---

|MANAGEMENTS REPORT
|-------------------

Managements Report

Managements Responsibilityon Financial Statements

The consolidated financial statements of TransGlobe Energy
Corporation were prepared by management within acceptable limits of materiality
and are in accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board. Management is responsible for
ensuring that the financial and operating information presented in this annual
report is consistent with that shown in the consolidated financial statements.

The consolidated financial statements have been prepared by
management in accordance with the accounting policies as described in the notes
to the consolidated financial statements. Timely release of financial
information sometimes necessitates the use of estimates when transactions
affecting the current accounting period cannot be finalized until future
periods. When necessary, such estimates are based on informed judgments made by
management.

To ensure the integrity of the consolidated financial
statements, we carefully select and train qualified personnel. We also ensure
our organizational structure provides appropriate delegation of authority and
division of responsibilities. Our policies and procedures are communicated
throughout the organization and include a written Code of Conduct that applies
to all employees, including the Chief Executive Officer and Chief Financial
Officer.

Deloitte & Touche LLP, an independent firm of Chartered
Accountants appointed by the shareholders, have conducted an examination of the
corporate and accounting records in order to express their opinion on the
consolidated financial statements. The Audit Committee, consisting of five
independent directors, has met with representatives of Deloitte & Touche LLP
and management in order to determine if management has fulfilled its
responsibilities in the preparation of the consolidated financial statements.
The Board of Directors has approved the consolidated financial statements.

Managements Report On Internal Control Over Financial
  Reporting

Management has designed and maintains an appropriate system of
internal controls to provide reasonable assurance that all assets are
safeguarded and financial records are properly maintained to facilitate the
preparation of consolidated financial statements for reporting purposes.
Managements evaluation concluded that the internal control over financial
reporting was effective as of December 31, 2011.

|Signed by:                          |                                                        
|----------------------------------- | -------------------------------------------------------
|                                    |                                                        
|Ross G. Clarkson                  | David C. Ferguson                                    
|Ross G. Clarkson                    | David C. Ferguson                                      
|President & Chief Executive Officer | Vice President, Finance & Chief Financial
      Officer
|                                    |                                                        
|March 6, 2012                       |                                                        

1

---

|REPORT OF THE
      INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
|----------------------------------------------------------------

REPORT OF THE INDEPENDENT REGISTERED ACCOUNTANTS

To the Board of Directors and Shareholders of TransGlobe Energy
Corporation

We have audited the accompanying consolidated financial statements
  of TransGlobe Energy Corporation and subsidiaries, which comprise the consolidated
  balance sheets as at December 31, 2011, December 31, 2010,and January 1, 2010, and the consolidated statements
  of earnings and comprehensive income, statements of changes in shareholders
  equity and statements of cash flows for the years ended December 31, 2011 and
  December 31, 2010, and a summary of significant accounting policies and other
  explanatory information.

Managements Responsibility for the Consolidated Financial
Statements

Management is responsible for the preparation and fair
presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the International
Accounting Standards Board, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or
error.

Auditors Responsibility

Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors judgment, including
the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entitys
preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances. An
audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our audit
opinion.

Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of TransGlobe Energy
Corporation and subsidiaries as at December 31, 2011, December 31, 2010, and
January 1, 2010 and their financial performance and cash flows for the years
ended December 31, 2011 and December 31, 2010 in accordance with International
Financial Reporting Standards as issued by the International Accounting
Standards Board.

Other Matter

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Companys internal control over financial
reporting as at December 31, 2011, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 6, 2012
expressed an unqualified opinion on the Companys internal control over
financial reporting.

Independent Registered Chartered Accountants March 6, 2012

  Calgary, Canada

2

---

|REPORT OF THE
      INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
|----------------------------------------------------------------

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Shareholders of TransGlobe Energy
Corporation

We have audited the internal control over financial reporting
of TransGlobe Energy Corporationand
subsidiaries (the Company)as of December
31, 2011, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Companys management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a
process designed by, or under the supervision of, the companys principal
executive and principal financial officers, or persons performing similar
functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2011, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of
the Treadway Commission.

We have also audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as at and
for the year ended December 31, 2011 of the Company and our report dated March
6, 2012 expressed an unqualified opinion on those financial statements.

Independent Registered Chartered Accountants March 6, 2012

  Calgary, Canada

3

---

|CONSOLIDATED
      FINANCIAL STATEMENTS
|---------------------------------------

Consolidated Statements of Earnings and Comprehensive
Income

(Expressed in thousands of U.S. Dollars, except per share
amounts)

|                                                         |       |   |         |   |   | 2010           |  
|-------------------------------------------------------- | ----- | - | ------- | - | - | -------------- | -
|                                                         | Notes |   | 2011    |   |   | (Note
      26 | )
|                                                         |       |   |         |   |   |                |  
|REVENUE                                                  |       |   |         |   |   |                |  
|Oil sales, net of royalties
      and other              | 6     | $ | 247,754 |   | $ | 157,220        |  
|Derivative gain (loss) on commodity contracts            |       |   | (807    | ) |   | (670           | )
|Finance revenue                                          | 8     |   | 467     |   |   | 28             |  
|                                                         |       |   | 247,414 |   |   | 156,578        |  
|                                                         |       |   |         |   |   |                |  
|EXPENSES                                                 |       |   |         |   |   |                |  
|Production and operating                                 |       |   | 36,662  |   |   | 26,850         |  
|General and administrative                               | 7     |   | 18,893  |   |   | 15,458         |  
|Foreign exchange (gain) loss                             |       |   | 310     |   |   | 216            |  
|Finance costs                                            | 8     |   | 4,983   |   |   | 3,317          |  
|Exploration                                              |       |   | 1,561   |   |   | 331            |  
|Depletion, depreciation and amortization                 | 14    |   | 35,081  |   |   | 28,140         |  
|Impairment of exploration and
      evaluation assets    | 13    |   | 12,147  |   |   | -              |  
|Gain
      on acquisition                                | 4     |   | (13,187 | ) |   | -              |  
|                                                         |       |   | 96,450  |   |   | 74,312         |  
|                                                         |       |   |         |   |   |                |  
|Earnings before income taxes                             |       |   | 150,964 |   |   | 82,266         |  
|                                                         |       |   |         |   |   |                |  
|Income tax expense (recovery)  current                  | 12    |   | 74,017  |   |   | 39,807         |  
|
      deferred                                         | 12    |   | (4,445  | ) |   | 1,894          |  
|                                                         |       |   | 69,572  |   |   | 41,701         |  
|                                                         |       |   |         |   |   |                |  
|NET EARNINGS AND COMPREHENSIVE INCOME FOR THE
      YEAR |       | $ | 81,392  |   | $ | 40,565         |  
|                                                         |       |   |         |   |   |                |  
|Earnings per share                                       |       |   |         |   |   |                |  
|Basic                                                    | 21    | $ | 1.12    |   | $ | 0.61           |  
|Diluted                                                  | 21    | $ | 1.09    |   | $ | 0.59           |  

See accompanying notes to the Consolidated Financial
Statements.

4

---

|CONSOLIDATED FINANCIAL
      STATEMENTS
|---------------------------------------

Consolidated Balance Sheets

(Expressed in thousands of U.S. Dollars)

|                                                   |       |   |                   |  |   | As at             |   |   | As at          |  
|-------------------------------------------------- | ----- | - | ----------------- |  | - | ----------------- | - | - | -------------- | -
|                                                   |       |   | As at             |  |   | December 31, 2010 |   |   | January 1,2010 |  
|                                                   | Notes |   | December 31, 2011 |  |   | (Note
      26    | ) |   | (Note
      26 | )
|                                                   |       |   |                   |  |   |                   |   |   |                |  
|ASSETS                                             |       |   |                   |  |   |                   |   |   |                |  
|Current                                            |       |   |                   |  |   |                   |   |   |                |  
|Cash and cash equivalents                          | 9     | $ | 43,884            |  | $ | 57,782            |   | $ | 16,177         |  
|Accounts receivable                                | 10    |   | 162,225           |  |   | 69,085            |   |   | 35,319         |  
|Derivative commodity contracts                     |       |   | 125               |  |   | 303               |   |   | -              |  
|Prepaids and other                                 |       |   | 7,441             |  |   | 2,867             |   |   | 1,909          |  
|                                                   |       |   | 213,675           |  |   | 130,037           |   |   | 53,405         |  
|Non-Current                                        |       |   |                   |  |   |                   |   |   |                |  
|Restricted cash                                    | 11    |   | 2,226             |  |   | 3,387             |   |   | -              |  
|Intangible exploration and
      evaluation assets | 13    |   | 17,453            |  |   | 22,609            |   |   | 20,403         |  
|Property and equipment                             |       |   |                   |  |   |                   |   |   |                |  
|Petroleum
      properties                         | 14    |   | 280,524           |  |   | 178,639           |   |   | 144,009        |  
|Other assets                                       | 14    |   | 3,748             |  |   | 2,773             |   |   | 2,405          |  
|Goodwill                                           | 15    |   | 8,180             |  |   | 8,180             |   |   | 8,180          |  
|                                                   |       | $ | 525,806           |  | $ | 345,625           |   | $ | 228,402        |  
|                                                   |       |   |                   |  |   |                   |   |   |                |  
|                                                   |       |   |                   |  |   |                   |   |   |                |  
|LIABILITIES                                        |       |   |                   |  |   |                   |   |   |                |  
|Current                                            |       |   |                   |  |   |                   |   |   |                |  
|Accounts payable and accrued
      liabilities     | 16    | $ | 73,692            |  | $ | 41,808            |   | $ | 14,879         |  
|Derivative commodity contracts                     |       |   | -                 |  |   | -                 |   |   | 514            |  
|Current portion of long-term debt                  | 17    |   | -                 |  |   | -                 |   |   | 49,799         |  
|                                                   |       |   | 73,692            |  |   | 41,808            |   |   | 65,192         |  
|Non-Current                                        |       |   |                   |  |   |                   |   |   |                |  
|Long-term debt                                     | 17    |   | 57,609            |  |   | 86,420            |   |   | -              |  
|Deferred taxes                                     | 12    |   | 52,891            |  |   | 35,207            |   |   | 33,313         |  
|Other
      long-term liabilities                  |       |   | 1,122             |  |   | -                 |   |   | -              |  
|                                                   |       |   | 185,314           |  |   | 163,435           |   |   | 98,505         |  
|                                                   |       |   |                   |  |   |                   |   |   |                |  
|SHAREHOLDERS EQUITY                               |       |   |                   |  |   |                   |   |   |                |  
|Share capital                                      | 19    |   | 154,263           |  |   | 80,106            |   |   | 66,106         |  
|Contributed surplus                                |       |   | 8,538             |  |   | 5,785             |   |   | 8,057          |  
|Retained earnings                                  |       |   | 177,691           |  |   | 96,299            |   |   | 55,734         |  
|                                                   |       |   | 340,492           |  |   | 182,190           |   |   | 129,897        |  
|                                                   |       |   |                   |  |   |                   |   |   |                |  
|                                                   |       | $ | 525,806           |  | $ | 345,625           |   | $ | 228,402        |  

See accompanying notes to the Consolidated Financial
Statements.

Approved on behalf of the Board:

|Signed by:         |                 
|------------------ | ----------------
|                   |                 
|                   |                 
|Ross G. Clarkson | Fred J. Dyment
|                   |                 
|Ross G. Clarkson   | Fred J. Dyment  
|President and CEO, | Director        
|Director           |                 

5

---

|CONSOLIDATED FINANCIAL
      STATEMENTS
|---------------------------------------

Consolidated Statement of Changes in ShareholdersEquity

(Expressed in thousands of U.S. Dollars)

|                                                       |       |       |             |   |   | 2010           |  
|------------------------------------------------------ | ----- | ----- | ----------- | - | - | -------------- | -
|                                                       | Notes |       | 2011        |   |   | (Note
      26 | )
|                                                       |       |       |             |   |   |                |  
|Share Capital                                          |       |       |             |   |   |                |  
|Balance, beginning of
      year                       |       | $     | 80,106      |   | $ | 66,106         |  
|Stock options exercised                                | 19    |       | 1,946       |   |   | 9,959          |  
|Share issuance                                         | 19    |       | 75,594      |   |   | -              |  
|Share issue costs                                      | 19    |       | (4,011      | ) |   | -              |  
|Stock-based compensation on exercise                   | 19    |       | 628         |   |   | 4,041          |  
|Balance, end of year                                   |       | **$** | **154,263** |   | $ | 80,106         |  
|                                                       |       |       |             |   |   |                |  
|Contributed Surplus                                    |       |       |             |   |   |                |  
|Balance, beginning of
      year                       |       | $     | 5,785       |   | $ | 8,057          |  
|Stock-based compensation expense                       | 20    |       | 3,381       |   |   | 1,769          |  
|Transfer to share capital on exercise of
      options |       |       | (628        | ) |   | (4,041         | )
|Balance, end of year                                   |       | $     | 8,538       |   | $ | 5,785          |  
|                                                       |       |       |             |   |   |                |  
|Retained Earnings                                      |       |       |             |   |   |                |  
|Balance, beginning of
      year                       |       | $     | 96,299      |   | $ | 55,734         |  
|Net earnings                                           |       |       | 81,392      |   |   | 40,565         |  
|Balance, end of year                                   |       | **$** | **177,691** |   | $ | 96,299         |  

See accompanying notes to the Consolidated Financial
Statements.

6

---

|CONSOLIDATED FINANCIAL
      STATEMENTS
|---------------------------------------

Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. Dollars)

|                                                                             |       |   | Year Ended        |   |   | Year Ended        |  
|---------------------------------------------------------------------------- | ----- | - | ----------------- | - | - | ----------------- | -
|                                                                             | Notes |   | December 31, 2011 |   |   | December 31, 2010 |  
|                                                                             |       |   |                   |   |   |                   |  
|CASH FLOWS RELATED TO THE FOLLOWING
      ACTIVITIES:                        |       |   |                   |   |   |                   |  
|                                                                             |       |   |                   |   |   |                   |  
|OPERATING                                                                    |       |   |                   |   |   |                   |  
|Net earnings for the year                                                    |       | $ | 81,392            |   | $ | 40,565            |  
|Adjustments for:                                                             |       |   |                   |   |   |                   |  
|Depletion, depreciation
      and amortization                               | 14    |   | 35,081            |   |   | 28,140            |  
|Deferred
      lease inducement                                              |       |   | 350               |   |   | -                 |  
|Impairment of exploration
      and evaluation costs                         | 13    |   | 12,147            |   |   | -                 |  
|Stock-based compensation                                                     | 20    |   | 3,062             |   |   | 2,360             |  
|Finance costs                                                                |       |   | 4,983             |   |   | 3,317             |  
|Income
      tax expense                                                     |       |   | 69,572            |   |   | 41,701            |  
|Gain on acquisition                                                          | 4     |   | (13,187           | ) |   | -                 |  
|Unrealized (gain) loss on commodity contracts                                |       |   | 177               |   |   | (816              | )
|Unrealized loss on
      foreign currency translation                        |       |   | 416               |   |   | -                 |  
|Income taxes paid                                                            |       |   | (74,017           | ) |   | (39,807           | )
|Changes in non-cash working capital                                          | 25    |   | (56,346           | ) |   | (18,491           | )
|Net cash generated by (used in) operating activities                         |       |   | 63,630            |   |   | 56,969            |  
|                                                                             |       |   |                   |   |   |                   |  
|INVESTING                                                                    |       |   |                   |   |   |                   |  
|Additions to intangible exploration and
      evaluation assets              | 13    |   | (6,991            | ) |   | (2,205            | )
|Additions to petroleum
      properties                                      | 14    |   | (61,266           | ) |   | (61,845           | )
|Additions to other assets                                                    | 14    |   | (1,861            | ) |   | (1,293            | )
|Business acquisitions                                                        | 4     |   | (73,836           | ) |   | -                 |  
|Changes in restricted cash                                                   |       |   | 1,161             |   |   | (3,387            | )
|Changes in non-cash working capital                                          | 25    |   | 24,690            |   |   | 9,999             |  
|Net cash generated
      by (used in) investing activities                   |       |   | (118,103          | ) |   | (58,731           | )
|                                                                             |       |   |                   |   |   |                   |  
|FINANCING                                                                    |       |   |                   |   |   |                   |  
|Issue of common shares for
      cash                                        | 19    |   | 77,540            |   |   | 9,959             |  
|Issue costs for common shares                                                | 19    |   | (4,011            | ) |   | -                 |  
|Financing costs                                                              |       |   | -                 |   |   | (4,216            | )
|Interest paid                                                                |       |   | (3,550            | ) |   | (2,481            | )
|Increase in long-term debt                                                   |       |   | -                 |   |   | 95,916            |  
|Repayments of long-term debt                                                 |       |   | (30,000           | ) |   | (55,916           | )
|Increase in other long-term
      liabilities                                |       |   | 772               |   |   | -                 |  
|Changes in non-cash working capital                                          | 25    |   | 139               |   |   | 105               |  
|Net cash generated by (used in) financing activities                         |       |   | 40,890            |   |   | 43,367            |  
|                                                                             |       |   |                   |   |   |                   |  
|Currency translation differences relating to cash and cash
      equivalents |       |   | (315              | ) |   | -                 |  
|                                                                             |       |   |                   |   |   |                   |  
|NET INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                     |       |   | (13,898           | ) |   | 41,605            |  
|                                                                             |       |   |                   |   |   |                   |  
|CASH AND CASH
      EQUIVALENTS, BEGINNING OF YEAR                           |       |   | 57,782            |   |   | 16,177            |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                       |       | $ | 43,884            |   | $ | 57,782            |  

See accompanying notes to the Consolidated Financial
Statements.

