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Message: WesternZagros Announces Fourth Quarter 2011 and Year End Results
March 26, 2012
WesternZagros Announces Fourth Quarter 2011 and Year End Results
CALGARY, ALBERTA--(Marketwire - March 26, 2012) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR DISSEMINATION IN THE UNITED STATES

WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the Corporation") announced today its operating and financial results for the fourth quarter and year ended December 31, 2011.

A summary of WesternZagros's highlights and activities for the year ended December 31, 2011 and up to and including March 26, 2012 include:

Health, Safety, Environment and Security (HSE&S)

WesternZagros has operated in Kurdistan with an excellent safety and security record since 2004. On October 27, 2011, WesternZagros's operations celebrated having worked one full year without a recordable injury incident. As at March 23, 2012, over 1.7 million hours of work have been performed safely and WesternZagros has achieved a total of 514 days without any Lost Time Incidents ("LTIs").

Kurdamir-2 Well

On March 26, 2012, The Corporation announced the discovery of a major oil column in the Oligocene reservoir at the Kurdamir-2 exploration well. The well has reached an intermediate casing depth of 2,812 metres and has drilled through the Oligocene interval. Wireline logs indicated a porous zone of 140 metres thickness within the Oligocene interval, between 2,422 and 2,562 metres, all of which is hydrocarbon bearing. Within this hydrocarbon zone, well log data indicates 22 metres of gross gas pay above 118 metres of gross oil pay. No evidence of water has been encountered with the Oligocene interval. An open hole drill stem test was conducted from 2,315 metres to 2,477 metres, which included 55 metres of the Oligocene porous zone. This test was conducted across the interpreted gas-oil contact at 2,444 metres. The test achieved a flow rate of 7.3 million cubic feet ("MMcf") per day of gas and a stabilized flow rate of 950 barrels per day ("bbl/d") of 47 degree API mixture of light oil and condensate over the final seven hours of the main flow period. This rate was achieved through a 56/64 inch choke at an average flowing well head pressure of 650 pounds per square inch and without any stimulation. There was no observed decline and no formation water was recovered during the testing. According to analysis by an independent third party engineering expert, the 33 metres of oil pay tested to date is capable of flowing at rates of 4,000 barrels per day if isolated from the gas pay and stimulated. The Corporation is working with the operator, Talisman (K44) B.V. ("Talisman") to examine options for additional cased hole testing focused on the 118 metres of gross oil pay in the Oligocene after the well has met the Production Sharing Contract ("PSC") commitments. The Kurdamir-2 test and wireline log data will be analyzed to update contingent and prospective resource estimates for the Oligocene which, in the Company's views, are likely to materially increase. The co-venturers are also planning a 3D seismic program and a further appraisal well to help determine the ultimate size of the Oligocene reservoir.

Sarqala-1 Re-Entry

On March 29, the Corporation re-entered the Sarqala-1 well bore on the Garmian Block, having originally drilled Sarqala-1 in 2008 and early 2009 and suspending the well after equipment problems prevented logging. Subsequent analysis of the drilling cuttings from, and wireline well logs across, the interval showed good oil potential and led to the decision to re-enter the well bore and to undertake a sidetrack operation. In April 2011, the Corporation completed an approximate 100 metre sidetrack through the Jeribe Formation into the Dhiban Formation to a depth of 3,897 metres. In May, 2011, the Corporation announced an oil discovery in the Jeribe Formation, achieving maximum flow rates in excess of 9,000 bbl/d of light, 40 degree API oil. No hydrogen sulphide ("H2S") and no formation water were identified during testing.

Sarqala Extended Well Test Production

In September, 2011, WesternZagros received approval from the Ministry of Natural Resources of the KRG to start an extended well test at the Sarqala-1 well and in October 2011, first oil production from the extended well test was achieved. Production started of approximately 2,000 bbl/d. On October 27, 2011, WesternZagros sold its first oil produced from Sarqala-1 into the domestic market. The Sarqala crude is being processed in local refineries under the auspices of the Ministry of Natural Resources. Under the terms of these sales agreements, all proceeds are currently being credited against recoverable costs under the Garmian PSC. As at December 31, 2011, the Corporation had generated $12.9 million of proceeds from the sales of test oil and the Corporation entered into further contracts to sell test oil for additional proceeds of $25.9 million in the first quarter of 2012. Production continues at an average rate of 5,000 bbl/d.

Mil Qasim-1 Well

In August 2011, drilling commenced on the Corporation's third exploration well, Mil Qasim-1, located on the Garmian Block. The well was drilled to a total depth of 2,425 metres, ahead of time and on budget. The well encountered a gross hydrocarbon bearing interval of approximately 800 metres containing numerous sandstones (each in the range of 2-13 metres thick) in the Lower Bakhtiari and Upper Farms Formations. A drill stem testing operation, consisting of four tests, was concluded on February 14, 2012. The testing program resulted in the flow of light, 43 to 44 degree API oil to surface from low permeability sandstone reservoirs and natural fractures in the Upper Farms Formation. Test 1 resulted in an average flow rate of 108 bbl/d; Test 2 resulted in an inability to evaluate the potential of this section due to ineffective perforations; Test 3 resulted in an average rate of 488 bbl/d; and Test 4 resulted in an estimated 250 bbl/d. All tests were conducted over a one to two day period utilizing an assortment of choke sizes. WesternZagros plans to conduct further testing over the Test 4 interval in order to clean up the well and gain additional information on its long term deliverability.

The Mil Qasim-1 well also encountered hydrocarbon shows in a high porosity conglomerate and sandstone interval of approximately 25 metres thickness in the Upper Bakhtiari Formation at a depth of approximately 500 metres. The Corporation is actively investigating a shallow, relatively lower cost, multi-well drilling program to evaluate this reservoir as it is encouraged by the existence of numerous highly productive water wells drilled in the Upper Bakhtiari Formation in the southern Garmian area that have typical flow rates of up to 6,000 bbl/d.

Exploration and Appraisal of Discoveries

During 2011, Sproule International Limited, ("Sproule"), completed a total of four independent audits of the Corporation's contingent and prospective resources including:

--  January 14, 2011: Tertiary Eocene and Cretaceous reservoir intervals at
    Kurdamir-1, Jeribe reservoir at Sarqala-1 and the Upper Fars reservoir
    at Mil Qasim-1. 
--  January 31, 2011: Oligocene, Eocene and Cretaceous reservoir intervals
    at the Qulijan prospect; Oligocene and Eocene reservoirs at the Baran
    prospect; and the Oligocene, Eocene and Cretaceous reservoirs at the
    Sarqala prospect. 
--  July 19, 2011: Jeribe, Mio-Oligocene, Eocene and Shiranish (Cretaceous)
    reservoirs (Tilako, Zardi, Segrdan, Chwar, and Alyan prospects) and two
    Upper Fars plays (Fault Trap Play, Bawanoor Saddle). 
--  September 7, 2011: Jeribe/Upper Dhiban reservoir interval at Sarqala-1.
With the completion of these additional assessments on the Corporation's two contract areas in Kurdistan, the combined mean estimate of gross unrisked contingent resources is 54.0 million barrels of oil, or 258 million barrels of oil equivalent, and gross unrisked prospective resources is 2.3 billion barrels of oil, or 3.7 billion barrels of oil equivalent.

During the year ended December 31, 2011, the Corporation submitted and received approval from the KRG for an appraisal work program and budget with respect to the Sarqala discovery. The Corporation plans to complete the EWT on Sarqala, conduct a 3D seismic program and drill two appraisal wells, the first of which will be Sarqala-2. The Corporation further submitted and received approval from the KRG for the exploration well, Hasira-1, to comply with the Garman PSC commitments for the second exploration sub-period.

Financial

In March 2011, WesternZagros completed a private placement of approximately 89.7 million Common Shares at a price of Cdn$0.48 per Common Share for gross proceeds of approximately Cdn$43 million through a syndicate of agents.

On October 25, 2011, WesternZagros closed a strategic investment with the Abu Dhabi National Energy Company PJSC ("TAQA") whereby TAQA has purchased from WesternZagros, through a private placement, 74 million Common Shares of the Corporation at a price of Cdn$0.63 per share for gross proceeds of Cdn$46.6 million. TAQA holds approximately 19.9 percent of the Corporation's issued and outstanding Common Shares.

Corporate

In July 2011, WesternZagros finalized an agreement with the KRG and Talisman to amend the Original Production Sharing Contract which had been signed by WesternZagros and the KRG on February 28, 2008 with respect to the entirety of the PSC Lands (the "Original PSC") that governed the Corporation's exploration activities in the Kalar-Bawanoor Block in Kurdistan. The amendments divided the contract area of the Original PSC into the Garmian Block and the Kurdamir Block, which are now governed by the Garmian PSC and the Kurdamir PSC, respectively. The Corporation retained its 40 percent working interest in each of the PSCs. Under the Kurdamir PSC, Talisman is the operator, with a 40 percent working interest and the KRG has a 20 percent working interest which is carried by the Corporation. Under the Garmian PSC, WesternZagros is the operator, the KRG has a 20 percent working interest and the remaining 40 percent working interest is held by the KRG to be assigned to another third party participant. The Corporation is currently funding 100 percent of the activities under the Garmian PSC until the third party participant interest is assigned, at which time the Corporation will be reimbursed for the third party participant's share of costs. WesternZagros's PSC terms, under both the Garmian and Kurdamir PSCs remain unchanged from the Original PSC.

On October 27, 2011, David Cook, TAQA Executive Officer and Head of Oil and Gas, was appointed to the WesternZagros Board of Directors. Mr. Cook has in excess of 20 years of experience in the upstream oil and gas sector through a variety of global technical, commercial and managerial positions based from the United States, United Kingdom, and Russia, as well as board directorships.

Corporate Social Responsibility

WesternZagros has proven to be an industry leader with respect to corporate social responsibility. The Corporation continues to focus on five key corporate social responsibility initiatives in the PSC Lands, namely, local employment, water supply, education, health care and recreation.

WesternZagros continues to place a strong emphasis on the incremental development of local personnel capacity. As at December 31, 2011, WesternZagros had 342 full-time local national employees and service contractors directly employed due to the presence of its operations, 61 of which are employed in the Corporation's field and staff offices in professional/semi-professional roles.

Commenting on the year end results, WesternZagros's Chief Executive Officer Simon Hatfield said, "We are pleased with the success in all our initiatives in 2011, including oil discoveries at both Sarqala and Mil Qasim and the first production of crude oil from Sarqala. This success has continued into 2012 with the discovery of a major oil column in the Oligocene reservoir at the Kurdamir-2 exploration well. These successes are a result of our entrepreneurial energy, our proven expertise, our disciplined delivery, and our commitment to bring everyone home safely at the end of the day. Our objectives for the remainder of 2012 include the completion of drilling and testing activities at Kurdamir-2, further exploration on the Garmian Block with the Hasira-1 well and the continuation of appraisal activities on our Sarqala, Mil Qasim and Kurdamir discoveries."

Management's Discussion and Analysis

This Management's Discussion and Analysis ("MD&A") of the financial and operating results for WesternZagros Resources Ltd. ("WesternZagros" or the "Corporation") should be read in conjunction with the Corporation's audited consolidated financial statements (the "Annual Financial Statements") prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and the related notes for the years ended December 31, 2011 and 2010.

Additional information relating to the Corporation, including its quarterly MD&A for the year is available on SEDAR atwww.sedar.com

This MD&A is dated March 26, 2012.

Forward-Looking Information

This discussion offers management's analysis of the financial and operating results of WesternZagros and contains certain forward-looking statements relating to, but not limited to, operational information, future drilling plans and testing programs and the timing associated therewith, future production and sales, estimated commitments under the Corporation's amended Production Sharing Contract for the Kurdamir area ("Kurdamir PSC") and Production Sharing Contract for the Garmian area ("Garmian PSC"), anticipated capital and operating budgets, anticipated working capital and estimated costs. Forward-looking information typically contains statements with words such as "anticipate", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Corporation cautions readers and prospective investors in the Corporation's securities to not place undue reliance on forward-looking information as, by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros. Readers are also cautioned that disclosed test rates and results are not necessarily indicative of long-term performance or of ultimate recovery.

Forward looking information is not based on historical facts but rather on management's current expectations as well as assumptions made by, and information currently available to management, concerning, among other things, outcomes of future well operations, plans for and results of extended well tests and drilling activity, future capital and other expenditures (including the amount, nature and sources of funding thereof), future economic conditions, future currency and exchange rates, continued political stability, timely receipt of any necessary government or regulatory approvals, the successful resolution of disputes, the Corporation's continued ability to employ qualified staff and to obtain equipment in a timely and cost efficient manner, the participation of the Corporation's co-venturers in exploration activities, the timing of and quantum of costs reimbursed by the third party participant interest assignment in the Garmian PSC and continued sales of test production. In addition, budgets are based upon WesternZagros's current exploration and appraisal plans and anticipated costs, both of which are subject to change based on, among other things, the actual outcomes of well operations and the results of drilling and testing activity, unexpected delays, availability of future financing and changes in market conditions. Although the Corporation believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in exploration and production; inherent uncertainties in interpreting geological data; changes in plans with respect to exploration or capital expenditures; interruptions in operations together with any associated insurance proceedings; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with any dispute resolution proceedings, the uncertainty associated with negotiating with foreign governments and risk associated with international activity.

In addition, statements relating to "resources" contained herein are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources described can be economically produced in the future. Terms related to resource classifications referred to herein are based on the definitions and guidelines in the Canadian Oil and Gas Evaluation Handbook which are as follows. "Prospective resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery (geological chance of success) and a chance of development (economic, regulatory, market, facility, corporate commitment or political risks). The chance of commerciality is the product of these two risk components. The estimates referred to herein have not been risked for either the chance of discovery or the chance of development. There is no certainty that any portion of the prospective resources will be discovered. If a discovery is made, there is no certainty that it will be developed or, if it is developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the prospective resources. "Contingent resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingent resources have an associated chance of development (economic, regulatory, market and facility, corporate commitment or political risks). The estimates referred to herein have not been risked for the chance of development. There is no certainty that the contingent resources will be developed and, if developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the contingent resources. All resource estimates presented are gross volumes for the indicated reservoirs, without any adjustment for the Corporation's working interest or encumbrances. A barrel of oil equivalent (BOE) is determined by converting a volume of natural gas to barrels using the ratio of 6 million cubic feet (Mcf) to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
The Corporation's Statement of Oil and Gas Information contained in its Annual Information Form for the 2011 financial year ("AIF") filed on SEDAR at www.sedar.com contains additional detail with respect to the resource assessments and includes the significant risks and uncertainties associated with the estimates and the recovery and development of the resources, and, in respect of contingent resources, the specific contingencies which prevent the classification of the resources as reserves. In addition, combined mean estimates of resources which are presented in this MD&A are an arithmetic sum of the mean estimates for individual reservoirs and each such mean estimate is the average from the probabilistic assessment that was completed for the reservoir. Readers should refer to the AIF for a detailed breakdown of the high (P10), low (P90) and best (P50) estimates for each of the individual reservoir assessments.

Readers are cautioned that the foregoing list of important factors is not exhaustive. The forward-looking statements contained in this MD&A are made as of the date of this MD&A and, except as required by law, WesternZagros does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. See the Risk Factors section of the Corporation's AIF for a further description of these risks and uncertainties facing WesternZagros. Additional information relating to WesternZagros is also available on SEDAR at www.sedar.com, including the Corporation's AIF.

Overview

WesternZagros is a publicly-traded, Calgary-based, international oil and gas company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros holds two Production Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the Kurdistan Region of Iraq that are both on trend with, and adjacent to, a number of prolific historic oil and gas discoveries. The Kurdamir and Garmian PSCs each govern separate contract areas (collectively referred to as the "PSC Lands"). The Garmian contract area (1,780 square kilometres) is operated by WesternZagros. The Kurdamir contract area (340 square kilometres) is operated by Talisman (Block K44) B.V. ("Talisman") with a 40 percent working interest. WesternZagros holds a 40 percent working interest in both PSCs. The KRG holds a 20 percent working interest in both PSCs. The remaining 40 percent third party participant interest ("TPPI") in the Garmian PSC is held pending assignment by the KRG to a third party participant.

Basis of Presentation

Reporting and Functional Currency

December 31, 2011 marks the Corporation's first annual reporting date under IFRS. Accordingly, the comparative information for 2010, including that utilized in this MD&A, has been prepared in accordance with the Corporation's IFRS accounting policies. Please refer to "Adoption of IFRS" section of this MD&A for further descriptions of this impact. Comparative information presented for periods prior to 2010 is presented in accordance with previous GAAP, prior to the adoption of IFRS.

The reporting and functional currency of the Corporation is the United States ("U.S.") dollar. All references herein to US$ or to $ are to United States dollars and references herein to Cdn$ are to Canadian dollars. During 2011, the average conversion rate was Cdn$0.9891 to US$1, and the closing conversion rate at December 31, 2011 was Cdn$1.017 to US$1.

Strategy

WesternZagros's main focus is the exploration and development of its PSC Lands in the Kurdistan Region of Iraq. WesternZagros's objective is to be recognized, through consistently superior business performance and operations excellence, as one of the leading junior oil and gas companies active in Iraq. The Corporation is committed to apply the lessons learned from its operations and from operations occurring elsewhere within the Kurdistan Region to improve its operating performance. The Corporation is committed to operating in Iraq in a safe and secure manner. In executing its strategy, WesternZagros has made it a priority to recruit and retain local personnel and to actively participate in, and contribute to, community development projects. WesternZagros believes it has developed a relationship with government authorities, local communities and the business community in the Kurdistan Region that has enabled access to opportunities and to facilitate the cooperation needed to successfully execute projects.

Highlights

WesternZagros is currently exploring for and appraising discoveries of crude oil and natural gas in the Kurdistan Region of Iraq and the Corporation currently has no reserves. WesternZagros's revenue is comprised entirely of interest earned on cash and cash equivalent balances and short-term investments. During the fourth quarter of 2011, the Corporation commenced an extended well test on its Sarqala-1 oil discovery. The approximate 5,000 barrels of oil per day currently produced under the extended well test is sold by the Corporation and refined in local plants in Kurdistan under the auspices of the Ministry of Natural Resources. Under the terms of these sales agreements, all proceeds are currently being credited against recoverable costs under the Garmian PSC. The oil sales are based on local market prices and the Corporation receives payment in advance of delivering oil to the buyer. As the Corporation is currently within the exploration and evaluation phase, including an extended well test for the Sarqala discovery, the proceeds received from these sales are being credited against the exploration and evaluation costs it has incurred. WesternZagros's highlights and activities to March 26, 2012 include the following.

Health, Safety, Environment and Security (HSE&S)                            

--  WesternZagros has operated in Kurdistan with an excellent safety and
    security record since 2004. On October 27, 2011, WesternZagros's
    operations celebrated having worked one full year without a recordable
    injury incident. As at March 23, 2012, over 1.7 million hours of work
    have been performed safely and WesternZagros has achieved a total of 514
    days without any Lost Time Incidents ("LTIs"). 
--  The dedication to safety demonstrated by all of the Corporation's
    employees and contractors has produced a world class safety culture. 
--  As WesternZagros conducts its operations in Kurdistan, health, safety,
    environment and security are of utmost importance. WesternZagros has
    adopted western and international health, safety and environment
    standards for its Kurdistan operations. Kurdistan features an emerging
    regulatory regime consistent with a rapidly developing region.
    WesternZagros is committed to meeting local regulations and to acting
    responsibly, and the Corporation will follow relevant Canadian oil and
    gas regulations and environmental practices where none have yet been
    developed locally. 
--  Security risks still exist in Iraq outside of Kurdistan although they
    have greatly improved over the last few years. In WesternZagros's
    experience, Kurdistan maintains the safest operating environment in
    Iraq. Within Kurdistan, the limited number of insurgent activities have
    been directed towards the offices and personnel of the KRG. The
    beneficial security environment in Kurdistan is a direct result of the
    influence of the KRG through the Peshmerga and the Asaiysh. Through the
    deployment of the Peshmerga and the Asaiysh, the KRG has been largely
    effective in controlling its borders and maintaining security in the
    Region. Based on the general success achieved by the KRG and on advice
    from the Corporation's security advisors, WesternZagros assesses the
    threat level within the PSC Lands as low. 

