioning –

At 31 December 2008 4,500,000

The provision has been made by estimating the decommissioning cost at current prices using existing technology. Decommissioning costs are expected to be incurred between 2016 and 2020.

An amount of Rs155,838,000 (US$3,211,830) has been deposited with State Bank of India for site restoration obligations. This amount has been treated as a non-current asset.


Financial Statem



23. Share capital

Number $0.01 Ordinary Shares ‘000’ US$

Authorised ordinary sharesAt 1 January 2007 200,000 2,000,000At 1 January 2008 200,000 2,000,000At 31 December 2008 200,000 2,000,000

Allotted, issued and fully paid ordinary sharesAt 1 January 2007 57,252,994 572,530Share options exercised during the year 45,001 450Shares issued during the year 4,964,540 49,645

At 1 January 2008 62,262,535 622,625Share options exercised during the year 38,330 383Shares issued during the year (see note 7) 20,182 202

At 31 December 2008 62,321,047 623,210

Ordinary shares issued are with equal voting and other rights with no guarantee on dividend or other payments.

24. Reserves

Shares Share to be Other Retained premium issued reserves earnings Total US$ US$ US$ US$ US$

At 1 January 2007 52,982,983 940,093 6,364,709 30,541,521 90,829,306Share options exercised 245,527 – – – 245,527Issue of shares 41,593,363 – – – 41,593,363Issue expenses (1,720,294) – – – (1,720,294)Shares to be issued – 1,561,497 – – 1,561,497Valuation gain (loss) on investment 3,514,603 3,514,603Deferred tax on valuation gain (loss) – – (966,780) – (966,780)Retained earnings for the year – – – 8,315,978 8,315,978

At 1 January 2008 93,101,579 2,501,590 8,912,532 38,857,499 143,373,200Share options exercised 170,358 – 170,358Issue of shares 80,001 – 80,001Shares to be issued – 1,425,280 – 1,425,280Transferred to profit on sale (12,354,477) – (12,354,477)Deferred tax on valuation gain released on sale of investment – – 3,441,945 – 3,441,945Retained earnings for the year – – – 7,472,356 7,472,356

At 31 December 2008 93,351,938 3,926,870 – 46,329,855 143,608,663

Other reserves represent the unrealised gain on investment based on the fair value at the balance sheet date, net of related deferred taxes for the year 2007. Shares to be issued represent the share based payments.


25. Financial risk managementHardy finances its operations through a mixture of retained earnings, equity and bank borrowings if required. Finance requirements such as equity, debt and project finance are reviewed by the board when funds are required for acquisition, exploration and development of projects.

Hardy treasury functions are responsible for managing fund requirements and investments which includes banking and cash flow management. Interest and foreign exchange exposure are key functions of treasury management to ensure adequate liquidity at all times to meet cash requirements.

Hardy’s principal financial instruments are cash, deposits and short term investments and these instruments are for the purpose of meeting its requirements for operations.

Hardy’s main risks arising from financial instruments are foreign currency risk, liquidity risk, commodity price risk and credit risks. Set out below are policies that are used to manage such risks:

Foreign currency riskThe group reports in US dollars and the majority of its business is conducted in US dollars. All revenues from oil sales are received in US dollars and all costs except a portion towards expenses for overhead are incurred in US dollars. For currency exposure other than US dollars, a portion of the cash is kept in deposit in other currencies to meet its payments as required. No forward exchange contracts were entered into during the year.

Liquidity riskThe group currently has surplus cash, which has been placed in deposits and short term investments which can be converted into cash at short notice ensuring sufficient liquidity to meet the group’s expenditure requirements. Hardy has no outstanding loan obligations at balance sheet dates.

Interest rate riskSurplus funds are placed in deposits and short term investments at floating rates. Hardy’s policy is to deposit with well established banks or financial institutions that offer the competitive interest rates at the time of issue.

Commodity price risksThe group’s share of production of crude oil from PY-3 field is sold to the Government of India nominee Chennai Petroleum Corporation Limited. The price has been arrived at based on an average price for the 30 day period commencing 15 days before and ending 15 days after the delivery of crude oil. No commodity price hedging contracts have been entered into.

Credit riskAll Hardy’s sales are to Chennai Petroleum Corporation Limited, a state oil company in India. As it is the Government of India nominee for the purchase of crude oil, the credit risk is negligible.

In case of deposits and other money market instruments, as a general rule, the banks and financial institutions wherein the deposits are placed have good ratings of not less than AA or equivalent, which are verified before placing the deposits. Cash surpluses are also invested in short term investments represented by certain liquid funds. These funds are primarily invested in term deposits and graded commercial papers of not less than AAA.

The board will continue to assess the strategies for managing credit risk and is satisfied with the existing policies for sale of crude oil to Chennai Petroleum Corporation Limited. At the year end the Group does not have any bad debt risk. The maximum financial risk exposure relating to the financial assets is the carrying value as on the balance sheet date.