7

---

|NOTES TO THE
      CONSOLIDATED FINANCIAL STATEMENTS
|----------------------------------------------------

December 31, 2011, December 31, 2010 and January 1, 2010
(Expressed in U.S. Dollars)

1. CORPORATE INFORMATION

TransGlobe Energy Corporation is a publicly listed company
incorporated in Alberta, Canada and its shares are listed on the Toronto Stock
Exchange (TSX) and NASDAQ Exchange (NASDAQ). The address of its registered
office is 2300, 250  5th Street SW, Calgary, Alberta, Canada, T2P
0R4. TransGlobe Energy Corporation together with its subsidiaries (TransGlobe
or the Company) is engaged primarily in oil exploration, development and
production and the acquisition of properties.

2. BASIS OF PREPARATION

Statement of compliance

On February 13, 2008, the Canadian Accounting Standards Board
(AcSB) confirmed that effective for interim and annual financial statements
related to fiscal years beginning on or after January 1, 2011, International
Financial Reporting Standards (IFRS) will replace Canadian generally accepted
accounting principles (GAAP, Canadian GAAP or Cdn. GAAP) for all publicly
accountable profit-oriented enterprises.

These Consolidated Financial Statements have been prepared in
accordance with IFRS as issued by the International Accounting Standards Board
effective as of December 31, 2011.

These Consolidated Financial Statements were authorized for
issue by the Board of Directors on March 6, 2012.

Basis of measurement

The preparation of these Consolidated Financial Statements
resulted in changes to accounting policies and methods of computation as
compared to the most recent Annual Financial Statements for the year-ended
December 31, 2010 prepared under GAAP. Refer to Note 3, Significant
Accounting Policies, for details of changes and Note 26, First Time
Adoption of IFRS, for a reconciliation between the IFRS and GAAP
computations.

The Company prepared these Consolidated Financial Statements on
a going concern basis, which contemplates the realization of assets and
liabilities in the normal course of business as they become due. Accordingly,
these Consolidated Financial Statements have been prepared on a historical cost
basis, except for cash and cash equivalents, restricted cash and derivative
financial instruments that have been measured at fair value. The method used to
measure fair value is discussed further in Notes 3 and 5.

Functional and presentation currency

In these Consolidated Financial Statements, unless otherwise
indicated, all dollar amounts are expressed in United States (U.S.) dollars,
which is the Companys functional currency. All references to US$ or to $ are to
United States dollars and references to C$ are to Canadian dollars and all
values are rounded to the nearest thousand except when otherwise indicated.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied
consistently to all periods presented in these Consolidated Financial Statements
and in preparing the opening IFRS balance sheet at January 1, 2010 for the
purposes of transition to IFRS.

Basis of consolidation

Subsidiaries are entities controlled by the Company. Control
exists when the Company has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. In assessing
control, potential voting rights that currently are exercisable are taken into
account. The Consolidated Financial Statements include the financial statements
of the Company and its controlled subsidiaries.

The financial statements of the subsidiaries are prepared for
the same reporting period as the parent company, using consistent accounting
policies.

All intra-company transactions, balances, income and expenses,
unrealized gains and losses are eliminated on consolidation.

Jointly controlled assets

A jointly controlled asset involves joint control and offers
joint ownership by the Company and other venturers of assets acquired for the
purpose of the joint venture, without the formation of a corporation,
partnership or other entity. Interests in jointly controlled assets are
accounted for using the proportionate consolidation method, whereby the
Companys proportionate share of revenues, expenses, assets and liabilities are
included in the accounts.

8

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Foreign currency translation

The Consolidated Financial Statements are presented in U.S.
dollars. The Companys reporting and functional currency is the U.S. dollar as
this is the principal currency of the primary economic environment the entity
operates in and is normally the one in which it primarily generates and expends
cash. Transactions in foreign currencies are translated to the functional
currency of the Company at exchange rates at the dates of the transactions.

Monetary assets and liabilities denominated in foreign
currencies at the reporting date are re-translated to the functional currency at
the exchange rate at that date. The foreign currency gain or loss on monetary
items is the difference between its functional currency equivalent at the
beginning of the period or when the transaction was entered into if it occurred
during the period and the functional currency equivalent translated at the
exchange rate at the end of the period.

Non-monetary assets and liabilities denominated in foreign
currencies that are measured at fair value are re-translated to the functional
currency at the exchange rate at the date that the fair value was determined.
The foreign currency gain or loss on non-monetary items is the difference in
fair value measured in the functional currency between measurement dates.

Use of estimates and judgments

Timely preparation of the financial statements in conformity
with IFRS requires that management make estimates and assumptions and use
judgments that affect the application of accounting policies and the reported
amounts of assets, liabilities, revenues and expenses. Such estimates primarily
relate to unsettled transactions and events as of the date of the financial
statements. Accordingly, actual results may differ from estimated amounts as
future confirming events occur.

Purchase price allocations, depletion, depreciation and
amortization, fair value measurements as deemed cost and amounts used for
impairment tests and charges for intangible assets, goodwill and property, plant
and equipment are based on estimates of oil reserves, commodity prices, weighted
average cost of capital and future capital and operating costs required to
develop and produce those reserves. By their nature, estimates of reserves and
the related future cash flows are subject to measurement uncertainty, and the
impact of differences between actual and estimated amounts on the financial
statements of future periods could be material.

The measurement of income tax expense, and the related
provisions on the Consolidated Balance Sheets, is subject to uncertainty
associated with future recoverability of oil reserves, commodity prices, the
timing of future events and changes in legislation, tax rates and
interpretations by tax authorities.

The fair values of financial instruments are estimated based
upon market and third party inputs. These estimates are subject to change with
fluctuations in commodity prices, interest rates, foreign currency exchange
rates and estimates of non-performance risk.

The fair values of equity-settled and cash-settled share-based
payment awards are estimated using the lattice-based binomial pricing model.
These estimates depend on certain assumptions including share price volatility,
risk free interest rate, the term of the awards, and the forfeiture rate which,
by their nature, are subject to measurement uncertainty.

The effect of these estimates, assumptions and the use of
judgments are explained throughout the notes to the Consolidated Financial
Statements. Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the year in which the
estimates are revised and in any future years affected.

Cash equivalents

Cash equivalents includes short-term, highly liquid investments
that mature within three months of the date of their purchase.

Financial instruments

Non-derivative financial instruments

Non-derivative financial instruments comprise investment in
accounts receivable, cash and cash equivalents, restricted cash, long-term debt,
and accounts payable. Non-derivative financial instruments are recognized
initially at fair value plus, for instruments not at fair value through profit
or loss, any directly attributable transaction costs. Subsequent to initial
recognition non-derivative financial instruments are measured as described
below.

Financial assets at fair value through profit or loss

An instrument is classified at fair value through profit or
loss if it is held for trading or is designated as such upon initial
recognition, such as cash and cash equivalents. Financial instruments are
designated at fair value through profit or loss if the Company makes purchase
and sale decisions based on their fair value in accordance with the Companys
documented risk management strategy. Upon initial recognition, any transaction
costs attributable to the financial instruments are recognized through earnings
when incurred. Financial instruments at fair value through profit or loss are
measured at fair value, and changes therein are recognized in earnings.

9

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|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Other

Other non-derivative financial instruments, such as accounts
receivable, long-term debt, and accounts payable and accrued liabilities are
measured initially at fair value, then at amortized cost using the effective
interest method, less any impairment losses.

Derivative financial instruments

The Company has entered into certain financial derivative
contracts in order to reduce its exposure to market risks from fluctuations in
commodity prices. These instruments are not used for trading or speculative
purposes. The Company has not designated its financial derivative contracts as
effective accounting hedges, and thus has not applied hedge accounting, even
though the Company considers all commodity contracts to be economic hedges. As a
result, all financial derivative contracts are classified as fair value through
profit or loss and are recorded on the balance sheet at fair value. Attributable
transaction costs are recognized in earnings when incurred. The estimated fair
value of all derivative instruments is based on quoted market prices and/or
third party market indications and forecasts.

Embedded derivatives are derivatives embedded in a host
contract. They are recorded separately from the host contract when their
economic characteristics and risks are not clearly and closely related to those
of the host contract, the terms of the embedded derivatives are the same as
those of a freestanding derivative and the combined contract is not measured at
fair value through profit or loss. Changes in the fair value of separable
embedded derivatives are recognized immediately in profit or loss.

The Company applies trade-date accounting for the recognition
of a purchase of derivative contracts.

Share capital

Common shares are classified as equity. Incremental costs
directly attributable to the issue of common shares and share options are
recognized as a deduction from equity.

When share capital recognized as equity is repurchased, the
amount of the consideration paid, which includes directly attributable costs, is
recognized as a deduction from equity. When treasury shares are sold or reissued
subsequently, the amount received is recognized as an increase in equity, and
the resulting surplus or deficit in the transaction is transferred to/from
retained earnings.

Property and equipment and intangible exploration and
evaluation assets

Recognition and measurement

The Company accounts for exploration and evaluation (E&E)
costs, in accordance with the requirements of IFRS 6: Exploration for and
Evaluation of Mineral Resources. E&E costs related to each license/prospect
are initially capitalized within intangible exploration and evaluation assets.
Such E&E costs may include costs of license acquisition, technical services
and studies, seismic acquisition, exploration drilling and testing, directly
attributable expenses, including remuneration of production personnel and
supervisory management, and the projected costs of retiring the assets (if any),
but do not include pre-licensing costs incurred prior to having obtained the
legal rights to explore an area, which are expensed directly to earnings as they
are incurred.

Tangible assets acquired for use in E&E activities are
classified as other assets; however, to the extent that such a tangible asset is
consumed in developing an intangible exploration asset, the amount reflecting
that consumption is recorded as part of the cost of the intangible exploration
and evaluation asset.

Intangible exploration and evaluation assets are not depleted.
They are carried forward until technical feasibility and commercial viability of
extracting a mineral resource is considered to be determined. The technical
feasibility and commercial viability is considered to be determined when proved
and/or probable reserves are determined to exist or they can be empirically
supported with actual production data or conclusive formation tests. A review of
each concession agreement is carried out at least annually. Intangible
exploration and evaluation assets are transferred to petroleum properties as
development and production (D&P) assets upon determination of technical
feasibility and commercial viability.

Petroleum properties and other assets are measured at cost less
accumulated depletion, depreciation, and amortization, and accumulated
impairment losses. The initial cost of an asset comprises its purchase price or
construction cost, any costs directly attributable to bringing the asset into
operation, including qualifying E&E costs on reclassification from
intangible exploration and evaluation assets, and for qualifying assets, where
applicable, borrowing costs. When significant parts of an item of property and
equipment have different useful lives, they are accounted for as separate
items.

As at January 1, 2010, the date of transition to IFRS, the cost
of petroleum properties and other assets was determined by reference to IFRS 1:
First-time Adoption of International Financial Reporting Standards. The
methodology adopted for initial recognition of these costs at transition was the
cost model, whereby all non-petroleum assets and all E&E assets were
measured at the amount recognized under the Companys previous accounting
framework, Canadian GAAP, and assets in the development and production phases
were measured at the amount determined for the cost centre to which they relate.
The adopted process allocated the development and production asset amounts to
the underlying assets pro rata based on reserve values as at the date of
transition.

Gains and losses on disposal of items of property and equipment
are determined by comparing the proceeds from disposal with the carrying amount
of property and equipment and are recognized in earnings immediately.

10

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|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Subsequent costs

Costs incurred subsequent to the determination of technical
feasibility and commercial viability and the costs of replacing parts of
property and equipment are recognized as petroleum properties or other assets
only when they increase the future economic benefits embodied in the specific
asset to which they relate. All other expenditures are recognized in earnings as
incurred. Such capitalized property and equipment generally represent costs
incurred in developing Proved and/or Probable reserves and bringing in or
enhancing production from such reserves, and are accumulated on a field or
geotechnical area basis.

The carrying amount of any replaced or sold component is
derecognized.

Depletion, depreciation and amortization

The depletion, depreciation and amortization of petroleum
properties and other assets, and any eventual reversal thereof, are recognized
in earnings.

The net carrying value of D&P assets included in petroleum
properties is depleted using the unit of production method by reference to the
ratio of production in the year to the related proved and probable reserves
using estimated future prices and costs. Costs subject to depletion include
estimated future development costs necessary to bring those reserves into
production. These estimates are reviewed by independent reserve engineers at
least annually.

Proved and probable reserves are estimated using independent
reserve evaluator reports and represent the estimated quantities of crude oil,
natural gas and natural gas liquids which geological, geophysical and
engineering data demonstrate with a specified degree of certainty to be
recoverable in future years from known reservoirs and which are considered
commercially viable. The specified degree of certainty must be a minimum 90%
statistical probability that the actual quantity of recoverable reserves will be
more than the amount estimated as proved and a minimum 50% statistical
probability for proved and probable reserves to be considered commercially
viable.

Furniture and fixtures are depreciated at declining balance
rates of 20% to 30%, whereas vehicles and leasehold improvements are depreciated
on a straight-line basis over their estimated useful lives.

Depreciation methods, useful lives and residual values are
reviewed at each reporting date.

Goodwill

Goodwill arises on the acquisition of businesses.

Recognition and measurement

For acquisitions on or after January 1, 2010, goodwill
represents the excess of the cost of the acquisition over the Companys interest in the net fair value of the identifiable
assets, liabilities and contingent liabilities of the acquiree. When the excess
is negative (negative goodwill), it is recognized immediately in earnings.

Goodwill arising on the acquisition of a minority interest
represents the excess of the cost of the additional investment over the carrying
amount of the interest in the net assets acquired at the date of exchange.

Subsequent measurement

Goodwill is measured at cost less accumulated impairment
losses.