Operations                                                                  
                                                                            
Kurdamir-2 Well                                                             

--  On October 25, 2011, drilling commenced on the Corporation's exploration
    commitment well, Kurdamir-2, with Talisman as the operator. The well is
    being drilled on the flank of the Kurdamir structure approximately two
    kilometres northeast of the Corporation's Kurdamir-1 discovery well and
    will target the Oligocene, Eocene and Cretaceous reservoirs. 
--  On March 26, 2012, the Corporation announced a major oil discovery in
    the Oligocene reservoir at the Kurdamir-2 exploration well in the
    Kurdistan Region of Iraq. The well is being drilled on the flank of the
    Kurdamir structure approximately two kilometers northeast of the
    Corporation's Kurdamir-1 discovery well and will target the Oligocene,
    Eocene and Cretaceous reservoirs. 
--  The Kurdamir-2 well has reached the intermediate casing depth of 2,812
    metres, and has drilled through the Oligocene interval. Wireline logs
    indicate a porous zone of 140 metres thickness within the Oligocene
    interval, between 2,422 and 2,562 metres, all of which is hydrocarbon
    bearing. Within this hydrocarbon zone, well log data indicates 22 metres
    of gross natural gas pay above 118 metres of gross oil pay. No evidence
    of water has been encountered within the Oligocene interval. 
--  When the well reached a depth of 2,477 metres, a drill stem test was
    conducted of the open hole from the base of the 13 5/8" liner at 2,315
    metres to 2,477 metres, which included 55 metres of the Oligocene porous
    zone. This test was conducted across the interpreted gas-oil contact at
    2,444 metres and tested 22 metres of gas pay in contact with 33 metres
    of oil pay. The test achieved a flow rate of 7.3 million cubic feet per
    day of gas and a stabilized flow rate of 950 barrels per day of 47
    degree API mixture of light oil and condensate over the final seven
    hours of the main flow period. This rate was achieved through a 56/64
    inch choke at an average flowing well head pressure of 650 pounds per
    square inch and without any stimulation. There was no observed decline
    and no formation water was recovered during the testing. The deeper
    Oligocene oil pay will not be tested at this time due to time
    constraints, as the well is required to drill and evaluate the deeper
    Cretaceous by the end of June 2012. The Corporation interprets these
    results as an additional successful confirmation of a significant oil
    column underlying the gas cap in the Oligocene reservoir. (The first
    confirmation was provided in Kurdamir-1 as disclosed in the
    Corporation's news release of December 16, 2010.) 
--  WesternZagros interprets that since the test was conducted across the
    gas-oil contact, and the fact that gas flow impedes oil flow, the
    results do not represent the true oil rate potential of this interval.
    According to analysis by an independent third party engineering
    expert, the 33 metres of oil pay tested to date is capable of flowing at
    rates of 4,000 barrels per day if isolated from the gas pay and
    stimulated. The Corporation is working with the operator, Talisman (K44)
    B.V. ("Talisman"), to examine options for additional cased hole testing
    focused on the full 118 metres of gross oil pay in the Oligocene after
    the well has met the PSC commitments. The co-venturers are also planning
    a 3D seismic program and a further appraisal well to help determine the
    ultimate size of the Oligocene reservoir. 
--  These interim results from the Kurdamir-2 well are significant for two
    reasons. 
    1.  The 327 metres of Oligocene hydrocarbon column that was proven in
        the Kurdamir-1 well, has now increased significantly to at least 420
        metres (i.e. from the top of the Oligocene reservoir in Kurdamir-1
        well at 2,142 metres to the base of the gross oil pay in the
        Kurdamir-2 well at 2,562 metres.) As no oil-water contact has been
        encountered in Kurdamir-2, the maximum thickness of the oil column
        is not yet known. 
    2.  The bottom of the known oil column extends down to at least 2,562
        metres, which is significantly deeper than the limit of closure of
        the Kurdamir structure as mapped from seismic data. This finding, in
        turn, supports the observation that the Oligocene reservoir is
        involved in a considerably larger trap and that Kurdamir and the
        neighbouring Topkhana structure share a common oil leg. 
--  The Kurdamir-2 test and wireline log data will be analyzed to update
    contingent and prospective resource estimates for the Oligocene which,
    in the Company's views, are likely to materially increase. Once
    confirmed by the Corporation's independent auditors, this update will
    be publicly released. Prior to these latest results, the independently
    audited unrisked mean estimates for the contingent resources in the
    Oligocene reservoir of the Kurdamir structure were 920 billion cubic
    feet of gas, 35 million barrels ("MMbbl") of condensate and 30 MMbbl
    oil, plus an unrisked mean estimate of 280 MMbbl prospective oil
    resources as of December 14, 2010. 

Sarqala-1 Re-Entry                                                          

--  On March 29, 2011, the Corporation re-entered the Sarqala-1 well bore on
    the Garmian Block in the Kurdistan Region of Iraq with the 1,500 HP
    Romfor Rig #23. The Corporation originally drilled Sarqala-1 in 2008 and
    early 2009, suspending the well after equipment problems prevented
    logging. Subsequent analysis of the drilling cuttings from, and wireline
    well logs across, the interval showed good oil potential and led to the
    decision to re-enter the well bore and to undertake a sidetrack
    operation. 
--  On April 14, 2011, the Corporation completed an approximate 100 metre
    sidetrack through the Jeribe Formation into the Dhiban Formation to a
    depth of 3,897 metres in the Sarqala-1 well. Drilling shows and log
    results indicated a potential gross pay interval of over 55 metres in
    this zone. 
--  Testing commenced in late May. The Jeribe/Upper Dhiban Formations flowed
    light, 40 degree API oil at a stabilized rate of 6,000 barrels per day
    over the 24 hours of the initial flow period. This rate was achieved
    through a 36/64 inch choke at a flowing well head pressure of 3,900 psi
    and without any stimulation. 
--  On June 7, 2011 the Corporation successfully completed the main flow.
    The well achieved maximum flow rates in excess of 9,000 barrels per day
    of 40 degree API oil. This rate was reached after flowing and
    stabilizing the well at progressively bigger choke sizes until reaching
    the limits of the surface equipment. The final rate was achieved on a
    52/64 inch choke with a wellhead pressure of 2,475 psi. No water was
    produced during the testing program. 
--  The total gross costs for the Sarqala-1 re-entry were $27.5 million
    comprising $17.2 million for remediation and sidetracking (includes
    approximately $10 million on Sarqala-1 remediation and $7.2 million for
    sidetracking operations) plus $10.3 million for completion and testing. 

Sarqala Extended Well Test Production                                       

--  In September 2011, WesternZagros received approval from the Ministry of
    Natural Resources of the KRG to start an extended well test at the
    Sarqala-1 well and on October 18, 2011, first oil production from the
    extended well test was achieved. Production started at approximately
    2,000 barrels of oil per day ("bbl/d"). 
--  On October 27, 2011, WesternZagros sold its first oil produced from
    Sarqala-1 into the domestic market. The Sarqala crude is being processed
    in local refineries under the auspices of the Ministry of Natural
    Resources. Under the terms of these sales agreements, all proceeds are
    currently being credited against recoverable costs under the Garmian
    PSC. As at December 31, 2011, the Corporation had generated $12.9
    million of proceeds from the sales of test oil and the Corporation
    entered into further contracts to sell test oil for additional proceeds
    of $25.9 million in the first quarter of 2012. 
--  On December 21, 2011, production reached a record high of 5,248 bbl/d.
    Production continues at an average rate of approximately 5,000 bbl/d.
    WesternZagros plans to use the information gathered from the extended
    well test in determining future appraisal programs and potential
    development activities. Horizontal completions may be considered in
    order to take advantage of the fractured nature of the reservoir and the
    potential to achieve significantly higher deliverabilities from the
    Jeribe reservoir. 

Mil Qasim-1 Well                                                            

--  On August 29, 2011, drilling commenced on the Corporation's third
    exploration well, Mil Qasim-1, on the Garmian Block in the Kurdistan
    Region of Iraq. On November 24, 2011, Mil Qasim-1 was drilled to a total
    depth of 2,425 metres ahead of time and on budget. The well encountered
    a gross hydrocarbon bearing interval of approximately 800 metres
    containing numerous sandstones (each in the range of 2-13 metres thick)
    in the Lower Bakhtiari and Upper Fars Formations. Hydrocarbon shows and
    wireline logs indicated the presence of oil in the Upper Fars Formation
    and this was the focus of the testing program. Hydrocarbon shows and
    wireline logs also indicated the potential for additional oil in both
    the Upper and the Lower Bakhtiari Formations, but testing of these
    intervals has been deferred to a later date. 
--  On February 14, 2012, the drill-stem testing operations were concluded.
    The testing program resulted in the flow of light, 43 to 44 degree API
    oil to surface from low permeability sandstone reservoirs and natural
    fractures in the Upper Fars Formation. No hydrogen sulphide ("H2S") and
    no formation water were identified during testing. Four tests were
    conducted in the Mil Qasim-1 well. Test 1 was an open hole test, while
    tests 2 to 4 were cased hole tests. 
--  Test 1 was conducted over the open hole section between the depths of
    2,129 metres and 2,168 metres. Test 1 resulted in a flow of 44 degree
    API gravity oil with no formation water, at an average rate of 108
    bbl/d over a two day period using an 8/64" choke with a flowing well
    head pressure of 1,606 psi. Initial reservoir pressure was calculated
    to be 6,405 psi. 
--  Test 2 was conducted over a gross perforated interval of 49 metres
    between the depths of 2,054 metres and 2,103 metres. Although Test 2
    successfully flowed limited amounts of oil to surface, the test failed
    to evaluate the potential of this section of the reservoir interval due
    to unsuccessful(NTD: "ineffective" was used in our news release)
    perforations. 
--  Test 3 was conducted over a gross perforated interval of 167 metres
    between 1,799 metres and 1,966 metres. Test 3 resulted in a flow of 44
    degree API oil with no formation water, at an average rate of 488 bbl/d
    over a one day period using a 48/64" choke with a flowing well head
    pressure of 113 psi. Initial reservoir pressure was calculated to be
    5,338 psi. Test 3 analysis conducted by an independent third party
    engineering expert indicates that this interval has the potential to
    produce at over 1,000 bbl/d if formation damage can be mitigated by
    stimulation or use of alternative drilling techniques. The Company is
    considering additional measures to enhance future flow from this
    interval. 
--  Test 4 was conducted over a gross perforated interval of 107 metres
    between the depths of 1,636 metres and 1,743 metres. Test 4 resulted in
    a flow of 43 degree API oil and an emulsion at an estimated rate of 250
    barrels per day ("bpd") over a one day period. Test 4 was conducted
    using a 32/64" choke with a flowing well head pressure of 90 psi. 
--  WesternZagros plans to conduct further testing over the Test 4 interval
    in order to clean-up the well and gain additional information on its
    long term deliverability. The Corporation will conduct additional
    analysis to determine how to increase flow rates and unlock the
    considerable potential of the low permeability, naturally fractured
    sandstones of the Upper Fars Formation. 
--  The total gross costs for the Mil Qasim-1 well were $47.6 million
    including $19.5 million for testing (includes approximately $17 million
    on Mil Qasim-1 testing plus $2.5 million on clean up and rig tear down).
--  Drilling Mil Qasim-1 fulfills WesternZagros's work obligation under the
    first exploration sub period of the Garmian PSC. The Corporation has now
    entered the second exploration sub-period of the Garmian PSC. 
--  The Mil Qasim-1 well also encountered hydrocarbon shows in a high
    porosity conglomerate and sandstone interval of approximately 25 metres
    thickness in the Upper Bakhtiari Formation at a depth of approximately
    500 metres. The Company is actively investigating a shallow, relatively
    lower cost, multi-well drilling program to evaluate this reservoir as it
    is encouraged by the existence of numerous highly productive water wells
    drilled in the Upper Bakhtiari Formation in the southern Garmian area
    that have typical flow rates of up to 6,000 bpd. 

Exploration and Appraisal of Discoveries                                    

--  During the year ended December 31, 2011, WesternZagros undertook a range
    of exploration activities to further its understanding of the petroleum
    potential on its Kurdamir and Garmian Blocks (the "PSC Lands"). These
    included geological outcrop studies, advanced wireline log analysis and
    reservoir modeling based on testing results at Sarqala. 
--  During 2011, Sproule International Limited ("Sproule"), completed a
    total of four independent audits of the Corporation's contingent and
    prospective resources including: 
    --  January 14, 2011: Tertiary Eocene and Cretaceous reservoir intervals
        at Kurdamir-1, Jeribe reservoir at Sarqala-1 and the Upper Fars
        reservoir at Mil Qasim-1. 
    --  January 31, 2011: Oligocene, Eocene and Cretaceous reservoir
        intervals at the Qulijan prospect; Oligocene and Eocene reservoirs
        at the Baran prospect; and the Oligocene, Eocene and Cretaceous
        reservoirs at the Sarqala prospect. 
    --  July 19, 2011: Jeribe, Mio-Oligocene, Eocene and Shiranish
        (Cretaceous) reservoirs (Tilako, Zardi, Segrdan, Chwar, and Alyan
        prospects) and two Upper Fars plays (Fault Trap Play, Bawanoor
        Saddle). 
    --  September 7, 2011: Jeribe/Upper Dhiban reservoir interval at
        Sarqala-1.  
    --  With the completion of these additional assessments on the
        Corporation's two contract areas in Kurdistan, the combined mean
        estimate of gross unrisked contingent resources is 54.0 million
        barrels of oil, or 258 million barrels of oil equivalent, and gross
        unrisked prospective resources is 2.3 billion barrels of oil, or 3.7
        billion barrels of oil equivalent (contingent and prospective
        resources estimated as of, January 14, 2011, January 31, 2011, July
        19, 2011, and September 7, 2011, as audited by Sproule International
        Limited - see "Forward Looking Information").  
--  During the year ended December 31, 2011, the Corporation submitted and
    received approval from the KRG for an appraisal work program and budget
    with respect to the Sarqala discovery. The Corporation plans to complete
    the EWT on Sarqala, conduct a 3D seismic program and drill two appraisal
    wells, the first of which will be Sarqala-2. The Corporation further
    submitted and received approval from the KRG for the exploration well,
    Hasira-1, to comply with the Garman PSC commitments for the second
    exploration sub-period. Key areas of focus for the Corporation's
    subsurface and exploration work in 2011 included: 
    --  Planning a 3D seismic program for appraising the Sarqala structure. 
    --  Conducting wellbore imaging studies through independent third party
        experts at Kurdamir-1, Sarqala-1 and Mil Qasim-1. 
    --  Building an initial reservoir simulation model for the Sarqala
        Jeribe/Upper Dhiban discovery.  
    --  Geological field work including fracture studies and evaluation of
        prospective subsurface reservoirs at outcrop. 
    --  Finalizing surface locations and well prognoses for the planned 2012
        Sarqala-2 and Hasira-1 wells. 
--  WesternZagros also continues to compile seismic data and information
    from wells adjacent to its PSC Lands and to integrate the data, together
    with the reprocessed seismic data on its PSC Lands, into its seismic
    interpretations to further define and update its prospects and leads
    inventory.  
--  All of the above exploration work in 2011 refined the Corporation's
    understanding of the regional geology, and reinforced management's view
    of the excellent prospects for significant oil discoveries on the
    Corporation's PSC Lands. 

Financial                                                                   

--  As at December 31, 2011, WesternZagros had $41.0 million in working
    capital. 
--  During the fourth quarter of 2011 the Corporation commenced an extended
    well test at the Sarqala-1 oil discovery which generated $12.9 million
    in proceeds from the sale of test oil up to December 31, 2011. During
    the first quarter of 2012, the Corporation contracted to sell additional
    test oil from January to March 2012 from the ongoing well test and
    received additional proceeds of $25.9 million. While the KRG may decide
    to halt its allowance of crude sales from the extended well test, the
    Corporation believes this risk to be low. With the passing of the 2012
    Iraqi budget, Kurdistan is committed to producing 175,000 bbl/d for the
    export market (from the current approximate 100,000 bbl/d). In addition,
    Kurdistan needs to maintain production for the domestic market to supply
    diesel and fuel oil. Due to WesternZagros's light crude, it is highly
    desired by the domestic market for its high yield for finished products.
--  For the year ended December 31, 2011, WesternZagros's share of
    exploration and evaluation expenditures ("E&E") associated with its
    Garmian and Kurdamir PSC activities and other capitalized costs was
    $95.6 million (prior to the impact of changes in non-cash investing
    capital, insurance recoveries, proceeds received from the extended well
    test and disposals). Expenditures for 2011 included $71.3 million of
    drilling-related costs; $5.7 million for appraisal activities; $2.2
    million of geological and geosciences related work; $5.9 million of
    supervision and local office costs; $3.0 million of PSC related
    expenditures; and $7.5 million of corporate related expenditures. 
--  On March 10, 2011, WesternZagros completed a private placement of
    approximately 89.7 million Common Shares at a price of Cdn$0.48 per
    Common Share for gross proceeds of approximately Cdn$43 million through
    a syndicate of agents. The syndicate of agents was led by TD Securities
    Inc. and Scotia Capital Inc. and included Macquarie Capital Markets
    Canada Ltd., RBC Capital Markets and Stifel Nicolaus Canada Inc. 
--  On October 25, 2011, WesternZagros closed a strategic investment with
    the Abu Dhabi National Energy Company PJSC ("TAQA") whereby TAQA has
    purchased from WesternZagros, through a private placement, 74 million
    Common Shares of the Corporation at a price of Cdn$0.63 per share for
    gross proceeds of Cdn$46.6 million. TAQA holds approximately 19.9
    percent of the Corporation's issued and outstanding Common Shares. The
    Common Shares issued to TAQA are subject to a contractual hold period
    until June 30, 2012, pursuant to the terms of the investment agreement
    (the "Investment Agreement") entered into between the Corporation and
    TAQA on October 16, 2011. 

Insurance                                                                   

--  WesternZagros initiated a control of well insurance claim in the first
    quarter of 2010 related to the events at Kurdamir-1, which began when
    the well was drilled into a high pressure, sour water bearing interval
    in the Gulneri Formation. During the third quarter 2011, WesternZagros
    and the insurers settled the balance of the claim; the total insurance
    recoveries were $45 million. 
--  During 2011, WesternZagros and its insurers renewed the Corporation's
    insurance policy for the drilling of the Kurdamir-2 well. The terms of
    the policy included an increase in the net aggregate limit from $45
    million to $75 million. 

Corporate                                                                   

--  On July 25, 2011, WesternZagros finalized an agreement with the KRG and
    Talisman to amend the Original Production Sharing Contract which had
    been signed by WesternZagros and the KRG on February 28, 2008 with
    respect to the entirety of the PSC Lands ("the Original PSC") that
    governed the Corporation's exploration activities in the Kalar-Bawanoor
    Block in Kurdistan. The amendments divided the contract area of the
    Original PSC into the Garmian Block and the Kurdamir Block, which are
    now governed by the Garmian PSC and the Kurdamir PSC, respectively. The
    Corporation retained its 40 percent working interest in each of the
    PSCs. Under the Kurdamir PSC, Talisman is the operator, with a 40
    percent working interest and the KRG has a 20 percent working interest
    which is carried by the Corporation. Under the Garmian PSC,
    WesternZagros is the operator, the KRG has a 20 percent working interest
    and the remaining 40 percent working interest is held by the KRG to be
    assigned to another third party participant. The Corporation is
    currently funding 100 percent of the activities under the Garmian PSC
    until the third party participant interest is assigned, at which time
    the Corporation will be reimbursed for the third party participant's
    share of costs. WesternZagros's PSC terms, under both the Garmian and
    Kurdamir PSCs remain unchanged from the Original PSC. 
--  On October 27, 2011, David Cook, TAQA Executive Officer and Head of Oil
    and Gas, was appointed to the WesternZagros Board of Directors pursuant
    to the terms of the Investment Agreement. Mr. Cook has in excess of 20
    years of experience in the upstream oil and gas sector through a variety
    of global technical, commercial and managerial positions based from the
    United States, United Kingdom, and Russia, as well as board
    directorships.  

Political                                                                   

--  Despite the fact that certain Iraq federal laws have yet to be enacted
    to address the future organization of Iraq's petroleum industry or the
    sharing of petroleum and other revenues within Iraq, an interim
    agreement was reached in February 2011, between the KRG and the federal
    government of Iraq with respect to the export and sale of 100,000 bbl/d
    of crude oil from Kurdistan. The agreement is reported to provide 50
    percent of the revenues from such sales to the KRG in order to reimburse
    the operators for costs associated with the producing fields. The KRG
    has confirmed receipt of two payments to date under this agreement, with
    the first payment received from the federal government equaling $243
    million for production from February and March and distributed to the
    operators in June. The second payment to the KRG pursuant to this
    interim agreement occurred in the third quarter of 2011, with the KRG
    confirming it has received $207 million from the federal government for
    production from the second quarter of 2011. Subsequent to December 31,
    2011, the Council of Representatives, or Parliament, of Iraq passed the
    2012 Iraq budget in which Kurdistan is required to export 175,000
    barrels per day. Contained within the budget legislation is explicit
    language that requires the federal government to pay pursuant to the
    terms of the agreement between the Federal Ministry of Oil and the
    Kurdistan Ministry of Natural Resources. It does not clarify if this
    legislation refers to the previous interim agreement reached in February
    2011 (to pay 50 percent of the revenues to reimburse operators for the
    costs) or if a new agreement will be enacted. 
--  During 2011, the Kurdistan Region has attracted interest globally,
    including new entrants to the region: Afren plc, PetroCeltic
    International plc, Repsol YPF, SA, and Hess Corporation, each purchasing
    interests in license blocks, as well as ExxonMobil which purchased
    interests in six blocks in the Kurdistan Region. 
--  As at December 31, 2011, the passage of federal oil and gas legislation
    remained stalled due to a lack of political agreement. The oil and gas
    legislation has been the major point of dispute between the federal
    government of Iraq and the KRG for several years. 
--  The Parliament committee reviewing draft legislation has three different
    draft laws before it: the 2007 draft law, to which the Kurds have
    suggested specific alterations; an amended law proposed by the federal
    government's Ministry of Oil and Deputy Prime Minister for Energy
    affairs, Hussain al-Shahristani; and a draft crafted under the oversight
    of Parliament oil committee members with the backing of the Kurds. 
--  The major difference between the two versions drafted post-2007 is that
    the draft law prepared by the federal Ministry of Oil would give more
    power to the federal government and the prime minister. Kurds advocate
    for the passing of the original draft law from 2007 or the Parliament's
    version that would give provinces and federal regions authority to
    independently manage their own natural resources without referring to
    the federal government as they argue the draft prepared by the Ministry
    of Oil is not aligned with the Constitution of Iraq or Kurdish
    interests. 
--  The Prime Minister's office has stated that parliament will approve the
    Parliament's version of the drafted legislation in 2012 as the federal
    government and the KRG are both determined about resolving the issue. 

Corporate Social Responsibility                                             

--  In addition to its commitment to being an industry leader in many areas,
    WesternZagros has proven to be an industry leader with respect to
    corporate social responsibility. The Corporation continues to focus on
    five key corporate social responsibility initiatives in the PSC Lands,
    namely, local employment, water supply, education, health care and
    recreation. Activities in 2011, which continue in 2012, include drilling
    and repairing water wells in several villages, commencement of a
    Community Health Awareness Program in Hasira and Mil Qasim villages;
    refurbishment of several medical clinics, completion of approximately
    twenty earthwork projects, refurbishment and upgrading of six primary
    schools in local villages and partnering with local NGOs to facilitate
    "mobile literary bus" education visits to villages in the Sarqala sub-
    district. 
--  WesternZagros continues to place a strong emphasis on the incremental
    development of local personnel capacity. As at December 31, 2011,
    WesternZagros had 342 full-time local national employees and service
    contractors directly employed due to the presence of its operations, 61
    of which are employed in the Corporation's field and staff offices in
    professional/semi-professional roles. 