Financial Statem



Maturity of non current financial liabilitiesThe maturity of non current financial liabilities as at 31 December 2008 and 31 December 2007 is as follows:

2008 2007 US$ US$

In more than two years but not more than five years – –In more than five years 4,500,000 4,500,000

The group does not have any fixed maturity and interest bearing financial liabilities as at 31 December 2008 or 31 December 2007.

Interest rate risk profile of financial assetsThe interest rate risk profile of the financial assets of the group as at 31 December 2008 is as follows:

Fixed rate Floating rate Financial asset financial financial – no interest is asset asset earned Total US$ US$ US$ US$

US Dollars 991,800 4,836,375 1,473,420 7,301,595Pound Sterling – 83,857 50,648 134,505Indian Rupees 513,949 – 177,622 691,571Nigerian Naira – – 11,643 11,643

Cash and cash equivalents 1,505,749 4,920,232 1,713,333 8,139,314

An amount of US$3,211,830 deposited with State Bank of India for site restoration obligation is treated as a non-current asset and the interest rate of this deposit is based on the highest rate of interest as applicable for the period paid by the State Bank of India.

Financial assets include cash and deposits and the floating interest rates are based on market rates.

The interest rate risk of the financial assets of the group as at 31 December 2007 is as follows:

Fixed rate Floating rate Financial asset financial financial – no interest is asset asset earned Total US$ US$ US$ US$

US Dollars 18,754,014 916,405 713,606 20,384,025Pound Sterling 9,213,427 221,015 39,752 9,474,194Indian Rupees 589,053 – 707,310 1,296,363Nigerian Naira – – 2,466 2,466

28,556,494 1,137,420 1,463,134 31,157,048

An amount of US$3,369,820 deposited with State Bank of India for site restoration obligation is treated as a non-current asset and the interest rate of this deposit is based on the highest rate of interest as applicable for the period paid by the State Bank of India.

Financial assets include cash and deposits and the floating interest rates are based on market rates.


Currency exposuresThe currency exposures of the monetary assets denominated in currencies other than US dollars of the group as at 31 December 2008 are as follows:

Indian Pound Nigerian Rupees Sterling Naira Total US$ US$ US$ US$

US$ 3,903,401 4,348,906 11,643 8,263,950

An amount of US$ 2,418,807 was recognized as a foreign exchange loss on account of exchange rate fluctuations on bank balances and investments made in currencies other than US dollars for the year 2008.

The currency exposures of the monetary assets denominated in currencies other than US dollars of the group as at 31 December 2007 are as follows:

Indian Pound Nigerian Rupees Sterling Naira Total US$ US$ US$ US$

US$ 4,666,183 9,474,194 2,466 14,142,843

An amount of US$522,103 was recognised as a foreign exchange gain on account of exchange rate fluctuations on bank balances and investments made in currencies other than US dollars for the year 2007.

26. Financial instrumentsBook values and fair values of Hardy’s financial assets and liabilities are as follows:

Book value Fair value Book value Fair value 2008 2008 2007 2007 Primary financial instruments US$ US$ US$ US$

Fixed asset investments – – 15,092,311 15,092,311Short term investments 22,010,291 22,010,291 – –Cash and short term deposits 8,139,314 8,139,314 31,157,048 31,157,048Site restoration deposit 3,211,830 3,211,830 3,369,820 3,369,820

33,361,435 33,361,435 49,619,179 49,619,179

Financial liabilities


Accounts payable (13,758,099) (13,758,099) (9,631,178) (9,631,178)Provision for taxation – – (226,731) (226,731)Provisions for decommissioning (4,500,000) (4,500,000) (4,500,000) (4,500,000)

(18,258,099) (18,258,099) (14,357,909) (14,357,909)

All of the above financial assets and liabilities are current at the balance sheet date.


Financial Statem



27. Capital commitments

2008 2007 US$ US$

Oil and gas expenditures 3,290,528 –Intangible exploration/appraisal assets contracted for – 100,692

28. Pension commitmentsThe Group has no pension commitments as at the balance sheet date.

29. Other financial commitments under operating leasesGroup entities have entered into commercial leases for land and building and office equipment. These leases have an average life of 1 to 5 years and there are no restrictions placed on the lessee by entering into these leases. The minimum future lease payments for the non-cancellable operating leases are as follows:

2008 2007 US$ US$

Land and buildings:One year 284,991 346,717Two to five years 380,526 776,474After five years – – Other:One year 21,963 19,782Two to five years 39,939 9,190After five years – –

30. Contingent liabilitiesBank guarantees for US$3,258,815 have been issued to Government of India. The guarantees were obtained by placing a fixed deposit of Rs24,936,801 (US$513,949) with a bank with the interest rate of 10.50%.

