WesternZagros 3rd Quarter Results

Insurance Claim Update

WesternZagros initiated an insurance claim in the first quarter of 2010 related to the cost of well control operations at Kurdamir-1, including those when Kurdamir-1 was drilled into a high pressure formation in the Gulneri seal and the subsequent high pressure zone encountered in the Lower Aaliji seal in the subsequent sidetrack. The control of well insurance policy covering these claims has a net aggregate limit to WesternZagros of $45 million, net of a $0.4 million deductible. Up to October 14, 2010, when the completion and testing of a portion of the Kurdamir-1 well began, the Company had incurred approximately $38.2 million in costs related to well control operations. This leaves approximately $6.8 million remaining under the claim available for Kurdamir-2.

As at September 30, 2010, WesternZagros had received $15.7 million in interim insurance payments. In addition, further total claimable costs of $21.3 million, net to WesternZagros, have been recorded as a receivable as at September 30, 2010. These costs, under the terms of the insurance policy, are subject to review and approval by the adjuster as appointed by the insurers, and are submitted by WesternZagros as they are incurred and paid. Subsequent to September 30, 2010, insurance proceeds of $1.2 million were received.

Force Majeure

WesternZagros, on behalf of the Contractor Group, has notified the KRG of a force majeure event under the terms of the PSC related to the well control and subsequent sidetracking operations associated with Kurdamir-1. Under the terms of the PSC, when a force majeure event occurs, the time resulting from any such delay and the time necessary to repair any damage resulting from the delay would be added to any time period provided under the PSC, including the first exploration sub-period. The period of force majeure started on January 22, 2010 and continued until October 14, 2010.

Outlook

In spite of the challenges that WesternZagros encountered while drilling its first two wells in the Kurdistan Region of Iraq, management remains confident about the prospectivity of the region and optimistic about the potential to discover and produce oil. However, the delays encountered at the Kurdamir-1 well due to well control operations resulted in it not being possible to meet the PSC requirements to drill the third commitment well prior to the end of the first exploration sub-period on December 31, 2010 unless this sub-period is extended. The Company has declared that the well control incident experienced in January, 2010, and subsequent well control operations that continued until October, 2010, constitute a force majeure event under the PSC. As such, the PSC allows for a day for day extension for every day of delay resulting from the force majeure event and, accordingly, the sub-period would be extended from December 31, 2010 until September, 2011, in order to allow sufficient time to drill the third commitment well.

WesternZagros has continued to analyze the petroleum prospectivity of the remainder of its PSC lands. WesternZagros has identified two locations, Mil Qasim and Qulijan, as potential drilling opportunities to meet the third well commitment, and is currently preparing to drill Mil Qasim. The Mil Qasim prospect, which is located nearby the first exploration well drilled by WesternZagros at Sarqala-1, is shallower and considerably less complex than other prospects WesternZagros has identified in the Kalar-Bawanoor Block. The Company plans to complete site construction, well planning and the ordering of the necessary long lead items in the fourth quarter of 2010 and the first quarter of 2011, and anticipates spudding the Mil Qasim well early in the second quarter of 2011. The Company has also revisited the results of Sarqala-1, the first well it drilled in Kurdistan, and has revised its analysis of the oil shows in the Miocene Jeribe reservoir encountered in that well. Once the cased hole tests are completed at Kurdamir-1, and prior to moving operations to Mil Qasim, WesternZagros plans to re-enter Sarqala-1 to drill a short sidetrack to test this zone.

WesternZagros estimates its share of expenditures for the remainder of 2010 to be between $16 million and $18 million after insurance proceeds. This range includes $8.2 million of costs for the continued completions and testing operations at Kurdamir-1, of which $1.2 million is estimated to be recoverable from insurance, leaving a net cost to the Company of $7.0 million. The remainder of the costs include approximately $0.5 million for the preparation of Mil Qasim and $5.8 million to initiate operations to re-enter Sarqala, with the balance associated with various other support costs.

With the objective of maximizing its options and flexibility to increase the likelihood of success, WesternZagros' priorities for the remainder of 2010 are as follows:

- Conclude testing at Kurdamir-1 to confirm the presence of the potential oil leg below the discovered natural gas and condensate in the Oligocene formation.

- Based on a promising study that WesternZagros conducted of the Miocene Jeribe Formation, re-enter the Sarqala-1 well in order to test this zone in the first quarter of 2011;

- Conclude PSC discussions with the KRG and Talisman in a manner that gives the Company flexibility around the timing of the third commitment well and provides for an orderly progression of drilling and other exploration activities to maximize the efficient use of capital;

- The Company continues to evaluate the commercial potential of the natural gas and condensate discovered at Kurdamir-1. This evaluation has identified a potential local market for natural gas, including local cement plans and the potential for an export market.

Liquidity and Capital Resources

WesternZagros is currently exploring for crude oil and natural gas in the Kurdistan Region of Iraq and currently has no reserves, production or operational cash flows. WesternZagros' revenue is comprised entirely of interest earned on cash and cash equivalent balances. WesternZagros invests its cash and cash equivalents with major Canadian financial institutions with investment grade credit ratings and in Government of Canada instruments. This is in accordance with an Investment Policy approved by the Board of Directors. WesternZagros had no outstanding bank debt or other interest-bearing indebtedness as at September 30, 2010.

At September 30, 2010, WesternZagros had $50.5 million in working capital. Management currently expects to use this balance to fund future capital expenditures as described in the "Outlook" section. WesternZagros is considering the proper timing to access further financial resources, including assessing the following factors:

- The conclusion of discussions with both the KRG and Talisman as it relates to the PSC and associated timing of work commitments;

- Continued reimbursement of costs under the insurance claim;

- Continued participation of the Company's co-venturers in the PSC activities;

- Capital and operating budgets, including the budget for commencing drilling activities on the third exploration commitment well;

- The completion of the recent federal election process in Iraq and the formation of a new federal government;

- The promulgation of the new Federal Petroleum Law of Iraq and the ability to export oil and natural gas from the Kurdistan Region of Iraq in accordance with the economic terms under the PSC; and

- The current conditions in the financial markets, including the potential for further market instability.

Given the potential for further market instability, ongoing PSC discussions and the continued delays in concluding the Federal Petroleum Law of Iraq, WesternZagros will seek to maintain financial flexibility and will monitor and assess its financing requirements and its ability to access additional financing as its exploration activities progress. With the successful resolution of PSC discussions and the re-entry of Sarqala-1, WesternZagros anticipates that it may require additional funding to complete the drilling of Mil Qasim (the third exploration commitment well). WesternZagros will also require additional financial resources over time to complete any appraisal programs, to potentially drill Kurdamir-2 and to ultimately fund any future development program that is warranted by discoveries at Kurdamir-1 or subsequent wells.

Future global economic events and conditions may result in further volatility in the financial markets which, in turn, could negatively impact WesternZagros' ability to access equity or debt markets over time. In addition, the results of the Company's exploration activities or any prolonged delay in the export of oil from the Kurdistan Region of Iraq in accordance with the economic terms under the PSC could negatively impact the future ability to access equity or debt markets. Any inability to access the equity or debt markets for sufficient capital, at acceptable terms and within required timeframes, could have a material adverse effect on WesternZagros' financial condition, results of operations and prospects.

Outstanding Share Data

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