Goodwill is not amortized but instead tested for impairment
annually on December 31, or at any time there are indications of impairment.

Impairment

Financial assets

(i)Assets carried at
amortized cost

A financial asset is assessed at each reporting date to
determine whether there is any objective evidence that it is impaired. A
financial asset is considered to be impaired if objective evidence indicates
that one or more events have had a negative effect on the estimated future cash
flows of the asset.

An impairment loss in respect of a financial asset measured at
amortized cost is calculated as the difference between its carrying amount, and
the present value of the estimated future cash flows discounted at the original
effective interest rate. Individually significant financial assets are tested
for impairment on an individual basis. The remaining financial assets are
assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in profit or loss. An impairment loss is
reversed if the reversal can be related objectively to an event occurring after
the impairment loss was recognized. Any such reversal is recognized in profit or
loss.

11

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|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

(ii)Availablefor-sale assets

An impairment loss in respect of an available-for-sale
financial asset is calculated by reference to its fair value. Any cumulative
loss in respect of an available-for-sale financial asset recognized previously
in equity through its decline in value before impairment is transferred from
equity to profit or loss.

Non-financial assets

The carrying amounts of the Companys non-financial assets are
reviewed at each reporting date to determine whether there is any indication of
impairment, except for E&E assets, inventories and deferred tax assets,
which are reviewed when circumstances indicate impairment may exist and at least
annually, as discussed in more detail below. If any such indication exists, then
the assets recoverable amount is estimated.

For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of other assets
or groups of assets (the cash-generating unit or CGU). The recoverable amount
of an asset or a CGU is the greater of its value in use and its fair value less
costs to sell. The Companys CGUs are not larger than a segment. In assessing
value in use, the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset. Value in use is
generally computed by reference to the present value of the future cash flows
expected to be derived from production of proved and probable reserves.

An impairment loss is recognized if the carrying amount of an
asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment
losses recognized in respect of CGUs are allocated first to reduce the carrying
amount of any goodwill allocated to the units and then to reduce the carrying
amounts of the other assets in the unit (group of units) on a pro-rata basis.

Impairment losses recognized in prior years are assessed at
each reporting date for any indications that the loss has decreased or no longer
exists. An impairment loss is reversed if there has been a change in the
estimates used to determine the recoverable amount. An impairment loss is
reversed only to the extent that the assets carrying amount does not exceed the
carrying amount that would have been determined, net of depletion and
depreciation or amortization, if no impairment loss had been recognized.

For goodwill, the recoverable amount is estimated each year at
the same time. An impairment loss in respect of goodwill is calculated by
reference to the recoverable amount determined at that time. Costs of exploring
for and evaluating petroleum properties are capitalized and the resulting
intangible E&E assets are tested for impairment by reference to CGUs. E&E assets are assessed for impairment when they are
reclassified to petroleum properties and also if facts and circumstances suggest
that the carrying amount exceeds the recoverable amount. Any resulting
impairment loss is recognized through earnings.

The goodwill acquired in a business combination, for the
purpose of impairment testing, is allocated to CGUs that are expected to
benefit from the synergies of the combination. E&E assets are allocated to
the CGUs when they are assessed for impairment, both at the time of any
triggering facts and circumstances as well as upon their eventual
reclassification to D&P assets (petroleum properties).

An impairment loss in respect of goodwill is not reversed.

Share-based payment transactions

Equity-settled transactions

The cost of equity-settled transactions with employees is
measured by reference to the fair value at the date at which equity instruments
are granted and is recognized as an expense over the vesting period, which ends
on the date on which the relevant employees become fully entitled to the award.
Fair value is determined by using the lattice-based binomial option pricing
model. In valuing equity-settled transactions, no account is taken of any
vesting conditions, other than conditions linked to the price of the shares of
the company (market conditions). Awards where vesting is conditional upon a
market condition are treated as vesting regardless of whether the market
condition is satisfied as long as all other conditions are satisfied. An
estimated forfeiture rate is taken into consideration when assigning a fair
value to options granted such that no expense is recognized for awards that do
not ultimately vest.

At each financial reporting date before vesting, the cumulative
expense is calculated; representing the extent to which the vesting period has
expired and managements best estimate of the number of equity instruments that
will ultimately vest. The movement in cumulative expense since the previous
financial reporting date is recognized in earnings, with a corresponding entry
in equity.

When the terms of an equity-settled award are modified or a new
award is designated as replacing a cancelled or settled award, the cost based on
the original award terms continues to be recognized over the remainder of the
new vesting period for the incremental fair value of any modification, based on
the difference between the fair value of the original award and the fair value
of the modified award, both as measured on the date of the modification. No
reduction is recognized if this difference is negative.

Cash-settled transactions

The cost of cash-settled transactions is measured at fair value
using the lattice-based binomial pricing model and recognized as an expense over
the vesting period, with a corresponding liability recognized on the balance
sheet.

12

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|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

The grant date fair value of options granted to employees is
recognized as compensation expense, within general and administrative expenses,
with a corresponding increase in accounts payable and accrued liabilities, over
the period that the employees become unconditionally entitled to the options.
The amount recognized as an expense is adjusted to reflect the actual number of
share options for which the related service and non-market vesting conditions
are met. Until the liability is ultimately settled, it is re-measured at each
reporting date with changes to fair value recognized through profit or loss.

Provisions

A provision is recognized if, as a result of a past event, the
Company has a present legal or constructive obligation that can be estimated
reliably, and it is probable that an outflow of economic benefits will be
required to settle the obligation. Provisions are determined by discounting the
expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the liability.
Provisions are not recognized for future operating losses.

Revenue recognition

Revenues associated with the sales of the Companys crude oil
are recognized by reference to actual volumes produced and quoted market prices
in active markets for identical assets, adjusted according to specific terms and
conditions in partner agreements, when the significant risks and rewards of
ownership have been transferred, which is when title passes from the Company to
its customer. Crude oil produced and sold by the Company below or above its
working interest share in the related resource properties results in production
under-liftings or over-liftings. Under-liftings are recorded as inventory and
over-liftings are recorded as deferred revenue.

International operations conducted pursuant to Production
Sharing Agreements and Production Sharing Concessions (together defined as PSAs) are reflected in the Consolidated
Financial Statements based on the Companys working interest in such operations.
The Company and other non-governmental partners pay all operating and capital
costs for exploring and developing the PSA. Each PSA establishes specific terms
for the Company to recover these costs (Cost Recovery Oil) and to share in the
production sharing oil. Cost Recovery Oil is determined in accordance with a
formula that is generally limited to a specified percentage of production during
each fiscal year. Production sharing oil is that portion of production remaining
after Cost Recovery Oil and is shared between the joint interest partners and
the government of each country, varying with the level of production. Production
sharing oil that is attributable to the government includes an amount in respect
of all income taxes payable by the Company under the laws of the respective
country. Revenue represents the Companys share and is recorded net of royalty
payments to government and other mineral interest owners. For the Companys
international operations, all government interests, except for income taxes, are
considered royalty payments. The Companys revenue also includes the recovery of
costs paid on behalf of foreign governments in international locations.

Finance revenue and costs

Finance revenue comprises interest income on funds invested and
positive changes in the fair value of financial assets or liabilities measured
at fair value through profit or loss. Interest income is recognized as it
accrues in earnings, using the effective interest method.

Finance costs comprises interest expense on borrowings,
unwinding of the discount on provisions, negative changes in the fair value of
financial assets or liabilities measured at fair value through profit or loss,
and impairment losses recognized on financial assets.

Borrowing costs incurred for qualifying assets are capitalized
during the period of time that is required to complete and prepare the assets
for their intended use or sale. Qualifying assets are those that necessarily
take a substantial period of time to get ready for their intended use or sale.
All other borrowing costs are recognized in earnings using the effective
interest method.

The capitalization rate used to determine the amount of
borrowing costs to be capitalized is the weighted average interest rate
applicable to the Companys outstanding borrowings during the year.

Foreign currency gains and losses, reported under finance
revenue and costs, are reported on a net basis.

Income tax

The Companys contractual arrangements in foreign jurisdictions
stipulate that income taxes are paid by the respective government out of its
entitlement share of production sharing oil. Such amounts are included in
current income tax expense at the statutory rate in effect at the time of
production.

The Company determines the amount of deferred income tax assets
and liabilities based on the difference between the carrying amounts of the
assets and liabilities reported for financial accounting purposes from those
reported for tax. Deferred income tax assets and liabilities are measured using
the substantively enacted tax rates expected to apply to taxable income in the
years in which the temporary differences are expected to be recovered or
settled. Deferred income tax assets associated with unused tax losses are
recognized only if the benefits are more likely than not to be realized.

13

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|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Business combinations

The Company applies IFRS 3 Business Combinationsin
accounting for business combinations.

Business combinations are accounted for using the acquisition
method as at the acquisition date, which is the date on which control is
transferred to the Company. Control is the power to govern the financial and
operating policies of an entity so as to obtain the benefits from its
activities. In assessing control, the Company takes into consideration potential
voting rights that currently are exercisable. Judgment is applied in determining
the acquisition date and determining whether control is transferred from one
party to another.

The Company measures goodwill at the acquisition date as:

- the fair value of the consideration transferred; plus
- the recognized amount of any non-controlling interests in the acquiree;
  plus
- if the business combination has been achieved in stages, the fair value of
  the existing equity interest in the acquiree; less
- the net recognized amount (generally fair value) of the identifiable
  assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is
recorded immediately in profit or loss.

Consideration transferred includes the fair values of the
assets transferred, liabilities incurred by the Company to the previous owners
of the acquiree, and equity interests issued by the Company.

Future changes to accounting policies

As at the date of authorization of these financial statements
the following Standards and Interpretations which have not yet been applied in
these financial statements were in issue but not yet effective:

IFRS 7 (revised) Financial Instruments: Disclosures

In October 2010, the International Accounting Standards Board
(IASB) issued amendments to IFRS 7 to provide additional disclosure on the
transfer of financial assets including the possible effects of any residual
risks that the transferring entity retains. These amendments are effective for
annual periods beginning after July 1, 2011; therefore, the Company will adopt
them for the year ending December 31, 2012. The Company is currently evaluating
the impact of these amendments to its Consolidated Financial Statements, but the
impact, if any, is not expected to be material.

IFRS 9 (revised) Financial Instruments: Classification
  and Measurement

In November 2009, the IASB issued IFRS 9 as part of its project
to replace IAS 39, Financial Instruments: Recognition and Measurement.
In October 2010, the IASB updated IFRS 9 to include the requirements for
financial liabilities. IFRS 9 replaces the multiple rules in IAS 39 with a single approach
to determine whether a financial asset is measured at amortized cost or fair
value. The approach in IFRS 9 is based on how an entity manages its financial
instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets. IFRS 9 is effective for annual periods
beginning on or after January 1, 2013. The Company is currently evaluating the
impact of this standard on its Consolidated Financial Statements.

IFRS 10 (new) Consolidated Financial Statements

In May 2011, the IASB issued IFRS 10 to replace SIC-12,
ConsolidationSpecial Purpose Entities, and parts of
IAS 27, Consolidated and Separate Financial Statements. IFRS 10
establishes principles for the presentation and preparation of consolidated
financial statements when an entity controls one or more other entities. IFRS 10
is effective for annual periods beginning on or after January 1, 2013. The
Company is currently evaluating the impact of this standard on its Consolidated
Financial Statements.

IFRS 11 (new) Joint Arrangements

In May 2011, the IASB issued IFRS 11 to replace IAS 31,
Interests in Joint Ventures, and SIC-13, Jointly Controlled
EntitiesNon-monetary Contributions by Venturers. IFRS 11
requires entities to follow the substance rather than legal form of a joint
arrangement and removes the choice of accounting method. IFRS 11 is effective
for annual periods beginning on or after January 1, 2013. The Company is
currently evaluating the impact of this standard on its Consolidated Financial
Statements.

IFRS 12 (new) Disclosure of Interests in Other Entities

In May 2011, the IASB issued IFRS 12, which aggregates and
amends disclosure requirements included within other standards. IFRS 12 requires
entities to provide disclosures about subsidiaries, joint arrangements,
associates and unconsolidated structured entities. IFRS 12 is effective for
annual periods beginning on or after January 1, 2013. The Company is currently
evaluating the impact of this standard on its Consolidated Financial Statements.

IFRS 13 (new) Fair Value Measurement

In May 2011, the IASB issued IFRS 13 to clarify the definition
of fair value and provide guidance on determining fair value. IFRS 13 amends
disclosure requirements included within other standards and establishes a single
framework for fair value measurement and disclosure. IFRS 13 is effective for
annual periods beginning on or after January 1, 2013. The Company is currently
evaluating the impact of this standard on its Consolidated Financial Statements.

14

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|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

IAS 1 (revised) Presentation of Financial Statements

In June 2011, the IASB issued amendments to IAS 1 to require
separate presentation for items of other comprehensive income that would be
reclassified to profit or loss in the future from those that would not. These
amendments are effective for annual periods beginning on or after July 1, 2012.
The Company is currently evaluating the impact of these amendments to its
Consolidated Financial Statements.

IAS 12 (revised) Income Taxes

In December 2010, the IASB issued amendments to IAS 12 to
remove subjectivity in determining on which basis an entity measures the
deferred tax relating to an asset. The amendments introduce a presumption that
entities will assess whether the carrying value of an asset will be recovered
through the sale of the asset. These amendments are effective for annual periods
beginning on or after January 1, 2012. The Company is currently evaluating the
impact of these amendments to its Consolidated Financial Statements, but the
impact, if any, is not expected to be material.

IAS 19 (revised) Employee Benefits

In June 2011, the IASB issued amendments to IAS 19 to revise
certain aspects of the accounting for pension plans and other benefits. The
amendments eliminate the corridor method of accounting for defined benefit
plans, change the recognition pattern of gains and losses, and require
additional disclosures. These amendments are effective for annual periods
beginning on or after January 1, 2013. The Company does not expect the impact of
this standard on its Consolidated Financial Statements to be material.

IAS 28 (revised) Investments in Associates and Joint
  Ventures

In May 2011, the IASB issued amendments to IAS 28 to prescribe
the accounting for investments in associates and set out the requirements for
applying the equity method when accounting for investments in associates and
joint ventures. These amendments are effective for annual periods beginning on
or after January 1, 2013. The Company is currently evaluating the impact of
these amendments to its Consolidated Financial Statements, but the impact, if
any, is not expected to be material.

4.BUSINESS COMBINATIONS

On December 29, 2011, the Company completed the acquisition of
a 100% working interest in the West Bakr Concession (West Bakr) agreement in
the Arab Republic of Egypt from the Egyptian Petroleum Development Co. Ltd. (of
Japan) (EPEDECO). West Bakr had Proved reserves of 7.4 million
barrels and Proved plus Probable reserves of 11.6 million barrels as of January
1, 2012. The transaction was structured as an all-cash deal, effective July 1,
2010, to acquire all the Egyptian assets of EPEDECO, funded through working
capital and the Borrowing Base Facility. Total consideration for the transaction
was $74.5 million, comprised of $52.6 million cash and $21.9 million payable to
EPEDECO. Total consideration represents an initial $60 million base purchase
price plus $14.5 million in working capital and other closing adjustments
between the effective date and the acquisition closing date.

This acquisition was accounted for using the acquisition
method. The Company consolidated the underlying assets acquired and liabilities
assumed as at the acquisition date.

The estimated fair values assigned to the assets acquired and
liabilities assumed were based on a combination of independent appraisals and
internal estimates. The fair values of the net identifiable assets were in
excess of the consideration paid and as a result there was a bargain purchase
gain recognized immediately in the Consolidated Statement of Earnings and
Comprehensive Income of $13.2 million. The bargain purchase gain relates
primarily to the impact that the escalation of oil prices from the effective
date of the acquisition (July 1, 2010) to the closing date (December 29, 2011)
had on the fair value of the petroleum properties acquired.

