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Gulfsands Ceased Activities in Syria

Source: 2/2/2012, Location: Middle East

Gulfsands Petroleum plc, the oil and gas production, exploration and development company with activities in Syria, Iraq, Tunisia, Italy and the U.S.A., wishes to provide the following corporate update.

As previously reported, the Company and its 50% working interest partner in Block 26, Syria, Sinochem (together referred to as the "Contractor" under the Production Sharing Contract), declared force majeure in respect of Block 26 production operations on 11 December 2011, in response to the tightening of EU sanctions against Syria. Since that date, the Contractor has had no involvement in any production from Block 26.

General Petroleum Company (GPC), the Syrian state-owned oil company which is effectively the Contractor's joint venture partner under the PSC has continued since 11 December to produce oil from Block 26 at the rate of approximately 4,000 barrels per day. Contractor has received no payment in respect of such production.

As of the date hereof, inclusive of arrears of payments owed in respect of production up to 30th November the Contractor is owed approximately US$50 million of which half is owed to Gulfsands. This figure will continue to increase modestly at current levels of production.

Legal advice received by the Board is to the effect that the declaration of force majeure is entirely valid and that both the Company's and the Contractor's positions are protected under the terms of the PSC, a contract governed by both English and Syrian Laws. The conduct of all parties to date has been consistent with a mutual reservation of all rights pursuant to the PSC, pending a resolution of the present difficult situation.

Block 26 Exploration
Following successful testing of the KE102 Appraisal Well, the results of which were announced on 31st January 2012, the Board has decided to cease exploration activity within Block 26 for the duration of the Sanctions.

While the Sanctions do not explicitly preclude further exploration, the Board considers such cessation to be consistent with the intent of the Sanctions and a matter of financial and operational prudence in response to increasing difficulties in procuring access to essential technical services and supplies required for these activities. Accordingly, appropriate notices have been served under the Company's drilling contracts.

It is disappointing to be obliged to cease exploration following a recent run of considerable success and with substantial exploration potential still untapped. The current Exploration Period for the Block 26 PSC expires in August this year and because the PSC's minimum work obligations have long since been fulfilled, it is uncertain whether the remainder of the Exploration Period has also been suspended by the Company's declaration of force majeure. However, the Board intends to retain a full exploration capability in country and remains hopeful that, when the present difficult situation is resolved, such capability combined with the previous track record of proven exploration success will be persuasive with the Syrian authorities in extending the Exploration Period to account for the period lost due to the Sanctions.

Local Staff and Creditors
The Company's local staff in Syria is a highly valuable resource and has been in large part responsible for the success enjoyed in Syria to date. As previously stated and as reiterated to GPC and the Syrian Oil Ministry, it is the Company's present intention, on behalf of Contractor, to retain substantially all local staff throughout this difficult period, to continue to pay them and to provide as best possible for their security.

In the same spirit, all bona fide trade creditors in respect of obligations predating the cessation of production activities are being paid.

The Board is convinced that this level of commitment, combined with the maintenance of a visible office and presence in Damascus, is not only necessary to the fulfilment of the Company's legal, moral and humanitarian obligations but is also the best possible insurance that the Company will be well-positioned to recommence activities when the present difficult situation in due course resolves itself.

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