Petro Andina announces 191% increase in proved reserves



    /NOT FOR DISTRIBUTION TO US NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE
    UNITED STATES/

    CALGARY, March 13 /CNW/ - Petro Andina Resources Inc. (the "Company") is
pleased to report that its proved reserves grew 191 percent and its proved
plus probable reserves grew 73 percent in 2007 over 2006. At December 31, 2007
total proved reserves were 12.4 million barrels and proved and probable
reserves totaled 23.0 million barrels. The Company's reserves have been
independently evaluated by GLJ Petroleum Consultants Ltd. at December 31, 2007
in accordance with National Instrument 51-101 (NI 51-101) Standards of
Disclosure for Oil and Gas Activities. Petro Andina's cumulative finding and
development costs per barrel since inception, including provision for future
costs were $11.16 per barrel for proved and probable reserves. Finding and
development costs based on cumulative spending since inception were $5.83 per
barrel for proved and probable reserves.
    The Company replaced 469 percent of production on a proved basis and
539 percent of production on a proved plus probable basis. Production averaged
6,045 barrels of oil equivalent per day net in 2007, up 306 percent from 1,489
barrels of oil equivalent per day net in 2006. Production in the fourth
quarter averaged 8,079 barrels of oil equivalent per day net, up 183 percent
from the same period in 2006. Production growth has continued into 2008,
averaging 10,245 barrels of oil per day net (20,517 gross) during the last
week of February.
    Revenues from production totaled $91.2 million in 2007, an increase of
289 percent from 2006 and funds generated from operations rose to
$38.7 million, up 383 percent. Capital spending in 2007 totaled $104.7
million, up 202 percent from $34.7 million in 2006.

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                                   DETAIL
    

    The Company announces its operating and financial results for the year
December 31, 2007. Copies of the 2007 annual financial statements and related
Management's Discussion and Analysis (MD&A) for the year ended December 31,
2007 will be made available under the Company's profile at www.sedar.com and
on the Company's website at www.petroandina.com.

    Conference Call & Webcast

    Petro Andina will host a conference call and live webcast to discuss
these results on Friday, March 14, 2008 beginning at 10:30 a.m. Mountain
Daylight Time (12:30 p.m. Eastern Daylight Time). Media, analysts or any other
interested parties wishing to participate in the call can access it by calling
403-537-9608 or 1-800-952-4972 (toll free in North America). No access codes
are required.
    The live audio webcast of the conference call will be available through
Windows Media Player by following the link posted under the Investor
Relations, Events section of the Company's website at www.petroandina.com.
Following the conclusion of the call, a link to a replay of the webcast will
also be posted on the Company's website.

    
    2007 Year-end Reserve Summary

    -  Replaced 469 percent of 2007 production on a proved basis and
       539 percent of 2007 production on a proved plus probable basis;
    -  Increased proved reserves by 191 percent and proved plus probable
       reserves by 73 percent;
    -  Including 2007 production of 2.2 Mboe, 11.9 Mboe of proved plus
       probable reserves were added in 2007;
    -  Proved waterflood recovery of 20 percent was recognized by the
       independent reserve evaluator for most of the Company's core
       development areas, and
    -  Proved plus probable recovery factors were increased from 20 percent
       to 24 percent.

    The Company's total reserves from its Canadian and Argentine properties as
of December 31, 2007 are shown in comparison to the total reserves as of
December 31, 2006.

                             Reserves     Reserves
                                (MBoe)       (Mboe)  NPV(10) $M   NPV(10) $M
    Reserves                   Dec 31,      Dec 31,      Dec 31,      Dec 31,
    Category                     2007         2006         2007         2006

    Total Proved               12,401        4,265      152,722       66,423

    Proved plus Probable       23,017       13,342      285,084      192,466

    Proved, Probable
     & Possible                30,445       17,030      386,282      264,215


    Reserve Statistics

                                      Year ended           Cumulative since
                                   December 31, 2007        inception 2003
                                   -----------------        --------------

                                              Proved                  Proved
                                                plus                    plus
                                  Proved    Probable      Proved    Probable
    Including future
     development capital
      Finding and development
       costs ($/boe)              $16.12      $13.26      $16.00      $11.16
      Recycle ratio                 1.57        1.90        1.56        2.24
      Reserve replacement
       ratio                        4.69        5.39        5.43        9.23
    Excluding future
     development capital
      Finding and development
       costs ($/boe)              $10.12       $8.81       $9.91       $5.83
      Recycle ratio                 2.50        2.87        2.53        4.29
      Reserve replacement ratio     4.69        5.39        5.43        9.23



    Operational Highlights

    -  Increased average oil production during the fourth quarter to
       8,063 barrels per day net, a 22 percent increase over the third
       quarter of 2007 and a 183 percent increase over the same period in
       2006;
    -  Drilled a total of 31 net (60 gross) wells during the fourth quarter
       with an overall success rate of 90 percent;
    -  Drilled 3.8 net (six gross) exploration wells during the fourth
       quarter with a 68 percent success rate;
    -  Exited 2007 with  161 wells on production and 11 wells on waterflood
       injection in Argentina;
    -  Completed acquisition of 224 square kilometres of three
       dimensional (3D) seismic on the CNQ-7 Concession in February 2008
       bringing total seismic coverage to 68 percent of the Company's lands.
    


    Operational Update

    Waterflood

    Enhanced recovery water injection at El Corcobo Norte (ECN) continues to
show positive results in the form of increased oil production. At the end of
February 2008, the Company had a total of 26 waterflood patterns on injection
at the ECN and JCP fields injecting a total of 16,400 barrels of water per day
(gross), effectively replacing approximately 80 percent of the produced oil
volumes from the patterns, which is adequate to maintain pressure. Waterflood
expansion is on schedule and Petro Andina anticipates commencement of
injection into an additional 60 to 70 waterflood patterns in 2008.