The consideration paid and fair values of the identifiable
assets acquired and liabilities assumed by the Company are as follows:

|Fair value of net
      assets acquired (000s)      |   |         |  
|--------------------------------------------------- | - | ------- | -
|Property and equipment - petroleum
      properties | $ | 74,500  |  
|Working capital (including cash - $684)             |   | 35,021  |  
|Property and equipment  other assets               |   | 314     |  
|Deferred taxes                                      |   | (22,129 | )
|Total identifiable net assets at fair value         |   | 87,706  |  
|Bargain purchase
      gain                         |   | (13,187 | )
|Total cost of acquisition                           | $ | 74,519  |  
|                                                    |   |         |  
|Satisfied by:                                       |   |         |  
|Cash paid in 2011                                   | $ | 52,654  |  
|Amount payable to acquiree1                         |   | 21,865  |  
|Consideration
      paid                            | $ | 74,519  |  

1.      Payment of $10.0 million due
by May 31, 2012, with the balance due by June 29, 2012.

15

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|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

The fair value of the acquired accounts receivable ($34.2
million) approximate their carrying value due to their short term nature. None
of the trade accounts receivable have been impaired and it is expected that the
entire balance will be collected in full.

The Consolidated Financial Statements include the results of
operations, working capital and other adjustments recorded for the three days
remaining in the year ended December 31, 2011 after closing. The Consolidated
Statement of Earnings and Comprehensive Income for the year ended December 31,
2011 includes revenue of $1.1 million and after-tax earnings of $0.1 million
generated from the assets acquired since the closing date. It is impracticable
for the Company to determine the amounts of revenue and profit or loss of the
West Bakr assets in order to disclose proforma information as though the
acquisition had occurred as of January 1, 2011 due to the fact that the data was
not collected during this period in a manner that would be representative of the
economic model of TransGlobe.

Acquisition-related costs in the amount of $0.6 million were
expensed as incurred in 2011 and 2010 and included in general and administrative
expenses in the Consolidated Statement of Earnings and Comprehensive Income.

5. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Fair Values of Financial Instruments

The Company has classified its cash and cash equivalents as
assets at fair value through profit or loss and its derivative commodity
contracts as financial assets or liabilities at fair value through profit or
loss, which are both measured at fair value with changes being recognized
through earnings. Accounts receivable and restricted cash are classified as
loans and receivables; accounts payable and accrued liabilities, and long-term
debt are classified as other liabilities, all of which are measured initially at
fair value, then at amortized cost after initial recognition.

Carrying value and fair value of financial assets and liabilities
  are summarized as follows:

|                                                                     |   | December 31, 2011 |  |   | December 31, 2010 |  |   | January 1, 2010 | 
|-------------------------------------------------------------------- | - | ----------------- |  | - | ----------------- |  | - | --------------- | 
|                                                                     |   | Carrying          |  |   | Fair              |  |   | Carrying        | 
|Classification (000s)                                                |   | Value             |  |   | Value             |  |   | Value           | 
|Financial assets at fair value    
      through profit or loss      | $ | 44,009            |  | $ | 44,009            |  | $ | 58,085          | 
|Loans and receivables                                                |   | 164,451           |  |   | 164,451           |  |   | 72,472          | 
|Financial liabilities at fair value    
      through profit or loss |   | -                 |  |   | -                 |  |   | -               | 
|Other liabilities                                                    |   | 131,301           |  |   | 133,692           |  |   | 128,228         | 

Assets and liabilities at December 31, 2011 that are measured
  at fair value are classified into levels reflecting the method used to make
  the measurements. Fair values of assets and liabilities included in Level 1
  are determined by reference to quoted prices in active markets for identical
  assets and liabilities. Assets and liabilities in Level 2 include valuations
  using inputs other than quoted prices for which all significant inputs are observable,
  either directly or indirectly. Level 3 valuations are based on inputs that are
  unobservable and significant to the overall fair value measurement.

The Companys cash and cash equivalents and derivative
commodity contracts are assessed on the fair value hierarchy described above.
TransGlobes cash and cash equivalents are classified as Level 1 and derivative
commodity contracts as Level 2. Assessment of the significance of a particular input
to the fair value measurement requires judgment and may affect the placement
within the fair value hierarchy level.

Overview of Risk Management

The Companys activities expose it to a variety of financial
  risks that arise as a result of its exploration, development, production and
  financing activities:

- Credit risk
- Market risk
- Liquidity risk

This note presents information about the Companys exposure to
each of the above risks, the Companys objectives, policies and processes for
measuring and managing risk, and the Companys management of capital. Further
quantitative disclosures are included throughout these Consolidated Financial
Statements.

The Board of Directors oversees managements establishment and
execution of the Companys risk management framework. Management has implemented
and monitors compliance with risk management policies. The Companys risk
management policies are established to identify and analyze the risks faced by
the Company, to set appropriate risk limits and controls, and to monitor risks
and adherence to market conditions and the Companys activities.

Credit risk

Credit risk is the risk of loss if the counterparties do not
fulfill their contractual obligations. The Companys exposure to credit risk
primarily relates to accounts receivable, the majority of which are in respect
of oil operations and derivative commodity contracts. The Company generally
extends unsecured credit to these parties and therefore the collection of these
amounts may be affected by changes in economic or other conditions. Management
believes the risk is mitigated by the size and reputation of the companies to
which they extend credit. The Company has not experienced any material credit
losses in the collection of accounts receivable to-date.

16

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Trade and other receivables are analyzed in the table below.
The majority of these receivables are due from the Egyptian Government, and the recent political unrest in the country has
increased TransGlobes credit risk. Despite these factors the Company still
expects to collect in full all outstanding receivables.

|(000s)                                                  |   |        | 
|------------------------------------------------------- | - | ------ | 
|Trade receivables
      at December 31, 2011            |   |        | 
|Neither impaired nor past due                           | $ | 44,945 | 
|Impaired                                                |   | -      | 
|Not impaired and past due in the following
      period |   |        | 
|Within 30 days                                          |   | 21,200 | 
|31-60 days                                              |   | 21,808 | 
|61-90 days                                              |   | 22,085 | 
|Over 90 days                                            |   | 52,187 | 

In Egypt, the Company sold all of its 2011 and 2010 production
to one purchaser. In Yemen, the Company sold all of its 2011 and 2010 Block 32
production to one purchaser and all of its 2011 and 2010 Block S-1 production to
one purchaser. Management considers such transactions normal for the Company and
the international oil industry in which it operates.

Market risk

Market risk is the risk or uncertainty arising from possible
market price movements and their impact on the future performance of a business.
The market price movements that the Company is exposed to include oil prices
(commodity price risk), foreign currency exchange rates and interest rates, all
of which could adversely affect the value of the Companys financial assets,
liabilities and financial results. The objective of market risk management is to
manage and control market risk exposures within acceptable parameters, while
optimizing the return.

Commodity price risk

The Companys operational results and financial condition are
partially dependent on the commodity prices received for its oil production.
Commodity prices have fluctuated significantly during recent years.

Any movement in commodity prices would have an effect on the
Companys financial condition. Therefore, the Company has entered into various
financial derivative contracts to manage fluctuations in commodity prices in the
normal course of operations. The following contract is outstanding as at
December 31, 2011:

|                                |                  |                 | Dated Brent  
|------------------------------- | ---------------- | --------------- | -------------
|Period                          | Volume           | Type            | Pricing - Put
|Crude Oil                       |                  |                 |              
|January 1, 2012  June 30, 2012 | 20,000 Bbl/month | Financial Floor | $      80.00 

The estimated fair value of unrealized commodity contracts is
  reported on the Consolidated Balance Sheets, with any change in the unrealized
  positions recorded to earnings. The Company assessed these instruments on the
  fair value hierarchy and has classified the determination of fair value of these
  instruments as Level 2, as the fair values of these transactions are based on
  an approximation of the amounts that would have been received from counter-parties
  to settle the transactions outstanding as at the date of the Consolidated Balance
  Sheets with reference to forward prices and market values provided by independent
  sources. The actual amounts realized may differ from these estimates.

When assessing the potential impact of commodity price changes
  on its financial derivative commodity contracts, the Company believes 10% volatility
  is a reasonable measure. The effect of a 10% increase or decrease in commodity
  prices on the derivative commodity contracts would not have a material impact
  on net earnings for the year ended December 31, 2011.

Foreign currency exchange risk

As the Companys business is conducted primarily in U.S.
dollars and its financial instruments are primarily denominated in U.S. dollars,
the Companys exposure to foreign currency exchange risk relates to certain cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities denominated in Canadian dollars. When assessing the potential impact
of foreign currency exchange risk, the Company believes 10% volatility is a
reasonable measure. The effect of a 10% increase or decrease in the value of the
Canadian dollar against the U.S. dollar would not have a material impact on net
earnings for the year ended December 31, 2011. The Company does not utilize
derivative instruments to manage this risk.

Interest rate risk

Fluctuations in interest rates could result in a significant
change in the amount the Company pays to service variable-interest,
U.S.-dollar-denominated debt. No derivative contracts were entered into during
2011 to mitigate this risk. When assessing interest rate risk applicable to the
Companys variable-interest, U.S.-dollar-denominated debt the Company believes
1% volatility is a reasonable measure. The effect of interest rates increasing
by 1% would decrease the Companys net earnings, for the year ended December 31,
2011, by $0.6 million. The effect of interest rates decreasing by 1% would
increase the Companys net earnings, for the year ended December 31, 2011, by
$0.6 million.

17

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Liquidity risk

Liquidity risk is the risk that the Company will not be able to
meet its financial obligations as they become due. Liquidity describes a
companys ability to access cash. Companies operating in the upstream oil and
gas industry require sufficient cash in order to fund capital programs necessary
to maintain and increase production and proved reserves, to acquire strategic
oil and gas assets and to repay debt.

The Company actively maintains credit facilities to ensure it
has sufficient available funds to meet current and foreseeable financial
requirements at a reasonable cost. The following are the contractual maturities
of financial liabilities at December 31, 2011:

(000s)
      
      
      Payment Due by Period 12Recognizedin Financial
      
      Contractual
      
      
      Less than
      
      
      
      
      
      
      
      
      More thanStatements
      
      Cash
        Flows
      
      
      1 year
      
      
      1-3
        years
      
      
      4-5
        years
      
      
      5 yearsAccounts payable and accrued liabilities
      Yes - Liability
      $
      73,692
      
      $
      73,692
      
      $
      -
      
      $
      -
      
      $
      -Long-term debt
      Yes - Liability
      
      60,000
      
      
      -
      
      
      60,000
      
      
      -
      
      
      -Office and equipment leases
      No
      
      17,300
      
      
      8,368
      
      
      3,465
      
      
      2,028
      
      
      3,439Minimum work commitments3
      No
      
      750
      
      
      750
      
      
      -
      
      
      -
      
      
      -Total
      
      $
      151,742
      
      $
      82,810
      
      $
      63,465
      
      $
      2,028
      
      $
      3,439


|1. | Payments exclude ongoing operating costs, finance costs
      and payments required to settle derivatives.                                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Payments denominated in foreign currencies have been
      translated at December 31, 2011 exchange rates.                                                              
|3  | Minimum work commitments include contracts awarded for
      capital projects and those commitments related to exploration and drilling
      obligations. (See note 18)

The Company actively monitors its liquidity to ensure that its
cash flows, credit facilities and working capital are adequate to support these
financial liabilities, as well as the Companys capital programs. In addition,
the Company raised gross proceeds of C$75.0 million (US$75.6 million) in the
first quarter of 2011 through an equity offering.

The existing banking arrangement at December 31, 2011 consists
of a Borrowing Base Facility of $100.0 million of which $60.0 million is
drawn.

On February 22, 2012, the Company closed an agreement with a
syndicate of underwriters under which the members of the syndicate have agreed
to purchase for resale, on a bought-deal basis, C$97.8 million (US$97.9 million)
aggregate principal amount of convertible unsecured subordinated debentures with
a maturity date of March 31, 2017. The amount raised was comprised of an
original issuance in the amount of C$85.0 million (US$85.0 million) that closed
on February 22, 2012, along with an overallotment option in the amount of C$12.8
million (US$12.9 million) that was exercised by the underwriters and closed on
February 29, 2012. The debentures are convertible into common shares of the
Company at a price of C$15.10 per common share. The debentures will not be
redeemable by the Company on or before March 31, 2015. After March 31, 2015 and
prior to March 31, 2017, the debentures may be redeemed by the Company at a
redemption price equal to the principal amount plus accrued and unpaid interest,
provided that the weighted average trading price of the common shares for the 20
consecutive trading days ending five trading days prior to the date on which
notice of redemption is provided is not less than 125 percent of the conversion
price. Interest of 6% will be payable semi-annually in arrears on March 31 and
September 30 of each year, commencing on September 30, 2012. The Company has the
option to settle all or any portion of principal obligations by delivering to
the debenture holders sufficient common shares to satisfy these obligations.

The Egyptian Government has restrictions on transferring funds
outside the country which requires approval from the Egyptian Central Bank. To
date, the Company has experienced no difficulties with transferring funds
abroad.

Capital disclosures

The Companys objectives when managing capital are to ensure
the Company will have the financial capacity, liquidity and flexibility to fund
the ongoing exploration and development of its petroleum assets. The Company
relies on cash flow to fund its capital investments. However, due to long lead
cycles of some of its developments and corporate acquisitions, the Companys
capital requirements may exceed its cash flow generated in any one period. This
requires the Company to maintain financial flexibility and liquidity. The
Company sets the amount of capital in proportion to risk and manages to ensure
that the total of the long-term debt is not greater than two times the Companys
funds flow from operations for the trailing twelve months. For the purposes of
measuring the Companys ability to meet the above stated criteria, funds flow
from operations is defined as the profit or loss before any deduction for
depletion, depreciation, amortization of deferred financing charges, non-cash
stock-based compensation, and non-cash derivative (gain) loss on commodity
contracts. Funds flow from operations may not be comparable to similar measures
used by other companies.

The Company defines and computes its capital as follows:

|(000s)                                                                                     |   | 2011    |   |   | 2010    |  
|------------------------------------------------------------------------------------------ | - | ------- | - | - | ------- | -
|Shareholders equity                                                                       | $ | 340,492 |   | $ | 182,190 |  
|Long-term debt, including the current portion (net of
      unamortized transaction costs) |   | 57,609  |   |   | 86,420  |  
|Cash and cash equivalents                                                                  |   | (43,884 | ) |   | (57,782 | )
|Total capital                                                                              | $ | 354,217 |   | $ | 210,828 |  

18

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

The Companys debt-to-funds flow ratio is computed as follows:

|(000s)                                                                                     |   | 2011    |  |   | 2010   | 
|------------------------------------------------------------------------------------------ | - | ------- |  | - | ------ | 
|Long-term debt, including the current
      portion (net of unamortized transaction costs) | $ | 57,609  |  | $ | 86,420 | 
|                                                                                           |   |         |  |   |        | 
|Cash flow from operating activities                                                        |   | 63,630  |  |   | 56,969 | 
|Changes in
      non-cash working capital                                                  |   | 56,346  |  |   | 18,491 | 
|Funds flow from operations                                                                 | $ | 119,976 |  | $ | 75,460 | 
|Ratio                                                                                      |   | 0.5     |  |   | 1.1    | 

The Companys financial objectives and strategy as described
above have remained substantially unchanged over the last two completed fiscal
years. These objectives and strategy are reviewed on an annual basis. The
Company believes that its ratios are within reasonable limits, in light of the
relative size of the Company and its capital management objectives. The Company
is also subject to financial covenants in the Borrowing Base Facility that
existed as at December 31, 2011.

