2012 Second Quarter Report

During the second quarter of 2012, the Company together with its partners continued a two-rig drilling campaign with exploratory drilling in Kenya and Puntland (Somalia). In Block 10BB (Kenya), the Company and its partner Tullow completed drilling the Ngamia-1 exploration well to a total depth of 2,340 meters and reported a significant light oil discovery. The Ngamia-1 well encountered over 100 meters of net light oil pay in the Upper Lokhone Sand section and an additional 43 meters of potential oil pay in the lower Lokhone Sandstone section.

With the discovery of Ngamia-1, two additional drilling rigs are currently being mobilized into the Company's areas of operation in Kenya and Ethiopia. One of the rigs will be utilized in Ethiopia, drilling Sabisa-1 which is our first exploration well on the South Omo Block, and the second rig will be mobilized into Kenya to commence drilling operations in Block 10A on the Paipai-1 exploration well. The Company will also continue to actively acquire, process and interpret 2D seismic over Blocks 10BA, 10BB, 12A, 13T and South Omo.

In Puntland (Somalia), the Company, through its 44.7% ownership interest in Horn, completed drilling the Shabeel-1 exploration well and commenced drilling the Shabeel North-1 exploration well in June of 2012. Following the positive indications of hydrocarbons in Shabeel-1, the Shabeel North-1 location was drilled to test an adjacent structural trap. The Shabeel North-1 exploration well encountered oil and gas shows in the Cretaceous-aged Jesomma sandstone section similar to those encountered in the Shabeel-1 well. Following this encouragement, an open-hole drill stem test was performed but failed to flow hydrocarbons. Although the test was unsuccessful, the Company and its partners were encouraged by the positive evidence of oil shows and the presence of good quality reservoirs, and as a result, the decision was made to deepen the well in order to evaluate the potential of Lower Cretaceous, Jurassic and Triassic sections. The Shabeel North-1 well has reached a total depth of 3,945 meters and encountered metamorphic basement at a depth of 3,919 meters. The well penetrated 149 meters of interbedded sands and shales of the Triassic Adigrat Formation with no oil or gas shows and only minor porosity exhibited on electric logs. Accordingly, the well is being plugged.

KENYA

The Company and Tullow, its operating partner in each of the Kenyan blocks other than Block 9, are actively exploring for oil as described below.

Block 10BB

The Company and its operating partner on Block 10BB, Tullow, spudded the partnership's first well, Ngamia-1, on January 24, 2012. The well encountered in excess of 100 meters of net oil pay in multiple reservoir zones over a gross interval of 650 meters of the Upper Lokhone Sandstone interval (855 meters to 1,500 meters). The reservoirs are composed of good quality Tertiary age sandstones. Moveable oil with an API greater than 30 degrees has been recovered to surface from four representative intervals. This oil has similar properties to the light waxy crude which has been discovered in Uganda by Tullow. After testing and evaluation of the Upper Lokhone payzones, the well was drilled through the Lower Lokhone Sandstone interval and encountered an additional 43 meters of potential oil pay based on logs and the recovery of light oil on an MDT sample over a gross interval of 150 meters. The well was drilled to a total depth of 2,340 meters after penetrating the Lower Lokhone objective sequence. The well is now suspended for future flow testing. Testing equipment, including downhole pumps, is being mobilized and the intention is to flow test a number of prospective zones in the Upper and Lower Lokhone Sandstones to confirm the full potential of this discovery.

The positive results of the Ngamia-1 well have led the Company and its operating partner to accelerate the pace of exploration activities along the Ngamia-1 trend in Block 10BB and adjacent Block 13T. The Company and its partner have also elected to accelerate an additional 1,783 kilometers of 2D seismic in Block 10BB with plans to acquire 300 square kilometers of 3D seismic in the first half of 2013.

The drilling of the Ngamia-1 well satisfied the remaining work obligations of the initial exploration period under the Block 10BB PSC. The partnership elected to proceed into the next phase of exploration and have received formal government approval. The next exploration period which expires in July 2014 includes a commitment to drill one exploratory well and acquire 300 square kilometers of 3D seismic.

