Gulf of Mexico Restructuring
The Company successfully completed a partition of Northstar Gulfsands LLC effective 1 November 2005 by taking directly into Gulfsands Petroleum USA Inc. an approximate 52.6% working interest ownership in the properties formerly held in Northstar Gulfsands LLC. In conjunction with this partition, the Company simultaneously acquired 52.6% of the liabilities of Northstar Gulfsands LLC which primarily consisted of the mezzanine debt and warrants in that entity.

At closing, Gulfsands retired its entire portion of the mezzanine debt including warrants that were held by the mezzanine lender for total consideration of $24.18 million. The restructuring of the Gulf of Mexico operations should result in significant savings to the Company of approximately $3 million for the 2006 calendar year due to the elimination of interest expense and associated lending fees, plus a reduction in overhead.

Additional savings will also be incurred on any new Gulf of Mexico projects undertaken by the Company as there will no longer be a 4% overriding royalty payable on new projects. Also, each month going forward certain contracts on existing oil and gas hedges in place expire and allow the Company to take further advantage of the high oil and gas spot prices which are at a premium to the prices the Company currently receives for a portion of the volumes which are being hedged.

Current hedges represent approximately 40% of pre-Hurricane Rita average daily production levels and will be down to approximately 25% of forecasted daily production by mid-year 2006 and less than 15% of forecasted daily production by year-end 2006. All hedges will have expired by May 2007.

However, as a result of the partition the Company will be required to take a non-recurring, non-cash one time charge of approximately $1.4 million to the Profit and Loss Account for the year ending 31 December 2005 primarily associated with goodwill that was recognized on the consolidated balance sheet of the Company following the formation of Northstar Gulfsands LLC.

John Dorrier, CEO of Gulfsands Petroleum, said, “Mezzanine debt finance played a critical initial role in the building of Gulfsands’ business in the Gulf of Mexico. The Company however believes that it is prudent to retire that debt and the attached warrants before pursuing an expansion program of drilling and acquisition of additional interests in the Gulf. The funds for this restructuring were raised at the Company’s IPO in April and this transaction completes a fundamental objective of the IPO. Additionally, even though it is taking longer than expected to return daily production in the Gulf to pre-storm levels, the Company’s reserves base is unaffected and the exploration program will further benefit the Company’s growth in reserves and production.”