The key financial covenants are as follows:

- Consolidated Financial Indebtedness to EBITDAX will not exceed 3.0 to 1.0.
  For the purposes of this calculation, Consolidated Financial Indebtedness
  shall mean the aggregate of all Financial Indebtedness of the Company. EBITDAX
  shall be defined as Consolidated Net Earnings before interest, income taxes,
  depreciation, depletion, amortization, accretion of abandonment liability,
  unrealized hedging losses and other similar non-cash charges (including
  expenses related to stock options), minus unrealized hedging gains and all
  non-cash income added to Consolidated Net Earnings.
- Current ratio (current assets to current liabilities, excluding the
  current portion of long-term debt) of greater than 1.0 to 1.0.

The Company is in compliance with all financial covenants at
December 31, 2011.

6. OIL REVENUE

|(000s)                                |   | 2011    |  |   | 2010    | 
|------------------------------------- | - | ------- |  | - | ------- | 
|Oil sales                             | $ | 449,794 |  | $ | 268,901 | 
|Less: Royalties
      and other       |   | 202,040 |  |   | 111,681 | 
|Oil sales, net of royalties and other | $ | 247,754 |  | $ | 157,220 | 

7. PERSONNEL EXPENSES

The aggregate payroll expense of employees and executive
management recognized in general and administrative expenses was as follows:

|(000s)                                          |   | 2011   |   |   | 2010   |  
|----------------------------------------------- | - | ------ | - | - | ------ | -
|Wages, salaries and benefits                    | $ | 11,904 |   | $ | 9,607  |  
|Equity-settled share-based payment transactions |   | 3,382  |   |   | 1,769  |  
|Cash-settled share-based payment transactions   |   | (299   | ) |   | 591    |  
|Total employee remuneration                     |   | 14,987 |   |   | 11,967 |  
|Capitalized portion of total remuneration       |   | (1,235 | ) |   | (1,005 | )
|                                                | $ | 13,752 |   | $ | 10,962 |  

8. FINANCE REVENUE AND COSTS

Finance revenue relates to interest earned on the Companys
bank account balances and term deposits.

Finance costs recognized in earnings were as follows:

|(000s)                                         |   | 2011  |  |   | 2010  | 
|---------------------------------------------- | - | ----- |  | - | ----- | 
|Interest expense                               | $ | 3,794 |  | $ | 2,481 | 
|Amortization of
      deferred financing costs |   | 1,189 |  |   | 836   | 
|Finance costs                                  | $ | 4,983 |  | $ | 3,317 | 

9. CASH AND CASH EQUIVALENTS

Cash is comprised of cash on hand and balances with banks.
There were no term deposits outstanding as at December 31, 2011, December 31,
2010 or January 1, 2010 with original maturities longer than three months.

The Companys exposure to interest rate risk is disclosed in
Note 5.

19

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

10. ACCOUNTS RECEIVABLE

Accounts receivable is comprised of current trade receivables
due from third parties. There were no amounts due from related parties and no
loans to management or employees as at December 31, 2011, December 31, 2010 or
January 1, 2010.

The Companys exposure to credit, currency and interest rate
risks related to trade and other receivables is disclosed in Note 5.

11. RESTRICTED CASH

As at December 31, 2011, the Company had restricted cash of
$2.2 million (December 31, 2010 - $3.4 million) set aside in a debt service
reserve account, as required by the Borrowing Base Facility (Note 17). This
represents the aggregate amount of interest for six months on the loan balance
outstanding based on the five-year forward interest strip. Amounts are deposited
as required to maintain minimum reserve requirements.

12. INCOME TAXES

The Companys deferred income tax assets and liabilities are as
follows:

|(000s)                                                                               |   | 2011   |   |   | 2010   |  
|------------------------------------------------------------------------------------ | - | ------ | - | - | ------ | -
|Balance, beginning of year                                                           | $ | 35,207 |   | $ | 33,313 |  
|Expenses related to the
      origination and reversal of temporary differences for: |   |        |   |   |        |  
|Property and equipment                                                               |   | (9,261 | ) |   | 379    |  
|Non-capital losses carried forward                                                   |   | (2,008 | ) |   | (2,245 | )
|Share issue expenses                                                                 |   | (707   | ) |   | 314    |  
|Changes in unrecognized tax benefits                                                 |   | 7,531  |   |   | 3,446  |  
|Deferred income tax expense (recovery)
      recognized in earnings                  |   | (4,445 | ) |   | 1,894  |  
|Deferred income
      tax liabilities assumed from business combinations             |   | 22,129 |   |   | -      |  
|Balance, end of year1                                                                | $ | 52,891 |   | $ | 35,207 |  

|1 | The tax benefits associated with certain deferred tax
      assets have not been recognized as it is not probable that taxable profit
      will be available against which the deferred tax assets could be
      utilized.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has non-capital losses of $27.9 million (2010 -
$19.9 million) that expire between 2028 and 2031. No deferred tax assets have
been recognized in respect of these unused tax losses. The Company has
additional $5.3 million (2010 - $0.3 million) in unrecognized tax benefits
arising in foreign jurisdictions.

Current income taxes represent income taxes incurred and paid
under the laws of Yemen pursuant to the PSAs on Block 32 and Block S-1 and
under the laws of Egypt pursuant to the PSCs on the West Gharib and West Bakr
Concessions.

Income taxes vary from the amount that would be computed by
applying the Canadian statutory income tax rate of 26.5% (2010  28.0%) to
income before taxes as follows:

|(000s)                                                       |   | 2011   |   |   | 2010   |  
|------------------------------------------------------------ | - | ------ | - | - | ------ | -
|Income taxes calculated at the Canadian
      statutory rate | $ | 40,005 |   | $ | 23,034 |  
|Increases (decreases) in income taxes resulting from:        |   |        |   |   |        |  
|Non-deductible expenses                                      |   | 3,667  |   |   | 2,860  |  
|Gain on acquisition                                          |   | (5,347 | ) |   | -      |  
|Changes in unrecognized
      tax benefits                   |   | 7.531  |   |   | 3,446  |  
|Effect of tax rates in foreign
      jurisdictions1          |   | 24,142 |   |   | 13,564 |  
|Changes in tax rates and other                               |   | (426   | ) |   | (1,203 | )
|Income tax expense                                           | $ | 69,572 |   | $ | 41,701 |  

|1 | The statutory tax rates in Egypt and Yemen are 40.55% and
      35.0%, respectively.
|- | ------------------------------------------------------------------------------------

13. INTANGIBLE EXPLORATION AND EVALUATION ASSETS

|(000s)                                      |   |         |  
|------------------------------------------- | - | ------- | -
|Balance at January 1, 2010                  | $ | 20,403  |  
|Additions                                   |   | 13,000  |  
|Transferred to property and
      equipment |   | (10,794 | )
|Balance at December 31, 2010                |   | 22,609  |  
|Additions                                   |   | 6,991   |  
|Impairment loss                             |   | (12,147 | )
|Balance at December 31, 2011                | $ | 17,453  |  

20

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

The Company recorded an impairment loss in the amount of $12.1
million during the year ended December 31, 2011. The impairment relates to Nuqra
Block 1 in Egypt and represents all intangible exploration and evaluation asset
costs that had been incurred at Nuqra up to December 31, 2011. It was determined
that an impairment loss was necessary as no commercially viable quantities of
oil have been discovered at Nuqra. The Company no longer has a firm plan for
further expenditures on exploration and evaluation at Nuqra at this time.

As at December 31, 2011, December 31, 2010 and January 1, 2010,
none of the Companys other assets were being used in E&E activities.

14. PROPERTY AND EQUIPMENT

|                                                                                                 |   | Petroleum  |  |   | Other  |  |   |         | 
|------------------------------------------------------------------------------------------------ | - | ---------- |  | - | ------ |  | - | ------- | 
|(000s)                                                                                           |   | Properties |  |   | Assets |  |   | Total   | 
|Cost at January 1, 2010                                                                          | $ | 144,009    |  | $ | 4,420  |  | $ | 148,429 | 
|Additions                                                                                        |   | 51,051     |  |   | 1,293  |  |   | 52,344  | 
|Transferred from exploration and
      evaluation assets                                         |   | 10,794     |  |   | -      |  |   | 10,794  | 
|Balance at December 31, 2010                                                                     |   | 205,854    |  |   | 5,713  |  |   | 211,567 | 
|Additions                                                                                        |   | 61,266     |  |   | 1,861  |  |   | 63,127  | 
|Acquisitions                                                                                     |   | 74,500     |  |   | 314    |  |   | 74,814  | 
|Balance at December 31, 2011                                                                     | $ | 341,620    |  | $ | 7,888  |  | $ | 349,508 | 
|                                                                                                 |   |            |  |   |        |  |   |         | 
|                                                                                                 |   |            |  |   |        |  |   |         | 
|Accumulated depletion, depreciation, amortization and
      impairment losses at January 1, 2010 | $ | -          |  | $ | 2,015  |  | $ | 2,015   | 
|Depletion, depreciation and amortization for the period                                          |   | 27,215     |  |   | 925    |  |   | 28,140  | 
|                                                                                                 |   |            |  |   |        |  |   |         | 
|Balance at December 31, 2010                                                                     |   | 27,215     |  |   | 2,940  |  |   | 30,155  | 
|Depletion,
      depreciation and amortization for the period                                    |   | 33,881     |  |   | 1,200  |  |   | 35,081  | 
|Balance at December 31, 2011                                                                     | $ | 61,096     |  | $ | 4,140  |  | $ | 65,236  | 

|Net Book
      Value |   |         |  |   |       |  |   |         | 
|-------------------- | - | ------- |  | - | ----- |  | - | ------- | 
|At January 1, 2010   | $ | 144,009 |  | $ | 2,405 |  | $ | 146,414 | 
|At December 31, 2010 | $ | 178,639 |  | $ | 2,773 |  | $ | 181,412 | 
|At December 31, 2011 | $ | 280,524 |  | $ | 3,748 |  | $ | 284,272 | 

Future development costs of $37.1 million (2010 - $49.7
million) for Proved and Probable reserves were included in the depletion
calculation for the year ended December 31, 2011.

15. GOODWILL

|(000s)                                     |   |       | 
|------------------------------------------ | - | ----- | 
|Balance at January 1, 2010                 | $ | 8,180 | 
|Acquisitions through business combinations |   | -     | 
|Balance at December 31, 2010               | $ | 8,180 | 
|Acquisitions through business combinations |   | -     | 
|Balance at December 31, 2011               | $ | 8,180 | 

Goodwill was assessed for impairment as at December 31, 2011,
  December 31, 2010 and January 1, 2010, and no impairment was recognized as a
  result of these assessments. The after-tax cash flows used to determine the
  recoverable amounts of the cash-generating units were discounted using an estimated
  year-end weighted average cost of capital of 15%.

16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are comprised of
current trade payables and accrued expenses due to third parties. There were no
amounts due to related parties as at December 31, 2011, December 31, 2010 or
January 1, 2010.

The Companys exposure to currency and liquidity risk related
to trade and other payables is disclosed in Note 5.

21

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

17. LONG-TERM DEBT

The contractual terms of the Companys interest-bearing loans
and borrowings are measured at amortized cost. As at December 31, 2011, the only
significant interest-bearing loans and borrowings related to the Borrowing Base
Facility are described below. For more information about the Companys exposure
to interest rate, foreign currency and liquidity risk, see Note 5.

|                                  |   | December 31 |   |   | December 31 |   |   | January 1 |  
|--------------------------------- | - | ----------- | - | - | ----------- | - | - | --------- | -
|(000s)                            |   | 2011        |   |   | 2010        |   |   | 2010      |  
|Bank debt                         | $ | 60,000      |   | $ | 90,000      |   | $ | 50,000    |  
|Deferred financing
      costs    |   | (2,391      | ) |   | (3,580      | ) |   | (201      | )
|                                  |   | 57,609      |   |   | 86,420      |   |   | 49,799    |  
|                                  |   |             |   |   |             |   |   |           |  
|Current portion of long-term debt |   | -           |   |   | -           |   |   | 49,799    |  
|                                  | $ | 57,609      |   | $ | 86,420      |   | $ | -         |  

As at December 31, 2011, the Company had a $100.0 million
Borrowing Base Facility of which $60.0 million was drawn. The Borrowing Base Facility is secured by a pledge over certain
bank accounts, a pledge over the Companys subsidiaries and a fixed and floating
charge over certain assets. The credit facility bears interest at the LIBOR rate
plus an applicable margin, which ranges from 3.75% to 4.75% and is dependent on
the amount drawn. During the year ended December 31, 2011, the average effective
interest rate was 7.9% (2010  6.4%) . As repayments on the Borrowing Base
Facility are not expected to commence until the third quarter of 2013, the
entire balance has been presented as a long-term liability on the Consolidated
Balance Sheets.Repayments will be made on a
semi-annual basis in order to reduce the amount borrowed to an amount no greater
than the Borrowing Base. The amount of the Borrowing Base may fluctuate over
time and is determined principally by the net present value of the Companys
Proved and Probable reserves over the term of the facility, up to a pre-defined
commitment amount which is subject to pre-determined semi-annual reductions.
Accordingly, for each balance sheet date, the timing of repayment is estimated
based on the most recent redetermination of the Borrowing Base and repayment
schedules may change in future periods.

The estimated future debt payments on long-term debt, as of
December 31, 2011 are as follows:

|(000s) |   |        | 
|------ | - | ------ | 
|2012   | $ | -      | 
|2013   |   | 18,000 | 
|2014   |   | 29,995 | 
|2015   |   | 12,005 | 
|2016   |   | -      | 
|       | $ | 60,000 | 

18. COMMITMENTS AND CONTINGENCIES

On June 29, 2011, the Company entered into an agreement to
acquire a 50% working interest in the South Alamein Concession agreement in the
Arab Republic of Egypt from Cepsa Egypt SA B.V. (Cepsa Egypt), a wholly-owned
subsidiary of Compania Espanola De Petroleos, S.A. (of Spain), subject to the
approval of the Egyptian Government and customary closing conditions. The
Company has structured the transaction as an all-cash deal effective on and
subject to approval from the Egyptian Government. Consideration for the
transaction is $3.0 million plus an inventory adjustment to be determined based
on customary due diligence and other closing conditions. Because of uncertainty
related to the successful approval of the transaction by the Egyptian
Government, management is not able to provide any assurances that it will
successfully close the subject transaction. Accordingly, no amount has been
accrued in the Consolidated Financial Statements for the year ended December 31,
2011 related to the contingency.

The Company is subject to certain office and equipment leases
(Note 5).

Pursuant to the PSA for Block 75 in Yemen, the Contractor
(Joint Venture Partners) has a remaining minimum financial commitment of $3.0
million ($0.8 million to TransGlobe) for one exploration well. Drilling has been
suspended in Yemen due to security and logistics concerns.

Pursuant to the August 18, 2008 asset purchase agreement for
  a 25% financial interest in eight development leases on the West Gharib Concession
  in Egypt, the Company has committed to paying the vendor a success fee to a
  maximum of $2.0 million if incremental reserve thresholds are reached in the
  South Rahmi development lease to be evaluated annually. As at December 31, 2011,
  no additional fees are due in 2012.

In the normal course of its operations, the Company may be
subject to litigations and claims. Although it is not possible to estimate the
extent of potential costs, if any, management believes that the ultimate
resolution of such contingencies would not have a material adverse impact on the
results of operations, financial position or liquidity of the Company.

The Company is not aware of any material provisions or other
contingent liabilities as at December 31, 2011.

22

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

19. SHARE CAPITAL

Authorized

The Company is authorized to issue an unlimited number of
common shares with no par value.

