24 October 2012

Sound Oil plc

("Sound Oil" or "the Company")

Nervesa Funding Contract

Sound Oil, the Italian focused upstream oil and gas company, is pleased to announce a funding contract for Nervesa with the Italian engineering company CSTI Srl ("CSTI").

As previously announced the Company plans to spud the Nervesa appraisal well once final governmental approval has been obtained, expected around the end of 2012.  Preparations for spud are well advanced with long lead items delivered, land and rig secured, service contracts awarded and site preparation expected to commence soon. 

The funding contract with CSTI contains the following terms:

·        CSTI will fund directly €1.5 million towards the Nervesa appraisal well, which equates to roughly 50% of the remaining spend on the well.  The payments will be phased in three equal tranches over the drill period.

·        In addition CSTI will, as part of the subsequent field development programme (which is subject to the results of the appraisal well), have pre-emption on funding directly the total cost of the facilities, currently estimated to be €4 million and on the associated EPC (Engineering, Procurement and Construction) contract for Nervesa.

·        Based on the P50 contingent resources of 21 Bscf gas (the Company's base case), Sound Oil estimates that the contract will result in a reduction of the Nervesa project NPV for Sound Oil of approximately 8% (assuming CSTI fund both the well and the facilities) or approximately 7% if they fund only the appraisal well.  The payments to CSTI are structured as a "net profit interest", with CSTI receiving a maximum of 36.5% of the project's net cash flows (net of taxes, costs and royalties) for a maximum of four years.  Total payments to CSTI are also subject to a monetary cap of €19.2 million (assuming CSTI fund both the well and the facilities) or €12 million (if they fund only the appraisal well).

·        Should gas production not start at Nervesa for any reason, Sound Oil will have no liability to repay any funds to CSTI.  In this scenario CSTI would however be entitled to a pre-emption right on one future EPC contract (either Strombone or one alternative appraisal well of Sound Oil's choice).

·        Sound Oil retains 100% ownership and control of the Nervesa and Strombone opportunities and associated licences.

·        The funding contract is conditional on the final government approval of the Nervesa appraisal well.

James Parsons, Sound Oil's Chief Executive Officer, commented:

"This funding contract secures up to €5.5 million of additional funding in exchange for an estimated 7 to 8% reduction in the Nervesa project NPV.  It also limits Sound Oil's remaining cash spend on the Nervesa appraisal well to €1.4 million, therefore preserving cash for subsequent wells.

We will continue to pursue these innovative structures, which secure additional funding without issuing new equity and without ceding material upside on our core assets."

For further information please contact:

Note

The information contained in this announcement has been reviewed by Sound Oil's Chief Operating Officer, Dr M. J. Cope BSc PhD CGeol FGS, a qualified petroleum geologist. "Bscf" means billions of standard cubic feet of gas; "P50" refers to a 50% chance of finding a given volume and is consistent with SPE (The Society of Petroleum Engineers) guidelines; the contingent resource estimate shown above is from a Competent Person's Report prepared by Fugro Robertson Limited in October 2011.