FINANCIAL PERFORMANCE                                                       
----------------------------------------------------------------------------
Selected Annual Information                                                 
                                                                            
US$(000's), unless otherwise                                                
 specified                               2011           2010         2009(1)
----------------------------------------------------------------------------
Total Interest Revenue                     92             87            184 
Net Loss                                6,873          5,801          5,491 
Net Loss Per Share (US$ Per                                                 
 Share)(Basic and Diluted)              0.023          0.028           0.03 
E&E Expenditures(2)                    95,557         66,853         54,356 
Oil Sales Proceeds from                                                     
 Extended Well Test (3)                12,879            Nil            Nil 
Total Assets                          339,439        240,290        241,077 
Total Non-Current Liabilities           1,903            649            175 
Dividends (US$ Per Share)                 Nil            Nil            Nil 
----------------------------------------------------------------------------
(1): Numbers as presented are prior to the adoption of IFRS.                
(2): E&E expenditures are prior to change in non-cash investing activities, 
     and do not reflect insurance recoveries (2011: $20.6 million and 2010: 
     $24.4 million) nor disposal of E&E assets at 2011: $0.5 million)       
(3): Includes proceeds from the sale of crude oil from the extended well    
     test on Sarqala-1 for the period of October 27 to December 31, 2011.
General and Administrative Expenses

For the year ended December 31, 2011, WesternZagros expensed $8.5 million in general and administrative expenses ("G&A") as compared to $6.4 million for the prior year. Total G&A expenses were higher in 2011 due to increased personnel costs and a relatively stronger Canadian dollar in 2011, which impacts a large portion of the Corporation's G&A expenditures.

The Corporation capitalized $4.8 million of G&A in 2011 as compared to $2.0 million in 2010, including the capitalized portion of share-based payments. The amounts capitalized are directly related to the supervision of the Corporation's exploration and evaluation activities. The increase in 2011 reflects the requirement that WesternZagros fund 100 percent of the activities on the Garmian Block, prior to the assignment of the TPPI by the KRG.

Depreciation, Depletion and Amortization (DD&A)

For the year ended December 31, 2011, WesternZagros had $0.2 million of depreciation related to certain administrative assets, compared to $0.6 million for the year ended December 31, 2010. No depletion of exploration and evaluation assets will be recognized until such time that the technical feasibility and commercial viability has been demonstrated and development has been sanctioned, in which case the applicable E&E assets would be tested for impairment and reclassified as development expenditures and then depleted on a unit of production basis.

Stock Based Compensation

The Corporation recognizes the expense associated with share-based payments on a graded vesting basis for all stock options granted. For the year ended December 31, 2011, WesternZagros recorded $0.9 million in stock based compensation expense and $0.6 million as part of capitalized G&A, with a corresponding increase to contributed surplus. For the year ended December 31, 2010, WesternZagros recorded $1.3 million in stock-based compensation expense, and $0.3 million as part of capitalized G&A. Total stock based compensation was relatively flat in 2011 ($1.5 million) as compared to 2010 ($1.6 million). The reduction in the expensed portion of stock based compensation related to the timing of tranches that vested in 2010 (i.e. fully expensed). The increased portion of capitalized stock based compensation in 2011 relates mainly to unvested options that were forfeited in 2010 that did not repeat in 2011 for employees directly related to the supervision of the Corporation's exploration and evaluation activities.

Foreign Exchange

WesternZagros adopted the U.S. dollar as its measurement and reporting currency since the majority of its expenditures are, or will be, directly or indirectly denominated in U.S. dollars and to facilitate a more direct comparison to other international crude oil and natural gas exploration and development companies. As at December 31, 2011, WesternZagros held approximately 85 percent of its cash and cash equivalents and short-term investments in U.S. dollar accounts and U.S. dollar overnight term deposits. The Corporation also has certain assets and liabilities in currencies other than the U.S. dollar (mainly Canadian dollars). For financial statement presentation purposes, WesternZagros converts other currencies to U.S. dollars at the end of each period resulting in foreign exchange gains and losses. Canadian dollar balances are held for the purpose of funding WesternZagros's Canadian dollar expenditures, which are mainly related to the costs associated with general and administrative costs for its head office and certain drilling-related services and tangible equipment procured from Canadian suppliers. For the year ended December 31, 2011, WesternZagros recorded a foreign exchange gain of $0.2 million relating to these conversions, compared to a $0.1 million foreign exchange loss for the year ended December 31, 2010.

As at December 31, 2011, had the US Dollar changed by one percent against the Canadian Dollar, with all other variables held constant, the Corporation's foreign exchange gain or loss would have been affected by approximately $100,000 (2010: $11,000).

Income Taxes

For the year ended December 31, 2011, WesternZagros had a net income tax recovery of $1.5 million (2010: $1.2 million recovery), comprised of $1.7 million of current income tax recovery (2010: $1.3 million recovery) and reduced by $0.2 million of deferred income tax expense (2010: $0.2 million expense). The current tax recovery relates to the net impact of previously unrecognized foreign exchange gains and losses which were now recognized in the current year, and the utilization of non-capital loss carry forwards and G&A costs incurred, the combination of which resulted in the expected recovery of taxes originally incurred in 2008.

The Corporation received proceeds of $0.8 million for prior year tax recoveries during the year ended December 31, 2011 (2010: $2.2 million recovery).

Other Income

WesternZagros's other income is comprised entirely of interest earned on cash and cash equivalents and short-term investment balances. Interest of $0.1 million was earned for the year ended December 31, 2011 compared to $0.1 million for the year ended December 31, 2010.

Net Loss

For the year ended December 31, 2011, WesternZagros recorded a net loss of $6.9 million compared to $5.8 million for the year ended December 31, 2010. WesternZagros is an early stage exploration enterprise and, apart from its working interest in the Kurdamir and Garmian PSCs, cash and cash equivalents and short-term investments, the Corporation has no other significant assets. The increase in G&A expenses during 2011 was partially offset by increased tax recoveries and increased foreign exchange gains as compared to 2010.

Capital Expenditures

For the year ended December 31, 2011, WesternZagros's share of E&E expenditures was $95.6 million (prior to the impact of changes in non-cash investing capital, insurance recoveries and proceeds from the extended well test and disposals). Expenditures for the year included $71.3 million of drilling-related costs; $5.7 million for appraisal activities; $2.2 million of geological and geosciences related work; $5.9 million for supervision and local office costs; $3.0 million for PSC related expenditures; and $7.5 million for corporate activities.

By comparison, WesternZagros's share of E&E expenditures for the year ended December 31, 2010, was $66.9 million (prior to the impact of changes in non-cash investing capital and insurance recoveries). Expenditures for the year included $62.6 million of drilling-related costs; $1.0 million of geological and geosciences related work; $2.5 million for supervision and local office costs; $0.2 million for PSC related expenditures; and $0.6 million for corporate activities.

In the fourth quarter of 2011, the Corporation began the Sarqala-1 extended well test ("EWT") which resulted in the Corporation's first sales of test oil. At December 31, 2011, the Corporation had collected a total of $12.9 million of proceeds from the sales of test oil. The Corporation is still in the exploration stage of development and the proceeds received, net of costs, were credited against E&E expenditures.

During 2011, the Corporation settled the balance of the Kurdamir-1 insurance claim which had started in 2010. Insurance proceeds received from the claim were credited against E&E expenditures. The Corporation received a total of $45.0 million in insurance proceeds under the claim, of which $42.0 million had been recognized as a credit against E&E expenditures for the year ended December 31, 2010. Hence, $3.0 million was credited to E&E expenditures in 2011.

The Corporation's share of E&E expenditures increased in 2011 due to the requirement that WesternZagros fund 100 percent of activities on the Garmian Block, which included drilling Mil Qasim-1, the Sarqala-1 re-entry operation and the related Sarqala-1 appraisal activities. In addition, Kurdamir-2 drilling activities (non-operated) commenced during the fourth quarter of 2011 and the Corporation was required to fund 60 percent of those activities. In comparison, during 2010 the Corporation's share of E&E expenditures related mainly to the Kurdamir-1 well control and recovery operations as well as completing and testing a portion of the well. The Corporation was required to fund 60 percent of these activities.

Quarterly Information                                                       
                                                                            
The following table summarizes key financial information on a quarterly     
basis for the 2011 and 2010 fiscal periods:                                 
----------------------------------------------------------------------------
(US$ thousands, unless         Year                                         
 otherwise specified)         Ended        Three Month Periods Ended        
----------------------------------------------------------------------------
                            Dec 31,    Dec 31    Sep 30   June 30  March 31 
                               2011      2011      2011      2011      2011 
----------------------------------------------------------------------------
Revenue                          92        25        16        34        17 
----------------------------------------------------------------------------
Net Loss                      6,873     1,964     2,013     1,416     1,480 
----------------------------------------------------------------------------
Net Loss Per Share (US$                                                     
 Per Share)(Basic and                                                       
 Fully Diluted)               0.023     0.005     0.007     0.005     0.006 
----------------------------------------------------------------------------
E&E Expenditures(1)          95,557    36,531    24,651    18,420    15,955 
----------------------------------------------------------------------------
Oil Sales Proceeds from                                                     
 Extended Well Test (2)      12,879    12,879       Nil       Nil       Nil 
----------------------------------------------------------------------------
Total Assets                339,439   339,439   275,078   272,650   271,720 
----------------------------------------------------------------------------
Total Non-Current                                                           
 Liabilities                  1,903     1,903     1,417       864       816 
----------------------------------------------------------------------------
Dividend (US$ per Share)        Nil       Nil       Nil       Nil       Nil 
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
                               Year                                         
                              Ended        Three Month Periods Ended        
----------------------------------------------------------------------------
                            Dec 31,    Dec 31    Sep 30   June 30  March 31 
                               2010      2010      2010      2010      2010 
----------------------------------------------------------------------------
Revenue                          87        13        38        17        19 
----------------------------------------------------------------------------
Net Loss                      5,801     2,003       819     1,646     1,333 
----------------------------------------------------------------------------
Net Loss Per Share (US$                                                     
 Per Share)(Basic and                                                       
 Fully Diluted)               0.028     0.010     0.004     0.008     0.006 
----------------------------------------------------------------------------
E&E Expenditures(1)          66,853    17,283    20,455    15,962    13,153 
----------------------------------------------------------------------------
Oil Sales Proceeds from                                                     
 Extended Well Test (2)         Nil       Nil       Nil       Nil       Nil 
----------------------------------------------------------------------------
Total Assets                240,290   240,290   233,770   235,295   235,514 
----------------------------------------------------------------------------
Total Non-Current                                                           
 Liabilities                    649       649       665       624       573 
----------------------------------------------------------------------------
Dividend (US$ per Share)        Nil       Nil       Nil       Nil       Nil 
----------------------------------------------------------------------------
(1): E&E expenditures as presented are prior to change in non-cash investing
     capital, insurance recoveries, proceeds received from the extended well
     test and disposals.                                                    
(2): Includes proceeds from the sale of crude oil from the extended well    
     test on Sarqala-1 for the period of October 27 to December 31, 2011.
Fourth Quarter

In the fourth quarter of 2011, WesternZagros had a net loss of $2.0 million in comparison to the fourth quarter of 2010 which was also a net loss of $2.0 million. Increased G&A expenses in the fourth quarter of 2011 were offset by increased foreign exchange gains, resulting in a negligible difference in the net loss between the two quarters.

WesternZagros's E&E expenditures (prior to changes in non-cash investing capital, insurance recoveries, proceeds received from the EWT and disposals) totaled $36.5 million in the fourth quarter of 2011 compared to $17.3 million in the fourth quarter of 2010. The increase in the fourth quarter of 2011 was primarily due to the Corporation's 100 percent funding requirement for Garmian Block activities in addition to the Corporation's 60 percent funding requirement for the Kurdamir Block non-operated activities, including the drilling operations that commenced at Kurdamir-2. In comparison, activities during the fourth quarter of 2010 related to Kurdamir-1 operations, including completing and testing a portion of the well. The Corporation funded 60 percent of these activities.

On October 27, 2011, WesternZagros sold its first oil produced from Sarqala-1 into the domestic market. The Sarqala crude is being processed in local refineries under the auspices of the Ministry of Natural Resources and proceeds are applied against the Corporation's cost recovery pools. As at December 31, 2011, the Corporation had generated $12.9 million of proceeds from the sales of test oil.

Kurdamir and Garmian Production Sharing Contracts: Summary and Commitments

Under the terms of its Kurdamir and Garmian PSCs, WesternZagros has a 40 percent working interest in each PSC and the KRG has a 20 percent working interest which is carried by WesternZagros. The remaining 40 percent TPPI in the Kurdamir PSC is held by Talisman and the remaining 40 percent TPPI in the Garmian PSC is held by the KRG to be assigned to another third party participant. WesternZagros, the KRG and Talisman for the Kurdamir PSC and WesternZagros, the KRG, and the third party participant for the Garmian PSC, are each a "Contractor Group."

WesternZagros's remaining PSC exploration commitments are summarized in the following table:

----------------------------------------------------------------------------
                     Kurdamir PSC                Garmian PSC                
----------------------------------------------------------------------------
First exploration    June 30, 2012               December 31, 2011          
 sub-period (expires)                                                       
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Exploration          Kurdamir-2                  Mil Qasim-1 exploration    
 obligation                                      well (completed)           
 (remaining)                                                                
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Second exploration   Additional two years        Additional two years       
 sub-period                                                                 
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Exploration          One appraisal well          One exploration well       
 obligation          (Kurdamir-3)                (Hasira-1)                 
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Other extensions     Six month extension         One year extension         
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Work commitments     One appraisal well          One exploration well       
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Economic terms       Unchanged                   Unchanged                  
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PSC payments         Additional Capacity         Additional Capacity        
                     Building Support Payment    Building Support Payment   
                     payable equal to 3% of      payable equal to 3% of     
                     WesternZagros Profit Oil.   WesternZagros Profit Oil.  
                     Continuation of previous    Annual payments 50% of     
                     annual payments.            previous payments.         
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Operator             Talisman                    WesternZagros              
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Working interest     WesternZagros    40%        WesternZagros    40%       
                     Talisman         40%        KRG              40%(ii)   
                     KRG              20% (i)    Unassigned TPPI  20% (i)   
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Contract area        340 km2                     1,780 km2                  
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(i)  WesternZagros funds the KRG costs, ultimately to be recovered by       
     WesternZagros through the KRG's share of Cost Recovery Oil. For the    
     Garmian Block, the current PSC requires that the third party           
     participant will be required to pay for half of the KRG's carried      
     share. This will be confirmed once the TPPI is assigned.               
(ii) WesternZagros initially funds the 40% of the costs for the third party 
     participant until the TPPI is assigned by the KRG. The amounts funded  
     by WesternZagros for the TPPI will be repaid upon assignment of this   
     interest.
As at December 31, 2011, the Corporation estimates expenditures of approximately $32 million to meet its 60 percent funding requirement to fulfill its remaining commitments for the first exploration sub-period under the Kurdamir PSC. This estimate includes the Corporation's portion of costs for drilling the Kurdamir-2 commitment well by June 30, 2012; planned initial testing activities while drilling Kurdamir-2; and associated supervision and local office support costs and other planned Kurdamir Block activities to December 31, 2012.

During the year ended December 31, 2011, the Corporation finished drilling the Mil Qasim-1 exploration well in order to meet its commitments for the first exploration sub-period under the Garmian PSC. The Corporation has now entered the second exploration sub-period of the Garmian PSC. During the second exploration sub-period the Corporation is required to drill one exploration commitment well (Hasira-1) by December 31, 2013, and spend a minimum of $25 million on drilling and associated geological and geophysical activities. Upon fulfilling these minimum exploration commitments, the Corporation would then be entitled to a one year extension of the second exploration sub-period (i.e. to December 31, 2014) if the Corporation committed to drilling one additional exploration well during the extension period.

At the end of the first exploration sub-period, the Corporation and the other parties to the Kurdamir PSC may relinquish the entire contract area (other than any discovery or development areas), or 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. At the end of the second exploration sub-period, WesternZagros, and the other parties to the Kurdamir 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 period subject to the following relinquishment requirements. If the second sub-period option is exercised, the Kurdamir PSC specifies the obligation to drill one appraisal well with the commitment of a minimum financial amount of $30 million for this purpose. It further states that either thirty-five (35) line kilometres of two dimensional seismic data or forty (40) square kilometres of three dimensional seismic data within the Kurdamir Block area must be acquired, processed or interpreted. At the end of the second exploration sub-period, and at the end of the subsequent extension period, the Kurdamir PSC requires WesternZagros, and other parties who have elected to participate, to relinquish 25 percent of the remaining undeveloped area within the Kurdamir Block or the entire contract area (other than any discovery or development areas).

At the end of the second exploration sub-period, the Corporation, and the other parties to the Garmian 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 the Corporation and other parties who have elected to participate, to relinquish 25 percent of the remaining undeveloped area within the Garmian Block or the entire contract area (other than any discovery or development areas).

During the year ended December 31, 2011, the Corporation submitted and received approval from the KRG for an appraisal work program and budget with respect to the Sarqala discovery. The Corporation plans to continue the EWT on Sarqala-1, conduct a 3D seismic program and drill two appraisal wells, the first of which will be Sarqala-2.

Kurdamir and Garmian Production Sharing Contracts: Production

The Kurdamir and Garmian PSCs provide each respective Contractor Group with the exclusive right to develop and produce any commercial discoveries. The development period for producing a commercial discovery is an initial term of 20 years from the date of declaring a commercial discovery with a further automatic right to a five year extension. If commercial production is possible at the end of the last period then the Contractor Group shall be entitled to an extension of a further five years under the same terms as in the applicable PSC if a request is made by the Contractor Group at least six months before the end of the first five year extension.

Pursuant to the terms of the Kurdamir and Garmian PSCs, WesternZagros maintains the right to market its share of oil on the world market. There is an obligation under the Kurdamir and Garmian PSCs to make oil production available to meet regional market demand. During the fourth quarter of 2011, the Corporation commenced selling test oil from the Sarqala-1 extended well test into the local domestic Kurdistan market under the approval from the Ministry of Natural Resources of the KRG. Under the terms of these sales agreements, all proceeds are currently being credited against recoverable costs under the Garmian PSC. With continued approval from the Ministry of Natural Resources of the KRG, any future sales contracts for ongoing test oil from Sarqala-1 could continue to be sold via the local auction market process or alternatively sold for export depending on local demand.

Pursuant to the terms of the Kurdamir and Garmian PSCs, the price for natural gas is based on local commercial value and Iraq tariffs. Limited markets exist for natural gas within Iraq and there is limited infrastructure for export and no such price for natural gas has yet to be established in Kurdistan. The KRG has the expansion of its electricity generation as one of its priorities and is pursuing a number of projects that may expand these markets and the demand for natural gas.

Kurdamir and Garmian Production Sharing Contracts: Commercial Terms

Once a declaration of commerciality has been made under the Kurdamir and Garmian PSCs, the sharing of oil occurs as follows: of the total oil produced, operations oil is available to the Contract Group for use in carrying out its obligations under the PSCs; the remaining oil is subject to a 10 percent royalty payable to the KRG (the residual is considered to be "net available oil"). Up to 45 percent of the net available oil is available for cost recovery with the remainder as "profit oil". Costs subject to 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 available gas available for cost recovery is 55 percent and the profit sharing component is on a different scale. 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.
As at December 31, 2011, the Corporation had approximately $146 million related to the Garmian PSC and $88 million relating to the Kurdamir PSC, both net to WesternZagros, of recoverable costs available that may ultimately be recovered from future crude oil or natural gas sales in accordance with the PSCs. Pursuant to the terms of the PSCs, these estimated cost pools are subject to government audit.

Other Commitments

The Corporation has entered into various exploration-related contracts, including contracts for drilling equipment, services and other tangible equipment. The following table summarizes the estimated commitments in relation to these exploration-related contracts relating to the Garmian PSC and other contractual obligations at December 31, 2011:

US$(000's), unless                                                          
 otherwise specified        For the Years Ending December 31,               
                          2012     2013     2014     2015    2016+    Total 
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Exploration             $1,067        -        -        -        -   $1,067 
Office                    $657     $559     $456        -        -   $1,672 
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                        $1,724     $559     $456        -        -   $2,739 
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Legal Proceedings

From time to time, the Corporation may become involved in legal or administrative proceedings in the normal conduct of business. The Corporation is currently in disputes with two contractors, one is related to compensation owing to a contractor under a terminated agreement and the other is over a potential breach of contract by a contractor related to services provided to the Corporation. Although there has been no formal claim of monetary damages to date in either of the matters, the Corporation does not currently expect that the matters, individually or in aggregate, would have a material impact on the Corporation's financial position. The Corporation continues to pursue resolution of these disputes, and will enforce its contractual rights through arbitration if necessary. Notice of arbitration has been received by the Corporation with respect to one of these disputes. Given the early stage of the disputes there is no certainty as to the ultimate outcome of any such proceedings. Amounts involved in such matters are not reasonably estimable due to uncertainty as to the final outcome.

Off Balance Sheet Arrangements

The Corporation does not presently utilize any off-balance sheet arrangements to enhance its liquidity and capital resource positions, or for any other purpose. During the year ended December 31, 2011, WesternZagros did not enter into any off-balance sheet transactions.

Outlook for 2012

WesternZagros's plans for 2012 and early 2013 are to focus its exploration and appraisal programs on the highly prospective formations discovered through the drilling of the Sarqala-1, Mil Qasim-1 and Kurdamir wells. These exploration and appraisal programs will further delineate the approximately one billion barrels of oil equivalent of mean gross unrisked prospective resources that these formations are estimated to contain (prospective resources estimated as of December 14, 2010, January 14, 2011, January 31, 2011, July 19, 2011, and September 7, 2011, as audited by Sproule International Limited - see "Forward Looking Information").