Issued

|                                     |  | December 31, 2011 |  |   | December 31, 2010 |  
|------------------------------------ |  | ----------------- |  | - | ----------------- | -
|000s                                |  | Shares            |  |   | Amount            |  
|Balance, beginning of year           |  | 67,576            |  | $ | 80,106            |  
|Share issuance                       |  | 5,000             |  |   | 75,594            |  
|Stock options exercised              |  | 479               |  |   | 1,946             |  
|Stock-based compensation on exercise |  | -                 |  |   | 628               |  
|Share issue costs                    |  | -                 |  |   | (4,011            | )
|Balance, end of year                 |  | 73,055            |  | $ | 154,263           |  

On February 1, 2011, the Company closed an equity offering of
  5,000,000 common shares at C$15.00 per common share for gross proceeds of C$75.0
  million (US$75.6 million).

20. SHARE-BASED PAYMENTS

The Company adopted a stock option plan in May 2007 (the
Plan) and reapproved unallocated options issuable pursuant to the Plan in May
2010. The number of Common Shares that may be issued pursuant to the exercise of
options awarded under the Plan and all other Security Based Compensation
Arrangements of the Company is 10% of the common shares outstanding from time to
time. All incentive stock options granted under the Plan have a per-share
exercise price not less than the trading market value of the common shares at
the date of grant. All grants of stock options vest one-third on each of the
first, second and third anniversaries of the grant date. Each tranche of an
award with different vesting dates is considered a separate grant for the
calculation of fair value and the resulting fair value is amortized over the
vesting period of the respective tranches.

The following tables summarize information about the stock
options outstanding and exercisable at the dates indicated:

|                                       |  | Year Ended        |   |  | Year Ended        | 
|-------------------------------------- |  | ----------------- | - |  | ----------------- | 
|                                       |  | December 31, 2011 |   |  | December 31, 2010 | 
|                                       |  |                   |   |  | Weighted-         | 
|                                       |  | Number            |   |  | Average           | 
|                                       |  | of                |   |  | Exercise          | 
|(000s except per share
      amounts)  |  | Options           |   |  | Price (C$)        | 
|Options outstanding, beginning of year |  | 4,156             |   |  | 3.80              | 
|Granted                                |  | 1,134             |   |  | 12.65             | 
|Exercised                              |  | (479              | ) |  | 4.06              | 
|Forfeited                              |  | (51               | ) |  | 6.28              | 
|Options outstanding, end of year       |  | 4,760             |   |  | 6.81              | 
|Options exercisable,
      end of year |  | 2,440             |   |  | 4.31              | 

Options Outstanding
      
      
      Options ExercisableWeighted-
      
      
      
      
      
      
      
      
      Weighted-Number
      
      
      Average
      
      
      Weighted-
      
      
      Number
      
      
      Average
      
      
      Weighted-Exercise
      
      Outstanding at
      
      
      Remaining
      
      
      Average
      
      
      Exercisable at
      
      
      Remaining
      
      
      AveragePrices
      
      Dec 31, 2011
      
      
      Contractual
      
      
      Exercise Price
      
      
      Dec 31, 2011
      
      
      Contractual
      
      
      Exercise(C$)
      
      (000s
      )
      
      Life
        (Years)
      
      
      (C$)
      
      
      (000s
      )
      
      Life
        (Years)
      
      
      Price
        (C$)2.30-4.00
      
      1,613
      
      
      2.2
      
      
      3.08
      
      
      1,303
      
      
      2.1
      
      
      2.984.01-6.00
      
      932
      
      
      1.5
      
      
      4.89
      
      
      780
      
      
      1.2
      
      
      4.866.01-8.00
      
      803
      
      
      3.4
      
      
      7.39
      
      
      268
      
      
      3.4
      
      
      7.398.01-10.00
      
      377
      
      
      4.0
      
      
      8.66
      
      
      69
      
      
      3.6
      
      
      8.0410.01-13.20
      
      851
      
      
      4.4
      
      
      13.00
      
      
      -
      
      
      -
      
      
      -13.21-15.12
      
      184
      
      
      4.2
      
      
      14.35
      
      
      20
      
      
      4.0
      
      
      15.124,760
      
      
      2.9
      
      
      6.81
      
      
      2,440
      
      
      2.0
      
      
      4.31


23

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Stockbased compensation

Compensation expense of $3.4 million was recorded in general
and administrative expenses in the Consolidated Statements of Earnings and
Comprehensive Income and Changes in Shareholders Equity during year ended
December 31, 2011 (2010 - $1.8 million) in respect of equity-settled share-based
payment transactions. The fair value of all common stock options granted is
estimated on the date of grant using the lattice-based binomial option pricing
model. The weighted average fair value of options granted during the period and
the assumptions used in their determination are as noted below:

|                                                             |  | 2011  |  |  | 2010  | 
|------------------------------------------------------------ |  | ----- |  |  | ----- | 
|Weighted average fair market value per
      option (C$)     |  | 4.22  |  |  | 2.81  | 
|Risk free interest rate (%)                                  |  | 1.82  |  |  | 2.70  | 
|Expected volatility (%)                                      |  | 50.60 |  |  | 48.94 | 
|Dividend per share                                           |  | 0.00  |  |  | 0.00  | 
|Expected forfeiture rate (non-executive
      employees) (%) |  | 9.34  |  |  | 6.08  | 
|Suboptimal
      exercise factor                             |  | 1.25  |  |  | 1.25  | 

Options granted vest annually over a three-year period and
expire five years after the grant date. During the year ended December 31, 2011,
employees exercised 479,000 (2010  2,177,000) stock options. In accordance with
IFRS, the fair value related to these options was $0.6 million, (2010 - $4.0
million,) at time of grant and has been transferred from contributed surplus to
share capital. As at December 31, 2011, December 31, 2010 and January 1, 2010,
the entire balance in contributed surplus was related to previously recognized
stock-based compensation expense on equity-settled stock options.

Share appreciation rights plan

In addition to the Companys stock option plan, the Company
  also issues share appreciation rights (units) under the share appreciation
  rights plan, which was adopted in March 2010. Share appreciation rights are
  similar to stock options except that the holder does not have the right to purchase
  the underlying share of the Company but receives cash. Units granted under the
  share appreciation rights plan vest one-third on each of the first, second and
  third anniversaries of the grant date. Share appreciation rights granted expire
  five years after the grant date. The following table summarizes information
  about the share appreciation rights outstanding and exercisable at the dates
  indicated:

|                                       |  | 2011   |   |  | 2010       | 
|-------------------------------------- |  | ------ | - |  | ---------- | 
|                                       |  |        |   |  | Weighted-  | 
|                                       |  | Number |   |  | Average    | 
|                                       |  | of     |   |  | Exercise   | 
|(000s, except per
      share amounts) |  | Units  |   |  | Price (C$) | 
|Units outstanding, beginning of year   |  | 150    |   |  | 6.61       | 
|Granted                                |  | -      |   |  | -          | 
|Exercised                              |  | (15    | ) |  | 7.94       | 
|Forfeited                              |  | (30    | ) |  | 7.94       | 
|Units outstanding, end of year         |  | 105    |   |  | 6.04       | 
|                                       |  |        |   |  |            | 
|Units exercisable, end of year         |  | 35     |   |  | 6.04       | 

For the year ended December 31, 2011, compensation expense recoveries
  of $0.3 million were recorded in general and administrative expenses in the
  Consolidated Statements of Earnings and Comprehensive Income (2010  expense
  of $0.6 million) in respect of cash-settled, share-based payment transactions.
  The carrying amount of liabilities for cash-settled arrangements as at December
  31, 2011 was $0.3 million (2010 - $0.6 million) and the total fair value of
  the liability for vested benefits as at December 31, 2011 was $0.1 million (2010
  - $Nil).

21. PER SHARE AMOUNTS

In calculating the earnings per share, basic and diluted, the
  following weighted-average shares were used:

|(000s)                                                |  | 2011   |  |  | 2010   | 
|----------------------------------------------------- |  | ------ |  |  | ------ | 
|Weighted-average number of shares
      outstanding   |  | 72,529 |  |  | 66,328 | 
|Dilution effect of
      stock options                |  | 2,408  |  |  | 2,564  | 
|Weighted-average number of diluted shares outstanding |  | 74,937 |  |  | 68,892 | 

In determining diluted earnings per share, the Company assumes
that the proceeds received from the exercise of in-the-money stock options are
used to repurchase common shares at the average market price. In calculating the
weighted-average number of diluted common shares outstanding for the year ended
December 31, 2011, the Company excluded 1,016,500 stock options (2010  60,000)
as their exercise price was greater than the average common share market price
in the year.

24

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

22. RELATED PARTY DISCLOSURES

Details of controlled entities are as follows:

|                                              |                      | Ownership Interest | Ownership Interest
|--------------------------------------------- | -------------------- | ------------------ | ------------------
|                                              | Country of           | 2011               | 2010              
|                                              | Incorporation        | (%)                | (%)               
|TransGlobe Petroleum
      International Inc. | Turks & Caicos       | 100                | 100               
|TG Holdings Yemen Inc.                        | Turks & Caicos       | 100                | 100               
|TG West Yemen Inc.                            | Turks & Caicos       | 100                | 100               
|TransGlobe Petroleum Egypt Inc.               | Turks & Caicos       | 100                | 100               
|TransGlobe West Bakr Inc.                     | Turks & Caicos       | 100                | -                 
|TransGlobe West Gharib Inc.                   | Turks & Caicos       | 100                | 100               
|TransGlobe South Alamein Inc.                 | Turks & Caicos       | 100                | -                 
|TransGlobe GOS Inc.                           | Turks
      & Caicos | 100                | 100               

23. COMPENSATION OF KEY MANAGEMENT PERSONNEL

Key management personnel have been identified as the board of
directors and the four executive officers of the Company.

Key management personnel remuneration consisted of the
following:

|(000s)                                             |   | 2011  |  |   | 2010  | 
|-------------------------------------------------- | - | ----- |  | - | ----- | 
|Salaries, incentives and short-term
      benefits | $ | 2,380 |  | $ | 2,014 | 
|Stock-based
      compensation                     |   | 1,522 |  |   | 916   | 
|                                                   | $ | 3,902 |  | $ | 2,930 | 

24. SEGMENTED INFORMATION

The Company has two reportable operating segments: the Arab
Republic of Egypt and the Republic of Yemen. The Company, through its operating
segments, is engaged primarily in oil exploration, development and production
and the acquisition of properties.

In presenting information on the basis of operating segments,
segment revenue is based on the geographical location of assets which is also
consistent with the location of the segment customers. Segmented assets are also
based on the geographical location of the assets. There are no inter-segment
sales.

25

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

The accounting policies of the operating segments are the same
as the Companys accounting policies. The following is an analysis of reported
segment earnings, revenues, operating expenses and depreciation, depletion and
amortization expenses analyzed by operating segment and reconciled to the
Companys Consolidated Financial Statements:

Egypt
      
      
      Yemen
      
      
      Total(000s)
      
      2011
      
      
      2010
      
      
      2011
      
      
      2010
      
      
      2011
      
      
      2010RevenueOil sales, net of royalties and other
      $
      215,851
      
      $
      114,895
      
      $
      31,903
      
      $
      42,325
      
      $
      247,754
      
      $
      157,220Gain on acquisition
      
      13,187
      
      
      -
      
      
      -
      
      
      -
      
      
      13,187
      
      
      -Other income
      
      6
      
      
      -
      
      
      14
      
      
      -
      
      
      20
      
      
      -Total segmented revenue
      
      229,044
      
      
      114,895
      
      
      31,917
      
      
      42,325
      
      
      260,961
      
      
      157,220Segmented expensesProduction and operating
      
      27,407
      
      
      16,464
      
      
      9,255
      
      
      10,386
      
      
      36,662
      
      
      26,850Depletion, depreciation and amortization
      
      31,035
      
      
      21,338
      
      
      3,585
      
      
      6,562
      
      
      34,620
      
      
      27,900Income taxes - current
      
      66,630
      
      
      29,686
      
      
      7,387
      
      
      10,121
      
      
      74,017
      
      
      39,807Income taxes - deferred
      
      (4,606
      )
      
      1,894
      
      
      161
      
      
      -
      
      
      (4,445
      )
      
      1,894Impairment loss
      
      12,147
      
      
      -
      
      
      -
      
      
      -
      
      
      12,147
      
      
      -Total segmented expenses
      
      132,613
      
      
      69,382
      
      
      20,388
      
      
      27,069
      
      
      153,001
      
      
      96,451Segmented earnings
      $
      96,431
      
      $
      45,513
      
      $
      11,529
      
      $
      15,256
      
      
      107,960
      
      
      60,769Non-segmented expenses (income)Derivative loss (gain) on commodity
        contracts
      
      
      
      
      
      
      
      
      
      
      
      
      
      807
      
      
      670Exploration
      
      
      
      
      
      
      
      
      
      
      
      
      
      1,561
      
      
      331General and administrative
      
      
      
      
      
      
      
      
      
      
      
      
      
      18,893
      
      
      15,458Foreign exchange loss
      
      
      
      
      
      
      
      
      
      
      
      
      
      310
      
      
      216Depreciation
        and amortization
      
      
      
      
      
      
      
      
      
      
      
      
      
      461
      
      
      240Finance revenue
      
      
      
      
      
      
      
      
      
      
      
      
      
      (447
      )
      
      (28
      )Finance costs
      
      
      
      
      
      
      
      
      
      
      
      
      
      4,983
      
      
      3,317Total non-segmented expenses
      
      
      
      
      
      
      
      
      
      
      
      
      
      26,568
      
      
      20,204Net earnings for the year
      
      
      
      
      
      
      
      
      
      
      
      
      $
      81,392
      
      $
      40,565Capital expendituresExploration and development
      $
      63,177
      
      $
      56,946
      
      $
      5,495
      
      $
      7,583
      
      $
      68,672
      
      $
      64,529Acquisitions
      
      74,814
      
      
      -
      
      
      -
      
      
      -
      
      
      74,814
      
      
      -Corporate
      
      
      
      
      
      
      
      
      
      
      
      
      
