VPC Venture Prod.

The Group documents at the inception of the transaction, the relationship 
between hedging instruments and hedged items, as well as its risk management 
objective and strategy for undertaking various hedge transactions. The Group 
also documents its assessment, both at hedge inception and on an ongoing basis, 
of whether the derivatives that are used in hedging transactions are highly 
effective in offsetting changes in cash flows of hedged items. At the point of 
settlement, any payments or receipts relating to hedge transactions are included 
in revenue. 
 
 
Cash Flow Hedge 
 
 
The effective portion of changes in the fair value of derivatives that are 
designated and qualify as cash flow hedges, are recognised in equity net of 
deferred income tax. The gain or loss relating to the ineffective portion is 
recognised immediately in the income statement. 
 
 
Amounts accumulated in equity, including the associated deferred income taxes, 
are recycled in the income statement in the periods when the hedged item will 
affect profit or loss (for example, when the hedged forecast sale takes place). 
 
 
When a hedging instrument expires or is sold, or when a hedge no longer meets 
the criteria for hedge accounting, any cumulative gain or loss existing in 
equity at that time remains in equity, and is recognised when the forecast 
transaction is ultimately recognised in the income statement. When a forecast 
transaction is no longer expected to occur, the cumulative gain or loss that was 
reported in equity is immediately transferred to the income statement. 
 
 
Derivatives that Do Not Qualify for Hedge Accounting 
 
 
Certain derivative instruments do not qualify for hedge accounting. Such 
derivatives are measured at fair value in the balance sheet and changes in the 
fair value of any derivative instruments that do not qualify for hedge 
accounting are recognised immediately in the income statement. 
 
 
Fair Value Estimation 
 
 
Fair value is the amount at which a financial instrument could be exchanged in 
an arm's length transaction between informed and willing parties, other than a 
forced or liquidation sale and excludes accrued interest. Where available, 
market values are used to determine fair values. Where market values are not 
available, fair values are calculated by discounting expected cash flows at 
prevailing interest and exchange rates. 
 
 
Taxation 
 
 
The tax charge, including UK corporation tax and overseas corporate tax, 
represents the sum of tax currently payable and deferred tax. Tax currently 
payable is based on the taxable profit for the year. Taxable profit differs from 
the profit reported in the income statement due to items that are not taxable or 
deductible in any period and also due to items that are taxable or deductible in 
a different period. The Group's liability for current tax is calculated using 
tax rates enacted or substantively enacted at the balance sheet date. 
 
 
Current UK Petroleum Revenue Tax (PRT) is charged as a tax expense on chargeable 
field profits included in the income statement and is deductible for UK 
corporation tax. Deferred PRT is provided for in full, using the effective PRT 
rate method. 
 
 
Deferred income tax is provided in full, using the liability method, on 
temporary differences arising between the tax bases of assets and liabilities 
and their carrying amounts in the consolidated financial statements. However, if 
the deferred income tax arises from initial recognition of an asset or liability 
in a transaction other than a business combination, that at the time of the 
transaction affects neither accounting nor taxable profit or loss, it is not 
accounted for. Deferred income tax is determined using tax rates (and laws) that 
have been enacted, or substantively enacted, at the balance sheet date and are 
expected to apply when the related deferred income tax asset is realised or the 
deferred income tax liability is settled. 
 
 
Deferred income tax assets are recognised to the extent that it is probable that 
future taxable profit will be available against which the temporary differences 
can be utilised. 
 
 
Deferred income tax is provided on temporary differences arising on investments 
in subsidiaries and associates, except where the timing of the reversal of the 
temporary difference is controlled by the Group, and it is probable that the 
temporary difference will not reverse in the foreseeable future. 
 
 
Operating Leases 
 
 
Rentals payable under operating leases are charged to the income statement on a 
straight-line basis. 
 
 
Pension Costs 
 
 
The Group pays contributions to personal pension schemes of employees, which are 
administered independently of the Group. The Group has no further payment 
obligations once the contributions have been paid. The contributions are 
recognised as an employee benefit expense when they are due. 
 