The Group issues guarantees in respect of obligations under various Production Sharing Contracts (‘PSC’) in the normal course of business. The Group has provided guarantees of US$3,258,815 as at 31 December 2008 issued under the bank facility with Bank of Nova Scotia for the Group’s share of minimum work program commitments for the year 2008. The details of the bank guarantees provided are as follows:

PSC Guarantee Number US$

GS-OSN-2000/1 ILG009/42465/07 801,640KG-DWN-2001/1 ILG010/42465/07 1,156,995KG-DWN-2003/1 ILG011/42465/07 1,065,085AS-ONN-2000/1 ILG046/42465/08 235,095

In addition, parent company guarantees for the group’s obligations under various Production Sharing Contracts were provided to the Government of India.


31. Related party transactionsa) The Company’s wholly owned subsidiaries are listed in note 17. The following provides the details of balances outstanding with

subsidiary companies at balance sheet dates:

2008 2007 US$ US$

Amount owed from subsidiary undertakings 86,788,000 55,523,294

b) The following provides the details of the transactions with subsidiary companies, all of which were carried out at an arms length basis:

2008 2007 US$ US$

Parent company fees to joint venture operations of subsidiary 868,905 566,565Management fees 180,000 180,000Inter company interest receivable 2,190,090 2,720,545

The interest charges and receivable are based on market rates.

c) Remuneration of key management personnelThe remuneration of directors and the key management personnel of the group in aggregate are as follows:

2008 2007 US$ US$

Short term employee benefit 1,793,587 1,346,742Share based payments 1,919,469 1,134,792

3,713,056 2,481,534

Further information about the remuneration of individual directors is provided in the Directors’ Remuneration Report which forms part of the Group’s 2008 Annual Report.


Financial Statem



Parent Company Statement of Changes in Equityfor the year ended 31 December 2008

2008 2007 Notes US$ US$

Beginning of year 110,939,026 58,466,526

Profit for the year 7,371,593 8,194,489Unrealised valuation gain – 3,514,603Transferred to profit on sale from other reserves (12,354,477) –Deferred tax on valuation gain released on sale of investment 3,441,945 –Deferred tax liability on unrealised valuation gain or loss – (966,780)

Total recognised (losses) gains (1,540,939) 10,742,312

New shares issued 250,944 40,168,691Share based payments 6 1,425,280 1,561,497

End of year 111,074,311 110,939,026

An analysis of the changes in equity by reserve is given in note 17.


2008 2007 Notes US$ US$

Assets

Non-current assetsIntangible assets – others 9 750 21,835Property, plant and equipment 10 108,473 140,927Investments 11 91,965,601 74,974,386

92,074,824 75,137,148

Current assets

Trade and other receivables 12 256,850 12,689,331Short term investments 13 22,010,291 –Cash and cash equivalents 17 1,006,086 28,471,133

23,273,227 41,160,464

Total assets 115,348,051 116,297,612

Liabilities

Current liabilitiesTrade and other payables 14 (115,819) (567,396)

Non-current liabilitiesProvision for deferred tax 15 (4,157,921) (4,791,190)

Total liabilities (4,273,740) (5,358,586)

Net assets 111,074,311 110,939,026

EquityCalled-up share capital 16 623,210 622,625Share premium 17 93,351,938 93,101,579Shares to be issued 17 3,926,870 2,501,590Other reserves 17 – 8,912,532Retained earnings 17 13,172,293 5,800,700

Total equity attributable to the members 111,074,311 110,939,026

Approved and authorised for issue by the Board of Directors on 18 March 2009.

E.P. Mortimer Dinesh Dattani Chairman Finance Director

Parent Company Balance Sheetas at 31 December 2008

Financial Statem



Parent Company Statement of Cash Flowfor the year ended 31 December 2008

2008 2007 Notes US$ US$

Operating activitiesCash flow from operating activities 4 (4,886,057) (1,730,151)Taxation paid (790,238) –

Net cash (used in) from operating activities (5,676,295) (1,730,151)

Investing activitiesPurchase of other fixed assets (17,056) (11,731)Purchase of investment (13,184,387) –Sale of investment 41,378,216 –Short term investments (22,010,291) –

Net cash from (used in) investing activities 6,166,482 (11,731)

Financing activitiesInterest and investment income 3,138,731 3,726,459Inter corporate loan (31,264,706) (33,000,294)Issue of shares 170,741 40,168,691

Net cash (used in) from financing activities (27,955,234) 10,894,856

Net increase (decrease) in cash and cash equivalents (27,465,047) 9,152,974

Cash and cash equivalents at the beginning of the year 28,471,133 19,318,159

Cash and cash equivalents at the end of the year 1,006,086 28,471,133


1. Accounting policiesThe Company follows the accounting policies of the group.

2. Revenue

2008 2007 US$ US$

Overhead recovery 868,905 566,565Management fees from subsidiary 180,000 180,000

1,048,905 746,565

The directors do not consider there to be more than one class of business or geographic segment for the purposes of reporting. The Company operates in one geographical area, the United Kingdom, and the Company’s activity is one class of business as holding company for the Group.