Activities on the Kurdamir Block for the remainder of 2012 are planned to include the drilling and testing of Kurdamir-2 and planning for further appraisal activities, including a potential 3D seismic program, a potential extended well test, a potential early production system, and future appraisal wells. Activities on the Garmian Block for 2012 are planned to include the necessary engineering and design work for the expansion of facilities for Sarqala; the appraisal program for the Sarqala and Mil Qasim discoveries and further exploration activities including the design, drilling plan and necessary long-lead procurement for the Sarqala-2 well and the Hasira-1 well (the commitment well required during the second exploration sub-period for the Garmian PSC) and potential wells on the Upper Bakhtiari reservoir encountered while drilling Mil Qasim-1.

Kurdamir

With the significant crude oil, condensate and natural gas discovery in the Oligocene reservoir at Kurdamir, which has been confirmed in the Kurdamir-2 well, WesternZagros is working with its co-venturer, Talisman, to advance appraisal efforts. WesternZagros expects the deeper Eocene and Cretaceous reservoirs to be drilled and evaluated in Kurdamir-2 by the end of the second quarter of 2012 followed by a fulsome testing program. Subsequently, further activities to appraise the Kurdamir discovery will commence planning for a 3D seismic program over the Kurdamir structure with acquisition to commence in late 2012 or early 2013, a possible extended well test in the Kurdamir-2 well and a further appraisal well (Kurdamir-3) to be drilled in 2013/2014.

Garmian

WesternZagros will continue the EWT at Sarqala to gain additional information with respect to appraising the Sarqala structure for future development opportunities. The Corporation commenced engineering work in the fourth quarter of 2011 with respect to sourcing permanent facilities and optimizing the location of these facilities for increasing future production beyond 5,000 barrels per day from the Sarqala-1 EWT and future wells on the Sarqala structure. This work will include the necessary facilities to utilize the associated natural gas from this crude oil production to minimize the flaring of natural gas.

WesternZagros will conduct further testing on the Test 4 interval at Mil Qasim-1 to further clean-up the well and gain additional information on the long term deliverability of the Upper Fars reservoir. The Corporation will also conduct additional analysis to determine how to increase flow rates and unlock the considerable potential of the low permeability, naturally fractured sandstones of the Upper Fars Formation.

The Mil Qasim-1 well also encountered hydrocarbon shows in a high porosity conglomerate and sandstone interval of approximately 25 metres thickness in the Upper Bakhtiari Formation at a depth of approximately 500 metres. WesternZagros is actively investigating a shallow, relatively lower cost, multi-well drilling program to evaluate this reservoir. The Corporation is encouraged by the existence of numerous highly productive water wells drilled in the Upper Bakhtiari Formation in the southern Garmian area that have typical flow rates of up to 6,000 bpd. These wells may be indicative of the potentially high productivity Upper Bakhtiari reservoir at relatively shallow depths.

During the first half of 2012, WesternZagros is designing and planning a 3D seismic appraisal program over the Sarqala and Mil Qasim structures. Seismic acquisition is anticipated to commence in the second half of 2012, and the Corporation will utilize the information to optimize the number and placement of future appraisal wells, improve its understanding of fracturing within these structures and further evaluate the Bakhtiari, Upper Fars, Jeribe, Oligocene, Eocene and Cretaceous reservoirs. In addition, WesternZagros plans to acquire 2D seismic at Chwar to elevate this low risk, Jeribe oil opportunity to drill ready status.

WesternZagros expects to design, plan and contract geophysical services with the intention of spudding the Sarqala-2 appraisal well in the third or fourth quarter of 2012. Sarqala-2 will be the Corporation's first appraisal well to delineate the Jeribe reservoir and is anticipated as the next potential producing well.

WesternZagros also expects to design, plan and procure the necessary long lead materials and services with the intention of spudding the Hasira-1 well in the fourth quarter of 2012. Hasira-1 has been approved as the Corporation's exploration well to comply with the Garmian PSC commitments for the second exploration sub-period. Hasira-1 will be designed to test the Oligocene reservoir. It will also appraise the Jeribe reservoir and will have the potential to complete as a producer in either the Oligocene or Jeribe reservoirs dependent on results.

The Sarqala-2 and Hasira-1 wells will also drill through and evaluate the Upper Fars and Upper Bakhtiari discovered while drilling Mil Qasim-1. The Corporation will utilize the information from the further testing of the Test 4 interval to determine the potential opportunity to test the Upper Fars in these wells.

For the first half of fiscal 2012, WesternZagros estimates its capital expenditures, including the requirement for the Corporation to fund 100 percent of Garmian activities in 2012 until the assignment of the TPPI by the KRG and to fund its share of the costs of the Kurdamir-2 well, to be approximately $58-68 million. This includes approximately $30-35 million for drilling and testing Kurdamir-2; $11 million of incremental costs to test Mil-Qasim-1; $10-15 million for designing, planning and procurement of the necessary long lead materials for the Sarqala-2 and Hasira-1 wells and the appraisal 3D seismic program; $4 million for in-country support costs and other PSC expenditures for both the Kurdamir and Garmian Blocks; and approximately $3 million for corporate and general and administrative costs. This excludes any of the proceeds from the sale of crude oil from the extended well test at Sarqala-1 and the reimbursement of the costs on the Garmian Block that WesternZagros has funded and will be reimbursed upon the assignment of the TPPI by the KRG.

The KRG is committed to gas development with the focus initially on domestic power generation and by other industrial usages. This would be followed by development of infrastructure to facilitate exports to other parts of Iraq, Turkey and, ultimately, Europe. WesternZagros is working with the KRG to determine how the large gas cap discovered at Kurdamir can be mutually beneficial to their larger development plan. In addition, WesternZagros is also in discussions with TAQA, the Corporation's strategic investor and the sixth largest independent power producer in the world, to explore alternate private development options for potentially utilizing Kurdamir's gas resources.

Liquidity and Capital Resources

WesternZagros is currently exploring for and appraising discoveries of crude oil and natural gas in the Kurdistan Region of Iraq. WesternZagros's other income is comprised entirely of interest earned on cash and cash equivalent balances and short-term investments. WesternZagros invests its cash and cash equivalents and short-term investments 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. As at December 31, 2011, WesternZagros had $41.0 million in working capital and short-term investments with no outstanding bank debt or other interest bearing indebtedness.

During the fourth quarter of 2011, WesternZagros began oil production from the Sarqala-1 extended well test and sales of this test production into the domestic market in Kurdistan. Under the terms of the contracts entered into for the sale of this production, the purchasers have prepaid WesternZagros for the production. Proceeds received up to December 31, 2011, totaled $12.9 million. Subsequently, the Corporation contracted to sell any further test oil from January to March 2012 and received additional proceeds of $25.9 million. WesternZagros will use these cash proceeds, along with additional sales proceeds received for test oil from the extended well test to fund future exploration and appraisal activities.

WesternZagros will monitor the timing and likelihood of the TPPI being assigned by the KRG in the Garmian PSC in determining its future capital requirements, as WesternZagros will continue to fund 100 percent of the costs incurred on the Garmian Block until such a time as the TPPI is assigned by the KRG. Upon assignment of the TPPI by the KRG, WesternZagros will be reimbursed for the costs that it has funded on the Garmian PSC and will be able to utilize these funds for other exploration and appraisal activities and the ongoing capital obligations under the Garmian PSC should be reduced to 50percent with the TPPI responsible for their 50percent share.

Currently, the Corporation does not anticipate the need to raise additional debt or equity financing during 2012 given the continued production from the extended well test and likely assignment of the TPPI. However, WesternZagros may be required to access further funding dependent on the level and timing of exploration and appraisal activities pursued by the Corporation and the funding requirements under the relevant PSCs. WesternZagros, in considering the proper timing to potentially access further capital, will also assess the following factors:

--  Further exploration results from Kurdamir-2 and timing of future
    appraisal activities; 
--  The expected timing for appraisal activities at Sarqala and Mil Qasim
    and the future exploration activities on the Garmian Block; 
--  The ability to export oil and natural gas from the Kurdistan Region of
    Iraq in accordance with the economic terms under the PSCs likely
    following the promulgation of the new Federal Petroleum Law of Iraq; and
--  The current conditions in the financial markets, including the potential
    for further market instability.
Outstanding Share Data

As at December 31, 2011, and as at March 26, 2012, there were 371,209,472 shares issued and outstanding. The number of common shares reserved for issuance pursuant to options granted will not exceed 10 percent of the issued and outstanding common shares.

For the year ended December 31, 2011, there were 630,000 stock options granted, 79,800 options exercised in exchange for common shares, and 2,126,400 options forfeited by employees and contractors, bringing the total stock options outstanding as of December 31, 2011 to 18,778,700. Subsequent to December 31, 2011, there were 7,104,000 stock options granted to directors, officers, employees and contractors, and 18,400 forfeited by employees, bringing the total stock options outstanding as of March 26, 2012 to 25,864,300.

RISK FACTORS

The oil and gas industry is very competitive and is subject to many risks. Many of these risks are outside of WesternZagros's control. The ability of WesternZagros to successfully carry out its business plan beyond exploration is primarily dependent upon the continued support of its shareholders, the discovery of economically recoverable reserves, meeting all commitments under the PSCs, the resolution of remaining political disputes in Iraq, progress on the Federal Petroleum Law and the ability to export oil and natural gas from the Kurdistan Region of Iraq in accordance with the economic terms under the PSCs, the state of the capital markets, the ability of WesternZagros to obtain financing as required to develop reserves, and the continued receipt of proceeds from the Sarqala-1 EWT. Management of WesternZagros has identified certain key risks and their potential impact on WesternZagros's operations.

For further information on risk factors affecting the business of WesternZagros, see "Risk Factors" relating to the Corporation as referenced in the March 26, 2012 Annual Information Form ("AIF").

Adoption of International Financial Reporting Standards ("IFRS")

The Corporation has prepared its December 31, 2011 Consolidated Financial Statements in accordance with International Financial Reporting Standards, this is the Corporation's first annual reporting date under IFRS. Accordingly, the comparative information for 2010 has also been prepared in accordance with the Corporation's IFRS accounting policies. The adoption of IFRS has not had a material impact on the Corporation's operations, strategic decisions, cash flow, or overall capital expenditures.

The Corporation's IFRS accounting policies are provided in detail in Note 3 to the December 31, 2011, Consolidated Financial Statements. Prior period reconciliations between IFRS and previous GAAP are included within Note 23 to the December 31, 2011 Consolidated Financial Statements. In summary, Note 23 includes the following reconciliations:

--  Balance Sheets as at January 1, 2010, and December 31, 2010; 
--  Statement of Comprehensive Loss for the year ended December 31, 2010;
    and 
--  Statement of Cash Flow for the year ended December 31, 2010.
Financial Statement Impacts Upon Conversion to IFRS

The following discussion explains the significant impacts on the financial statements upon conversion to IFRS.

Exploration and Evaluation Expenditures "(E&E")

WesternZagros previously utilized the full cost method under Canadian GAAP for accounting for its exploration activities in the Kurdistan Region of Iraq. Under the full cost method, all costs associated with the acquisition of, exploration for, and development of crude oil and natural gas, including asset retirement obligations, were capitalized and accumulated within cost centres on a country-by-country basis. Such costs included land acquisition, geological and geophysical activity, drilling and testing of productive and non-productive wells, carrying costs directly related to unproved properties, major development projects as well as insurance and administrative costs directly related to exploration and development activities. As WesternZagros was only operating in the Kurdistan Region of Iraq and originally had only one PSC in that region covering all of the PSC Lands, it capitalized all costs associated with those exploration activities, including certain costs incurred prior to entering into the Original PSC.

IFRS 1 sets out the procedures that an entity must follow when adopting IFRS for the first time as the basis for preparing financial statements. IFRS 1 also provides entities with a number of optional exemptions upon conversion to IFRS, the most significant of which that WesternZagros utilized was the exemption that allows the December 31, 2009 full cost pool under previous GAAP which are related to costs where the technical feasibility and commercial viability have not yet been determined to be reclassified as exploration and evaluation assets under IFRS. This resulted in $154 million of costs being reclassified from property, plant and equipment ("PP&E") to E&E expenditures on a deemed cost basis as at January 1, 2010.

Upon conversion to IFRS, WesternZagros also adopted IFRS 6, "Exploration for and Evaluation of Mineral Resources", which is the standard that deals with accounting for exploration and evaluation expenditures for extractive industries. Typical costs included in the E&E expenditures are acquisition of rights to explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling, activities in relation to evaluating the technical feasibility and commercial viability of extracting mineral resources, as well as insurance and certain general and administrative costs. Under IFRS 6, costs incurred prior to the legal rights to explore an area being obtained may no longer be capitalized within E&E expenditures. During 2010 the Corporation reclassified a further $27 million from PP&E to E&E expenditures. As at December 31, 2010 a total of $181 million in costs had been reclassified from PP&E under previous GAAP to E&E expenditures relating to the Corporation's Original PSC upon conversion to IFRS.

WesternZagros was also required to complete an impairment test of E&E expenditures as at January 1, 2010. There was no impairment of E&E assets upon transition to IFRS.

Share Based Payments

The Corporation previously valued stock option issuances based on each grant as a whole and expensed the valuation of each grant on a straight line basis over the expected lives of the options. Upon conversion to IFRS, the Corporation was required to adopt IFRS 2, "Share-Based Payment," which provides that the valuation and expensing of share-based payment be done on a graded vesting basis. This resulted in an accelerated expensing of share-based payments based on each individual vesting tranche of options under IFRS as compared to previous GAAP, less the impact of estimated forfeiture rates under IFRS that had not previously been estimated under GAAP. As at January 1, 2010 the adoption of IFRS 2 resulted in an increase in contributed surplus of approximately $0.9 million, with a corresponding increase in the accumulated deficit. As at December 31, 2010 the adoption of IFRS 2 resulted in a net minor overall decrease in contributed surplus as compared to previous GAAP as the timing of expense recognition was similar between IFRS and previous GAAP at that point in time.

Provision for Decommissioning Liabilities

The provisions for decommissioning obligations under IFRS are treated similarly to previous Canadian GAAP, which had previously been disclosed as asset retirement obligations ("ARO"). Upon conversion to IFRS, the Corporation was required to adopt IAS 37, "Provisions, Contingent Liabilities and Contingent Assets", for which the Corporation judged that a that a risk-free discount rate, that was not credit risk adjusted, be applied to the present value calculation of estimated future abandonment costs. This resulted in a lower discount rate utilized in the present value calculation under IFRS as compared to previous GAAP. As a result of the lower discount rate under IFRS, the provision for decommissioning liabilities increased by $0.3 million under IFRS as at January 1, 2010 and remained at a $0.3 million increase as at December 31, 2010 when compared to GAAP.

Other IFRS 1 Exemptions Utilized

IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary exemptions from the general principal of retrospective treatment. Beyond the full-cost book value as deemed cost exemption utilized for E&E expenditures as discussed in the E&E section of this MD&A, the Corporation also utilized the allowed exemption relating to IFRS 3, "Business Combinations". Accordingly, IFRS 3 has not been applied to acquisitions that occurred prior to January 1, 2010.

CRITICAL ACCOUNTING ESTIMATES

WesternZagros's critical accounting estimates are defined as those estimates that have a significant impact on the portrayal of its financial position and operations and that require management to make judgments, assumptions and estimates in the application of IFRS. Judgments, assumptions and estimates are based on historical experience and other factors that management believes to be reasonable under current conditions. As events occur and additional information is obtained, these judgments, assumptions and estimates may be subject to change. WesternZagros believes the following are the critical accounting estimates used in the preparation of its consolidated financial statements, which can also be found in Note 5 to the December 31, 2011 Consolidate Financial Statements.

Use of Estimates

The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the condensed consolidated interim financial statements, and the reported amounts of revenues and expenses during the reporting period. Such estimates relate to unsettled transactions and events as of the date of the consolidated financial statements. Accordingly, actual results may differ from these estimated amounts as future confirming events occur. Significant estimates used in the preparation of the consolidated financial statements include, but are not limited to, recovery of asset carrying values, provision for decommissioning liabilities, incomes tax, and share-based payments.

Recoverability of asset carrying values

At each reporting date, the Corporation assesses its exploration and evaluation and property, plant and equipment expenditures for possible impairment if events or circumstances indicate the carrying values of the assets might not be recoverable. Relevant indicators include the following: the continued progression of Management's operational plans; new information obtained from wells that have been drilled or tested; changes or restrictions in access to drilling sites; changes in legal, regulatory, market, environmental, technological, or political factors that could impact ongoing operations; the ability of the Corporation to continue fulfilling ongoing commitments; and significant changes in the Corporation's market value.

If factors indicate that the Corporation may need to recognize impairment, the carrying value of the assets for each cash-generating-unit is compared to the greater of value-in-use or fair-value less costs to sell ("FVLCS"). It is anticipated that the FVLCS, would be more readily computed. Determination of the FVLCS amount and any resulting impairment involves the use of significant estimates and assumptions about future events and factors such as future commodity prices, the impact of inflation on operating expenses, discount rates, production profiles, the ability to produce and export crude oil and natural gas, the future capital costs needed to develop reserves, as well as the future marketability and availability of transportation for crude oil and natural gas that is produced.

At the reporting date, the Corporation is still in the exploration phase of operations on its PSC Lands. The Corporation has not recognized any impairment for exploration and evaluation expenditures nor for property, plant, and equipment.

Provision for decommissioning obligations

The Corporation recognizes both an asset and a provision for decommissioning obligations in the period in which they are incurred by estimating the fair value of the obligation. Provisions for environmental clean-up and remediation costs associated with the Corporation's drilling operations are based on current legal and constructive requirements, technology, price levels and expected plans for remediation. Actual costs and cash outflows and the timing of those cash outflows can differ from estimates because of changes in laws and regulations, public expectations, prices, discovery and analysis of site conditions, future performance of wells drilled, and changes in clean-up technology. Estimating the timing and amount of cash outflows required to settle these obligations are inherently difficult and are based on Management's current experience. A risk free rate has been used in the calculations. Any differences between actual and estimated decommissioning obligations would impact both the asset and the provision which then would impact future depletion on the asset as well as accretion on the provision.

Income tax

Tax regulations and legislation and the interpretations thereof in the jurisdictions that the Corporation operates are subject to change. As such, income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by Management based on all available information at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings.

Share-based payments

The estimates, assumptions, and judgments made in relation to the fair value of share-based payments and the associated expense recognition is subject to measurement uncertainty. The fair value of employee stock options is measured using a Black Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility, expected life of the instrument, estimated forfeitures, expected dividends, and the risk-free interest rate.

Recent accounting pronouncements issued but not yet effective

The IASB has issued the following standards which are effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Corporation is currently evaluating the impact, if any, of each of these new standards, which are briefly summarized as follows:

IAS 27 - Separate Financial Statements:

IAS 27 replaces the existing IAS 27, "Consolidated and Separate Financial Statements". IAS 27 contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. IAS 27 requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9, "Financial Instruments".

IAS 28 - Investments in Associates and Joint Ventures:

IAS 28 prescribes the accounting for investments in associates and sets out the application of the equity method when accounting for investments in associates and joint ventures.

IFRS 10 - Consolidated Financial Statements:

IFRS 10 establishes the principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces IAS 27 "Consolidated and Separate Financial Statements" and SIC-12 "Consolidation - Special Purpose Entities".

IFRS 11 - Joint Arrangements:

IFRS 11 establishes principles for financial reporting by parties to a joint arrangement, and requires entities to classify interests in joint arrangements as either a joint venture or a joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for joint operations the entity will recognize it share of the assets, liabilities, revenue and expenses of the joint operation. IFRS 11 replaces IAS 31 "Interests in Joint Ventures" and SIC-13 "Jointly Controlled Entities - Non-monetary Contributions by Venturers".

IFRS 12 - Disclosure of Interests in Other Entities:

IFRS 12 establishes disclosure requirements relating to an entity's interests in other entities such as joint arrangements, associates or unconsolidated structured entities, including special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosure requirements and also introduces significant additional disclosure requirements that address the nature and risk associated with interests in other entities.

IFRS 13 - Fair Value Measurements:

IFRS 13 defines fair value and sets out a single IFRS framework for measuring fair value and the required disclosures about fair value measurements for use across all IFRS standards. IFRS 13 is intended to eliminate the inconsistencies in fair value measurement and the disclosure requirements contained in various other IFRS standards that refer to fair value.

The following standard issued by the IASB becomes effective January 1, 2015:

IFRS 9 - Financial Instruments:

IFRS 9 is the first part of a new standard on classification and measurement of financial assets and liabilities that will replace IAS 39, "Financial Instruments: Recognition and Measurements".

For financial assets, IFRS 9 has two measurement categories: amortized cost and fair value. All equity instruments are measured at fair value. A debt instrument is at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is at fair value through profit and loss.

For financial liabilities, although the classification criteria for financial liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities may require different accounting for changes to the fair value of a financial liability as a result of changes to an entity's own credit risk.

