WesternZagros 3rd Quarter Results

Net Loss

For the three month period ended September 30, 2010, WesternZagros had a net loss of $1.1 million compared to a net loss of $2.7 million in the third quarter of 2009. The decreased net loss was mainly due to lower G&A costs and a greater proportion of support costs allocated to capital projects during the third quarter of 2010 as compared to the same quarter of 2009. For the nine month period ended September 30, 2010, WesternZagros recorded a net loss of $3.8 million as compared to a $4.5 million loss in the corresponding period of 2009. This was mainly due to a greater proportion of G&A costs allocated to capital projects as well as lower stock-based compensation expense in 2010 as compared to 2009.

Capital Expenditures

For the three month period ended September 30, 2010, total capital expenditures on the Kalar-Bawanoor Block were $32.7 million, prior to any insurance recoveries, including $30.6 million for drilling and related operations; $0.3 million for geological and geosciences related work (reprocessing and interpretation of seismic data); $0.3 million for PSC-related activities; and $1.5 million for supervision and local office costs in support of drilling operations. Included in drilling and related operations during the third quarter of 2010 were $29.9 million for operations at Kurdamir-1, $0.3 million for site preparation at Qulijan-1 and $0.3 million for initial planning costs related to the Mil Qasim-1 prospect.

WesternZagros' share of capital expenditures for the three months ended September 30, 2010 associated with its PSC activities and other capitalized costs was $20.5 million, prior to any insurance recoveries. Expenditures during the third quarter of 2010, prior to any insurance recoveries, include $19.0 million of drilling-related costs; $0.3 million of geological and geosciences related work; $0.7 million of supervision and local office costs; $0.3 million for PSC-related expenditures; and $0.2 million of corporate-related expenditures. By comparison, WesternZagros' share of capital expenditures in the third quarter of 2009 was $11.5 million, which included $8.4 million of costs related to Kurdamir-1 and $1.1 million of supervision and local office costs in support of drilling operations, and $2.0 million for long-lead items and other tangibles for a subsequent well and consumables for testing operations.

For the nine month period ended September 30, 2010, total capital expenditures on the Kalar-Bawanoor Block were $79.5 million, prior to any insurance recoveries, including $73.9 million for drilling and related operations; $0.8 million for geological and geosciences related work (reprocessing and interpretation of seismic data); $0.3 million for PSC-related activities; and $4.5 million for supervision and local office costs in support of drilling operations. Included in drilling and related operations during the nine months ended September 30, 2010, were $68.6 million for operations at Kurdamir-1, $4.8 million for Qulijan-1, $0.3 million for initial planning costs related to the Mil Qasim-1 prospect, and $0.2 million for other expenditures.

WesternZagros' share of capital expenditures for the nine months ended September 30, 2010 associated with its PSC activities and other capitalized costs was $49.8 million, prior to recovery of insurance proceeds, compared to $43.1 million for the comparable period in 2009. Year-to-date expenditures for 2010 include $46.2 million of drilling-related costs; $0.7 million of geological and geosciences related work; $1.9 million of supervision and local office costs; $0.3 million of PSC-related costs; and $0.7 million of corporate-related expenditures.

For the nine month period ended September 30, 2010, the costs for Kurdamir-1 have been credited by approximately $37.0 million, net to WesternZagros, for estimated claimable costs under the current insurance claim. This amount is net of deductibles.

WesternZagros capitalized $2.2 million in G&A expenses (2009: $2.1 million), including $0.7 million of stock-based compensation costs (2009: $1.0 million), directly related to exploration activities for the nine months ended September 30, 2010.

As at September 30, 2010, the Company had approximately $147 million, net to WesternZagros, of recoverable costs available that may be recovered from future oil and natural gas sales in accordance with the terms of the PSC.

Production Sharing Contract - Summary

Under the terms of its PSC, WesternZagros has a 40 percent working interest and the KRG has a 20 percent interest in the PSC which is carried by WesternZagros. The remaining 40 percent was allocated to Talisman in June 2008 by the KRG. WesternZagros, the KRG and Talisman are collectively the "Contractor Group" under the PSC. WesternZagros is the operator of the PSC lands until the end of the first operating sub-period of the PSC, when a Joint Operating Company may be established if so elected by the Contractor Group.

Production Sharing Contract - Commercial Terms

Under the PSC, the sharing of oil occurs as follows: of the total oil produced, operations oil is available to WesternZagros for use in carrying out its obligations under the PSC; the remaining oil is subject to a 10 percent royalty payable to the KRG (the residual is considered to be "net available oil"). The net available oil is determined on a development by development basis. Up to 45 percent of the net available oil is available for cost recovery, with the remainder as "profit oil." Expenses eligible for cost recovery include all costs and expenditures incurred by the Contractor Group for exploration, development, production and decommissioning operations, as well as any other costs and expenditures incurred directly or indirectly with these activities. The portion of profit oil available to the Contractor Group is based on a sliding scale from 35 percent to 16 percent, depending on a calculated R-Factor. The R-Factor is established by reference to the ratio of cumulative revenues over cumulative costs. When the ratio is below one, the Contractor Group is entitled to 35 percent of the profit oil. The percentage is then reduced on a linear sliding scale to a minimum of 16 percent at an R-Factor ratio of two or greater.