3. Income statementThe Company has taken advantage of the exemption provided under section 3 of the Isle of Man Companies Act 1982 not to publish its individual income statement and related notes. The Company’s profit for the year was US$7,371,593 (2007: US$8,194,489).

4. Reconciliation of operating profit to operating cash flows

2008 2007 US$ US$

Operating loss (5,141,684) (3,639,865)Depreciation 70,594 92,410Share based payments charges 610,916 1,333,947

(4,460,174) (2,213,508)Decrease in trade and other receivables 25,694 69,743Decrease/(increase) in trade and other payables (451,577) 413,614

Net cash outflow (4,886,057) (1,730,151)

5. Staff costs

2008 2007 US$ US$

Wages and salaries 1,464,415 1,041,694Social security costs 124,729 78,565Other pension costs – 7,550Share based payments charge 1,813,992 1,095,577

3,403,136 2,223,386

Staff costs include executive directors’ salaries, fees, benefits and share based payments. The Company has no pension commitments as at the balance sheet date.

The weighted average monthly number of employees, including executive directors and individuals employed by the Company, are as follows:

2008 2007

Management and administration 9 7

Notes to the Parent Company Financial Statementsfor the year ended 31 December 2008

Financial Statem



6. Share based paymentsShare based payments are disclosed in note 7 to the Consolidated Financial Statements.

7. Audit feesAudit fees payable to the Company’s auditor for the audit of the parent company accounts for the year 2008 is US$10,000 (2007: US$10,000).

8. Interest and investment income

2008 2007 US$ US$

Bank interest 448,728 1,010,126Interest on inter corporate loan 2,190,090 2,720,545Dividend 520,309 –

3,159,127 3,730,671

9. Intangible assets – others

US$

CostAt 1 January 2007 131,250

At 1 January 2008 131,250

At 31 December 2008 131,250

Accumulated depreciationAt 1 January 2007 65,668Charge for the period 43,747


At 31 December 2008 130,500

Net book value as at 31 December 2008 750

Net book value as at 31 December 2007 21,835

Intangible assets represent the software used for office automation and other business applications of the Company.


10. Property, plant and equipment

Total US$

CostAt 1 January 2007 321,769Additions 11,731

At 1 January 2008 333,500Additions 17,056

At 31 December 2008 350,556

DepreciationAt 1 January 2007 143,910Charge for the year 48,663


At 31 December 2008 242,083



11. Investments

Shares in Loan to Other subsidiary subsidiary investment US$ US$ US$

Carrying value at 1 January 2007 4,131,231 22,523,000 13,836,910

Increase in unrealised valuation gain during the year 3,514,603Additional investment during the year 227,550 33,000,294 –Cost of investment sold during the year (2,259,202)

Carrying value at 1 January 2008 4,358,781 55,523,294 15,092,311Additional investment during the year 818,820 31,264,706 13,184,387Cost of investment sold during the year (15,922,221)Reversal of unrealised valuation gain of earlier years (12,354,477)

Carrying value at 31 December 2008 5,177,601 86,788,000 –

Limited and Hardy Oil Nigeria Limited, the wholly owned subsidiaries of Hardy Oil and Gas plc. Full details of these subsidiaries are given in note 17 of the consolidated financial statements.

Other investment represents investment in equity shares of an Indian company Hindustan Oil Exploration Company Limited (‘HOEC’). During 2008, 8,086,156 equity shares were sold for a net consideration of US$28,085,048 resulting in a realised pretax gain on sale of investment of US$12,953,064.

Notes to the Parent Company Financial Statements continuedfor the year ended 31 December 2008

Financial Statem



12. Trade and other receivables

2008 2007 US$ US$

Other receivables 152,282 12,685,119Prepayments and accrued income 28,821 4,212Prepaid expenses – share based payments 75,747 –

256,850 12,689,331

Other receivables for 2008 include an amount of US$20,692 due from the directors of the Company as detailed in note 19 to the consolidated financial statements.

13. Short term investments

2008 2007 US$ US$

HSBC US$ Liquidity Fund Class-A 17,795,890 –HSBC £ Liquidity Fund Class-A 4,214,401 –

22,010,291 –

The above investments are in liquid funds which can be converted into cash at short notice. There is no change in the fair value of these investments as at 31 December 2008.