Consolidated Statements of Financial Position                               
(thousands of United States dollars)                                        
                                                December 31,     January 1, 
                                 December 31,           2010           2010 
                          Note           2011       (Note 23)      (Note 23)
----------------------------------------------------------------------------
                                                                            
Assets                                                                      
Current assets                                                              
  Cash and cash                                                             
   equivalents               7        $64,511        $31,482        $76,708 
  Short-term investments     7          9,997              -              - 
  Trade and other                                                           
   receivables               8            327          8,648          6,880 
  Insurance recoveries                                                      
   receivable                9              -         17,597              - 
  Deposits held in trust    10              -            420              - 
  Prepaid expenses                        275             39            183 
  Income tax recoverable    11          2,632            887          1,738 
----------------------------------------------------------------------------
  Total current assets                 77,742         59,073         85,509 
                                                                            
Non-current assets                                                          
  Deposits held in trust    10              -              -            420 
  Property, plant and                                                       
   equipment                12             89            261            814 
  Exploration and                                                           
   evaluation                                                               
   expenditures              9        261,608        180,770        154,097 
  Deferred tax assets       11              -            186            371 
----------------------------------------------------------------------------
  Total non-current                                                         
   assets                             261,697        181,217        155,702 
----------------------------------------------------------------------------
Total assets                         $339,439       $240,290       $241,211 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Liabilities                                                                 
Current liabilities                                                         
  Trade and other                                                           
   payables                 13        $35,922        $21,525        $18,297 
  Income tax payable                      813              -              - 
----------------------------------------------------------------------------
  Total current                                                             
   liabilities                         36,735         21,525         18,297 
                                                                            
Non-current liabilities                                                     
  Provision for                                                             
   decommissioning                                                          
   obligations              14          1,728            509            432 
  Deferred tax                                                              
   liabilities              11            175            140            134 
----------------------------------------------------------------------------
  Total non-current                                                         
   liabilities                          1,903            649            566 
----------------------------------------------------------------------------
Total liabilities                      38,638         22,174         18,863 
----------------------------------------------------------------------------
                                                                            
Equity                                                                      
Equity attributable to                                                      
 shareholders                                                               
  Share capital             15        341,681        253,583        253,583 
  Contributed surplus       16         12,683         11,223          9,654 
  Accumulated deficit                 (53,563)       (46,690)       (40,889)
----------------------------------------------------------------------------
  Total equity                        300,801        218,116        222,348 
----------------------------------------------------------------------------
Total equity and                                                            
 liabilities                         $339,439       $240,290       $241,211 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and                                                             
 contingencies (Note 22)                                                    
                                                                            
                                                                            
The notes are an integral part of these consolidated financial statements.  
                                                                            
These consolidated financial statements were authorized for issue by the    
Audit Committee of the Board of Directors on March 23, 2012. They are signed
on the Corporation's behalf by:                                             
                                                                            
                                                                            
       (Signed) "Fred J. Dyment"            (Signed) "Randall Oliphant"     
               Director                               Director              
                                                                            
Consolidated Statements of Comprehensive Loss                               
For the years ended December 31, 2011 and 2010                              
(thousands of United States dollars, except per share amounts)              
                                                                            
                                         Note           2011           2010 
----------------------------------------------------------------------------
                                                                            
Other Income                                                                
  Interest income                                        $92            $87 
                                                                            
Expenses                                                                    
  General and administrative expenses     17,                               
                                           18          8,472          6,413 
  Depreciation                                           201            553 
  Accretion on decommissioning                                              
   obligations                             14             25             16 
  Foreign exchange (gain) loss                          (228)            62 
----------------------------------------------------------------------------
  Total expenses                                       8,470          7,044 
----------------------------------------------------------------------------
                                                                            
Loss before taxation                                   8,378          6,957 
                                                                            
Taxation                                                                    
  Current                                  11         (1,726)        (1,347)
  Deferred                                 11            221            191 
----------------------------------------------------------------------------
  Total taxation (recovery)                           (1,505)        (1,156)
----------------------------------------------------------------------------
                                                                            
Total loss and comprehensive loss                                           
 attributable to shareholders                        $ 6,873         $5,801 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Net loss per share - basic and diluted     19         $0.023         $0.028 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
The notes are an integral part of these consolidated financial statements.  
                                                                            
Consolidated Statements of Changes in Equity                                
For the years ended December 31, 2011 and 2010                              
(thousands of United States dollars)                                        
                                                                            
                                                                            
                      Number of     Share Contributed Accumulated     Total 
               Note      shares   capital     surplus     deficit    equity 
----------------------------------------------------------------------------
                                                                            
Balance                                                                     
 January 1,                                                                 
 2010            23 207,464,320  $253,583     $ 9,654    $(40,889) $222,348 
  Share based                                                               
   payments                   -         -       1,569           -     1,569 
  Loss for the                                                              
   period                     -         -           -      (5,801)   (5,801)
----------------------------------------------------------------------------
Balance                                                                     
 December 31,                                                               
 2010            23 207,464,320   253,583      11,223     (46,690)  218,116 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
  Issuance of                                                               
   common                                                                   
   shares           163,665,352    90,185           -           -    90,185 
  Options                                                                   
   exercised     16      79,800        64         (22)                   42 
  Share                                                                     
   issuance                                                                 
   costs                      -    (2,151)          -           -    (2,151)
  Share based                                                               
   payments   16,17           -         -       1,482           -     1,482 
  Loss for the                                                              
   period                     -         -           -      (6,873)   (6,873)
----------------------------------------------------------------------------
Balance                                                                     
 December 31,                                                               
 2011               371,209,472  $341,681     $12,683     (53,563) $300,801 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                                            
The notes are an integral part of these consolidated financial statements.  
                                                                            
 Consolidated Statements of Cash Flow                                       
For the years ended December 31, 2011 and 2010                              
(thousands of United States dollars)                                        
                                                                            
                                                                            
                                         Note           2011           2010 
----------------------------------------------------------------------------
                                                                            
Cash flow from operating activities                                         
Net loss before taxation                             $(8,378)       $(6,957)
  Adjustments for                                                           
    Depreciation                                         201            553 
    Accretion                              14             25             16 
    Share based payments                16,17            860          1,310 
  Income taxes recovered                                 794          2,198 
  Change in non-cash operating working                                      
   capital                                 21           (232)          (123)
----------------------------------------------------------------------------
Net cash from (used in) operating                                           
 activities                                           (6,730)        (3,003)
----------------------------------------------------------------------------
                                                                            
Cash flow from investing activities                                         
  Short-term investments                              (9,997)             - 
  Expenditures on exploration and                                           
   evaluation activities                   21        (72,298)       (66,626)
  Oil sales proceeds from extended well                                     
   test                                     9         12,879              - 
  Disposals of exploration and                                              
   evaluation assets                                     482              - 
  Insurance recoveries                                20,646         24,403 
  Additions to property, plant and                                          
   equipment                                             (29)             - 
----------------------------------------------------------------------------
  Net cash from (used in) investing                                         
   activities                                        (48,317)       (42,223)
----------------------------------------------------------------------------
                                                                            
Cash flow from financing activities                                         
  Issuance of common shares, net of                                         
   costs                                              88,034              - 
  Proceeds from options exercised                         42              - 
----------------------------------------------------------------------------
Net cash from (used in) financing                                           
 activities                                           88,076              - 
----------------------------------------------------------------------------
                                                                            
                                                                            
----------------------------------------------------------------------------
Change in cash and cash equivalents                   33,029        (45,226)
----------------------------------------------------------------------------
                                                                            
Cash and cash equivalents, beginning of                                     
 year                                                 31,482         76,708 
                                                                            
----------------------------------------------------------------------------
Cash and cash equivalents, end of year               $64,511        $31,482 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
The notes are an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements

For the years ended December 31, 2011 and 2010

(thousands of United States dollars)

1. General information

WesternZagros Resources Ltd. (the "Corporation" or "WesternZagros") is headquartered in Calgary, Canada. The Corporation is incorporated under the laws of the Province of Alberta, Canada. The address for the Corporation is Suite 600, 440 - 2nd Avenue S.W., Calgary, Alberta, T2P 5E9.

WesternZagros is a publicly-traded, Calgary-based, international oil and gas company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros holds two Production Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the Kurdistan Region of Iraq. The Kurdamir and Garmian PSCs each govern a separate contract area. The Garmian contract area (1,780 square kilometres) is operated by WesternZagros. The Kurdamir contract area (340 square kilometres) is operated by Talisman (Block K44) B.V. ("Talisman") with a 40 percent working interest. WesternZagros holds a 40 percent working interest in both PSCs. The KRG holds a 20 percent working interest in both PSCs. The remaining 40 percent third party participant interest ("TPPI") in the Garmian PSC is held pending assignment by the KRG to a third party participant (refer to Note 22 "Commitments and contingencies" for a description of the PSCs).

The Corporation has its listing on the TSX Venture Exchange under the symbol "WZR.V".

Authorization of financial statements

These consolidated financial statements as at and for the year ended December 31, 2011 were authorized for issuance in accordance with a resolution of the Board of Directors on March 23, 2012.

2. Basis of preparation and adoption of IFRS

The Corporation prepares its financial statements in accordance with International Financial Reporting Standards ("IFRS"). In 2010, the CICA Handbook was revised to incorporate IFRS as issued by the International Accounting Standards Board ("IASB") which required publicly accountable enterprises to apply these standards effective for years beginning on or after January 1, 2011. Accordingly, these are the Corporation's first annual consolidated financial statements prepared in accordance with IFRS, as issued by the IASB, and interpretations issued by the IFRS Interpretations Committee ("IFRIC") that were published at the time of preparation and that were effective or available for early adoption on December 31, 2011.

These consolidated financial statements, including the prior year comparative information, have been prepared in compliance with IFRS. Subject to certain transition elections disclosed in Note 23 "Explanation of transition to IFRS", the Corporation has consistently applied the accounting policies disclosed within these financial statements to all periods presented herein as if these policies had always been in effect. This includes the opening statement of financial position at January 1, 2010 required for the purposes of transition to IFRS in accordance with IFRS 1, First Time Adoption of International Financial Reporting Standards. Prior to 2011, the Corporation prepared its consolidated annual financial statements in accordance with GAAP prior to the adoption of IFRS.

As is typical with exploration stage companies, the Corporation has incurred losses from operations and negative cash flows from operating activities, and has an accumulated deficit at December 31, 2011. During the year ended December 31, 2011, the Corporation had expenditures of $6.7 million for operating activities and $72.3 million for investing activities related to exploration and evaluation assets, including changes in non-cash working capital. During the fourth quarter of 2011, the Corporation completed a private placement of common shares for total gross proceeds of Cdn $46.6 million and commenced an extended well test at the Sarqala-1 oil discovery that generated an additional $12.9 million of proceeds from the sales of test oil. The test oil produced under the extended well test is sold by the Corporation and refined in local plants under the auspices of the Ministry of Natural Resources and proceeds are being applied to the Corporation's cost recovery pools. Subsequent to December 31, 2011, the Corporation entered into contracts to sell test oil from January through March 2012 from the ongoing Sarqala-1 extended well test and received additional proceeds of $25.9 million. Proceeds received from the sale of test oil during the Sarqala-1 extended well test will be utilized to fund the Corporation's ongoing activities. Currently the Corporation does not anticipate the need to raise additional debt or equity financing during the next twelve months. Accordingly, the Corporation has continued to adopt the going concern basis of accounting in preparing these financial statements, which assumes the Corporation can continue to meet its financial obligations and continue operations during the next fiscal year. These consolidated financial statements do not reflect adjustments in the carrying value of assets and liabilities, revenue or expense, nor the balance sheet classification that would be necessary if the going concern assumption was not valid, such adjustments could be material. Refer to Note 4 "Financial risk management" and the section within entitled "Liquidity and funding risk" for a detailed description of the potential requirement for additional debt or equity financing.

3. Significant accounting policies

The significant accounting policies used in the preparation of these consolidated financial statements are described below.

A. Basis of measurement

These consolidated financial statements have been prepared on a going concern basis under the historical cost convention, and have been prepared using the accrual basis of accounting, except for certain cash flow information. The accounting policies, as described in further detail in this note, have been consistently applied to all periods presented in these consolidated financial statements.

These consolidated financial statements, unless otherwise indicated, are expressed in United States dollars ("U.S."). The Corporation has adopted the U.S. dollar as its functional and reporting currency since most of its expenses are directly or indirectly denominated in U.S. dollars. When revenues are realized, it is expected that U.S. dollars would be received. All references herein to U.S. $ or to $ are to United States dollars and references herein to Cdn $ are to Canadian dollars. These consolidated financial statements are rounded to the nearest thousand (U.S. $000) except where otherwise indicated.

The preparation of these consolidated financial statements in conformity with IFRS requires the use of critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date, as well as the reported amounts of revenues and expenses during the reporting period. Such estimates relate to unsettled transactions and events at the reporting date. Accordingly, actual results may ultimately differ from the estimated amounts as future confirming events occur. Areas that involve a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 5 "Critical accounting judgements, estimates and assumptions".

B. Basis of consolidation

These consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries as follows:

Wholly-owned subsidiary                   Jurisdiction  Nature of operations
----------------------------------------------------------------------------
                                                                            
WesternZagros Resources Inc.                    Canada       Holding Company
Western Oil International Holdings Limited      Cyprus       Holding Company
WesternZagros Limited                           Cyprus   Exploration Company
WesternZagros (Garmian) Limited                 Cyprus              Inactive
These subsidiaries are entities over which the Corporation has the power to govern the financial and operating policies. The Corporation has 100 percent direct ownership of these entities. Accordingly, the subsidiaries are fully consolidated within the Corporation's consolidated financial statements.

Inter-company transactions and balances, including unrealized income and expenses arising from inter-company transactions, are eliminated in full in preparing these consolidated financial statements.

C. Jointly controlled assets under the PSCs

The jointly controlled assets under the PSCs offer joint ownership by the Corporation and its co-venturers to the PSCs for assets contributed to the ongoing exploration project in the Kurdistan Region of Iraq. The Corporation recognizes its share of the jointly controlled assets and its share of the joint liabilities incurred under the PSCs (refer to Note 22 "Commitments and contingencies" for a description of the PSCs).

D. Foreign currency translation

These consolidated financial statements are presented in U.S. dollars, which is the Corporation's functional and reporting currency.

Transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At the reporting date, monetary assets and liabilities that are denominated in foreign currencies are translated at the exchange rates prevailing at the date of the statement of financial position, any resulting exchange rate differences are recorded in the statement of comprehensive loss. Non-monetary items are measured at historical exchange rates.

E. Exploration and evaluation expenditures

Crude oil and natural gas exploration and evaluation expenditures ("E&E expenditures") are accounted for using a modified 'successful efforts' method of accounting. Accordingly, the Corporation accounts for its share of costs relating to the acquisition of, exploration for, and evaluation of crude oil and natural gas assets, including related provisions for decommissioning liabilities, as E&E expenditures. E&E expenditures include, but are not limited to, license and land acquisition costs; topographical, geological, geochemical, and geophysical costs or studies; drilling and testing of exploratory and non-productive wells; costs related to evaluating the technical feasibility or commercial viability of extracting mineral reserves; carrying costs directly related to unproved properties; major development projects; and administrative costs directly related to exploration and evaluation activities. Costs incurred prior to obtaining the rights to explore are expensed in the statement of comprehensive loss.

The costs continue to be carried as E&E expenditures until such time that the technical feasibility and commercial viability of the crude oil and natural gas hydrocarbons has been demonstrated and development has been sanctioned. At that point the E&E expenditures are assessed for impairment and then transferred to development expenditures. Prior to sanctioning development, any production is considered to be test production and any associated proceeds received, net of applicable costs, are credited to E&E expenditures. As at the date of these financial statements the Corporation is an exploration stage company and has not yet incurred any development expenditures.

Accumulated E&E expenditures are assessed for impairment if: a) sufficient data exists to determine technical feasibility and commercial viability; and b) facts or circumstances suggest the carrying amount exceeds the recoverable amount. Indicators of impairment are considered at least annually or whenever facts and circumstances indicate potential impairment. For the purposes of impairment testing, E&E expenditures are allocated on a cash-generating unit ("CGU") basis. The Corporation has established that each PSC entered into be identified as a separate CGU. An impairment loss is recognized for the amount by which the E&E expenditure's carrying value exceeds its recoverable amount. The recoverable amount is the higher of the E&E expenditure's fair value less costs to sell and their value in use. Impairment losses are recognized immediately in the statement of comprehensive income (loss). If facts and circumstances subsequently indicate that a reversal of a previous impairment loss is warranted, the carrying value is increased up to the recoverable amount, with the reversal limited to the original loss amount. As at the reporting date no impairment has been recognized.

No depreciation or amortization is charged against exploration and evaluation expenditures.

F. Property, plant and equipment ("PP&E")

Property, plant and equipment are stated at historical cost, less depreciation, and are depreciated on a straight-line basis over their estimated useful lives based on the following annual rates:

Furniture, fixtures and office equipment 20-33%
Computer hardware and software 33-50%

Whenever events or circumstances dictate, the Corporation compares the carrying value of property, plant and equipment to the higher of its value in use and fair value less costs to sell, based on estimated discounted future cash flows, to determine whether there is any indication of impairment.

G. Cash and cash equivalents and short-term investments

Cash and cash equivalents consist of cash in the bank, less outstanding cheques, and short-term highly liquid deposits with maturity dates of three months or less.

Short-term investments are highly liquid deposits with maturity dates between three and six months.

H. Financial instruments

Financial assets and liabilities are recognized on the Corporation's statement of financial position when the Corporation becomes party to the contractual provisions of the instrument. Financial assets are de-recognized when the contractual rights to the cash flows from the financial assets expire or when the contractual rights to those assets are transferred. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled, or expired.

Upon initial recognition, the Corporation classifies its financial instruments into one of the following categories based on the purpose for which the instruments were acquired:

Financial assets and liabilities at fair value through profit or loss - this category is comprised of derivatives, or assets acquired or incurred principally for the purpose of selling or repurchasing in the near term, except for those derivatives designated as hedges. They are carried in the statement of financial position at fair value with changes in fair value recognized in the comprehensive statement of income (loss) for the period. The Corporation has not classified any instruments in this category, and has not identified any material embedded derivatives in any of its financial instruments.

Available-for-sale financial assets - this category is comprised of non-derivative investments designated as available for sale and can include marketable securities and investments in debt and equity securities. Available-for-sale investments are recognized initially at fair value plus transaction costs and are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognized in other comprehensive income. Available-for-sale investments are classified as non-current, unless the investments mature within twelve months, or management expects to dispose of them within twelve months. The Corporation has not classified any instruments in this category.

Loans and receivables - this category is comprised of non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Corporation's loans and receivables are comprised of cash and cash equivalents, short-term investments, trade and other receivables, insurance recoveries receivable and deposits held in trust and are included in current assets due to their short-term nature.

Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest rate method.

Financial liabilities at amortized cost - this category is comprised of financial liabilities measured at amortized cost using the effective interest rate method, which includes trade and other payables.

I. Impairment of financial instruments

At each reporting date, the Corporation assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Corporation recognizes an impairment loss as follows:

Financial assets carried at amortized cost - the impairment loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument's original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account.

Available for sale financial assets - the impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the statement of loss. This amount represents the cumulative loss in accumulated other comprehensive income that is reclassified to net income.

Impairment losses on financial instruments carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Impairment losses on available-for-sale equity instruments are not reversed.

J. Provision for decommissioning obligations

Provision for decommissioning obligations are recognized when the Corporation has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. Provision is made for the present value of the future cost of abandonment of oil and gas wells and related facilities. The Corporation recognizes the initial spud date as the obligating event for each well location. The Corporation currently has no other facilities or infrastructure relating to petroleum operations that would require future abandonment activities. When the provision is first recognized a corresponding amount equivalent to the provision is also currently recognized as part of the cost of E&E expenditures.

The amount recognized is the estimated cost of decommissioning activities based on internal engineering estimates prevailing at the reporting date, discounted to its present value utilizing a pre-tax risk-free interest rate. Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision, with a corresponding adjustment to E&E expenditures, and are updated at each reporting date to reflect the current market assessments of the time value of money and the risks specific to the obligation.

The liability is increased each period due to the passage of time and the associated accretion is expensed to income in the period.

K. Taxation including deferred taxation

Tax expense represents current tax and deferred tax. Income tax is recognized in the statement of comprehensive income or loss except to the extent that it relates to items directly in equity, in which case the related income tax impact is recognized in equity.

Current tax is based on the taxable profits for the period using tax rates enacted or substantively enacted and any adjustment to tax payable or receivable in respect of previous years.

Deferred tax assets and liabilities are determined on a non-discounted basis, using the liability method, based on the differences between the carrying values in the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income tax assets and liabilities are presented as non-current. Deferred taxes are calculated using tax rates that have been enacted or substantively enacted by the reporting date.

Tax assets and liabilities are recognized on an entity by entity basis as the Corporation does not have the legal right to offset recognized amounts between entities.

L. Share capital

Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity.

M. Share-based payments

The Corporation has established a Stock Option Plan for the issuance of options to directors, officers, employees and consultants to purchase Common Shares of the Corporation. The vesting period and expiry date for each option grant is set at the discretion of the Board of Directors. Each vesting tranche is considered a separate award with its own vesting period. The fair value of each tranche is measured at the grant date using the Black-Scholes option pricing model. Compensation costs are recognized over the vesting period for each particular tranche based on the number of awards expected to vest, with a corresponding increase to contributed surplus. Compensation costs directly related to exploration activities are capitalized, costs related to non-exploration activities are treated as general and administrative expenses. The number of option awards expected to vest is reviewed at each reporting date, with any impact being recognized immediately.

The cash proceeds received, net of any directly attributable transaction costs, together with the amount recorded to contributed surplus are credited to share capital when the options are exercised.

N. Other income

The Corporation recognizes other income on an accrual basis and is related to the interest income earned on the Corporation's cash and cash equivalents and short-term investment balances.

O. Fair value

The fair value of instruments, trade and other receivables, and trade and other payables approximate their carrying amounts due to the short term maturity of the instruments.

P. Loss per share

The Corporation presents the basic and diluted loss per share data for its common shares, calculated by dividing the loss attributable to the shareholders of the Corporation by the weighted-average number of common shares outstanding during the period. Diluted income per share is determined by adjusting the income attributable to the common shareholders and the average number of common shares outstanding for the period for the effects of all potential dilutive common shares. Note that by definition, for periods in which there is a loss attributable to the common shareholders, there can be no dilutive impact on the loss per share calculation.

Q. Recent accounting pronouncements issued but not yet effective

The IASB has issued the following standards which are effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Corporation is currently evaluating the impact, if any, of each of these new standards which are briefly summarized as follows:

IAS 27 - Separate Financial Statements:

IAS 27 replaces the existing IAS 27, "Consolidated and Separate Financial Statements". IAS 27 contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. IAS 27 requires an entity preparing separate financial statements to account for those investments at cost or in accordance with IFRS 9, "Financial Instruments".

IAS 28 - Investments in Associates and Joint Ventures:

IAS 28 prescribes the accounting for investments in associates and sets out the application of the equity method when accounting for investments in associates and joint ventures.

IFRS 10 - Consolidated Financial Statements:

IFRS 10 requires an entity to consolidate an investee when it has power over the investee, is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from it activities. IFRS 10 replaces IAS 27 "Consolidated and Separate Financial Statements" and SIC-12 "Consolidation - Special Purpose Entities".