      1,447
      
      
      813Total capital expenditures
      $
      137,991
      
      $
      56,946
      
      $
      5,495
      
      $
      7,583
      
      $
      144,933
      
      $
      65,342


26

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

The carrying amounts of reportable segment assets and
liabilities are as follows:

|December 31, 2011                            |   |         |  |   |        |  |   |         | 
|-------------------------------------------- | - | ------- |  | - | ------ |  | - | ------- | 
|(000s)                                       |   | Egypt   |  |   | Yemen  |  |   | Total   | 
|Assets                                       |   |         |  |   |        |  |   |         | 
|Intangible exploration and evaluation assets | $ | 2,915   |  | $ | 14,538 |  | $ | 17,453  | 
|Property and equipment                       |   |         |  |   |        |  |   |         | 
|Petroleum properties                         |   | 244,920 |  |   | 35,604 |  |   | 280,524 | 
|Other assets                                 |   | 1,619   |  |   | -      |  |   | 1,619   | 
|Goodwill                                     |   | 8,180   |  |   | -      |  |   | 8,180   | 
|Other                                        |   | 184,545 |  |   | 14,269 |  |   | 198,814 | 
|Segmented assets                             |   | 442,179 |  |   | 64,411 |  |   | 506,590 | 
|Non-segmented assets                         |   |         |  |   |        |  |   | 19,216  | 
|                                             |   |         |  |   |        |  |   |         | 
|Total assets                                 |   |         |  |   |        |  | $ | 525,806 | 
|                                             |   |         |  |   |        |  |   |         | 
|Liabilities                                  |   |         |  |   |        |  |   |         | 
|Accounts payable and accrued liabilities     | $ | 67,170  |  | $ | 2,226  |  | $ | 69,396  | 
|Deferred taxes                               |   | 43,112  |  |   | 9,779  |  |   | 52,891  | 
|Segmented liabilities                        |   | 110,282 |  |   | 12,005 |  |   | 122,287 | 
|Non-segmented liabilities                    |   |         |  |   |        |  |   | 63,027  | 
|                                             |   |         |  |   |        |  |   |         | 
|Total liabilities                            |   |         |  |   |        |  | $ | 185,314 | 

|December 31, 2010                            |   |         |  |   |        |  |   |         | 
|-------------------------------------------- | - | ------- |  | - | ------ |  | - | ------- | 
|(000s)                                       |   | Egypt   |  |   | Yemen  |  |   | Total   | 
|Assets                                       |   |         |  |   |        |  |   |         | 
|Intangible exploration and evaluation assets | $ | 9,783   |  | $ | 12,826 |  | $ | 22,609  | 
|Property and equipment                       |   |         |  |   |        |  |   |         | 
|Petroleum properties                         |   | 143,233 |  |   | 35,406 |  |   | 178,639 | 
|Other assets                                 |   | 1,630   |  |   | -      |  |   | 1,630   | 
|Goodwill                                     |   | 8,180   |  |   | -      |  |   | 8,180   | 
|Other                                        |   | 71,504  |  |   | 11,378 |  |   | 82,882  | 
|Segmented assets                             |   | 234,330 |  |   | 59,610 |  |   | 293,940 | 
|Non-segmented assets                         |   |         |  |   |        |  |   | 51,685  | 
|                                             |   |         |  |   |        |  |   |         | 
|Total assets                                 |   |         |  |   |        |  | $ | 345,625 | 
|                                             |   |         |  |   |        |  |   |         | 
|Liabilities                                  |   |         |  |   |        |  |   |         | 
|Accounts payable and accrued liabilities     | $ | 31,321  |  | $ | 5,980  |  | $ | 37,301  | 
|Deferred taxes                               |   | 25,589  |  |   | 9,618  |  |   | 35,207  | 
|Segmented liabilities                        |   | 56,910  |  |   | 15,598 |  |   | 72,508  | 
|Non-segmented liabilities                    |   |         |  |   |        |  |   | 90,927  | 
|                                             |   |         |  |   |        |  |   |         | 
|Total liabilities                            |   |         |  |   |        |  | $ | 163,435 | 

|January 1, 2010                              |   |         |  |   |        |  |   |         | 
|-------------------------------------------- | - | ------- |  | - | ------ |  | - | ------- | 
|(000s)                                       |   | Egypt   |  |   | Yemen  |  |   | Total   | 
|Assets                                       |   |         |  |   |        |  |   |         | 
|Intangible exploration and evaluation assets | $ | 9,874   |  | $ | 10,529 |  | $ | 20,403  | 
|Property and equipment                       |   |         |  |   |        |  |   |         | 
|Petroleum properties                         |   | 107,327 |  |   | 36,682 |  |   | 144,009 | 
|Other assets                                 |   | 1,836   |  |   | -      |  |   | 1,836   | 
|Goodwill                                     |   | 8,180   |  |   | -      |  |   | 8,180   | 
|Other                                        |   | 41,347  |  |   | 5,877  |  |   | 47,224  | 
|Segmented assets                             |   | 168,564 |  |   | 53,088 |  |   | 221,652 | 
|Non-segmented assets                         |   |         |  |   |        |  |   | 6,750   | 
|                                             |   |         |  |   |        |  |   |         | 
|Total assets                                 |   |         |  |   |        |  | $ | 228,402 | 
|                                             |   |         |  |   |        |  |   |         | 
|Liabilities                                  |   |         |  |   |        |  |   |         | 
|Accounts payable and accrued liabilities     | $ | 10,788  |  | $ | 1,373  |  | $ | 12,161  | 
|Deferred taxes                               |   | 22,528  |  |   | 10,785 |  |   | 33,313  | 
|Segmented liabilities                        |   | 33,316  |  |   | 12,158 |  |   | 45,474  | 
|Non-segmented liabilities                    |   |         |  |   |        |  |   | 53,031  | 
|                                             |   |         |  |   |        |  |   |         | 
|Total liabilities                            |   |         |  |   |        |  | $ | 98,505  | 

27

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

25. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital consisted of the following:

|(000s)                                           |   | 2011    |   |   | 2010    |  
|------------------------------------------------ | - | ------- | - | - | ------- | -
|Operating Activities                             |   |         |   |   |         |  
|(Increase) decrease in current
      assets      |   |         |   |   |         |  
|Accounts receivable                              | $ | (58,803 | ) | $ | (33,766 | )
|Prepaids
      and other                         |   | (1,245  | ) |   | (928    | )
|Increase
      (decrease) in current liabilities |   |         |   |   |         |  
|Accounts payable and accrued liabilities         |   | 3,702   |   |   | 16,203  |  
|                                                 | $ | (56,346 | ) | $ | (18,491 | )

|(000s)                                           |   | 2011   |   |   | 2010   |  
|------------------------------------------------ | - | ------ | - | - | ------ | -
|Investing Activities                             |   |        |   |   |        |  
|(Increase)
      decrease in current assets      |   |        |   |   |        |  
|Prepaids
      and other                         | $ | (3,330 | ) | $ | (29    | )
|Increase
      (decrease) in current liabilities |   |        |   |   |        |  
|Accounts payable and accrued liabilities         |   | 28,020 |   |   | 10,028 |  
|                                                 | $ | 24,690 |   | $ | 9,999  |  

|(000s)                                           |   | 2011 |  |   | 2010 | 
|------------------------------------------------ | - | ---- |  | - | ---- | 
|Financing Activities                             |   |      |  |   |      | 
|Increase
      (decrease) in current liabilities |   |      |  |   |      | 
|Accounts payable and accrued liabilities         | $ | 139  |  | $ | 105  | 
|                                                 | $ | 139  |  | $ | 105  | 

26. FIRST TIME ADOPTION OF IFRS

These are the Companys first consolidated annual financial
statements presented in accordance with IFRS for the year ended December 31,
2011.

IFRS is applied retrospectively at the transition date of
January 1, 2010 with all adjustments to assets and liabilities as stated under
Canadian Generally Accepted Accounting Principles (GAAP) taken to retained
earnings unless certain exceptions and exemptions are applied.

IFRS 1, First-Time Adoption of International Financial
  Reporting Standards, permits first time adopters of IFRS a number of exemptions.
  The Company has elected to utilize the following exemptions for first-time adoption
  of IFRS:

| | (i)   | With respect to IFRS 3, Business Combinations,
      IFRS 1 allows for an implementation of the IFRS business combination rules
      on a prospective basis, therefore, business combinations entered into
      prior to January 1, 2010 will not be retrospectively restated;                                                                                                                                                                                                                                                                                                                                                  
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (ii)  | With respect to IAS 21, The Effects of Changes in
      Foreign Exchange Rates, IFRS 1 allows foreign currency translation
      adjustments classified in accumulated other comprehensive income to be
      deemed zero and reclassified to retained earnings on January 1, 2010, and
      for the retrospective restatement of foreign currency translation under
      IFRS to not be required;                                                                                                                                                                                                                              
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (iii) | With respect to IFRS 2, Share-based payments, IFRS
      1 does not require stock options that were granted after November 7, 2002
      and vested prior to January 1, 2010 and share appreciation rights that
      settled prior to January 1, 2010 to be retrospectively restated.
      Therefore, IFRS requirements apply only to those options that were
      unvested and share appreciation rights that were unsettled at the date of
      transition;                                                                                                                                                                 
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (iv)  | With respect to IAS 16, Property, Plant and Equipmentand IFRS 6, Exploration for and Evaluation of Mineral Resources,IFRS 1 allows for the petroleum asset balance as determined under the
      Companys previous accounting framework (Canadian GAAP) to be allocated to
      the IFRS categories of exploration and evaluation assets and development
      and production properties. Under the exemption, for assets in the
      development or production phases, the amount is allocated to the
      underlying IFRS transitional assets on a pro-rata basis using reserve
      values as of the IFRS transition date.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | (v)   | With respect to IFRS 23, Borrowing Costs, IFRS 1
      allows borrowing cost disclosures relating to qualifying assets to be
      applied prospectively from the IFRS transition
date.                                                                                                                                                                                                                                                                                                                                                                                                                                           

These mandatory exceptions and optional exemptions are applied
  in preparing:

| | (i)   | The Consolidated Financial Statements as at and for the
      year ended December 31, 2011,                                                                
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                            
| | (ii)  | The Consolidated Financial Statements as at and for the
      year ended December 31, 2010 prepared in accordance with IFRS for
      comparative purposes,
| |       |                                                                                                                                                            
| | (iii) | The opening IFRS consolidated balance sheet on January 1,
      2010.                                                                                      

28

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

IFRS employs a conceptual framework that is similar to Canadian
GAAP. While the adoption of IFRS has not changed the net increase or decrease in
cash and cash equivalents for any given period, the adoption has resulted in
changes to the reported financial position and results of operations of the
Company. The Company has prepared the following summary of adjustments to
reconcile the shareholders equity and earnings of the Company under IFRS with
those reported under Canadian GAAP:

Reconciliation of assets, liabilities and
shareholders equity asat January 1, 2010

(Expressed in thousands of U.S. Dollars)

|                                                   |               |   | As at           |  |   | Effect of     |   |   | As at       | 
|-------------------------------------------------- | ------------- | - | --------------- |  | - | ------------- | - | - | ----------- | 
|                                                   |               |   | **Jan 1, 2010** |  |   | Transition    |   |   | Jan 1, 2010 | 
|                                                   | Notes         |   | (GAAP)          |  |   | to
      IFRS |   |   | (IFRS)      | 
|                                                   |               |   |                 |  |   |               |   |   |             | 
|ASSETS                                             |               |   |                 |  |   |               |   |   |             | 
|Current                                            |               |   |                 |  |   |               |   |   |             | 
|Cash and cash equivalents                          |               | $ | 16,177          |  | $ | -             |   | $ | 16,177      | 
|Accounts receivable                                |               |   | 35,319          |  |   | -             |   |   | 35,319      | 
|Prepaids and other                                 |               |   | 1,909           |  |   | -             |   |   | 1,909       | 
|Derivative commodity contracts                     |               |   | -               |  |   | -             |   |   | -           | 
|                                                   |               |   | 53,405          |  |   | -             |   |   | 53,405      | 
|                                                   |               |   |                 |  |   |               |   |   |             | 
|Non-Current                                        |               |   |                 |  |   |               |   |   |             | 
|Restricted cash                                    |               |   | -               |  |   | -             |   |   | -           | 
|Intangible exploration and
      evaluation assets | c             |   | -               |  |   | 20,403        |   |   | 20,403      | 
|Property and equipment                             | c             |   | 167,297         |  |   | (167,297      | ) |   | -           | 
|Petroleum
      properties                         | c             |   | -               |  |   | 144,009       |   |   | 144,009     | 
|Other assets                                       | c             |   | -               |  |   | 2,405         |   |   | 2,405       | 
|Goodwill                                           |               |   | 8,180           |  |   | -             |   |   | 8,180       | 
|                                                   |               | $ | 228,882         |  | $ | (480          | ) | $ | 228,402     | 
|                                                   |               |   |                 |  |   |               |   |   |             | 
|LIABILITIES                                        |               |   |                 |  |   |               |   |   |             | 
|Current                                            |               |   |                 |  |   |               |   |   |             | 
|Accounts payable and accrued liabilities           |               | $ | 14,879          |  | $ | -             |   | $ | 14,879      | 
|Derivative commodity contracts                     |               |   | 514             |  |   | -             |   |   | 514         | 
|Current portion of long-term debt                  |               |   | 49,799          |  |   | -             |   |   | 49,799      | 
|                                                   |               |   | 65,192          |  |   | -             |   |   | 65,192      | 
|                                                   |               |   |                 |  |   |               |   |   |             | 
|Non-Current                                        |               |   |                 |  |   |               |   |   |             | 
|Long-term debt                                     |               |   | -               |  |   | -             |   |   | -           | 
|Deferred taxes                                     | e             |   | -               |  |   | 33,313        |   |   | 33,313      | 
|                                                   |               |   | 65,192          |  |   | 33,313        |   |   | 98,505      | 
|                                                   |               |   |                 |  |   |               |   |   |             | 
|SHAREHOLDERS EQUITY                               |               |   |                 |  |   |               |   |   |             | 
|Share capital                                      |               |   | 66,106          |  |   | -             |   |   | 66,106      | 
|Contributed surplus                                | a             |   | 6,691           |  |   | 1,366         |   |   | 8,057       | 
|Accumulated other
      comprehensive income       | b             |   | 10,880          |  |   | (10,880       | ) |   | -           | 
|Retained earnings                                  | a,
      b, e |   | 80,013          |  |   | (24,279       | ) |   | 55,734      | 
|                                                   |               |   | 163,690         |  |   | (33,793       | ) |   | 129,897     | 
|                                                   |               |   |                 |  |   |               |   |   |             | 
|                                                   |               | $ | 228,882         |  | $ | (480          | ) | $ | 228,402     | 

29

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Reconciliation of assets, liabilities and shareholders
  equity as at December 31, 2010

(Expressed in thousands of U.S. Dollars)

|                                                   |         |   | As at        |  |   | Effect of     |   |   | As at       | 
|-------------------------------------------------- | ------- | - | ------------ |  | - | ------------- | - | - | ----------- | 
|                                                   |         |   | Dec 31, 2010 |  |   | Transition    |   |   | Dec 31,2010 | 
|                                                   | Notes   |   | (GAAP)       |  |   | to
      IFRS |   |   | (IFRS)      | 
|                                                   |         |   |              |  |   |               |   |   |             | 
|ASSETS                                             |         |   |              |  |   |               |   |   |             | 
|Current                                            |         |   |              |  |   |               |   |   |             | 
|Cash and cash equivalents                          |         | $ | 57,782       |  | $ | -             |   | $ | 57,782      | 
|Accounts receivable                                |         |   | 69,085       |  |   | -             |   |   | 69,085      | 
|Prepaids and other                                 |         |   | 2,867        |  |   | -             |   |   | 2,867       | 
|Derivative commodity contracts                     |         |   | 303          |  |   | -             |   |   | 303         | 
|                                                   |         |   | 130,037      |  |   | -             |   |   | 130,037     | 
|Non-Current                                        |         |   |              |  |   |               |   |   |             | 
|Restricted cash                                    |         |   | 3,387        |  |   | -             |   |   | 3,387       | 
|Intangible exploration and
      evaluation assets | c       |   | -            |  |   | 22,609        |   |   | 22,609      | 
|Property and equipment                             | c, d    |   | 200,297      |  |   | (200,297      | ) |   | -           | 
|Petroleum
      properties                         | c, d    |   | -            |  |   | 178,639       |   |   | 178,639     | 
|Other assets                                       | c, d    |   | -            |  |   | 2,773         |   |   | 2,773       | 
|Goodwill                                           |         |   | 8,180        |  |   | -             |   |   | 8,180       | 
|                                                   |         | $ | 341,901      |  | $ | 3,724         |   | $ | 345,625     | 
|                                                   |         |   |              |  |   |               |   |   |             | 
|LIABILITIES                                        |         |   |              |  |   |               |   |   |             | 
|Current                                            |         |   |              |  |   |               |   |   |             | 
|Accounts payable and accrued liabilities           | a       | $ | 41,772       |  | $ | 36            |   | $ | 41,808      | 
|Derivative commodity contracts                     |         |   | -            |  |   | -             |   |   | -           | 
|Current portion of long-term debt                  |         |   | -            |  |   | -             |   |   | -           | 
|                                                   |         |   | 41,772       |  |   | 36            |   |   | 41,808      | 
|                                                   |         |   |              |  |   |               |   |   |             | 
|Non-Current                                        |         |   |              |  |   |               |   |   |             | 
|Long-term debt                                     |         |   | 86,420       |  |   | -             |   |   | 86,420      | 
|Deferred taxes                                     | e       |   | -            |  |   | 35,207        |   |   | 35,207      | 
|                                                   |         |   | 128,192      |  |   | 35,243        |   |   | 163,435     | 
|                                                   |         |   |              |  |   |               |   |   |             | 
|SHAREHOLDERS EQUITY                               |         |   |              |  |   |               |   |   |             | 
|Share capital                                      | a       |   | 80,193       |  |   | (87           | ) |   | 80,106      | 
|Contributed surplus                                | a       |   | 4,756        |  |   | 1,029         |   |   | 5,785       | 
|Accumulated other
      comprehensive income       | b       |   | 10,880       |  |   | (10,880       | ) |   | -           | 
|                                                   | a, b, c |   |              |  |   |               |   |   |             | 
|Retained earnings                                  |         |   | 117,880      |  |   | (21,581       | ) |   | 96,299      | 
|                                                   | d, e    |   |              |  |   |               |   |   |             | 
|                                                   |         |   | 213,709      |  |   | (31,519       | ) |   | 182,190     | 
|                                                   |         |   |              |  |   |               |   |   |             | 
|                                                   |         | $ | 341,901      |  | $ | 3,724         |   | $ | 345,625     | 