14. Trade and other payables

2008 2007 US$ US$

Trade payables 74,021 513,986Accruals 41,798 53,410

115,819 567,396

15. Deferred taxationDeferred tax analysis:

2008 2007 US$ US$

Differences between accumulated depreciation and capital allowances 27,226 26,729

Other temporary differences 382,792 154,642Group relief availed (4,567,939) (1,530,616)Unrealised gain on investment – (3,441,945)

Deferred tax (liability) (4,157,921) (4,791,190)


16. Share capital

Number $0.01 Ordinary Shares ‘000’ US$

Authorised ordinary sharesAt 1 January 2007 200,000 2,000,000At 1 January 2008 200,000 2,000,000At 31 December 2008 200,000 2,000,000

Allotted, issued and fully paid ordinary sharesAt 1 January 2007 57,252,994 572,530Share options exercised during the year 45,001 450Shares issued during the year 4,964,540 49,645

At 1 January 2008 62,262,535 622,625Share options exercised during the year 38,330 383Shares issued during the year 20,182 202

At 31 December 2008 62,321,047 623,210

17. Reserves

Shares Share to be Other Retained Premium issued reserves earnings Total US$ US$ US$ US$ US$

At 1 January 2007 52,982,983 940,093 6,364,709 (2,393,789) 57,893,996Share options exercised 245,527 – – 245,527Issue of shares 41,593,363 – – – 41,593,363Issue expenses (1,720,294) – – – (1,720,294)Shares to be issued – 1,561,497 – – 1,561,497Valuation gain (loss) on investment 3,514,603 – 3,514,603Deferred tax on valuation gain – – (966,780) – (966,780)Retained earnings for the year – – – 8,194,489 8,194,489

At 1 January 2008 93,101,579 2,501,590 8,912,532 5,800,700 110,316,401Share options exercised 170,358 – 170,358Issue of shares 80,001 – 80,001Shares to be issued – 1,425,280 1,425,280Transferred to profit on sale (12,354,477) – (12,354,477)Deferred tax on valuation gain released on sale of investment – – 3,441,945 – 3,441,945Retained earnings for the year – – – 7,371,593 7,371,593

At 31 December 2008 93,351,938 3,926,870 – 13,172,293 110,451,101

Other reserves represent the unrealized gain on investment based on the fair value at the balance sheet date, net of related deferred taxes for the year 2007. Shares to be issued represent the share based payments.


Financial Statem



18. Financial risk managementThe Company follows the risk management policy stipulated in note 25 of the Group accounts.

Interest rate risk profile of financial assetsThe interest rate risk profile of the financial assets of the Company as at 31 December 2008 is as follows:

Fixed rate Floating rate Financial asset Financial Financial – no interest is asset asset earned Total US$ US$ US$ US$

US Dollars – – 922,229 922,229Pound Sterling – 83,857 – 83,857

Cash and cash equivalents – 83,857 922,229 1,006,086

Financial assets include cash and deposits and the floating interest rates are based on the base rate of the relevant central bank.

The interest rate risk of the financial assets of the Company as at 31 December 2007 is as follows:

Fixed rate Floating rate Financial asset Financial Financial – no interest is asset asset earned Total US$ US$ US$ US$

US Dollars 18,754,014 282,677 – 19,036,691Pound Sterling 9,213,427 221,015 – 9,434,442

27,967,441 503,692 – 28,471,133

Financial assets include cash and deposits and the floating interest rates are based on the base rate of the relevant central bank.

Currency exposuresThe currency exposures of the monetary assets denominated in currencies other than US Dollar of the Company are as follows:

Pound Sterling in Equivalent US$ 2008 2007

US$ 4,298,258 9,434,442

Foreign exchange loss recognised on account of exchange rate for the year 2008 is US$1,565,574. In 2007, US$124,607 was recognised as foreign exchange gain.

19. Financial instrumentsBook values and fair values of company’s financial assets and liabilities as follows:

Financial assets


Fixed asset investments – – 15,092,311 15,092,311Short term investments 22,010,291 22,010,291 – –Cash and short term deposits 1,006,086 1,006,086 28,471,133 28,471,133

23,016,377 23,016,377 43,563,444 43,563,444


All of the above financial assets are current and unimpaired as at the balance sheet date.

Financial liabilities


Accounts payable (115,819) (115,819) (567,396) (567,396)

All of the above financial liabilities are current as at the balance sheet date.

20. Other financial commitments under operating leasesThe Company has entered into commercial leases for land and building and office equipment. These leases have an average life of 1 to 5 years and there are no restrictions placed on the lessee by entering into these leases. The minimum future lease payments for the non-cancelable operating leases are as follows:

2008 2007 US$ US$

Land and buildings:One year 139,928 189,696Two to five years 346,322 659,195After five years – –

21. Related party transactionsa) The company’s wholly owned subsidiaries are listed in note 17 of the group accounts. The following table provides the details of balances outstanding with subsidiary companies at balance sheet dates:

2008 2007 US$ US$

Amount owed from subsidiary undertakings 86,788,000 55,523,294

b) The following table provides the details of the transactions with subsidiary companies all of which were carried out at an arms length basis:

2008 2007 US$ US$

Parent company fees to joint venture operations of subsidiary 868,905 566,565Management fees 180,000 180,000Inter company interest income 2,190,090 2,720,545

The interest income is based on market rates.