IFRS 11 - Joint Arrangements:

IFRS 11 establishes principles for financial reporting by parties to a joint arrangement, and requires entities to classify interests in joint arrangements as either a joint venture or a joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for joint operations the entity will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. IFRS 11 replaces IAS 31 "Interests in Joint Ventures" and SIC-13 "Jointly Controlled Entities - Non-monetary Contributions by Venturers".

IFRS 12 - Disclosure of Interests in Other Entities:

IFRS 12 establishes disclosure requirements relating to an entity's interests in other entities such as joint arrangements, associates or unconsolidated structured entities, including special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosure requirements and also introduces significant additional disclosure requirements that address the nature and risk associated with interests in other entities.

IFRS 13 - Fair Value Measurements:

IFRS 13 defines fair value and sets out a single comprehensive IFRS framework for measuring fair value and the required disclosures about fair value measurements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. IFRS 13 is intended to eliminate the inconsistencies in fair value measurement and the disclosure requirements contained in various other IFRS standards that refer to fair value.

The following standard issued by the IASB becomes effective January 1, 2015:

IFRS 9 - Financial Instruments:

IFRS 9 addresses the classification and measurement of financial assets and liabilities and replaces the multiple category and measurement models contained in IAS 39, "Financial Instruments: Recognition and Measurements". For financial assets, IFRS 9 contains only two measurement categories: amortized cost and fair value through profit and loss. IFRS 9 also replaces the models for measuring equity instruments, all equity instruments are measured at fair value, either through profit and loss or other comprehensive income. Where equity investments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent they do not clearly represent a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely.

For financial liabilities, IFRS 9 largely carries forward the existing requirements of IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss are generally recorded in other comprehensive income.

4. Financial risk management

The Corporation's financial instruments consist of cash and cash equivalents, short-term investments, trade and other receivables, insurance recoveries receivable, deposits held in trust and trade and other payables. The main risks that could adversely affect the Corporation's financial instruments are credit risk, liquidity and funding risk, and market and interest rate risk.

Risk management is carried out by senior management, and is reviewed regularly by the Board of Directors. The Corporation's risk management program concentrates mainly on securing the necessary financial resources required to minimize the potential risk that the Corporation is not able to meet its ongoing obligations and commitments. The risk management policies employed by the Corporation are discussed below:

Credit risk

Credit risk is the risk of loss associated with the counterparty's inability to fulfill its payment obligations. The Corporation is currently exposed to credit risk on its cash and cash equivalents and short-term investments to the extent these balances are invested with various institutions. The Board of Directors of the Corporation has approved an Investment Policy to dictate the various types of instruments and institutions that can be invested in and monitors these against this policy on a regular basis. Currently, the Corporation has entered into transactions for cash equivalents and short-term investments with major Canadian financial institutions with investment grade credit ratings.

The Corporation is also normally exposed to credit risk on trade and other receivables, mainly associated with its role as operator for the Garmian PSC and its share of related expenditures and the potential reimbursement of costs incurred under the Garmian PSC that may ultimately be due upon assignment by the KRG of the third party participant interest in the Garmian PSC. Previously, the Corporation was exposed to credit risk on trade and other receivables for Talisman's 40 percent interest in the Kurdamir PSC for gross costs incurred by WesternZagros while operator for the Kurdamir PSC. However, Talisman has been the operator for the Kurdamir PSC since August 1, 2011, accordingly there was essentially a $NIL receivable balance with Talisman as at December 31, 2011. The ability of the Corporation to successfully carry out the exploration, appraisal and development of its PSC contract areas may be impacted by the continued participation of the parties in these activities and the potential assignment of the third party participant interest in the Garmian PSC by the KRG and any corresponding reimbursement of costs incurred under the Garmian PSC (refer to Note 22 "Commitments and contingencies" for a description of the PSCs).

With respect to the Corporation's financial assets, the maximum exposure to credit risk due to default of a counter party is equal to the carrying value of these instruments. The maximum exposure to credit risk as at the reporting date is as follows:

                                                                            
As at December 31                                       2011           2010 
----------------------------------------------------------------------------
Cash and cash equivalents                            $64,511        $31,482 
Short-term investments                                 9,997              - 
Trade and other receivables                              327          8,648 
Insurance recoveries receivable                            -         17,597 
Deposits held in trust                                     -            420 
----------------------------------------------------------------------------
Total                                                $74,835        $58,147 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
There are no past due or impaired amounts as at the reporting date. Accordingly, the Corporation does not expect any losses from non-performance by these counterparties, and has not recorded a provision against any of these amounts as it does not consider the balances to be impaired.

There is no credit risk associated with sales of test oil from the Sarqala-1 extended well test into the local Kurdistan domestic market, as each of the purchase and sales contracts are prepaid in advance by the buyer.

Liquidity

Liquidity and funding risk

Liquidity and funding risk is the risk that the Corporation may be unable to generate or obtain sufficient cash or its equivalent in a timely and cost-effective manner to meet its commitments as they become due. The Corporation is in the exploration phase of operations and is engaged in acquiring properties and exploring for crude oil and natural gas. During the fourth quarter of 2011, the Corporation completed a private placement of common shares for total gross proceeds of Cdn $46.6 million and commenced an extended well test at the Sarqala-1 oil discovery that generated an additional $12.9 million of proceeds from the sales of test oil. Subsequent to December 31, 2011, the Corporation contracted to sell further test oil from January to March 2012 from the ongoing Sarqala-1 extended well test and received additional proceeds of $25.9 million. Furthermore and under the continued auspices of the KRG, the Corporation anticipates receiving additional proceeds from the Sarqala-1 extended well test beyond March 2012. The Corporation funds its share of all commitments from existing cash balances and short-term investments, the sales proceeds received from any extended well tests, and, if required, by accessing additional sources of funding from debt or equity markets.

The Corporation may require additional funding over time to maintain ongoing exploration programs and property commitments, as well as for administration expenses. In general, the Corporation's ability to continue its operations and exploration activities is dependent upon its ability to sell oil and gas from any extended well tests or from any of its discoveries that are ultimately developed, or to obtain additional funding over time as required. Any additional funding that may be required above and beyond the amount of sales proceeds received from extended well tests or other discoveries that may be developed is dependent upon the level and timing of exploration and appraisal activities pursued by the Corporation and the funding requirements of the Corporation under the relevant PSCs. While the Corporation has been successful in obtaining required funding in the past, including having completed two equity financing transactions during 2011 which generated $90.2 million in gross proceeds, there is no assurance that sufficient funds will be available to the Corporation in the future, or if available, available on favourable terms. The inability of the Corporation to access sufficient capital for its operations could have a material adverse impact on the Corporation's financial condition, results of operations and prospects. Factors that could affect the availability of financing include the continued support of its shareholders; the results of exploration activities; the potential assignment by the KRG of the third party participant interest in the Garmian PSC and timing thereof (see Note 22 "Commitment and contingencies" for a description of the PSCs); results associated with the ongoing Sarqala-1 extended well test and the continued receipt of any associated proceeds; results and timing associated with other potential future production and sales; the political climate in Iraq and the general effect it has on the oil and gas industry; and the overall state of the capital markets.

The Corporation has not entered into any debt financing arrangements as at the reporting date and is not subject to any externally imposed capital requirements. Financial liabilities include trade and other payables and income tax payable. Commitments are comprised of PSC commitments for the Kurdamir and Garmian Blocks as well as other various commitments (refer to Note 22 "Commitments and contingencies" for a further description of the Corporation's commitments). The estimated timing of cash outflows relating to financial liabilities and the Corporation's exploration commitments as at the reporting date is summarized as follows (U.S. $000s):

                               Less than  Six months                        
                              six months   to 1 year   2-5 years      Total 
----------------------------------------------------------------------------
Trade and other payables         $35,922           -           -    $35,922 
Income tax payable                   813           -           -        813 
Kurdamir Block commitments                                                  
 (Note 22)                        27,000      $5,000           -     32,000 
Garmian commitments((i))                                                    
 (Note 22)                         6,500      18,500           -     25,000 
Other commitments (Note 22)        1,153         571      $1,015      2,739 
----------------------------------------------------------------------------
Total expected cash outflow      $71,388     $24,071      $1,015    $96,474 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
(i) Based on the Corporation's current 100% funding requirement of          
    activities on the Garmian Block.
Pursuant to the terms of the sales and purchase contracts related to the Sarqala-1 extended well test, the Corporation is prepaid for all contracted deliveries. The Corporation has yet to provide approximately $4 million of test oil to fulfill the terms of the most recent contract, which concludes at the end of March 2012.

The Corporation's capital structure consists of shareholder's equity and working capital. The Corporation will adjust its capital structure to manage its drilling programs though the issuance of shares and adjustments to capital spending. The Corporation's objectives when managing its capital structure are as follows:

i.  Ensure adequate levels of available cash and cash equivalents and short-
    term investments to meet the Corporation's commitments under the Garmian
    and Kurdamir PSCs (also refer to Note 22 "Commitments and
    contingencies"); and 
ii. To prudently fund expenditures related to the acquisition of properties,
    and for exploration, appraisal and development of crude oil and natural
    gas properties.
The Board of Directors regularly reviews the Corporation's cash and cash equivalents and short-term investments against the Corporation's expenditure commitments and estimates the need and timing for additional financing. This review includes anticipating the likelihood and timing of an assignment of the third party participant interest by the KRG under the Garmian PSC and any corresponding reimbursement of costs under the Garmian PSC (refer to Note 22 "Commitments and contingencies" for a description of the PSCs), as well as estimating potential proceeds to be derived from crude oil sales during extended well testing. Management has a reasonable expectation that the Corporation can raise the additional capital required in order to meet future expenditures.

Market and interest rate risk

Market risk is the risk of loss that may arise from changes in market factors such as interest rates, foreign exchange rates and equity or commodity prices received from both the export market or from the local Kurdistan domestic market. The Corporation is exposed to interest rate risk to the extent that changes in market interest rates will impact interest earned on the Corporation's cash and cash equivalents and short-term investments. The Corporation is also exposed to foreign exchange risk, as the majority of costs are anticipated to be incurred in U.S. dollars while the funds it will have available to it may be in other currencies.

The Corporation's Investment Policy dictates the various types of instruments and institutions that can be invested in and monitors these against this policy on a regular basis. The Board of Directors has also approved a Foreign Exchange Policy to dictate the currencies held by the Corporation and the instruments that can be utilized by the Corporation to meet its day to day requirements. This Foreign Exchange Policy requires the Corporation to hold the majority of its cash and cash equivalents and short term investments in U.S. dollars and sets out the type and duration of instruments that can be used to meet the Corporation's day to day foreign exchange requirements. The Foreign Exchange Policy does allow the Corporation to hold other balances, mainly Canadian dollars, to meet its funding needs for general and administrative and other spending requirements in these currencies. Neither aforementioned policy permits the Corporation to enter into any economic hedging as it relates to interest or foreign exchange risks. As at December 31, 2011, had the U.S. dollar changed by one percent against the Canadian dollar, with all other variables held constant, the Corporation's foreign exchange gain (loss) would have been affected by approximately $100 thousand (2010: $11 thousand).

In general, both crude oil and natural gas prices are subject to wide fluctuation. During the year ended December 31, 2011, Brent daily spot crude prices ranged in value from $93 to $126 per barrel. WesternZagros originally negotiated the economic terms of the Original PSC in 2007 in a crude oil price environment of approximately $50 per barrel. Any significant and sustained decline in crude oil prices received below that price that are subject to the terms of the PSCs may impact the feasibility of WesternZagros's business plan.

Currently, the Corporation is subject to both market conditions and commodity price fluctuations related to its ongoing sales of test oil from the Sarqala-1 extended well test into the local domestic Kurdistan market. Local sales prices are lower than the prevailing international prices. Any change in the sustainability of the local domestic Kurdistan market or fluctuation in the prices received could have a considerable impact on the cash proceeds received by WesternZagros.

If the Corporation were to export crude oil and natural gas from the Kurdistan Region of Iraq, the marketability and price of any crude oil and natural gas that may be exported is, and will continue to be, affected by numerous factors beyond its control including the impact that the various levels of government may have on the ultimate price received for crude oil and natural gas sales. In addition, the timing of payments received by the Corporation for any exports would be uncertain as the payment mechanism for export sales from Iraq is still developing. The Corporation's ability to market its crude oil and natural gas may depend on its ability to secure transportation. The Corporation may also be affected by deliverability uncertainties related to the proximity of its potential production to pipelines and processing facilities and operational problems affecting such pipelines and facilities as well as potential government regulation relating to price, the export of crude oil and natural gas and other aspects of the crude oil and natural gas business. To date, the Corporation has not exported any oil or natural gas from the Kurdistan Region of Iraq.

5. Critical accounting judgments, estimates and assumptions

The preparation of these consolidated financial statements in conformity with IFRS requires the use of critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the reporting date, as well as the reported amounts of revenues and expenses during the reporting period. Such estimates relate to unsettled transactions and events as at the reporting date. Accordingly, actual results may ultimately differ from the estimated amounts as future confirming events occur. Areas that involve a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed below.

A. Recoverability of asset carrying values

At each reporting date, the Corporation assesses its exploration and evaluation and property, plant and equipment expenditures for possible impairment if events or circumstances indicate the carrying values of the assets might not be recoverable. Relevant indicators include the following: the continued progression of Management's operational plans; new information obtained from wells that have been drilled or tested; changes or restrictions in access to drilling sites; changes in legal, regulatory, market, environmental, technological, or political factors that could impact ongoing operations; the ability of the Corporation to continue fulfilling ongoing commitments; and significant changes in the Corporation's market value.

If factors indicate that the Corporation may need to recognize impairment, the carrying value of the assets for each cash-generating-unit is compared to the greater of value-in-use or fair-value less costs to sell. The determination of the value-in-use amount, which is based on discounted future cash flows, and any resulting impairment involves the use of significant estimates and assumptions about future events and factors such as future commodity prices, the impact of inflation on operating expenses, discount rates, production profiles, the ability to produce and export crude oil and natural gas, the future capital costs needed to develop reserves, as well as the future marketability and availability of transportation for crude oil and natural gas that is produced.

At the reporting date, the Corporation is still in the exploration phase of operations on both the Garmian and Kurdamir Blocks. The Corporation has not recognized any impairment for E&E expenditures nor for property, plant, and equipment.

B. Provision for decommissioning obligations

The Corporation recognizes both an asset and a provision for decommissioning obligations in the period in which they are incurred by estimating the fair value of the obligation. The Corporation has chosen to base the fair value calculations on a risk-free discount rate, rather than a credit-adjusted risk-free rate, which is a critical accounting judgement under IFRS. Provisions for environmental clean-up and remediation costs associated with the Corporation's drilling operations are based on current legal and constructive requirements, technology, price levels and expected plans for remediation. Actual costs and cash outflows and the timing of those cash outflows can differ from estimates because of changes in laws and regulations, public expectations, prices, discovery and analysis of site conditions, future performance of wells drilled, and changes in clean-up technology. Estimating the timing and amount of cash outflows required to settle these obligations are inherently difficult and are based on Management's current experience. Any differences between actual and estimated decommissioning obligations would impact both the asset and the provision, which would then impact future depreciation of the asset as well as accretion on the provision.

C. Income tax

Tax regulations and legislation and the interpretations thereof in the jurisdictions that the Corporation operates are subject to change. As such, income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by Management based on all available information at the end of the reporting period to determine the likelihood that they will be realized from future taxable earnings.

D. Share-based payments

The estimates, assumptions, and judgments made in relation to the fair value of share-based payments and the associated expense recognition is subject to measurement uncertainty. The fair value of employee stock options is measured using a Black Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility, expected life of the instrument, expected dividends, and the risk-free interest rate.

6. Segment reporting

For the purposes of segment reporting, the Corporation is in the exploration phase and has one significant asset related to its interest in the PSCs with the KRG in respect of an exploration project in the Kurdistan Region of Iraq. Accordingly, the Corporation has identified one segment for operational activities carried out in the country of Iraq. Refer to Note 22 "Commitments and contingencies" for a description of the PSCs.

7. Cash and cash equivalents and short-term investments

As at                            December 31,   December 31,     January 1, 
                                         2011           2010           2010 
----------------------------------------------------------------------------
                                                                            
Cash and cash equivalents:                                                  
  Bank balances                        $3,212         $3,613         $6,609 
  Term deposits                        61,299         27,869         70,099 
----------------------------------------------------------------------------
Total cash and cash equivalents       $64,511        $31,482        $76,708 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Short-term investments:                                                     
  Term deposits                        $9,997             $-             $- 
----------------------------------------------------------------------------
Total short-term investments           $9,997             $-             $- 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
8. Trade and other receivables                                              
                                                                            
Current as at                                                               
                                 December 31,   December 31,     January 1, 
                                         2011           2010           2010 
----------------------------------------------------------------------------
Joint venture receivables                 $ -         $7,675         $6,636 
Other receivables                         327            973             53 
Loan receivable from related                                                
 party                                      -              -            191 
----------------------------------------------------------------------------
Total trade and other                                                       
 receivables                             $327         $8,648         $6,880 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other receivables relates mainly to a GST receivable and balances owing from certain payables vendors that have yet to be realized. The loan receivable at January 1, 2010 was in respect of a loan to a senior officer, this loan was fully repaid in the third quarter of 2010.

All classes within trade and other receivables do not contain any impaired assets.

9. Exploration and evaluation expenditures

As at                            December 31,   December 31,     January 1, 
                                         2011           2010           2010 
----------------------------------------------------------------------------
Costs                                $261,608       $180,770      $ 154,097 
----------------------------------------------------------------------------
Net book value                       $261,608       $180,770      $ 154,097 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
Opening net book value                              $180,770      $ 154,097 
Additions, net of insurance                                                 
 recoveries                                           94,199         26,673 
Proceeds received from extended                                             
 well testing                                        (12,879)             - 
Disposals                                               (482)             - 
----------------------------------------------------------------------------
Closing net book value                              $261,608      $ 180,770 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All E&E expenditures pertain to the Kurdistan Region exploration project with respect to the Corporation's PSCs and have been capitalized in accordance with the Corporation's exploration and evaluation accounting policy. Included in E&E expenditures as at December 31, 2011 is $1.4 million related to provisions for decommissioning obligations (December 31, 2010: $0.2 million). For the year ended December 31, 2011, the Corporation has capitalized $4.8 million of general and administrative costs (2010: $2.0 million), including $0.6 million of share-based compensation costs (2010: $0.3 million) directly related to exploration activities. All E&E expenditures are excluded from depreciation.

In the fourth quarter of 2011, the Corporation began the Sarqala-1 extended well test ("EWT") which resulted in the Corporation's first sales of test oil into the local Kurdistan domestic market. For the period ended December 31, 2011, the Corporation executed four sales contracts and received payments totaling $12.9 million. As at December 31, 2011, WesternZagros was still in the exploration stage of development and has credited the proceeds received from test oil sales against E&E expenditures.

The Corporation initiated an insurance claim during 2010 related to the cost of the well control and recovery operations at Kurdamir-1. The control of well insurance policy covering these claims had a net aggregate limit to the Corporation of $45 million, with a $0.4 million deductible. Under the terms of the insurance policy, the Corporation submitted claims for these costs as they were incurred and paid and these claims were then subject to the review and approval of an adjuster appointed by the insurers. During 2011, the Corporation and the insurers settled the balance of the claim which brought the total amount of insurance recoveries received and credited against E&E expenditures to approximately $45.0 million. As at December 31, 2010, $42.0 million had been credited to E&E expenditures for insurance recoveries, which also recognized an insurance recoveries receivable of $17.6 million that was subsequently collected during 2011.

As at December 31, 2011, the Corporation had approximately $88 million relating to the Kurdamir PSC and $146 million related to the Garmian PSC, net to WesternZagros, of recoverable costs available that may ultimately be recovered from future crude oil or natural gas sales in accordance with the PSCs (refer to Note 22 "Commitments and contingencies" for a description of the PSCs). Under each PSC, costs subject to recovery include all costs and expenditures incurred for exploration, development, production and decommissioning operations, as well as any other costs and expenditures incurred directly or indirectly from these activities. Pursuant to the terms of the PSCs, these estimated cost pools are subject to government audit.

10. Deposits held in trust

The Corporation had deposited an amount in trust for a supplier to be utilized to fund certain expenditures for drilling operations. During the first quarter of 2011 these funds held in trust were released back to the Corporation.

