Gulfsands Completes Restructuring of Gulf of Mexico Operations

Gulfsands Petroleum reports that the Company has completed the financial and operational restructuring of its Gulf of Mexico subsidiary, Northstar Gulfsands LLC. The Company has taken direct ownership in approximately 52.6% of all the property interests formerly held by Northstar Gulfsands LLC into Gulfsands Petroleum USA Inc., a wholly owned subsidiary of Gulfsands Petroleum PLC, and concurrently has repaid all outstanding debt accruing to its 52.6% interest in Northstar Gulfsands LLC.

Gulf of Mexico Restructuring

The Company successfully completed a partition of Northstar Gulfsands LLC effective November 1, 2005 by taking directly into Gulfsands Petroleum USA Inc. an approximate 52.6% working interest ownership in the properties formerly held in Northstar Gulfsands LLC. In conjunction with this partition, the Company simultaneously acquired 52.6% of the liabilities of Northstar Gulfsands LLC which primarily consisted of the mezzanine debt and warrants in that entity. At closing, Gulfsands retired its entire portion of the mezzanine debt including warrants that were held by the mezzanine lender for total consideration of $24.18 million. The restructuring of the Gulf of Mexico operations should result in significant savings to the Company of approximately $3 million for the 2006 calendar year due to the elimination of interest expense and associated lending fees, plus a reduction in overhead.

Additional savings will also be incurred on any new Gulf of Mexico projects undertaken by the Company as there will no longer be a 4% overriding royalty payable on new projects. Also, each month going forward certain contracts on existing oil and gas hedges in place expire and allow the Company to take further advantage of the high oil and gas spot prices which are at a premium to the prices the Company currently receives for a portion of the volumes which are being hedged. Current hedges represent approximately 40% of pre-Hurricane Rita average daily production levels and will be down to approximately 25% of forecasted daily production by mid-year 2006 and less than 15% of forecasted daily production by year-end 2006. All hedges will have expired by May 2007. However, as a result of the partition the Company will be required to take a non-recurring, non-cash one time charge of approximately $1.4 million to the Profit and Loss Account for the year ending December 31, 2005 primarily associated with goodwill that was recognized on the consolidated balance sheet of the Company following the formation of Northstar Gulfsands LLC.

As a result of the partition, Gulfsands has retired all debt within the Company, incurred significant cost savings, and has retained the use of the cash flow that is being generated from its interests in 39 Gulf of Mexico producing fields to fund further exploration and development in the Gulf of Mexico and elsewhere within the Company. Following this transaction, Gulfsands owns a direct working interest of approximately 30.3 billion cubic feet of natural gas equivalents of proved and probable reserves with a net present value of approximately $129 million per the 30 June 2005 reserve report prepared by Netherland Sewell & Associates, Inc. Gulfsands has a working interest in 64 offshore blocks comprising approximately 216,000 gross acres offshore Texas and Louisiana.

Operational Update

Since the events of Hurricane Rita, Gulfsands' shut-in production has been slowly coming back on-line toward a return to pre-Rita production levels, as pipelines and onshore facilities are being repaired by pipeline operators. Current production is approximately 40% of the pre-storm levels and continued increases are expected over the coming months. The Company anticipates being back to pre-storm daily production levels during the second quarter of 2006. Prior to Hurricane Rita, Gulfsands net working interest production was approximately 3,000 barrels of oil equivalent per day, or approximately 6,000 barrels of oil equivalent per day to the former subsidiary company Northstar Gulfsands LLC in which Gulfsands owned a 52.6% ownership interest prior to the partition of that entity.

The reduced production from the Gulf of Mexico during the fourth quarter will result in reduced turnover and operating profit for the second half of 2005 as compared to the first half of the year. This reduced operating profit combined with the write-off of goodwill may result in a small retained loss for the 2005 calendar year before any potential USA income tax expense. However, even though production volumes have been down since Hurricane Rita, this event will have no negative impact on the overall proven and probable reserves for the Company in the Gulf of Mexico.

John Dorrier, CEO of Gulfsands Petroleum, said:
"Mezzanine debt finance played a critical initial role in the building of Gulfsands' business in the Gulf of Mexico. The Company however believes that it is prudent to retire that debt and the attached warrants before pursuing an expansion program of drilling and acquisition of additional interests in the Gulf. The funds for this restructuring were raised at the Company's IPO in April and this transaction completes a fundamental objective of the IPO. Additionally, even though it is taking longer than expected to return daily production in the Gulf to pre-storm levels, the Company's reserves base is unaffected and the exploration program will further benefit the Company's growth in reserves and production."


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