Statement from the CEO

During the fourth quarter, Shelton Petroleum reached a production of 1,000 barrels per day, which is almost twice as high compared to the same period last year. The continued strong profitability is evidenced by the operating margin of 29%.

Shelton Petroleum recently published a geologic update highlighting the very encouraging implications of the latest #12 well on the Rustamovskoye field in Russia. The well demonstrated a net pay of nine meters compared to up to three meters in previous wells. If the thickening pay can be demonstrated in new wells, then the economics of future wells and total field potential will improve significantly. The #12 well also extended the known oil column to 45 meters, and all things equal, this will have a material positive effect on the company’s reserves and resources.

Shelton Petroleum is preparing for the future development of the Bashkirian fields. A design for horizontal wells is being developed. Scalable oil facilities to handle up to 2,000 barrels per day are being constructed. Seismic data is being collected on the surrounding fields.

In January, Shelton Petroleum announced a public offer to the shareholders of Petrogrand. The board of Shelton Petroleum believes that there is an industrial and financial rationale for the offer. A successful transaction would provide financial means to realize the large potential in Shelton Petroleum’s license portfolio and to pursue the expansion opportunities that the oil and gas market offers.

I am looking forward to pursuing the many opportunities that lie ahead during 2014.

Robert Karlsson

January - December 2013

Financial development

Revenue from oil sales amounted to SEK 109 (93) million. During the year, Shelton Petroleum sold 229,280 (178,300) barrels of oil and produced 248,870 (177,850) barrels of oil. The production has increased in both Russia and Ukraine compared to last year. The price of oil in USD in both Russia and Ukraine in 2013 were relatively stable compared to 2012. The strengthening of the Swedish Krona against the Russian Rouble and the Ukrainian Hryvna had a negative effect on the net revenue in the consolidated accounts.

The average daily production during 2013 amounted to 682 barrels compared to 486 barrels in 2012 and 212 barrels in 2011.

The company reported an operating result for the period January – December 2013 of SEK 30 (30) million. The other external expenses were higher in the fourth quarter compared to previous quarters during the year, due to legal fees. Revenue and result for 2012 include a positive one-off item of SEK 7 million relating to the shareholding in Tomsk Refining, and excluding this amount both revenue and operating result increased compared to last year.

(For graph, see attached file)

In April Shelton Petroleum divested its holding in PAN European Terminals plc (PAN, previously Baltic Oil Terminals). The transaction strengthened the company’s cash position by SEK 27 million and resulted in a gain of SEK 4 million compared to the book value as of 31 December 2012. This gain was recorded as financial cost of SEK -12 million (currency exchange and market price losses compared to the original cost) and as other comprehensive income of SEK 16 million (reversal of accumulated adjustments to fair value).

As a result of the above transactions, the company’s result before tax decreased to SEK 17 (31), despite an increase in profitability from the production and sale of oil.

The group held SEK 34 million in cash and cash equivalents at the end of the period compared to SEK 31 million at 31 December 2012. In addition, the group held SEK 186 million on a blocked account representing the proceeds plus interest from Convertible 2 issued to Petrogrand AB. Convertible 2 was settled in January 2014, for further details see section Issue of convertible bonds. Cash flow for the year was SEK 3 (-15) million. Cash flow from operational activities was SEK 3 (3) million for the year and SEK 10 (-7) million during the fourth quarter. During the year, the buyer of the group’s oil from the Lelyaki field in Ukraine has paid for sold and delivered oil with delays. Accounts receivable, included in other current receivables in the balance sheet, have therefore increased during the year from SEK 28 to 48 million. The accounts receivable balance as of 31 December 2013 is in line with the balance at the end of the third quarter. The outstanding amount and the validity of the receivable have been confirmed by the counterparty. The buyer of the oil has recently agreed with Kashtan Petroleum, the operator of the Lelyaki field, to sign a payment schedule to fully settle the currently overdue accounts receivable. Shelton Petroleum’s wholly owned Canadian subsidiary has received more than SEK 6 million in dividends from Kashtan Petroleum for the fourth quarter 2013 that can be used freely within the Shelton Petroleum group for investments and working capital.

Investments in exploration and development activity amounted to a total of SEK 57 (29) million for the year. Investments include drilling and tie-in of new wells, fracking, design studies and exploration work. The proceeds received from the sale of PAN, SEK 27 million, is included in cash flow from investing activities. In 2012 it included the funds received from the liquidation of Tomsk Refining AB, SEK 18 million.

Financial fixed assets amounted to SEK 0 million at the end of the year compared to SEK 23 million at 31 December 2012. The decrease is related to the sale of the holding in PAN.

Shareholders' equity per share at 31 December 2013 was SEK 26.20 (26.09) and the equity to assets ratio was 55 (80) %. The decrease is a result of the issued convertible 2 to Petrogrand AB.