Supplem

entary Information


Hardy Oil and Gas plc update:The Company’s most current CPR was published in January 2008 and effective 30 June 2007. Following the publication the Company has noted some important changes that the reader should consider whilst reviewing the summary tables listed below:

1. PY-3 – For the period 1 July 2007 to 31 December 2008 the PY-3 field produced 1.55 MMbbl of oil (gross).

2. GS-01 – The Company announced on 26 August 2008 that the well GS01-S1 had been plugged and abandoned.

3. CY-OS/2 – The Ganesha non-associated gas discovery was gas bearing. The reader should view the noted 24MMbbl 2C Contingent Resources as 24MMboe at 6:1 mcf:bbl conversion ratio.

4. D3 – The D3 Resources estimates listed below are pre-drill estimates and do not incorporate the data gathered from the Dhirubhai 39 and 41 gas discoveries.

5. Report update – The Company has commissioned a technical review of D9, D3 and Assam exploration blocks. The final report is expected to be completed by the end of the second quarter of 2009.

ReservesThe PY-3 field is Hardy’s sole producing asset from which revenues are derived. As at 30 June 2007, estimated gross and net entitlement oil Reserves were reported as follows:

Gross Oil Reserves MMbbl Net Oil Entitlement Reserves MMbbl

Proved, Proved, Proved Probable Hardy Proved Probable Proved + Probable + Possible Interest Proved + Probable + Possible

PY-3 5.09 17.57 23.81 18% 0.82 2.69 3.44

Contingent ResourcesThe Company through acquisition and exploration has added to its resources categories additional hydrocarbons in both India and Nigeria. These contingent resources are summarised below:

Gross and Net Natural Gas Contingent Resources

Gross Net Hardy Contingent Contingent Resources Hardy Resources Bcf Interest (%) Bcf

Licence 2C 2CGS-01, India 91.5 10 9.1Atala, Nigeria 359.0 20 71.8

Total 450.5 80.9

Note: The primary Contingent Resource volume reported here is the 2C, or ‘Best Estimate’, value.

Group Reserves and Resourcesas at 30 June 2007


Group Reserves and Resources continuedas at 30 June 2007

Gross Net Hardy Contingent Contingent Resources Hardy Resources MMbbl Interest (%) MMbbl

Licence 2C 2CCY-OS/2 (Ganesha-1 Deep Fan) 24.0 75 18.0Oza field Nigeria 3.8 40 1.5Atala field Nigeria 7.5 20 1.5

Total 35.3 21.0

Notes: 1. The primary Contingent Resource volume reported here is the 2C, or ‘Best Estimate’, value.

2. In the event of a commercial discovery, ONGC has the option to back-into the CY-OS/2 licence at an interest of 30%.

Prospective ResourcesHardy also has an extensive exploration portfolio in both India and Nigeria. Based on technical data and evaluation, the Company’s hydrocarbon prospects are summarised below:

Gross and net natural gas Prospective Resources – Prospects

Gross Net Hardy Prospective Prospective Resources Resources Bcf Hardy Bcf

Best Interest Best GCoSLicense Prospect estimate (%) estimate (%)

CY-OS/2 Shree Miocene Channel 1 105.0 75 78.8 14 Shree Miocene Channel 2 132.0 75 99.0 14

GS-01 B2 103.0 10 10.3 30 B1/B2 66.0 10 6.6 30 S1 190.0 10 19.0 30 Prn 1 54.0 10 5.4 10

D3 KGD-1 71.0 10 7.1 25 KGD-2 113.0 10 11.3 20 KGD-3 66.0 10 6.6 20 KGD-11 143.0 10 14.3 20 KGD12 18.0 10 1.8 15

* It is inappropriate to report summed-up Prospective Resource volumes or to otherwise focus upon those other than the ‘Best Estimate’.

Notes: 1. The Geologic Chance of Success (GCoS) reported here represents an indicative estimate of the probability that the drilling of this prospect

would result in a discovery which would warrant the re-categorisation of that volume as a Contingent Resource. The GCoS value for Contingent Resource is 100%. These GCoS percentage values have not been arithmetically applied within this assessment.

2. A Prospect is defined as ‘A project associated with a potential accumulation that is sufficiently well defined to represent a viable drilling target’.


Supplem

entary Information


Prospective Resources continued

Gross Net Hardy Prospective Prospective Resources Resources MMbbl Hardy MMbbl

Best Interest Best GCoSLicense Prospect estimate (%) estimate (%)

CY-OS/2 Ganesha – 1 Top fan 61.6 75 46.2 25 SE Four – Way Closure 7.0 75 5.3 25 Shree – Cretaceous 4.5 75 3.4 14


Notes: 1. The Geologic Chance of Success (GCoS) reported here represents an indicative estimate of the probability that the drilling of this

prospect would result in a discovery which would warrant the re-categorisation of that volume as a Contingent Resource. The GCoS value for Contingent Resource is 100%. These GCoS percentage values have not been arithmetically applied within this assessment.