 
Share-Based Payments 
 
 
The Group currently has various share-based payment schemes for its employees 
and Directors, details of which are given in the Directors' Remuneration Report. 
 
 
The fair value of share-based awards is determined at the date of grant of the 
award allowing for the effect of any market-based performance conditions. This 
fair value, adjusted by the Group's estimate of the number of awards that will 
eventually vest as a result of key performance measures, is expensed uniformly 
over the vesting period. The corresponding credit is taken to the employee 
benefit reserve. The proceeds on exercise of share options are credited to share 
capital and share premium. 
 
 
The fair values are calculated using a binomial option pricing model with 
suitable modifications to allow for employee turnover after vesting and early 
exercise. The inputs to the model include the share price at date of grant, 
exercise price, expected volatility, expected dividends, risk free rate of 
interest and patterns of early exercise of the plan participants. 
 
 
Decommissioning 
 
 
Provision for decommissioning is recognised in full at the commencement of oil 
and natural gas production. The amount recognised is the present value of the 
estimated future expenditure determined in accordance with local conditions and 
requirements. A corresponding tangible fixed asset of an amount equivalent to 
the provision is also created. This is subsequently depreciated as part of the 
capital costs of the production and transportation facilities. Any change in the 
present value of the estimated expenditure is reflected as an adjustment to the 
provision and the fixed asset. Unwinding of discount is treated as a finance 
cost. 
 
 
Disclosure of Impact of New and Future Accounting Standards 
 
 
The following standards, amendments and interpretations to published standards 
were mandatory for the year ended 31 December 2008: 
 
 
  *  IFRIC 11 Group and Treasury Share TransactionsThis interpretation addresses how 
  to apply IFRS 2 to share-based payment arrangements involving 

  an entity's 

  own equity instruments or instruments of another entity in the same group. IFRS 
  2 

  charges are correctly accounted for in a fellow subsidiary of the Group. 

  There has been no impact to 

  the Group from the introduction of IFRIC 11. 

 
 
 
The Group has not yet adopted the following standards, amendments and 
interpretations which are only effective for periods commencing on or after 1 
January 2009: 
 
 
  *  IFRS 8 Operating Segments This standard replaces IAS 14 'Segment Reporting' and 
  proposes that entities adopt a 'management 

  approach' to reporting financial 

  performance. 
 
 
 
  *  IFRS 3 (Revised) Business Combinations   This standard includes some significant 
  changes to IFRS 3 in respect of business combinations with 

  all payments made 

  to purchase a business recorded at fair value at acquisition date. The standard 
 

  also requires the recognition of subsequent changes in the fair value of 

  the contingent consideration 

  in the income statement rather than goodwill. 

  Transaction costs should be recognised immediately in 

  the income statement. 

  This standard is effective from 1 July 2009, but the Group will adopt this on 
    any acquisitions made from 1 January 2009. 
 
 
 
  *  IAS 27 (Revised) Consolidated and Separate Financial Statements   The revised 
  standard requires the effects of all transactions with non-controlling interests 
  to be 

  recorded in equity if there is no change in control and these 

  transactions will no longer result in 

  goodwill or gains and losses. When 

  control is lost, any remaining interest in the entity is re- 

  measured to 

  fair value and a gain or loss is recognised in profit or loss. 
 
 
 
  *  IAS 1 Presentation of Financial Statements  This standard prescribes the basis 
  for presentation of financial statements and aims to ensure   comparability 
  both with the entity's financial statements of previous periods and with the 
  financial   statements of other entities. 
 
 
 
  *   IFRS 2 Share-Based Payment - Vesting Conditions and Cancellations   The revised 
  standard clarifies the definition of a vesting condition and prescribes the 
  treatment of an 

  award that is effectively cancelled because a non-vesting 

  condition is not satisfied. 
 
 
 
  *  IAS 23 (Revised) Borrowing Costs   The revised standard removes the option of 
  immediately recognising an expense on borrowing costs 

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