Block 13T

Following the Ngamia-1 discovery, the Company and its operating partner on Block 13T, Tullow, focused additional efforts to better delineate the prospects along the Ngamia-1 trend northward into Block 13T. Based upon the recently acquired 500 kilometers of 2D seismic data, six additional 'Ngamia-style' prospects were mapped in Block 13T, including the Company and its partner's next exploration well, Twiga South-1, which recently spud in Kenya. The Twiga South-1 well is planned to a total depth of 3,114 meters and targets the same structural trend and reservoirs as the recent Ngamia-1 oil discovery 23 kilometers to the south. An additional 500 kilometers of 2D seismic is now being acquired in conjunction with additional seismic acquisition in Block 10BB to mature further leads into drillable prospects.

With the completion of the original 500 kilometers of 2D seismic, the Company fully satisfied its work obligations for the initial exploration period under the Block 13T PSC. The partnership elected to proceed into the next phase of exploration and have received formal government approval. The next exploration period which expires in September 2014 includes a commitment to drill one exploratory well and acquire 200 square kilometers of 3D seismic.

Block 10A

The Company and its operating partners on Block 10A have agreed on Paipai-1 as the location of the first exploratory well in Block 10A. The Paipai-1 well is planned to a total depth of 4,150 meters, and will test a large four-way closed structure with Cretaceous-age sandstone targets at multiple depths. The Paipai-1 civil works associated with the location have been completed and sufficient materials have been purchased and mobilized to the location for drilling operations. The Company and its partners have awarded a drilling contract to Sakson Drilling. The drilling rig and all third party services are currently in the final stages of mobilizing to site, and the well is scheduled to spud in September 2012. Paipai-1 will fully satisfy the required work obligations for the initial exploration period which was recently extended to April 2013.

Block 10BA

The Company and its operating partner on Block 10BA, Tullow, have completed approximately 40% of the planned 1,350 kilometer 2D seismic program in Block 10BA. The onshore portion of the survey has been completed and the offshore and near shore portions of the 2D program are currently underway. The 2D seismic program which is expected to be complete in the fourth quarter of 2012 will fulfill the work obligations of the initial exploration period under the Block 10BA PSC which expires in April 2013.

Block 12A

Based upon the acquired FTG survey, the Company and its operating partner on Block 12A, Tullow, have determined that the 500 kilometer 2D seismic acquisition obligation will be focused in the Kerio Valley in the southwestern portion of the block. The Block 12A program is scheduled to follow the completion of work in Blocks 10BB and 13T whose programs were expanded after the Ngamia-1 discovery. As a result, the Company and its partner obtained an extension of the initial exploration term to September 2013. The 500 kilometer 2D seismic program will satisfy the work obligations for the initial period under the Block 12A PSC and is expected to commence in fourth quarter of 2012.

Block 9

The Company currently holds a 100% interest and is the operator in Block 9 where a seismic acquisition program of 750 kilometers was completed in 2011. The new data was acquired over the Kaisut sub-basin in the northwestern portion of Block 9. Based upon the new data set, several large prospects have been mapped and resources have been estimated. The Company is currently planning to drill an exploratory well in 2013 that will satisfy the remaining exploration commitment for the second exploration period which expires in December 2013. The Company recently announced plans to farmout a 50% working interest to Marathon Oil Corporation ("Marathon"). Completion of the farmout is subject to government approval.

Ethiopia

South Omo Block

The Company and its joint operating partners on the South Omo Block have substantially completed a 1,046 kilometer 2D seismic program in the western portion of the South Omo Block. A number of interesting prospects and leads have been identified and some infill seismic data has already been acquired to mature leads into drillable prospects. The Company and its partners have selected Sabisa-1 as the first drilling location in the South Omo Block. Civil works associated with the Sabisa-1 location have recently commenced, and the Company and its partners are in the final stages of rig contract negotiations with spud of Sabisa-1 expected late in the fourth quarter of 2012. The seismic acquired to date and drilling of Sabisa-1 will satisfy the remaining work obligations for the initial exploration period which expires in January 2013. An additional 500 kilometers of 2D seismic is planned for the eastern portion of the South Omo Block (Chew B'hir Sub-Basin) beginning in late 2012.

Ogaden Blocks 7/8

The Company and its partners continue their focus on the El Kuran oil accumulation in Block 8, discovered in the early 1970's. After completing reservoir characterization studies, the Company focused efforts on testing and completion strategies for producing commercial quantities of oil and gas. During the second quarter of 2012, the Company received and began evaluating tenders for drilling and third party services for a proposed well in the El Kuran field. The Company also received formal approval for a one year extension of the initial exploration period to July 2013. The Company recently announced plans to farmout 25% of its 55% working interest and operatorship to New Age. Completion of the farmout is subject to government approval.