2. A Prospect is defined as ‘A project associated with a potential accumulation that is sufficiently well defined to represent a viable drilling target’.


Prospective Resources – LeadsIn addition to the Prospects listed above, a number of ‘Leads’ have been identified in Hardy’s acreage. Most notable of these is Block D9 in the Krishna Godavari deep water basin where three Leads have been identified from direct hydrocarbon indicators on seismic data. These Leads are at different geological horizons and are assessed below:

Gross Net Hardy Prospective Prospective Resources Resources Bcf Hardy Bcf

Best Interest Best GCoSLicense Lead estimate (%) estimate (%)

D9 Upper Miocene 13,000 10 1,300 15 Middle Miocene 19,000 10 1,900 15 Oligocene 13,000 10 1,300 15


Notes: 1. The Geologic Chance of Success (GCoS) reported here represents an indicative estimate of the probability that the drilling of this

prospect would result in a discovery which would warrant the re-categorisation of that volume as a Contingent Resource. The GCoS value for Contingent Resource is 100%. These GCoS percentage values have not been arithmetically applied within this assessment.

2. A ‘Lead’ is defined as a ‘Project associated with a potential accumulation that is currently poorly defined and requires more data acquisition and/or evaluation in order to be classified as a Prospect’. As such it must be appreciated that a Lead carries a higher risk than a Prospect.

Classification & Categorisation of Hydrocarbon volumes:Management System published by the Society of Petroleum Engineers, World Petroleum Council, American Association of Petroleum Geologists and Society of Petroleum Evaluation Engineers in March 2007 (SPE PRMS) as the basis for its classification and categorisation of hydrocarbon volumes.


Company Information

Hardy Oil and Gas plcLincoln House 137-143 Hammersmith Road London, W14 0QL, UK Phone: + 44 (0) 20 7471 9850 Fax: + 44 (0) 20 7471 9850 Email: [email protected] Website: www.hardyoil.com

Board of DirectorsE. P. Mortimer (Chairman) Sastry Karra (Chief Executive) Yogeshwar Sharma (Chief Operating Officer) Dinesh Dattani (Finance Director) Dr Carol Bell (Senior Non Executive) Pradip Shah (Non Executive) Ian Bruce (Non Executive)

Hardy Exploration & Production (India) Inc.5th Floor, Westminister Building 108, Dr Radhakrishnan Salai Chennai, India, 600 004 Phone: +91(44) 284 71990 Fax: +91 (44) 28471064 Email: [email protected]

Board of DirectorsSastry Karra (Director) Yogeshwar Sharma (President and CEO) Ramasamy Jeevanandam (CFO)

Hardy Oil (Africa) Limited15-19 Athol StreetDouglas, Isle of Man, IM1 1LB

Board of DirectorsSastry Karra (Director) Yogeshwar Sharma (Director)

Hardy Oil Nigeria LimitedPlot 180B Moshood Olugbani Street Victoria Island, Lagos, Nigeria Phone: +234 (1) 271 9664 Fax: +234(1) 270 9178

Board of DirectorsSastry Karra (Director) Yogeshwar Sharma (Director) Ravi Venkateswaran (Country Manager)

BrokerArden Partners plc Nicholas House 3 Laurence Pountney Hill London, EC4R 0EU

Company SecretaryRichard Vanderplank LLB Registered Office 15-19 Athol Street Douglas, Isle of Man, IM1 1LB

UK SolicitorsLawrence Graham LLP 4 More London Riverside London, SE1 2AU

Isle of Man Legal AdvisersCains Advocates Limited 15-19 Athol Street Douglas, Isle of Man, IM1 1LB

AuditorsHorwath Clark Whitehill LLP St Bride’s House 10 Salisbury Square London, EC4Y 8EH

Financial PRBuchanan Communications Limited 45 Moorfields London, EC2Y 9AE

Principal BankersHSBC Holdings Plc 8 Canada Square London, E14 5HQ

and

Barclays Bank Plc 54 Lombard Street London, EC3P 3AH

RegistrarsEquity Limited 15-19 Athol Street Douglas, Isle of Man, IM1 1LB

CREST Agent Computershare Investor Services (Channel Islands) Limited Ordnance House 31 Pier Road, St. Helier Jersey, JE4 8PW

39 Independent Auditors’ Report41 Consolidated Income Statement 42 Consolidated Statement of

Changes in Equity43 Consolidated Balance Sheet44 Consolidated Statement of

Cash Flows 45 Notes to the Consolidated

Financial Statements63 Parent Company Statement of

Changes in Equity64 Parent Company Balance Sheet65 Parent Company Statement of

Cash Flow 66 Notes to the Parent Company

Financial Statements

73 Group Reserves and Resources76 Company InformationIBC Definitions and Glossary of Terms

IFC Who We Are1 Highlights2 Hardy at a Glance 4 Chairman and

Chief Executive’s Statement8 Corporate Strategy

10 Review of Operations16 Financial Review 20 Corporate Social Responsibility22 Risk and Uncertainties

24 Board of Directors 26 Corporate Governance Statement31 Directors’ Report34 Directors’ Remuneration Report

Who We Are

Group Overview Financial Statements

Business Review

Governance

Hardy Oil and Gas plc is an upstream international oil and gas company whose assets are principally in India. Its portfolio includes a blend of exploration, appraisal, development, and production assets.

