Mr. W. David Lyons reports

ORCA EXPLORATION ANNOUNCES 2013 RESULTS AMID ANOTHER YEAR OF CHALLENGES

Orca Exploration Group Inc. has released its results for the year ended Dec. 31, 2013.

Orca operated its Tanzania Songo Songo gas field in 2013 at near plant and pipeline capacity, generating record results from production operations. Additional gas sales volumes increased 9 per cent over 2012 to average 61.5 million cubic feet per day. Overall production of protected gas and additional gas was essentially flat over 2012 at 96.3 million cubic feet per day (2012: 95.8 million cubic feet per day), and current average production is approximately 94 million cubic feet per day.

The situation with respect to the outstanding accounts receivable from Tanesco is increasingly urgent. In the event that the company does not collect from Tanesco the balance of the receivables and Tanesco continues to be unable to pay the company for subsequent gas deliveries, the company will need additional financing for its continuing operations by the end of the 2014 fiscal year.

Working capital was $27.8-million (U.S.) at year-end, down 41 per cent over 2012 ($46.8-million (U.S.)), a result of reclassifying $47.0-million (U.S.) (prior to discount) of Tanesco debt as a long-term receivable. As at Dec. 31, 2013, Tanesco owed the company $56.6-million (U.S.), of which $51.5-million (U.S.) was in arrears.

Tanesco currently owes the company $64.9-million (U.S.), of which $60.2-million (U.S.) is in arrears. Neither Tanesco nor the government has proposed any plan to address arrears and/or continuing payments. The company has served notice to Tanesco and is actively pursuing all legal options available to collect the arrears and arrest the increase in Tanesco receivables, including but not limited to the suspension of gas deliveries to Tanesco.

Earnings suffered in 2013 with the company posting a $5.9-million (U.S.) loss after tax, or a 17-U.S.-cent loss per share diluted (2012: income $18.4-million (U.S.) or 52 U.S. cents per share), as a result of provisions of $17.1-million (U.S.) against Tanesco receivables to account for the cost of timing, and $10.5-million (U.S.) against doubtful debts, primarily Songas.

Average gas prices were up 8 per cent in 2013 to $4.66 (U.S.) per thousand cubic feet (2012: $4.31 (U.S.) per thousand cubic feet), industrial gas prices were down 11 per cent in 2013 to $8.27 (U.S.) per thousand cubic feet (2012: $9.30 (U.S.) per thousand cubic feet) from changes in the sales mix and average power sector gas prices increased 18 per cent over 2012 to $3.76 (U.S.) per thousand cubic feet from $3.18 (U.S.) per thousand cubic feet, a result of increased take at higher marginal prices.

The 9-per-cent increase in additional gas sales volumes, together with an 8-per-cent increase in the average gas price, generated increased gross revenue, but the lack of cost pool recoveries due to minimal capital spending during the year reduced the company's share of revenue to $54.7-million (U.S.) (2012: $77.3-million (U.S.)).

Funds flow from operating activities was down 14 per cent to $39.8-million (U.S.) or $1.15 (U.S.) per share (2012: $46.3-million (U.S.) or $1.33 (U.S.) per share), a result of lower net revenues partially offset by reduced operating and general and administrative costs.

The company ended the year with $32.6-million (U.S.) in cash and $1.7-million (U.S.) in debt, double the cash balances of the prior year. Notwithstanding the stronger cash position, the continued Tanesco and Songas non-payment still threatens the company's viability, and the company has maintained a going-concern note in its 2013 consolidated financial statements. The company currently has $35-million (U.S.) in cash and no debt.

During 2013, the company received a number of assessments for additional tax from the Tanzania Revenue Authority, which together with interest penalties total $18.4-million (U.S.). Management, together with tax advisers, has reviewed each of the assessments and believes them to be without merit. The company has appealed against the assessments for additional withholding tax and employment-related taxes, and has filed formal objections against TRA's claims for additional corporation tax and value-added tax.