The production sharing terms for natural gas are the same as the oil production sharing terms except that the net gas available for cost recovery is 55 percent and the profit sharing component percentages and the R-Factor levels are increased. For natural gas, the portion of profit natural gas available for the Contractor Group is based on a sliding scale from 40 percent to 20 percent depending on a calculated R-factor. The R-Factor is established by reference to the ratio of the Contractor Group's cumulative revenue over cumulative costs. When the R-Factor is below one, the Contractor Group is entitled to 40 percent of the profit oil. The Contractor Group's percentage is then reduced on a linear scale to a minimum of 20 percent at a ratio of 2.75 or greater.

Production

Pursuant to the terms of the PSC, WesternZagros maintains the right to market its share of oil on the world market. There is an obligation under the PSC to make oil production available to meet regional market demand. The price of such oil is a market-based oil price based on a basket of crudes. The price for natural gas is based on local commercial value and Iraq tariffs. Currently, no markets exist for natural gas within Iraq and there is no infrastructure for export.

Contract Obligations and Commitments

The PSC contemplates two exploration sub-periods of three years and two years, respectively, with two possible one-year extensions. The first exploration sub-period ends December 31, 2010. During the first sub-period, the Contractor Group is required to complete a minimum of 1,150 kilometres of seismic surveying (which has been completed), to drill three exploration wells, and to commit a minimum of $75 million in the aggregate on these activities. At the end of the first exploration sub-period, WesternZagros and the other parties to the PSC may relinquish the entire contract area (other than any discovery or development areas), continue further exploration operations by entering into the second exploration sub-period, or request a one-year extension for further exploration and appraisal activities prior to deciding to enter into the second exploration sub-period.

The PSC also includes capacity-building support payments, which concluded in April 2009, and annual funding for certain technological, logistical, recruitment and training support during the exploration sub-periods. To meet its remaining commitments for the first exploration sub-period, WesternZagros estimates expenditures of approximately $15 million to $25 million, excluding the costs associated with future activities at Kurdamir-1. Additional costs of any testing, if required, would be in addition to these amounts. This represents the Company's 60 to 100 percent funding requirement and includes the remaining costs associated with drilling one additional exploration commitment well by the end of the first exploration sub-period, and providing associated supervision and local office support.

WesternZagros, on behalf of the Contractor Group, has applied to the KRG to extend the first exploration sub-period for up to 12 months, i.e. to December 31, 2011, in order to allow sufficient time for drilling the flank of the Kurdamir structure to determine whether the downdip Oligocene Reservoir is oil bearing or gas-condensate bearing. The Company, on behalf of the Contractor Group, has also notified the KRG of a force majeure event under the terms of the PSC. See "Force Majeure" and "Outlook" sections in this MD&A for further information.

WesternZagros is actively involved in discussions with the KRG and Talisman regarding the optimum way to conduct future activities on the PSC lands. These discussions have focused on determining the timing of the third exploration commitment well; the timing for Kurdamir-2; the operator for drilling Kurdamir-2; and addressing the co-venturers' commercial concerns. The current PSC may be restructured as a result of these discussions.

During the second exploration sub-period, the Contractor Group, or those parties that have elected to participate in further exploration, is required to complete a minimum of 575 kilometres of seismic surveying, drill at least two exploration wells and commit a minimum of $35 million to these activities. At the end of the second exploration sub-period, WesternZagros, and the other parties to the PSC who have elected to participate in the second exploration sub-period, may relinquish the entire contract area (other than any discovery or development areas) or continue further exploration and appraisal operations into the extension periods subject to the following relinquishment requirements. At the end of the second exploration sub-period, and at the end of each subsequent extension period, the PSC requires WesternZagros, and other parties who have elected to participate, to relinquish 25 percent of the remaining undeveloped area within the PSC lands or the entire contract area (other than any discovery or development areas).

WesternZagros has entered into various exploration-related contracts, including contracts for drilling equipment, services and tangibles. The following table summarizes these contractual obligations as at September 30, 2010.

For the period ended December 31

($ 000's) 2010 2011 2012 2013 2014+ Total

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Exploration 3,450 500 - - - 3,950

Office 127 480 160 - - 767

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Total 3,577 980 160 - - 4,717

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Third Party Obligations and Commitments

In 2003, WesternZagros entered into a consulting service agreement that provides for a three percent right to indirectly participate in the future profits the Company may earn in respect to the PSC, in exchange for consulting services provided since that date. In the determination of profits under this agreement, WesternZagros is entitled to deduct the consultant's proportional share of all costs associated with acquiring the PSC and the exploration, appraisal, development and production expenditures incurred by the Corporation ("eligible costs"), together with interest on such percentage of eligible costs at LIBOR plus three percent.

Further, in 2004, WesternZagros entered into a consulting service agreement that provides for a two percent right to indirectly participate in the future profits the Corporation may earn in respect to the PSC, in exchange for the provision of consulting services during the period 2004 to 2006. In the determination of profits under this agreement, WesternZagros is entitled to deduct one percent of all eligible costs, together with interest on such percentage of eligible costs at LIBOR plus ten percent. The consultant is required to fund the additional one percent of all eligible costs.

Off Balance Sheet Arrangement

The Company does not presently utilize any off-balance sheet arrangements to enhance its liquidity and capital resource positions, or for any other purpose. During the period ended September 30, 2010, WesternZagros did not enter into any off-balance sheet transactions.

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