11. Taxation

For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
                                                                            
Current tax:                                                                
  Recovery for the year                              $(1,819)         $(887)
  Adjustments in respect of prior years                   93           (460)
----------------------------------------------------------------------------
Total current tax expense (recovery)                 $(1,726)       $(1,347)
----------------------------------------------------------------------------
                                                                            
Deferred tax:                                                               
  Origination and reversal of temporary                                     
   differences - current year                           $221           $202 
  Expense (recovery) due to change in tax rate                              
   applied                                                 -            (11)
----------------------------------------------------------------------------
Total deferred tax expense                              $221           $191 
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
Total taxation (recovery)                            $(1,505)       $(1,156)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Income tax expense (recovery) differs from that which would be expected from
applying the combined statutory Canadian federal and provincial tax rate of 
26.5 percent (2010: 28 percent) due to the following:                       
                                                                            
For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
                                                                            
Net loss before taxation                             $(8,378)       $(6,957)
Statutory tax rate                                      26.5%            28%
----------------------------------------------------------------------------
Taxation (recovery) at statutory tax rate             (2,220)       $(1,948)
----------------------------------------------------------------------------
                                                                            
Reconciling items:                                                          
  Losses in foreign jurisdiction with no tax                                
   benefit                                               853          1,055 
  Stock-based compensation                               228            367 
  Adjustments in respect of prior years                   93           (460)
  Previously unrecognized non-capital losses             (69)             - 
  Impact of issuance costs not included in                                  
   loss before taxation                                  (99)             - 
  Effect of carrying back losses at a higher                                
   year tax rate                                        (155)           (48)
  Non-deductible expense                                   7             12 
  Impact of recognized currency differential                                
   on loss carry-backs                                  (446)          (167)
  Current year loss not recognized as a                                     
   deferred tax asset                                    337              - 
  Other                                                  (34)            33 
----------------------------------------------------------------------------
Total taxation (recovery)                            $(1,505)       $(1,156)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
The Canadian statutory tax rate decreased to 26.5% in 2011 from 28% in 2010 
as a result of tax legislation enacted in 2007.                             
                                                                            
The analysis of deferred tax assets and deferred tax liabilities is as      
follows:                                                                    
                                                                            
                                                December 31,   December 31, 
Deferred tax assets                                     2011           2010 
----------------------------------------------------------------------------
  To be recovered within 12 months                        $-           $186 
  To be recovered after more than 12 months                -              - 
----------------------------------------------------------------------------
Total deferred income tax asset                           $-           $186 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
                                                December 31,   December 31, 
Deferred tax liabilities                                2011           2010 
----------------------------------------------------------------------------
To be recovered within 12 months                           -              - 
To be recovered after more than 12 months               $175           $140 
----------------------------------------------------------------------------
Total deferred income tax liability                     $175           $140 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
The deferred income tax asset is comprised of:                              
                                                                            
                                 December 31,   December 31,     January 1, 
Deferred income tax asset as at          2011           2010           2010 
----------------------------------------------------------------------------
Share issue costs                          $-           $204           $408 
Temporary differences on                                                    
 property, plant and equipment              -            (18)           (37)
----------------------------------------------------------------------------
Total deferred income tax asset            $-           $186           $371 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
The deferred income tax liability is comprised of:                          
                                                                            
Deferred income tax liability    December 31,   December 31,     January 1, 
 as at                                   2011           2010           2010 
----------------------------------------------------------------------------
Temporary differences on                                                    
 property, plant and equipment           $175           $140           $134 
Non-capital loss carry-forwards             -              -              - 
----------------------------------------------------------------------------
Total deferred income tax                                                   
 liability                               $175           $140           $134 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Deferred tax assets are recognized to the extent that it is probable that   
taxable profit will be available against which the deductible temporary     
differences and the carry-forward of unused tax credits and unused tax      
losses can be utilized.                                                     
                                                                            
The Corporation has not recorded deferred tax assets in respect of the      
following temporary differences:                                            
                                                                            
Deferred tax assets not          December 31,   December 31,     January 1, 
 recognized as at                        2011           2010           2010 
----------------------------------------------------------------------------
Non-capital loss carry-forward         $1,270              -              - 
Share issue costs                       2,508           $691           $691 
Property, plant and equipment              51              -              - 
----------------------------------------------------------------------------
Taxation (recovery) at                                                      
 statutory tax rate                     3,829           $691           $691 
----------------------------------------------------------------------------
As at December 31, 2011, the Corporation had a $1,270 non-capital loss carry-forward that would be available to offset against future taxable income. This loss will expire on December 31, 2031.

As at December 31, 2011, the Corporation also had a deferred tax liability of $469 (2010: $469) for temporary differences of $3,751 related to an investment in the shares of a subsidiary which was not recognized because the Corporation controls whether the liability will be incurred and is satisfied that it will not be incurred in the foreseeable future.

12. Property, plant and equipment

As at the reporting date, property, plant and equipment is comprised of office and computer equipment and leasehold improvements. As the Corporation is still in the exploration stage, all oil and gas assets, including assets related to provisions for decommissioning obligations, are classified within exploration and evaluation assets.

As at                            December 31,   December 31,     January 1, 
                                         2011           2010           2010 
----------------------------------------------------------------------------
Costs                                  $1,860         $1,831        $ 1,831 
Accumulated depreciation               (1,771)        (1,570)        (1,017)
----------------------------------------------------------------------------
Net book value                            $89           $261          $ 814 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
Opening net book value                                  $261          $ 814 
Additions                                                 29              - 
Depreciation                                            (201)          (553)
----------------------------------------------------------------------------
Closing net book value                                   $89          $ 261 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
13. Trade and other payables                                                
                                                                            
Current                                                                     
                                 December 31,   December 31,     January 1, 
                                         2011           2010           2010 
----------------------------------------------------------------------------
Trade payables                         $7,031        $ 4,052        $ 6,705 
Accruals                               28,891         17,473         11,592 
----------------------------------------------------------------------------
Total trade and other payables        $35,922        $21,525        $18,297 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trade payables are non-interest bearing and are normally settled on 30 to 60 day terms. Accruals relate mainly to E&E and other expenditures incurred as at the reporting date.

14. Provision for decommissioning obligations

Decommissioning liabilities are recognized when the Corporation has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. Provisions are made for the present value of the future cost of abandonment of oil and gas wells and related facilities.

The amount recognized is the estimated cost of decommissioning activities based on internal engineering estimates prevailing at the reporting date, discounted to its present value utilizing a pre-tax risk-free interest rate. Changes in the estimated decommissioning costs or the estimated timing of decommissioning costs are dealt with prospectively by recording an adjustment to the provision, with a corresponding adjustment to exploration and evaluation assets, and are updated at each reporting date to reflect the current market assessments of the time value of money and the risks specific to the obligation.

These costs are assumed to be incurred in the years 2035 and 2036 in respect of well locations as at the reporting date. The Corporation's share of the total undiscounted amount of estimated cash flow required to settle the obligation is $3.2 million. The Corporation has used the Bank of Canada long-term bond yield rate and an inflation rate of 4 percent to calculate the net present value of the future obligations. The additional obligations incurred in 2011 relate to the Corporation's 100 percent working interest funding for both the Sarqala-1 re-entry operation and drilling operations at Mil Qasim-1, as well as the Corporation's 60 working interest in the drilling operations at Kurdamir-2 (also refer to Note 22 "Commitments and contingencies" for a description of the PSCs).

The following table presents the reconciliation of the Corporation's provision for decommissioning liabilities:

For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
Balance, beginning of year                              $509           $432 
Additional obligations incurred                        1,046              - 
Changes in estimates or timing of cash flows             148             61 
Accretion                                                 25             16 
----------------------------------------------------------------------------
Balance, end of year                                  $1,728           $509 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Share capital

As at December 31, 2011, the Corporation is authorized to issue an unlimited number of common shares and preferred shares, issuable in series. The common shares are without nominal or par value.

The common shares issued and outstanding were as follows:

                                                   Number of                
                                                      shares         Amount 
----------------------------------------------------------------------------
Balance as at January 1, 2010 and December 31,                              
 2010                                            207,464,320       $253,583 
Issuance of common shares, net of issuance                                  
 costs                                           163,665,352         88,034 
Options exercised for common shares                   79,800             64 
----------------------------------------------------------------------------
Balance as at December 31, 2011                  371,209,472       $341,681 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
16. Share based payments

Pursuant to the stock option plan, the Board of Directors may grant options to directors, officers, employees and other service providers. The aggregate number of shares that may be reserved for issuance pursuant to stock options may not exceed 10 percent of the issued and outstanding common shares of the Corporation on a non-diluted basis as at the time of granting. Stock options expire not more than five years from the date of grant, or earlier if the individual ceases to be associated with the Corporation, and the option vesting period is determined at the discretion of the Board of Directors when granted. These options are equity settled share based payment transactions.

The following tables present the reconciliation of stock options granted:

For the year ended December 31, 2010                               Weighted 
                                                                    average 
                                                   Number of       exercise 
                                                     options    price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of year                    13,007,334          $1.50 
Granted                                            9,764,900           0.49 
Exercised                                                  -              - 
Forfeited and expired                             (2,417,334)          1.67 
----------------------------------------------------------------------------
Outstanding, end of year                          20,354,900          $1.00 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
 Exercisable at December 31, 2010                                           
                                                  12,143,965          $1.30 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
For the year ended December 31, 2011                               Weighted 
                                                                    average 
                                                   Number of       exercise 
                                                     Options    price ($Cdn)
----------------------------------------------------------------------------
Outstanding, beginning of year                    20,354,900          $1.00 
Granted                                              630,000           0.55 
Exercised                                            (79,800)          0.51 
Forfeited and expired                             (2,126,400)          1.15 
----------------------------------------------------------------------------
Outstanding, end of year                          18,778,700          $0.97 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Exercisable at December 31, 2011                  14,707,466          $1.09 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
The fair value of all options granted have been estimated at the grant date 
using the Black-Scholes option pricing model and are summarized in the      
following table:                                                            
                                                                            
For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
Weighted average fair value of stock options                                
 granted                                               $0.37          $0.29 
Average Risk Free Interest Rate                        $1.14%          1.62%
Expected Life                                        3 years    2 - 3 years 
Average Expected Volatility                              108%           120%
Dividend Per Share                                       Nil            Nil 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
The following table summarizes Stock Options outstanding and exercisable    
under the Stock Option Plan at December 31, 2010:                           
                                                                            
            Options Outstanding                   Options Exercisable       
----------------------------------------------------------------------------
                         Weighted                         Weighted          
                          Average Weighted                 Average Weighted 
Range of                Remaining  Average               Remaining  Average 
 Exercise   Number of Contractual Exercise   Number of Contractual Exercise 
 Price        Options        Life    Price     Options        Life    Price 
 Cdn$     Outstanding      (years)    Cdn$ Exercisable      (years)    Cdn$ 
----------------------------------------------------------------------------
$0.38 -                                                                     
 $0.49      9,739,900        4.97     0.49   3,226,634        4.97     0.49 
$0.50 -                                                                     
 $1.00      4,756,667        3.10     0.63   3,275,664        3.09     0.65 
$1.01 -                                                                     
 $2.00        435,000        2.85     1.37     263,334        2.79     1.34 
$2.01 -                                                                     
 $3.28      5,423,333        2.12     2.19   5,378,333        2.12     2.19 
----------------------------------------------------------------------------
Total      20,354,900        3.73     1.00  12,143,965        3.15     1.30 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
The following table summarizes Stock Options outstanding and exercisable    
under the Stock Option Plan at December 31, 2011:                           
                                                                            
            Options Outstanding                   Options Exercisable       
----------------------------------------------------------------------------
                         Weighted                         Weighted          
                          Average Weighted                 Average Weighted 
Range of                Remaining  Average               Remaining  Average 
 Exercise   Number of Contractual Exercise   Number of Contractual Exercise 
 Price        Options        Life    Price     Options        Life    Price 
 Cdn$     Outstanding      (years)    Cdn$ Exercisable      (years)    Cdn$ 
----------------------------------------------------------------------------
$0.38 -                                                                     
 $0.49      9,411,700        3.97     0.49   6,222,466        3.97     0.49 
$0.50 -                                                                     
 $1.00      4,142,000        2.43     0.57   3,286,667        2.04     0.57 
$1.01 -                                                                     
 $2.00        255,000        1.95     1.43     228,333        1.89     1.39 
$2.01 -                                                                     
 $3.28      4,970,000        1.11     2.17   4,970,000        1.11     2.17 
----------------------------------------------------------------------------
Total      18,778,700        2.85     0.97  14,707,466        2.54     1.09 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the year ended December 31, 2011, the Corporation recognized $0.9 million (2010: $1.3 million) of share based compensation costs as general and administrative expense and capitalized $0.6 million (2010: $0.3 million).

17. General and administrative expenses, by nature

For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
Staff expensesShare-based payments                    $6,677         $4,668 
                                                         860          1,310 
Travel expenses                                        1,005            434 
Professional fees                                      1,956          1,513 
Office costs                                           1,084          1,017 
Regulatory and corporate project costs                   581            623 
Other administrative expenses                            532            426 
Less capitalized general and administrative                                 
 costs                                                (4,223)        (3,578)
----------------------------------------------------------------------------
                                                                            
Total administrative expenses                         $8,472         $6,413 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key management personnel have been identified as the Board of Directors and the Executive Management Team. Details of key management remuneration are shown in Note 18.

18. Related party transactions and balances

All wholly-owned subsidiaries as listed in Note 3(B) have been included in the consolidated accounts.

The remuneration of the twelve key management personnel of the Corporation, which includes the Directors and Officers and other Executive Management personnel, is set out below in aggregate:

For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
Salaries and wages                                    $2,351         $1,378 
Short-term benefits                                       48             45 
Share-based compensation (expensed and                                      
 capitalized portions)                                   867            951 
----------------------------------------------------------------------------
Total                                                 $3,266         $2,374 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
19. Loss per share, basic and diluted

The basic loss per share is calculated by dividing the loss attributable to shareholders of the Corporation by the weighted average number of common shares issued during the period. In computing diluted per share amounts, all of the Corporation's options at the reporting date totaling 18,778,700 (2010: 20,354,900) have been excluded as they are anti-dilutive. Accordingly no additional common shares were added to the basic weighted average shares outstanding to account for dilution.

The basic and diluted loss per share was calculated as follows:

For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
Loss for the period                                   $6,873         $5,801 
Weighted-average common shares (000's)               294,247        207,464 
----------------------------------------------------------------------------
Loss per share (basic and diluted)                    $0.023         $0.028 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
20. Shareholder rights plan

On October 18, 2007, the Corporation adopted a shareholder rights plan (the "Plan"). Under the Plan, one right has been issued in respect of each currently issued common share and one right will be issued with each additional common share which is issued. The rights remain attached to the common shares and are not exercisable or separable unless one or more of certain specified events occur. If a person or group acting in concert acquires 20 per cent or more of the common shares of the Corporation, the rights will entitle the holders thereof (other than the acquiring person or group) to purchase common shares at a substantial discount from the then market price. The rights are not triggered by a "Permitted Bid" as defined in the Plan. The Plan will remain in effect until termination of the annual meeting of shareholders in 2013, unless extended by resolution of the shareholders at such meeting.

21. Supplemental cash flow information

Expenditures on exploration and evaluation assets are comprised of:

                                                                            
For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
                                                                            
Expenditures on exploration and evaluation                                  
 assets                                             $(95,557)      $(66,853)
Change in non-cash investing working capital          23,259            227 
----------------------------------------------------------------------------
                                                    $(72,298)      $(66,626)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Changes in non-cash working capital is comprised of:                        
                                                                            
                                                                            
For the years ended December 31                         2011           2010 
----------------------------------------------------------------------------
                                                                            
Related to operating activities                                             
  Trade and other receivables                             $6          $(270)
  Prepaid expenses                                      (236)           144 
  Trade and other payables                                (2)             3 
----------------------------------------------------------------------------
                                                       $(232)         $(123)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Related to investing activities                                             
  Trade and other receivables                         $8,735        $(1,498)
  Trade and other payables                            14,524          1,725 
----------------------------------------------------------------------------
                                                     $23,259           $227 
----------------------------------------------==============================
22. Commitments and contingencies

A. PSC commitments

During the year ended December 31, 2011, the Corporation finalized an agreement with the Kurdistan Regional Government and Talisman to amend the original Production Sharing Contract ("Original PSC") that governed the Corporation's exploration activities in the Kalar-Bawanoor Block in Kurdistan. The agreement divided the contract area of the Original PSC into the Garmian Block and the Kurdamir Block, which are now governed by the Garmian PSC and Kurdamir PSC, respectively (also refer to chart below). The Corporation retained its 40 percent working interest in each of the PSCs.

Under the Kurdamir PSC, Talisman is the operator, with a 40 percent working interest and the KRG has a 20 percent working interest which is carried by the Corporation. Under the Garmian PSC, WesternZagros is the operator, the KRG has a 20 percent working interest and the remaining 40 percent working interest is held by the KRG to be assigned to another third party participant. The Corporation is currently funding 100 percent of the activities under the Garmian PSC until the third party participant interest is assigned, at which time the Corporation will be reimbursed for the third party participant's share of the costs. WesternZagros's production sharing terms, under both the Garmian and Kurdamir PSCs, remain unchanged from the Original PSC.

A summary of the material amendments to the Original PSC is as follows:

----------------------------------------------------------------------------
             Original PSC         Amended PSC          New PSC              
             (Kalar-Bawanoor)     (Kurdamir)           (Garmian)            
----------------------------------------------------------------------------
First        December 31, 2010    June 30, 2012        December 31, 2011    
 Exploration                                                                
 Sub-Period                                                                 
 (expires)                                                                  
----------------------------------------------------------------------------
Exploration  Third Exploration    Kurdamir-2           Mil Qasim-1          
 Obligation  Well                                      Exploration Well     
 (remaining)                                           (completed)          
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
Second       Additional Two Years Additional Two Years Additional Two Years 
 Exploration                                                                
 Sub-Period                                                                 
----------------------------------------------------------------------------
Exploration  Two Exploration      One Appraisal        One Exploration Well 
 Obligation  Wells                Well(Kurdamir-3)     (Hasira-1)           
----------------------------------------------------------------------------
                                                                            
----------------------------------------------------------------------------
Other        Two One Year         Six Month Extension  One Year Extension   
 Extensions  Extensions                                                     
----------------------------------------------------------------------------
Work         None                 One appraisal well   One exploration well 
 commitments                                                                
----------------------------------------------------------------------------
Economic     10% Royalty Oil,     Unchanged            Unchanged            
 Terms       remainder available                                            
             for Cost Recovery                                              
             and Profit Oil                                                 
----------------------------------------------------------------------------
PSC Payments $ 5 Million          Additional Capacity  Additional Capacity  
             Signature Bonus      Building Support     Building Support     
             $40 Million Capacity Payment payable      Payment payable equal
             Building Support     equal to 3% of       to 3% of             
             Payment              WesternZagros Profit WesternZagros Profit 
             $ 1.1 Million Annual Oil. Continuation of Oil. Annual payments 
             Payments             previous annual      50% of previous      
                                  payments.            payments.            
----------------------------------------------------------------------------
Operator     WesternZagros        Talisman             WesternZagros        
----------------------------------------------------------------------------
Ownership    WesternZagros 40%    WesternZagros 40%    WesternZagros 40%    
             Talisman      40%    Talisman      40%    Unassigned           
                                                       TPPI          40%(ii)
             KRG           20%(i) KRG           20%(i) KRG           20% (i)
----------------------------------------------------------------------------
Contract     2,120 km2            340 km2              1,780 km2            
 Area                                                                       
----------------------------------------------------------------------------
(i)  WesternZagros funds the KRG costs, ultimately to be recovered by       
     WesternZagros through KRG's share of Cost Recovery Oil. For the Garmian
     Block, the current PSC requires that the third party participant will  
     be required to pay for half of the KRG's carried share. This will be   
     confirmed once the TPPI is assigned.                                   
(ii) WesternZagros initially funds the 40% of the costs for the third party 
     participant until it is assigned by the KRG. The amounts funded by     
     WesternZagros for the TPPI will be repaid upon assignment of this      
     interest.
As at December 31, 2011, the Corporation estimates expenditures of approximately $32 million to meet its 60 percent funding requirement related to Kurdamir Block activities, including its remaining commitments for the first exploration sub-period under the Kurdamir PSC. This estimate includes the Corporation's funding requirement of costs for drilling the Kurdamir-2 commitment well by June 30, 2012; planned initial testing costs while drilling Kurdamir-2; and associated supervision and local office support costs and other planned Kurdamir Block activities to December 31, 2012.

During the year ended December 31, 2011, the Corporation finished drilling the Mil Qasim-1 exploration well in order to meet its commitments for the first exploration sub-period under the Garmian PSC. The Corporation has now entered the second exploration sub-period of the Garmian PSC. During the second exploration sub-period the Corporation is required to drill one exploration commitment well (Hasira-1) by December 31, 2013, and spend a minimum of $25 million on drilling and associated geological and geophysical activities. Upon fulfilling these minimum exploration commitments, the Corporation would then be entitled to a one year extension of the second exploration sub-period (i.e. to December 31, 2014) if the Corporation committed to drilling one additional exploration well during the extension period.

During the year ended December 31, 2011, the Corporation submitted and received approval from the KRG for an appraisal work plan and budget with respect to the Sarqala discovery. The Corporation plans to complete the EWT on Sarqala, conduct a 3D seismic program and drill two appraisal wells, the first of which will be Sarqala-2. The Corporation further submitted and received approval from the KRG for the exploration well, Hasira-1, to comply with the Garmian PSC commitments for the second exploration sub-period.

B. Other commitments

The Corporation has entered into various exploration-related contracts, including contracts for drilling equipment, services and other tangible equipment. The following table summarizes the estimated commitments in relation to these exploration-related contracts relating to the Garmian PSC and other contractual obligations at December 31, 2011 (U.S. $000's):

                            For the Years Ending December 31,               
                          2012     2013     2014     2015    2016+    Total 
----------------------------------------------------------------------------
Exploration             $1,067        -        -        -        -   $1,067 
Office                    $657     $559     $456        -        -   $1,672 
----------------------------------------------------------------------------
                        $1,724     $559     $456        -        -   $2,739 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
C. Contingencies

i. Litigation

From time to time, the Corporation may become involved in legal or administrative proceedings in the normal conduct of business. The Corporation is currently in disputes with two contractors, one is related to compensation owing to a contractor under a terminated agreement and the other is over a potential breach of contract by a contractor related to services provided to the Corporation. Although there has been no formal claim of monetary damages to date in either of the matters, the Corporation does not currently expect that the matters, individually or in aggregate, would have a material impact on the Corporation's financial position. The Corporation continues to pursue resolution of these disputes, and will enforce its contractual rights through arbitration if necessary. The Corporation has entered into arbitration proceedings with respect to one of these disputes. Given the early stage of the disputes, there is no certainty as to the ultimate outcome of such proceedings. Amounts involved in such matters are not reasonably estimable due to uncertainty as to the final outcome.

ii. Regulatory

Oil and gas operations are subject to extensive controls and regulations imposed by various levels of government that may be amended from time to time. The Corporation's operations may require licenses and permits from various governmental authorities in the countries in which it operates. Under the Garmian and Kurdamir PSCs, the KRG is obligated to assist in obtaining all permits and licenses from any government agencies in the Kurdistan Region and from any other government administration in Iraq. There can be no assurance that the Corporation will be able to obtain all necessary licenses and permits that may be required to carry out exploration and development of its projects.