30

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Reconciliation of earnings and comprehensive income for year
ended December 31,2010

(Expressed in thousands of U.S. Dollars)

|                                                         |       |   | **Year Ended**   |   |   | Effect of     |   |   | Year Ended   |  
|-------------------------------------------------------- | ----- | - | ---------------- | - | - | ------------- | - | - | ------------ | -
|                                                         |       |   | **Dec 31, 2010** |   |   | Transition    |   |   | Dec 31, 2010 |  
|                                                         | Notes |   | (GAAP)           |   |   | to
      IFRS |   |   | (IFRS)       |  
|REVENUE                                                  |       |   |                  |   |   |               |   |   |              |  
|Oil sales, net of royalties and
      other              |       | $ | 157,220          |   | $ | -             |   | $ | 157,220      |  
|Derivative loss
      on commodity contracts             |       |   | (670             | ) |   | -             |   |   | (670         | )
|Finance revenue                                          |       |   | 28               |   |   | -             |   |   | 28           |  
|                                                         |       |   | 156,578          |   |   | -             |   |   | 156,578      |  
|                                                         |       |   |                  |   |   |               |   |   |              |  
|EXPENSES                                                 |       |   |                  |   |   |               |   |   |              |  
|Production and operating                                 |       |   | 26,850           |   |   | -             |   |   | 26,850       |  
|General and
      administrative                         | c     |   | 14,588           |   |   | 870           |   |   | 15,458       |  
|Foreign exchange loss                                    |       |   | 216              |   |   | -             |   |   | 216          |  
|Finance costs                                            |       |   | 3,317            |   |   | -             |   |   | 3,317        |  
|Exploration                                              | c     |   | -                |   |   | 331           |   |   | 331          |  
|Depletion, depreciation and
      amortization           | d     |   | 33,933           |   |   | (5,793        | ) |   | 28,140       |  
|                                                         |       |   | 78,904           |   |   | (4,592        | ) |   | 74,312       |  
|                                                         |       |   |                  |   |   |               |   |   |              |  
|Earnings before income taxes                             |       |   | 77,674           |   |   | 4,592         |   |   | 82,266       |  
|                                                         |       |   |                  |   |   |               |   |   |              |  
|Income taxes  current                                   |       |   | 39,807           |   |   | -             |   |   | 39,807       |  
|Income taxes  deferred                                  | e     |   | -                |   |   | 1,894         |   |   | 1,894        |  
|                                                         |       |   | 39,807           |   |   | 1,894         |   |   | 41,701       |  
|Net earnings and comprehensive income for the
      year |       | $ | 37,867           |   | $ | 2,698         |   | $ | 40,565       |  

Reconciliation of changes in shareholders equity forthe year ended December 31, 2010

(Expressed in thousands of U.S. Dollars)

|                                                       |               |   | Year Ended   |   |   | Effect of     |   |   | Year Ended   |  
|------------------------------------------------------ | ------------- | - | ------------ | - | - | ------------- | - | - | ------------ | -
|                                                       |               |   | Dec 31, 2010 |   |   | Transition    |   |   | Dec 31, 2010 |  
|                                                       | Notes         |   | (GAAP)       |   |   | to
      IFRS |   |   | (IFRS)       |  
|                                                       |               |   |              |   |   |               |   |   |              |  
|Share Capital                                          |               |   |              |   |   |               |   |   |              |  
|Balance,
      beginning of year                       |               | $ | 66,106       |   | $ | -             |   | $ | 66,106       |  
|Stock options exercised                                |               |   | 9,959        |   |   | -             |   |   | 9,959        |  
|Share issuance                                         |               |   | -            |   |   | -             |   |   | -            |  
|Share issue costs                                      |               |   | -            |   |   | -             |   |   | -            |  
|Stock-based compensation on exercise                   | a             |   | 4,128        |   |   | (87           | ) |   | 4,041        |  
|Balance, end of year                                   |               | $ | 80,193       |   | $ | (87           | ) | $ | 80,106       |  
|                                                       |               |   |              |   |   |               |   |   |              |  
|Contributed Surplus                                    |               |   |              |   |   |               |   |   |              |  
|Balance,
      beginning of year                       | a             | $ | 6,691        |   | $ | 1,366         |   | $ | 8,057        |  
|Stock-based compensation expense                       | a             |   | 2,193        |   |   | (424          | ) |   | 1,769        |  
|Transfer to share capital on
      exercise of options | a             |   | (4,128       | ) |   | 87            |   |   | (4,041       | )
|Balance, end of year                                   |               | $ | 4,756        |   | $ | 1,029         |   | $ | 5,785        |  
|                                                       |               |   |              |   |   |               |   |   |              |  
|Accumulated Other Comprehensive                        |               |   |              |   |   |               |   |   |              |  
|Income                                                 |               |   |              |   |   |               |   |   |              |  
|Balance, beginning of year                             | b             | $ | 10,880       |   | $ | (10,880       | ) | $ | -            |  
|Other comprehensive income                             |               |   | -            |   |   | -             |   |   | -            |  
|Balance, end of year                                   |               | $ | 10,880       |   | $ | (10,880       | ) | $ | -            |  
|                                                       |               |   |              |   |   |               |   |   |              |  
|Retained Earnings                                      |               |   |              |   |   |               |   |   |              |  
|                                                       | a, b,         |   |              |   |   |               |   |   |              |  
|Balance, beginning of year                             |               | $ | 80,013       |   | $ | (24,279       | ) | $ | 55,734       |  
|                                                       | c, e          |   |              |   |   |               |   |   |              |  
|Net earnings                                           | a, b, c, d, e |   | 37,867       |   |   | 2,698         |   |   | 40,565       |  
|Balance, end of year                                   |               | $ | 117,880      |   | $ | (21,581       | ) | $ | 96,299       |  

31

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

Explanation of the above reconciliations from Canadian GAAP
to IFRS

(a) Share-based payment transactions

Under Canadian GAAP  The Company measured share-based
compensation related to share-purchase options at the fair value of options
granted using the lattice-based binomial option pricing model and recognized
this expense on a straight-line basis over the vesting period of the options.
The fair value of the options granted was measured on the date of the grant. The
Company measured the share-based compensation related to share appreciation
rights at their intrinsic value less any unvested portion, and accrued the
unvested portion evenly over the vesting period. The mark-to-market change in
the obligation of the share appreciation rights was determined each reporting
period and recognized through earnings.

Under IFRS  The Company continued to measure share-based
compensation related to share-purchase options at the fair value of options
granted using the same option pricing model; however, the fair value of the
options granted was determined separately for each tranche of awards with
different vesting dates, as each tranche is considered a separate grant for the
purpose of calculating fair value. The fair value of options granted was
recognized as compensation expense over the vesting period of the respective
tranche. The Company measured share-based compensation related to share
appreciation rights at the grant date fair value using the same option-pricing
model used for share-purchase options. Subsequent to grant, the liability was
re-measured at each reporting date with changes to fair value recognized through
earnings.

The effect of transition to IFRS for share-based payments
related to share-purchase options is an accelerated expensing of the share-based
payments as the fair value is weighted more heavily toward the periods closer to
the date of issuance of the stock options. The adjustment for the change in
treatment of share-based payments results in an increase in contributed surplus
of $1.4 million with a corresponding decrease in retained earnings. There were
no share appreciation rights outstanding at January 1, 2010, therefore, there
was no effect on transition to IFRS with respect to cash-settled share-based
payments. The effect of transition to IFRS on the December 31, 2010 comparative
balances are as presented.

(b) Cumulative translation differences

Under Canadian GAAP  Translation differences and cumulative
net exchange differences for each self-sustaining foreign operation are
classified in a separate component of equity. Prior to May 1, 2008, the
Companys foreign operations were considered to be self-sustaining and
consequently were translated using the current rate method. Under the current
rate method, assets and liabilities were translated at the period-end exchange
rates, while revenues and expenses were translated using rates for the period
and gains and losses were included in accumulated other comprehensive income.

Under IFRS  The classification of translation differences and
cumulative net exchange differences is dependent on the functional currency of
the entity and is measured based on the currency of the primary economic
environment in which it operates. The IFRS 1 exemption allows a first-time
adopter to eliminate the cumulative net exchange differences classified in
accumulated other comprehensive income and avoid retrospective restatement of
foreign currency translation requirements. The effect of transition to IFRS for
cumulative translation differences is a decrease in accumulated other
comprehensive income of $10.9 million with a corresponding increase in retained
earnings. The effect of transition to IFRS on the December 31, 2010 comparative
balances are as presented.

(c) Property and equipment

Under Canadian GAAP  The Company followed full cost accounting
as prescribed in Accounting Guideline 16, Oil and Gas Accounting  Full Cost,
whereby all pre-exploration and evaluation costs, E&E costs, including
undeveloped land and costs relating to pre-commercial exploration or
development, and Development and Production (D&P) costs were included in
the property and equipment balance on the Consolidated Balance Sheet and
depleted at the country level.

Under IFRS  Commencing January 1, 2010, the Company has
  applied both IFRS 6, Exploration for and Evaluation of Mineral Resources,
  and IAS 16, Property, Plant and Equipment, depending on the nature of
  the expenditures, as follows:

| | i.   | Pre-E&E costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ii.  | E&E costs, as determined based on Canadian GAAP, are
      moved out of the property and equipment balance and reported separately as
      intangible exploration and evaluation assets on the Condensed Consolidated
      Interim Balance Sheet. E&E costs are not depleted but assessed for
      impairment and unrecoverable costs are expensed. When a project is
      considered technically feasible and commercially viable, the costs are
      moved to D&P category of petroleum properties and depletion
      commences.
| | iii. | D&P costs, as determined under Canadian GAAP, remain
      in the petroleum assets balance on the Condensed Consolidated Interim
      Balance Sheet. D&P costs have been allocated to the underlying IFRS
      transitional assets on a pro-rata basis using the reserve value as of the
      IFRS transition date.                                                                                                                                                                                                                  

The effect on the Companys opening consolidated balance sheet
was a decrease in the property and equipment balance of $20.9 million and a
$20.4 million increase in the intangible exploration and evaluation assets
balance, now presented separately from property and equipment, and a
reallocation of property and equipment costs ($146.4 million) to the underlying
transitional assets, categorized within petroleum properties ($144.0 million)
and other assets ($2.4 million), based on reserve values.

In addition, the effect of transition to IFRS was the expensing
of certain previously capitalized pre-licensing costs, resulting in a decrease
to intangible exploration and evaluation assets of $0.5 million and a
corresponding decrease in retained earnings. The effect of transition to IFRS on
the December 31, 2010 comparative balances are as presented.

32

---

|NOTES TO THE CONSOLIDATED
      FINANCIAL STATEMENTS
|----------------------------------------------------

(d) Depletion and depreciation

Under Canadian GAAP  Development and production costs were
included in the property and equipment balance and were depleted using a reserve
base of Proved reserves.

Under IFRS  The Company continues to capitalize development
and production costs as property and equipment; however, these costs are
depleted using a reserve base of Proved plus Probable reserves.

The effect of transition to IFRS was the expensing of
development and production costs over a larger reserve base and including future
capital costs associated with the larger reserve base, resulting in a decrease
to depletion and depreciation expense and a corresponding increase in retained
earnings on the December 31, 2010 comparative balances as presented.

(e) Income tax

Under Canadian GAAP  The Company used the liability method to
account for income taxes, whereby future income taxes were determined based on
the difference between assets and liabilities reported for financial accounting
purposes from those reported for income tax. Future income tax assets and
liabilities were measured using the substantively enacted tax rates expected to
apply to taxable income in the years in which the temporary differences were
expected to be recovered or settled. When the cost of an asset was not
deductible in determining taxable income and any proceeds arising from its
eventual disposal would not be included in the determination of taxable income,
no temporary differences arose.

Under IFRS  The Company continues to account for all deferred
income taxes consistent with the previous methodology; however, deferred tax
liabilities are recognized for all taxable temporary differences, except to the
extent it arises from the initial recognition of an asset or liability that is
not a business combination, and at the time of the transaction affects neither
accounting profit nor taxable profit. The existing contractual arrangements in
foreign jurisdictions continue to be in effect and in accordance with IAS 12,
Income Taxes, certain transactions have been determined to have deferred
income tax consequences.

The effect of transition to IFRS was an increase to deferred
tax liabilities of $33.3 million with a corresponding decrease in retained
earnings. The effect of transition to IFRS on the income tax expense for
December 31, 2010 comparative balances are as presented.

Cash flows

The adoption of IFRS has had no impact on the Companys net
increase or decrease in cash and cash equivalents for any given period. The
changes made to the Consolidated Balance Sheet and Consolidated Statement of
Earnings and Comprehensive Income have resulted in reclassifications of various
amounts on the Consolidated Statements of Cash Flows. Interest paid has been
reclassified from operating activities to financing activities on the
Consolidated Statements of Cash Flows as interest expense is a cost the Company
incurs to have access to financial resources.

27. EVENTS AFTER THE REPORTING PERIOD

On February 22, 2012, the Company closed an agreement with a
syndicate of underwriters under which the members of the syndicate have agreed
to purchase for resale, on a bought-deal basis, C$97.8 million (US$97.9 million)
aggregate principal amount of convertible unsecured subordinated debentures with
a maturity date of March 31, 2017. The amount raised was comprised of an
original issuance in the amount of C$85.0 million (US$85.0 million) that closed
on February 22, 2012, along with an overallotment option in the amount of C$12.8
million (US$12.9 million) that was exercised by the underwriters and closed on
February 29, 2012.The debentures are convertible into common shares of the
Company at a price of C$15.10 per common share. The debentures will not be
redeemable by the Company on or before March 31, 2015. After March 31, 2015 and
prior to March 31, 2017, the debentures may be redeemed by the Company at a
redemption price equal to the principal amount plus accrued and unpaid interest,
provided that the weighted average trading price of the common shares for the 20
consecutive trading days ending five trading days prior to the date on which
notice of redemption is provided is not less than 125 percent of the conversion
price. Interest of 6% will be payable semi-annually in arrears on March 31 and
September 30 of each year, commencing on September 30, 2012. The Company has the
option to sell all or any portion of principal obligations by delivering to the
debenture holders sufficient common shares to satisfy these obligations.

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