The company ended negotiations on the Songo Songo production-sharing agreement and government-negotiating-team issues, having obtained a full retraction by the Tanzania Petroleum Development Corp. of the alleged overrecovery of $21-million (U.S.) in cost pools. The claim was the cornerstone of parliament's 2011 resolution advising the government to terminate the PSA. The company has committed to use the dispute resolution mechanisms in its agreements to address any and all pertinent issues going forward, including cost pool audits and downstream unbundling.

Establishing commercial terms for future incremental gas sales remains a key condition to the company's commitment to Songo Songo development. After a year of proposals from the company on gas pricing, there has yet to be an agreement with TPDC. In the absence of an agreement in the near future, the company intends to pursue its rights under the PSA to develop other markets for Songo Songo gas.

Despite the stalled efforts to reach agreement on commercial terms, the company continued planning the full development of Songo Songo to reach 190 million cubic feet per day deliverability by mid-2015, beginning designs for workovers of SS-3, SS-5 and SS-9, followed by the drilling of SS-12 and the installation of infrastructure, for projected total capital spending of approximately $165-million (U.S.). The company is currently working with the International Finance Corp. of World Bank Group to finance the development program. All development work remains contingent upon: (i) satisfactory resolution of Tanesco arrears; (ii) acceptable commercial terms; and (iii) payment guarantees for future gas deliveries to Tanesco.

The Tanzania national natural gas infrastructure project made significant progress during 2013, with the pipeline currently 72 per cent complete and gas-processing facilities 58 per cent complete. Expected on stream date is mid-2015.

In October, 2013, the government of Tanzania issued a national natural gas policy, which contemplates a restructuring of TPDC, its participation throughout the upstream, mid-stream and downstream sectors, its ownership and control of gas infrastructure, and the setting by the government of domestic natural gas prices. The company expects its rights under the PSA to be respected at such time as the policy is enacted by law in Tanzania.

Songo Songo gas reserves on a company gross basis remain solid with an 11-per-cent increase in Songo Songo's total proved additional gas reserves to the end of the licence period, after production, of 22.4 billion cubic feet during the year (2012: 20.6 billion cubic feet), and an 8-per-cent increase in the proved plus probable additional gas reserves from 489 billion cubic feet to 527 billion cubic feet (based on a report prepared by Orca's independent reserves evaluator as at Dec. 31, 2013, and dated April 3, 2014, in accordance with National Instrument 51-101 and the Canadian oil and gas evaluation handbook). The increase is primarily due to increased recoverability and adjustments to TPDC back-in, offset by a reduction in the remaining life of the licence. Net present value per cent 2P was estimated at $403-million (U.S.) (2012: $386-million (U.S.)).

Beer van Straten stepped down at the end of 2013 from the role of chief operating officer to join the advisory board. The company recently appointed Stephen Huckerby as chief accounting officer. Mr. Huckerby has been with Orca since 2007 and has been instrumental in supporting the company's economics and business analysis, treasury management, and accounting needs.

                                FINANCIAL HIGHLIGHTS
                    ($000 (U.S.) except per-share amounts)
                                                                      Year ended Dec. 31,  
                                                                        2013        2012

Revenue                                                              $54,718     $77,259
Cost of sales
Production and distribution expenses                                  (4,426)     (5,953)
Depletion expense                                                    (12,166)     (8,968)
Total                                                                 38,126      62,338
General and administrative expenses                                  (15,428)    (17,989)
Exploration asset impairment                                            (158)     (8,284)
Finance income                                                         2,646          23
Finance costs                                                        (28,908)       (634)
(Loss)/profit before tax                                              (3,722)     35,454
Income taxes                                                          (1,743)    (17,125)
(Loss)/profit after tax                                               (5,465)     18,329
Foreign currency translation (loss)/gain from foreign operations        (392)         89
Total comprehensive (loss)/income for the period                      (5,857)     18,418
Earnings per share
Basic                                                                  (0.17)       0.53
Diluted                                                                (0.17)       0.52

We seek Safe Harbor.