The political and security situation in Iraq is unsettled and volatile. The Kurdistan Region is the only "Region" of Iraq that is constitutionally established pursuant to the Iraq Constitution, which expressly recognizes the Kurdistan Region. The political issues of federalism and the autonomy of the Regions of Iraq are matters about which there are major differences between the various political factions in Iraq. These differences could adversely impact the Corporation's interest in the Kurdistan Region including the ability to export any hydrocarbons as a result of our activities.

23. Explanation of transition to IFRS

As described in Note 2 "Basis of preparation and adoption of IFRS", these consolidated financial statements present the Corporation's financial results of operations and financial position prepared in accordance with IFRS, as issued by the IASB, and interpretations issued by IFRIC that were published at the time of preparation and that were effective or available for early adoption on December 31, 2011, in respect of the Corporation's first annual reporting date under IFRS. Previously the Corporation prepared its consolidated annual and consolidated interim financial statements in accordance with Canadian GAAP prior to the adoption of IFRS. In accordance with IFRS 1, First Time Adoption of IFRS, certain disclosures relating to the transition to IFRS are given in this note.

IFRS 1 allows first time adopters of IFRS to utilize a number of voluntary exemptions from the general principal of retrospective restatement. The Corporation has utilized the following exemptions:

A. IFRS 3 Business combinations

This standard has not been applied to acquisitions that occurred before January 1, 2010, the Corporation's transition date.

B. Full-cost book value as deemed costs

In July 2009, the IASB published an amendment to IFRS 1, Additional Exemptions for First-Time Adopters, to allow a first time adopter that had previously utilized full-cost accounting for oil and gas activities under previous GAAP to elect to measure exploration and evaluation assets at the date of transition at the book value amount determined under the adopter's previous GAAP. The Corporation did follow a full cost approach under GAAP prior to the adoption of IFRS and has elected to utilize this exemption to measure E&E expenditures on a deemed cost basis at the date of transition to IFRS.

C. Reconciliation of equity from Canadian GAAP to IFRS as at the date of IFRS transition - January 1, 2010:

                                                   Effect of                
                                               transition to                
                         Notes  Canadian GAAP           IFRS           IFRS 
----------------------------------------------------------------------------
Assets                                                                      
Current assets                                                              
  Cash and cash                                                             
   equivalents                        $76,708            $ -        $76,708 
  Trade and other                                                           
   receivables                          6,880              -          6,880 
  Prepaid expenses                        183              -            183 
  Income tax recoverable                1,738              -          1,738 
  Deferred tax assets        a            231           (231)             - 
----------------------------------------------------------------------------
Total current assets                   85,740           (231)        85,509 
                                                                            
Non-current assets                                                          
  Property, plant and                                                       
   equipment                 b        154,911       (154,097)           814 
  Exploration and                                                           
   evaluation                                                               
   expenditures              b              -        154,097        154,097 
  Deposits held in trust                  420              -            420 
  Deferred tax assets        a              6            365            371 
----------------------------------------------------------------------------
  Total non-current                                                         
   assets                             155,337            365        155,702 
----------------------------------------------------------------------------
Total assets                         $241,077           $134       $241,211 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Liabilities                                                                 
Current liabilities                                                         
  Trade and other                                                           
   payables                           $18,297            $ -        $18,297 
----------------------------------------------------------------------------
  Total current                                                             
   liabilities                         18,297              -         18,297 
                                                                            
Non-current liabilities                                                     
  Provision for                                                             
   decommissioning                                                          
   obligations               c            175            257            432 
  Deferred tax                                                              
   liabilities               a              -            134            134 
----------------------------------------------------------------------------
  Total non-current                                                         
   liabilities                            175            391            566 
----------------------------------------------------------------------------
Total liabilities                      18,472            391         18,863 
----------------------------------------------------------------------------
                                                                            
Equity                                                                      
  Share capital                       253,583              -        253,583 
  Contributed surplus        d          8,749            905          9,654 
  Deficit                    e        (39,727)        (1,162)       (40,889)
----------------------------------------------------------------------------
  Total equity                        222,605           (257)       222,348 
----------------------------------------------------------------------------
Total equity and                                                            
 liabilities                         $241,077           $134       $241,211 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS:

a. Reclassification of the current portion of deferred income tax assets recognized under previous GAAP to non-current assets in accordance with IAS 12, Income Taxes. Net effect was a decrease in the current portion of deferred tax assets of $0.2 million. In addition, the presentation of net deferred tax assets and liabilities are based on a separate legal entity basis which resulted in a net increase of $0.4 million in deferred tax assets and an increase of $0.1 million in deferred tax liabilities. The net overall change to deferred taxes was NIL.

b. Reclassification of E&E expenditures previously classified as property, plant and equipment under previous GAAP in accordance with IFRS 1, First Time Adoption of IFRS. The Corporation utilized the exemption under IFRS 1 that allows entities following a full-cost approach under previous GAAP to recognize exploration and evaluation assets on a deemed cost basis upon transition to IFRS. Net effect was a decrease in property, plant and equipment of $154.1 million with a corresponding increase in exploration and evaluation assets.

c. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent Assets, the provision for decommissioning obligations (previously referred to as "asset retirement obligation") was increased due to a change in the discount rate utilized for the present value calculation of these obligations. Under previous GAAP a credit adjusted risk-free rate was utilized, but under IFRS a non-credit adjusted risk-free rate is utilized in the valuation of the discounted cash flows associated with estimated future abandonment costs. Net effect was an increase in the provision for decommissioning liabilities of $0.3 million, with a corresponding increase in the accumulated deficit.

d. Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to employees was recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. Upon transition to IFRS this resulted in an accelerated recognition of the expense associated with share-based payments, but was partially offset by a reduction in expense due to estimated forfeitures associated with unvested options not previously estimated under GAAP. Net effect was an increase in contributed surplus of $0.9 million, with a corresponding increase in the accumulated deficit.

e. The cumulative effect of these transition adjustments on the accumulated deficit as at the date of transition to IFRS is based on the combination of items (c) and (d). The net effect was an increase in the accumulated deficit of $1.2 million.

C. Reconciliation of equity from Canadian GAAP to IFRS as at the end of the last reporting year under Canadian GAAP - December 31, 2010:

                                                   Effect of                
                                               transition to                
                         Notes  Canadian GAAP           IFRS           IFRS 
----------------------------------------------------------------------------
Assets                                                                      
Current assets                                                              
  Cash and cash                                                             
   equivalents                        $31,482            $ -        $31,482 
  Trade and other                                                           
   receivables                          8,648              -          8,648 
  Insurance recoveries                                                      
   receivable                          17,597              -         17,597 
  Deposits held in trust                  420              -            420 
  Prepaid expenses                         39              -             39 
  Income tax recoverable                  887              -            887 
  Deferred tax assets        a            102           (102)             - 
----------------------------------------------------------------------------
  Total current assets                 59,175           (102)        59,073 
                                                                            
Non-current assets                                                          
  Property, plant and                                                       
   equipment                 b        182,056       (181,795)           261 
  Exploration and                                                           
   evaluation                                                               
   expenditures              b              -        180,770        180,770 
  Deferred income tax                                                       
   assets                    a              -            186            186 
----------------------------------------------------------------------------
  Total non-current                                                         
   assets                             182,056           (839)       181,217 
----------------------------------------------------------------------------
Total assets                         $241,231         $ (941)      $240,290 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                                            
Liabilities                                                                 
Current liabilities                                                         
  Trade and other                                                           
   payables                           $21,525            $ -        $21,525 
----------------------------------------------------------------------------
  Total current                                                             
   liabilities                         21,525              -         21,525 
                                                                            
Non-current liabilities                                                     
  Provision for                                                             
   decommissioning                                                          
   obligations               c            189            320            509 
  Deferred tax                                                              
   liabilities                             56             84            140 
----------------------------------------------------------------------------
  Total non-current                                                         
   liabilities                            245            404            649 
----------------------------------------------------------------------------
Total liabilities                      21,770            404         22,174 
----------------------------------------------------------------------------
                                                                            
Equity                                                                      
  Share capital                       253,583              -        253,583 
  Contributed surplus        d         11,353           (130)        11,223 
  Deficit                    e        (45,475)        (1,215)       (46,690)
----------------------------------------------------------------------------
  Total equity                        219,461         (1,345)       218,116 
----------------------------------------------------------------------------
Total equity and                                                            
 liabilities                         $241,231          $(941)      $240,290 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS:

a. Reclassification of the current portion of deferred income tax assets recognized under previous GAAP to non-current assets in accordance with IAS 12, Income Taxes. Net effect is a decrease in the current portion of deferred tax assets of $0.1 million. In addition, the presentation of net deferred tax assets and liabilities are based on a separate legal entity basis which resulted in a net increase of $0.2 million in deferred tax assets and an increase of $0.1 million in deferred tax liabilities. The net overall change to deferred taxes was NIL.

b. Adjustments to property, plant and equipment as well as E&E expenditures were as follows:

i.   E&E expenditures previously classified as property, plant and equipment
     under GAAP were reclassified in accordance with IFRS 1, First Time
     Adoption of IFRS. The Corporation utilized the IFRS 1 exemption
     allowing entities following a full-cost approach under previous GAAP to
     recognize exploration and evaluation assets on a deemed cost basis upon
     transition to IFRS. In addition, E&E expenditures incurred during the
     year ended December 31, 2010 were also reclassified in accordance with
     IFRS 6, Exploration for and Evaluation of Mineral Resources. The net
     effect was a decrease in property, plant and equipment of $181.8
     million and an associated increase in E&E expenditures of $181.8
     million. 
ii.  Certain corporate projects that were previously capitalized within the
     full cost pool as allowed under previous Canadian GAAP, but which were
     unrelated to the Corporation's PSC contract areas, have been expensed
     as part of general and administrative costs for the year ended December
     31, 2010. The net effect was a decrease in E&E expenditures of $0.3
     million. 
iii. Share-based payment amounts associated with employees that directly
     contribute to exploration and evaluation activities are recognized as
     part of intangible E&E expenditures. Upon adoption of IFRS 2, Share
     Based Payments, the expense relating to options granted to those
     employees is recognized over the vesting period for each individual
     vesting tranche, as opposed to previous GAAP which recognized the
     expense on a straight-line basis over the total vesting period of the
     entire grant. The net effect of the change in the timing of recognition
     of share-based payments associated with those employees that directly
     contributed to exploration and evaluation activities during the year
     ended December 31, 2010 resulted in a decrease in E&E expenditures of
     $0.8 million. 
iv.  Upon adoption of IAS 37, Provisions, Contingent Liabilities, and
     Contingent Assets, the provision for decommissioning obligations
     (previously referred to as "asset retirement obligation") is
     prospectively adjusted each period for changes in the estimated future
     decommissioning expenditures or the timing of estimated future
     decommissioning expenditures. Changes to estimates during the year
     ended December 31, 2010 resulted in an overall increase in the
     provision for decommissioning obligations of $0.1 million. The net
     effect was a corresponding increase in E&E expenditures of $0.1
     million. 
v.   The total net impact of items (i) through (iv) was an increase in
     exploration and evaluation expenditures of $180.8 million.
c. Upon adoption of IAS 37, Provisions, Contingent Liabilities, and Contingent Assets, the provision for decommissioning obligations (previously referred to as "asset retirement obligation") increased due to a change in the discount rate utilized for the present value calculation of these obligations upon conversion to IFRS. Under previous GAAP a credit adjusted risk-free rate was utilized, but under IFRS a non-credit adjusted risk-free rate is utilized in the valuation of the discounted cash flows associated with estimated future abandonment costs. In addition, during the year ended December 31, 2010, the provision for decommissioning obligations was also adjusted prospectively each period for changes in the estimated future decommissioning expenditures or the timing of estimated future decommissioning expenditures. The total net effect of these changes was an increase in the provision for decommissioning obligations of $0.3 million.

d. Upon adoption of IFRS 2, Share Based Payments, the expense relating to options granted to employees is recognized over the vesting period for each individual vesting tranche, as opposed to previous GAAP which recognized the expense on a straight-line basis over the total vesting period of the entire grant. Upon transition to IFRS this resulted in an accelerated recognition of the expense associated with share-based payments in prior periods and resulted in less expense recognition during 2010. In addition, the expense associated with share based payments was slightly reduced due to estimated forfeitures associated with unvested options that had not been estimated under previous GAAP. The net effect at December 31, 2010 was a reduction in contributed surplus of $0.1 million.

e. The cumulative change in the accumulated deficit is summarized as follows:

i.   Impact of increased provision for decommissioning obligation at January
     1, 2010 was an increase in accumulated deficit of $0.3 million. 
ii.  Impact of increased contributed surplus related to share based payments
     at January 1, 2010 was an increase in accumulated deficit of $0.9
     million. 
iii. Impact from expensed portion of share based payments during the year
     ended December 31, 2010 was a decrease in accumulated deficit of $0.3
     million. 
iv.  Impact from increased accretion expense associated with decommissioning
     liabilities for the year ended December 31, 2010 was NIL. 
v.   Impact of expensing certain Corporate projects that had been
     capitalized under previous GAAP during the year ended December 31, 2010
     was an increase in the accumulated deficit of $0.3 million. 
vi.  The total impact of all of items (i) through (v) was an increase in the
     accumulated deficit of $1.2 million.

D. Reconciliation of comprehensive loss from Canadian GAAP to IFRS for the  
year ended December 31, 2010:                                               

                                                   Effect of                
                                               transition to                
                          Note  Canadian GAAP           IFRS           IFRS 
----------------------------------------------------------------------------
                                                                            
Other income                                                                
----------------------------------------------------------------------------
  Other income                           $ 87            $ -           $ 87 
----------------------------------------------------------------------------
                                                                            
Expenses                                                                    
  General and                                                               
   administrative                                                           
   expenses                  a          6,362             51          6,413 
  Depreciation                            553              -            553 
  Accretion on                                                              
   decommissioning                                                          
   liabilities                             14              2             16 
  Foreign exchange loss                    62              -             62 
----------------------------------------------------------------------------
  Total expenses             a          6,991             53          7,044 
----------------------------------------------------------------------------
                                                                            
Loss before taxation                    6,904             53          6,957 
                                                                            
Taxation                                                                    
  Current                              (1,347)             -         (1,347)
  Deferred                                191              -            191 
----------------------------------------------------------------------------
  Total taxation                                                            
   (recovery)                          (1,156)             -         (1,156)
----------------------------------------------------------------------------
                                                                            
Total loss and                                                              
 comprehensive loss                                                         
 attributable to                                                            
 shareholders                          $5,748            $53         $5,801 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS:

a. Adjustments to general and administrative expenses were as follows:

i.   Certain corporate projects that were previously capitalized within the
     full cost pool as allowed under previous Canadian GAAP, but which were
     unrelated to the Corporation's PSC contract areas, have been expensed
     as part of general and administrative costs for the year ended December
     31, 2010 after conversion to IFRS. The net effect was an increase in
     general and administrative costs of $0.3 million. 
ii.  Share-based payment amounts associated with employees that do not
     directly contribute to exploration and evaluation activities are
     recognized as part of general and administrative expenses. Upon
     adoption of IFRS 2, Share Based Payments, the expense relating to
     options granted to those employees is recognized over the vesting
     period for each individual vesting tranche, as opposed to previous GAAP
     which recognized the expense on a straight-line basis over the total
     vesting period of the entire grant. The net effect of the change in the
     timing of recognition of share-based payments associated with
     employee's activities during the year ended December 31, 2010 resulted
     in a decrease in general and administrative expenses of $0.3 million. 
iii. The total net impact of items (i) and (ii) was an increased net loss of
     $0.1 million, including a $2k adjustment to accretion.

E. Reconciliation of statement of cash flows from Canadian GAAP to IFRS for 
the year ended December 31, 2010:                                           
                                                                            
                                                   Effect of                
                                               transition to                
                          Note  Canadian GAAP           IFRS           IFRS 
----------------------------------------------------------------------------
                                                                            
Cash flow from operating                                                    
 activities                                                                 
Net loss prior to                                                           
 taxation                    a       $ (5,748)       $(1,209)      $ (6,957)
  Adjustments for                                                           
    Depreciation                          553              -            553 
    Accretion on                                                            
     decommissioning                                                        
     liabilities                           14              2             16 
    Share based payments     b          1,568           (258)         1,310 
  Income tax recovered                                                      
   (paid)                    c              -          2,198          2,198 
  Deferred tax expense       d            191           (191)             - 
  Change in non-cash                                                        
   working capital           e            728           (851)          (123)
----------------------------------------------------------------------------
Net cash from (used in)                                                     
 operating activities                  (2,694)          (309)        (3,003)
----------------------------------------------------------------------------
                                                                            
Cash flow from investing                                                    
 activities                                                                 
  Expenditure on                                                            
   exploration and                                                          
   evaluation assets         f              -        (66,626)       (66,626)
  Expenditure on                                                            
   property, plant, and                                                     
   equipment                 g        (67,162)        67,162              - 
  Insurance recoveries                 24,403              -         24,403 
  Change in non-cash                                                        
   working capital           f            227           (227)             - 
----------------------------------------------------------------------------
Net cash from (used in)                                                     
 investing activities                 (42,532)           309        (42,223)
----------------------------------------------------------------------------
                                                                            
Cash flow from financing                                                    
 activities                                                                 
  None                                      -              -              - 
----------------------------------------------------------------------------
Net cash from (used in)                                                     
 financing activities                       -              -              - 
----------------------------------------------------------------------------
                                                                            
                                                                            
----------------------------------------------------------------------------
Change in cash and cash                                                     
 equivalents                          (45,226)             -        (45,226)
----------------------------------------------------------------------------
                                                                            
Cash and cash                                                               
 equivalents, beginning                                                     
 of period                             76,708              -         76,708 
                                                                            
----------------------------------------------------------------------------
Cash and cash                                                               
 equivalents, end of                                                        
 period                              $ 31,482              -       $ 31,482 
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of the effect of transition to IFRS:

a. Adjustments to net loss prior to taxation, which total to $(1.2 million), were as follows:

i.   Presentation of net loss under IFRS is prior to total taxation (current
     and deferred). The net effect was an increased net loss prior to
     taxation of $1.2 million. 
ii.  Decreased expense associated with share-based payments, net effect was
     a decreased net loss of $0.3 million. 
iii. Increased general and administrative expense for corporate projects
     previously capitalized under IFRS, the net effect was an increased net
     loss of $0.3 million. 
iv.  Total net effect of items (i) through (iii) is an increased net loss
     prior to taxation of $1.2 million.
b. Decreased expense relating to timing of recognition of share based payment under IFRS 2, net effect a decrease of $0.3 million.

c. For proper presentation under IFRS, actual taxes recovered of $2.2 million are reflected directly in the cash flow statement.

d. Presentation of net loss under IFRS is prior to taxation, accordingly there is no adjustment for deferred tax expense and the net effect was a reduction of the adjusting item to zero.

e. Adjustments to change in non-cash working capital were as follows:

i.   Presentation of net loss under IFRS is prior to taxation, as a result
     the change in current income tax recovery is removed from the change in
     non-cash working capital which results in an increase in the change in
     non-cash working capital for operating activities of $1.3 million. 
ii.  In addition, actual taxes recovered are reflected separately, which
     results in a $2.2 million decrease to the change in non-cash working
     capital for operating activities. 
iii. The net effect of items (i) and (ii) resulted in a decrease in the net
     change for non-cash working capital items of $0.9 million.

f. The net change in E&E expenditures is as follows:                        

i.   Reclassification of expenditures on property, plant and equipment of
     $67.2 million. 
ii.  Decrease in expenditures of $0.3 million for corporate projects
     previously capitalized under GAAP that were expensed as general and
     administrative expenses under IFRS. 
iii. Combine changes in non-cash investing working capital with E&E
     expenditures for proper presentation under IFRS, which reduces the
     change in non-cash working capital to NIL. 
iv.  The net effect of items (i) through (iii) results in an increase in E&E
     expenditures of $66.6 million.
g. Expenditures for property, plant and equipment were reclassified as E&E expenditures, net effect was a decrease of $67.2 million.

About WesternZagros Resources Ltd.

WesternZagros is an international exploration and production company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in the Kurdistan Region of Iraq. WesternZagros, through its wholly-owned subsidiaries, holds two Production Sharing Contracts ("PSCs") with the Kurdistan Regional Government, through a 40 percent working interest in both the Garmian and Kurdamir PSCs. WesternZagros's shares trade in Canada on the TSX Venture Exchange under the symbol "WZR".

This news release contains certain forward-looking information relating, but not limited, to operational information, future drilling and testing plans, future well designs and completions and future production rates and the timing associated therewith. Forward-looking information typically contains statements with words such as "anticipate", "plan", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Company cautions readers not to place undue reliance on forward-looking information as by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros. Readers are also cautioned that disclosed test rates and AOFs may not be indicative of ultimate production levels. In addition, the forward-looking information is made as of the date hereof, and the Company assumes no obligation to update or revise such to reflect new events or circumstances, except as required by law.

Forward-looking information is not based on historical facts but rather on management's current expectations and assumptions regarding, among other things, plans for and results of drilling activity and testing programs, future capital and other expenditures (including the amount, nature and sources of funding thereof), continued political stability, and timely receipt of any necessary government or regulatory approvals. Although the Company believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in exploration; inherent uncertainties in interpreting geological data; changes in plans with respect to exploration or capital expenditures; interruptions in operations together with any associated insurance proceedings; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. For further information on WesternZagros and the risks associated with its business, please see the Company's current Annual Information Form which is available on SEDAR at www.sedar.com.

WESTERNZAGROS RESOURCES WAS RECOGNIZED AS A TSX VENTURE 50(R) COMPANY IN 2012. TSX VENTURE 50 IS A TRADE-MARK OF TSX INC. AND IS USED UNDER LICENSE.


NEITHER THE TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE
CONTACT INFORMATION:

WesternZagros Resources Ltd.
Greg Stevenson
Chief Financial Officer
(403) 693-7007

or

WesternZagros Resources Ltd.
Lisa Harriman
Manager of Investor Relations
(403) 693-7017
investorrelations@westernzagros.com
www.westernzagros.com

INDUSTRY: Energy and Utilities - Oil and Gas
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