Hardy’s goal is to evaluate and exploit its asset base with a view to creating significant value for its shareholders.

Definitions:AFE: Authority for expenditure

AIM: The market of that name operated by the London Stock Exchange

Assam block: Licence AS-ONN-2000/1

Bayelsa: Bayelsa Oil Company Limited

Board: The Board of Directors of Hardy Oil and Gas plc

the Company: Hardy Oil and Gas plc

CPCL: Chennai Petroleum Company Limited, formerly known as Madras Refinery Limited

CPR: Competent persons report

D3: Licence KG-DWN-2003/1 awarded in NELP V

D9: licence KG-DWN-2001/1 awarded in NELP III

Deepwater Expedition: Operated by Transocean Inc, the Deepwater Expedition is a self-propelled dynamically positioned drillship capable of drilling in water depths up to 10,000 feet

DGH: Directorate General of Hydrocarbons

Dhirubhai 33: Gas discovery on GS-01-B1 well

Dhirubhai 39: Gas discovery on KGV-D3-A1 well

Dhirubhai 41: Gas discovery on KGV-D3-B1 well

DPR: Nigerian Department of Petroleum Resources

Emerald: Emerald Energy Resources Limited

FCA: Fellow of the Institute of Chartered Accountants


FEED: Front end engineering study

FSO: Floating storage and offloading vessel

GAIL: Gas Authority of India Limited

Ganesha: Gas discovery on Fan-A1 well located in CY-OS/2

GCA: Gaffney, Cline & Associates Ltd.


Group: The Company and its subsidiaries

GS-01: Licence GS-OSN-2000/1 awarded under NELP II

GXT ION: GX Technology Corporation

H2: Second half of the year

Hardy: Hardy Oil and Gas plc

HEPI: Hardy Exploration & Production (India) Inc.

HOEC: Hindustan Oil Exploration Company Limited

HON: Hardy Oil Nigeria Limited

HSE: Health, safety and environment

IFRS: International Financial Reporting Standards

IPO: Initial public offering

KG Basin: Krishna Godavari sedimentary basin comprising an area on the southeast India continental shelf

London Stock Exchange: London Stock Exchange plc

LTA: Lost time accident

Main Market: Official List of the London Stock Exchange’s market for listed securities

Management Committee: As per India PSC’s the management committee comprises representatives of each participating interest holder, DGH and the Ministry of Petroleum and Natural Gas of India

Millenium: Millenium Oil and Gas Company Limited

MOU: Memorandum of understanding

NELP: New Exploration Licensing Policy of the Ministry of Petroleum and Natural Gas of India

Operating Committee: As per India PSC’s the operating committee comprises representatives of the various participating interest holders in the licence

OML: Oil mining licence

Ordinary Share: The ordinary share of US$ 0.01 each in the capital of the Company

PSC: Production sharing contract

PY-3: Licence CY-OS-90/1

Reliance: Reliance Industries Limited

SPDC: Shell Petroleum Development Company of Nigeria

UK: United Kingdom

US: United States of America

Glossary of terms:$: United States dollars

2D/3D: Two dimensional/three dimensional

2P: Proven plus probable

API°: American Petroleum Institute gravity

AVO: Amplitude variations with offset

BOP: Blow-out preventer

bwpd: Barrels of water per day

Contingent Resources: Those quantities of petroleum estimates, as of a given date, to be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable due to one or more contingencies

Prospective Resources: Prospective Resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations

DST: Drill stem test

DWT: Dead weight tonne


GIIP: Gas initially in place


km: Kilometre

km2: Kilometre squared

lkm: Line kilometre

m: Metre

MDRT: Measured depth from the rotary table

MDT: Modular formation dynamics tester

MMscfd: Million standard cubic feet per day

MMscmd: Million standard cubic metres per day

MMstbd: Million stock tank barrels per day

PSDM: Pre-stack depth migration

psi: Pounds per square inch

scf: Standard cubic feet

scfd: Standard cubic feet per day

SPM: Single point mooring

stb: Stock tank barrel

stbd: Stock tank barrel per day

TCF: Trillion cubic feet

TVD: Total vertical depth

TVDRT: Total vertical depth from rotary table

Definitions and Glossary of Terms

Supplementary Information

Exploration & Production

Report and Accounts 2008Year Ended 31 December

Hardy Oil and Gas plcHardy Oil and Gas plcLincoln House137-143 Hammersmith RoadLondonW14 0QL www.hardyoil.com

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