Adigala Block

As part of work obligations for the second exploration period which expires July 2013, the Company and its partner worked during the second quarter to incorporate newly acquired FTG gravity data with seismic data to improve the subsurface interpretation of the block. The Company also integrated results of recent surface geological studies and began reprocessing data acquired in 2009 with the goal of improving the data quality.

Rift Valley Joint Study Block

The Company completed the acquisition of high resolution gravity and magnetic data over the Rift Valley Block as part of a Joint Study Agreement with Ministry of Mines in Ethiopia. This block is on trend with highly prospective blocks in the Tertiary rift valley such as Ethiopian South Omo Block, and Kenyan Blocks 10BA, 10BB, 13T, and 12A. The Company has submitted an application to convert the Rift Valley Block to a formal production sharing agreement.

PUNTLAND (SOMALIA)

Dharoor Valley and Nugaal Valley Blocks

In the first half of the year, the Company drilled the Shabeel-1 exploration well to a total depth of 3,470 meters before ending in metamorphic basement. The well encountered significant oil and gas shows in the Upper Cretaceous Jesomma Sandstones and Jurassic and Triassic sandstones deeper in the wellbore, but failed to encounter Lower Cretaceous sandstone reservoirs that were considered a primary objective. Petrophysical analysis indicated that potential hydrocarbon pay zones in the Jurassic and Triassic sandstones are thin and did not warrant further testing and the well was suspended pending further consideration of the Jesomma sandstone section.

Following results of the Shabeel-1 well, which provided evidence for a working petroleum system, the Sakson drilling rig was relocated 3.5 kilometers north of the Shabeel-1 well to test an adjacent structural trap, Shabeel North-1. The Shabeel North-1 exploration well was spud in June 2012 and encountered oil and gas shows in the Upper Cretaceous Jesomma sandstone section from 1,905 meters to 2,095 meters, similar to those encountered in the Shabeel-1 exploration well. An open-hole drill stem test was performed but failed to flow hydrocarbons. Although the test was unsuccessful, the Company and its partners were encouraged by the positive evidence of oil shows and the presence of good quality reservoirs and decided to deepen the well in order to evaluate the potential of the Lower Cretaceous, Jurassic and Triassic sections. The Shabeel North-1 well has reached a total depth of 3,945 meters and encountered metamorphic basement at a depth of 3,919 meters. The well penetrated 149 meters of interbedded sands and shales of the Triassic Adigrat Formation with no oil or gas shows and only minor porosity exhibited on electric logs. Accordingly, the well is being plugged.

As the Upper Cretaceous Jesomma sands in Shabeel North-1, which exhibited porosity and hydrocarbon shows but produced only fresh water on a drill stem test, were similar to the Jesomma sands encountered in the previously drilled Shabeel-1 well in respect of log response and oil and gas shows, the Company and its partners have determined that additional testing of these zones in the previously drilled Shabeel-1 well is also not warranted.

While the Company was disappointed that the first two exploration wells in Puntland (Somalia) did not flow oil, the Company remains highly encouraged that all of the critical elements exist for oil accumulations, namely a working petroleum system, good quality reservoirs and thick seal rocks. Based on the encouragement provided by the Shabeel wells, the Company and its partners plan to enter the next exploration period in both the Dharoor Valley and Nugaal Valley PSAs which carry a commitment to drill one well in each block within an additional three year term. The current operational plan would be to contract a seismic crew to acquire additional data in the Dharoor Valley block and to hold discussions with the Puntland Government regarding drill ready prospects in the Nugaal Valley block. The focus of the Dharoor Valley block seismic program will be to delineate new structural prospects for the upcoming drilling campaign.

MALI

Blocks 7 and 11

Recent security issues in Mali are being closely monitored, but currently the operational areas are not accessible. The Company's share of costs for initial seismic and the drilling of the first exploratory well are fully carried by its single partner and operator, Heritage. During the first quarter of 2012, the Company impaired $3.1 million of capitalized intangible exploration assets due to security concerns in Mali which has halted operations on the Company's blocks.