Falkland Oil & Gas Reaches Deal for Loan Agreement

Falkland Oil and Gas has agreed terms with RAB Special Situations (Master) Fund Limited ("RAB SSMF") for RAB SSMF to invest £8 million by way of convertible loan notes ("Notes") in the Company ("Transaction").

The issue of these Notes, which is dependant principally on the entry into definitive documentation, will provide the Company with additional cash resources for the funding of ongoing exploration in its licenses located to the South and East of the Falklands. In particular it will be used to fund the costs of the Controlled Source Electro Magnetic Survey ("CSEM") to be conducted by OHM Limited and a seabed coring program. The OHM vessel, the CS Teneo is due to commence the CSEM survey in January 2007. In addition, The Wavefield Bergen Surveyor is already en route to the Falkland Islands and is expected to commence the 2D seismic infill program in Mid December 2006.

Proposed terms of the Notes

The Notes are for a term of 5 years and bear interest at 6 per cent per annum, they carry the right to be converted at any time at the discretion of RAB SSMF in whole or in part into ordinary shares of 0.002 pence each in the Company ("Shares") at a price of 80 pence per Share (subject to adjustment). Interest can be paid in cash or securities at the option of the Company and the securities convert into Shares in the Company on the same basis as the Notes Full conversion would lead to the issue of 10,000,000 Shares of the Company. The Notes are not redeemable/repayable by the Company until the expiry of the term. On issue of the Notes RAB SSMF will receive 6,000,000 warrants, exercisable in whole or in part over a 6 year term, to acquire one Company Share per warrant at a price of 100 pence per Share (subject to adjustment) ("Warrants").

It is intended that RAB SSMF will subscribe £2 million on completion of the final documentation, £2 million on February 23, 2007, £2 million on April 30, 2007 and £2 million on September 24, 2007.

The conversion price for the Notes will, in the event that the Company issues Shares or securities convertible into Shares at a price lower than 80 pence per Share, be adjusted to the lower of 80 pence and a 10 per cent. premium to the price at which such Shares are issued. The exercise price for the Warrants will, in the event that the Company issues Shares or securities convertible into Shares at a price lower than 100 pence per Share, be adjusted to the lower of 100 pence and a 30 per cent. premium to the price at which such Shares are issued.


As at the date of this announcement, the Company has been informed by RAB SSMF that it has an interest in 28,322,778 Shares, representing 30 percent of the current issued share capital.

As the Company is incorporated in the Falkland Islands, the City Code on Takeovers and Mergers (the "Code") does not apply to the Company. Despite the fact that the Code does not apply, as set out in the Company's AIM Admission Document, the Articles of Association of the Company contain provisions which (in summary) entitle the Company's board (the "Board") at its discretion inter alia to suspend the voting rights of a shareholder if it (and those acting in concert with it) would be required to make an offer to acquire all of the shares of other shareholders of the Company under Rule 9 of the Code, if the Code applied to the Company (a "Mandatory Offer"), and has failed to do so within 21 days of when such obligation would have arisen (the "Suspension Right").

In the event that RAB SSMF converts the Notes and exercises the Warrants, an additional 16,000,000 Shares will fall to be issued to RAB SSMF. Additional Shares will also fall to be issued in the event that the conversion price of the Notes or exercise price of the Warrants is altered (as set out above) or that the interest due under the Notes is settled in securities into which the Notes convert on the same basis of the agreement.

The Board, after due consideration of what it considers to be in the best interests of the Company and its shareholders, has agreed not to invoke the Suspension Right (if applicable) in respect of all new Shares now held or to be acquired by RAB SSMF pursuant to the Transaction. This waiver does not apply to any issue of such Shares to, or their acquisition, by any other persons.

The Transaction is a related party transaction for the purpose of AIM rule 13, as RAB SSMF is a related party within the meaning of the AIM rules. The Directors of the Company consider, having consulted with the Company's nominated adviser KBC Peel Hunt, that the terms of the Transaction are fair and reasonable insofar as the shareholders are concerned.

Tim Bushell, Chief Executive of FOGL commented:

"I am delighted that we have been able to agree on this financing, which will provide FOGL with funding for the Company's fast track exploration plans in our licenses. We are embarking on a very exciting program over the next few months which will enable us to select the best prospects for drilling.

TRACS International ("TRACS") has also recently completed an independent review of what they believe are our top 10 prospects. In their opinion these 10 prospects have an un-risked prospective resource potential of 10 billion barrels and net (to FOGL) risked prospective resources of 863 million barrels. TRACS commented that 'the planned 2006-2007 work program (CSEM & 2D seismic) is a logical strategy and shows efficient use of resources'.

I am also pleased to report that our work program is progressing well, with CSEM, infill 2D Seismic and seabed cores all being acquired over the coming Austral summer. The results of these surveys will allow us to focus on the best prospects for drilling. I also, remain confident that we can achieve our objectives of securing suitable partners and contracting a rig to commence exploration drilling in 2008."

The un-risked prospective resource potential and net risked prospective resources referred to above have been reviewed independently in a recent competent persons report ("CPR") prepared by TRACS. This CPR has been prepared in accordance with the guidance in AIM notice 16 (AIM Rules - Guidance for Mining and Oil & Gas Companies) issued in March 2006. This resource update is prepared in accordance with the definitions used by The Society of Petroleum Engineers. The numbers quoted are those of TRACS.