Oilexco Provides Update for 2Q06 Exploration Operations

During the second quarter three wells from Oilexco's 2006 exploration/appraisal program were drilled with the semisubmersible Bredford Dolphin under a short term three well contract. The first well drilled by the Bredford Dolphin was located at Joy in Block 15/25c north of the Company's Nicol development. This well failed to intersect commercial hydrocarbons. The second well of the three well contract was drilled at Sheryl (formerly Disraeli) located in Block 21/23b. This well intersected a significant oil column in two sidetracks. However, pressure measurements and well testing were not performed because of the highly deviated nature of the well bores. The Company has returned to the Sheryl site with the semi-submersible Sedco 712 to conduct further appraisal drilling to evaluate the extent of the reservoir on the south flank of the structure. These operations are expected to be completed in September. The third well of the contract was drilled at Halibut (Blocks 14/21 and 14/22a). This high risk exploratory well did not encounter commercial quantities of hydrocarbons.

Oilexco submitted bids for ten licences the UK Department of Trade and Industry's (DTI) 24th Offshore Licensing Round, the results of which are expected to be announced in the third quarter.

In May 2006, the Company's wholly owned subsidiary Oilexco North Sea Limited executed a contract extension with Transocean Offshore (North Sea) Ltd. for the semisubmersible Sedco 712 from March 23, 2008 to March 23, 2010. The total dollar value for the two year extension is US$248 million, representing a day rate of $340,000 per day. This increase from $225,000 per day in the period March 23, 2007 to March 23, 2008, and $140,000 per day in the period March 23, 2006 to March 23, 2007 reflects the long term increase in world wide demand for offshore drilling equipment. Oilexco considers the long term contract for the Sedco 712 a key component to its overall strategy as it will allow the Company to continue its exploration, appraisal and development programs. The contract provides the Company guaranteed access to a drilling vessel and the ability to budget its capital spending without being exposed to the uncertainty of short term daily rig rates, in addition to allowing the Company flexibility to adjust its drilling schedule should circumstances require.

During the second quarter of 2006, the Company's wholly owned subsidiary also executed a Sale and Purchase Agreement with ConocoPhillips (U.K.) Limited ('COP') and ENI UK Limited ('ENI') related to the Nicol Field. Under the terms of the agreement, COP and ENI will lift a joint total of 1.25 million barrels from their combined 30% ownership of Nicol. After the production milestone is reached, COP and ENI will relinquish their equity and Oilexco will then become the 100% owner of the Nicol Field. In return for the increased ownership, the Company is paying COP and ENI's 30% share of the capital expenditures required to develop Nicol, currently estimated to be approximately US$16.6 million.

In May Oilexco North Sea Limited, the wholly owned subsidiary of the Company, completed the syndication of it's loan led by the Royal Bank of Scotland ('RBS') with the addition of 10 additional lending institutions. As a result of the syndication the total amount of the funds available to the Company increased by $50 million to $295 million. While the additional funds are not expected to be required for the Company's current developments, the increased funds will give Oilexco greater flexibility and agility to react to future development projects.

Oilexco finished the second quarter of 2006 in excellent financial condition. The Company had significant cash balances as at June 30, 2006 as a result of an equity financing that closed in December 2005 and draws from the RBS loan facility. Capital assets increased from $197.0 million at December 31, 2005 to $347.6 million at June 30, 2006 as a result of drilling three exploration wells, five production wells and additions to the subsea equipment for the Brenda and Nicol development. Current liabilities increased from $41.9 million at December 31, 2005 to $56.6 million at June 30, 2006, represented by a $31.3 million increase in accounts payable and accrued liabilities, and a $16.5 million decrease in the current portion of the bank loan (due to repayment of the Bridge Facility that was replaced with long-term senior debt from RBS). The long-term debt as at June 30, 2006 amounted to $119.8 million and relates to the Senior Facility. The Company expects its bank indebtedness to increase by the end of 2006 up to approximately $225 million. Net working capital was approximately $48.0 million as at June 30, 2006 compared to $89.1 million at December 31, 2005. The increase in share capital of approximately $7.0 million represents funds obtained from warrants and stock options exercised in the first and second quarters of 2006. The Company's 2006 UK North Sea exploration and appraisal drilling program will be fully funded by its cash reserves. The Brenda/Nicol development is funded by the Senior Facility from RBS.

Operating results for the first and second quarter were lower in 2006 compared to the first and second quarter of 2005. The decrease in UK production was a result of maintenance work completed on the Balmoral facility; however increased oil prices helped offset reduced production. The price received for UK oil production for the second quarter of 2006 averaged $67.01 per barrel compared to $51.95 for the same period in 2005. While total operating costs at the Balmoral facility in the first and second quarter of 2006 were similar to those of the first and second quarter of 2005, the per barrel costs were significantly higher. The increase in the per barrel cost was due to the decreased production in 2006 and scheduled maintenance of the facility. The per unit operating costs will decline when the Brenda/Nicol production begins later in the fourth quarter of 2006.

General and administrative expenses increased significantly in the second quarter of 2006 compared to 2005 because of continued increase in staffing levels in both Oilexco's head office in Calgary and its wholly owned subsidiary in Aberdeen. The additional expenses are a result of salaries, support and activity required for the Brenda/Nicol development and the ongoing exploration and appraisal drilling program. General and administrative expenses are expected to continue to rise somewhat throughout 2006, though not as sharply as in previous periods. A stock-based compensation expense of $7.7 million was recognized in the second quarter of 2006, which was $nil the same period in 2005. The Company continues its compensation policy of combining share options with competitive salaries and benefits packages in order to attract the best qualified staff.

As part of its loan facility agreement with RBS, the Company participated in commodity contracts that involve a costless collar agreement to secure the Company's future cash flow by eliminating its exposure to oil prices below $40 per barrel for a portion of the anticipated production from Brenda and Nicol. As a result of oil prices at June 30, 2006 compared to those of January 25, 2006, the date at which the commodity contracts were signed, the Company recorded an unrealized loss of $8.3 million in its financial statements for the second quarter ended June 30, 2006. This is a non cash item. The commodity contracts will not have a negative impact on the Company's cash flow unless the price of dated Brent exceeds a monthly average of $88 per barrel during the life of the commodity contracts.

The Company experienced a net loss of $17.8 million for the second quarter of 2006 compared to a $1.0 million net loss for the corresponding period in 2005. The sharp increase in the 2006 net loss is a result of approximately $8.3 million unrealized loss on derivative contracts, $7.7 million in stock based compensation and $0.6 million increase in general and administrative expenses.

As anticipated, cash flows from operating activities were negative in the second quarter of 2006, similar the corresponding period in 2005. It is expected that this trend will continue until oil production from Brenda and Nicol begins sometime in the fourth quarter of 2006.

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