    Steamflood

    Three wells have been completed for cyclic steam operations in the steam
injection pilot project at the Cerro Huanul Sur (CoHS) field. Injection into
the first well commenced October 31, 2007, completed its initial steam cycle
on December 6, 2007, and at year-end was producing oil and water. Injection
into the second well commenced on December 9, 2007 and continued to
December 31, 2007 when it was converted to production. The principal objective
of the first steam cycle was to ensure performance of the steam generator and
confirm injection capability, both of which have been affirmed. The steam
facility was modified in early February 2008 and the initial two wells were
returned to simultaneous steaming at a final combined rate of 140m(3) cold
water equivalent per day at approximately 11,000 kpa surface pressure. The
Company anticipates having adequate production data to further assess the
pilot program during the second half of the year.

    Pipeline

    In the third quarter of 2007 Petro Andina commenced construction of an
81 kilometre pipeline to move crude oil to market. To date approximately
75 kilometres, or 92 percent of the pipe has been installed and 75 percent has
been pressure tested. The storage tanks at ECN which feed into the pipeline
are currently being hydrotested and installation of the power supply is in
progress. The Company intends to utilize an existing bridge to make a pipeline
connection over the Rio Colorado. Commissioning of the pipeline remains on
schedule for the second quarter of 2008.


    
    Annual Highlights
                                        2007            2006          Change

    Production
      Oil (bbls/d)                     6,026           1,489            305%
      Natural gas (mcf/d)                116               -            100%
      Total (boe/d)                    6,045           1,489            306%

    Financial (thousands of
     Canadian dollars except per
     share amounts)
      Oil and natural gas revenue     91,232          23,478            289%
      Net loss                        (6,432)         (3,343)            92%
        Per share - basic(1)        $  (0.18)       $  (0.13)            38%
        Per share - diluted(1)      $  (0.18)       $  (0.13)            38%
      Funds flow from operations      38,703           8,006            383%
        Per share - basic(1)        $   1.05        $   0.30            250%
        Per share - diluted(1)      $   1.01        $   0.29            248%

    Reserves (Mboe)
      Proved                          12,401           4,265            191%
      Proved Plus Probable            23,017          13,342             73%

    Wells Drilled
      Gross                              173              49            253%
      Net                               88.3            24.9            255%

    Note:
    (1) Restated to reflect two-for-one stock split in September 2006.


                     MANAGEMENT'S DISCUSSION AND ANALYSIS
    

    The following Management's Discussion and Analysis (MD&A) of Petro Andina
Resources Inc. (Petro Andina or the Company) is dated as of March 13, 2007 and
should be read in conjunction with the audited consolidated financial
statements for the years ended December 31, 2007 and 2006. The consolidated
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (GAAP). All amounts are in Canadian dollars
unless otherwise specified. This discussion is intended to facilitate the
understanding of trends and significant changes in the financial condition and
operational results of Petro Andina for the year ended December 31, 2007.
    Additional information relating to Petro Andina is contained in the
Company's long-form prospectus dated May 10, 2007 and short-form prospectus
dated February 29, 2008. These documents are available on the Canadian
Securities Administrators' website at www.sedar.com.

    Forward-Looking Statements

    Certain statements in this document are "forward-looking statements".
Forward-looking statements are frequently characterized by words such as
"plan", "expect", "project", "intend", "believe", "anticipate", "estimate" or
other similar words, or statements that certain events or conditions "may" or
"will" occur. Forward-looking statements are not based on historical facts but
rather on the expectations of management of the Company ("Management")
regarding the Company's future growth, results of operations, production,
future capital and other expenditures (including the amount, nature and
sources of funding thereof), competitive advantages, plans for and results of
drilling activity, environmental matters, business prospects and
opportunities. Such forward-looking statements reflect Management's current
beliefs and assumptions and are based on information currently available to
Management. Forward-looking statements involve significant known and unknown
risks and uncertainties. A number of factors could cause actual results to
differ materially from the results discussed in the forward-looking statements
including the risks associated with competition, the ability to generate
revenue and exploit operating margins, capital resources, the use of certain
technologies and materials, annual impairment tests, labour relations,
insurance, damage from weather and other disasters, operating and maintenance
risks and environmental risks, new information regarding reserves, changes in
demand for and volatility of commodity prices of crude oil and natural gas,
legislative, regulatory and political changes and other factors, many of which
are beyond the control of the Company. The risks outlined should not be
construed as exhaustive. Although the forward-looking statements contained in
this document are based upon assumptions which Management believes to be
reasonable, the Company cannot assure investors that actual results will be
consistent with these forward-looking statements. These forward-looking
statements are made as of the date hereof, and the Company assumes no
obligation to update or revise them to reflect new events or circumstances,
except as required by law.
    Statements relating to "reserves" or "resources" are by their nature
forward-looking statements, as they involve the implied assessment, based on
certain estimates and assumptions that the resources and reserves described
can be profitably produced in the future. Readers are cautioned that the
foregoing list of factors is not exhaustive. The forward-looking statements
contained herein are expressly qualified by this cautionary statement.

    Non-GAAP Terms

    Funds flow from operations and netback per barrel are used in this
document, but do not have any standardized meaning under GAAP and may not be
comparable to similarly defined measures presented by other companies. Funds
flow from operations includes all cash from operating activities and is
calculated before changes in non-cash working capital. Funds flow from
operations is reconciled with net earnings in the Consolidated Statements of
Cash Flows. Funds flow per share is calculated by dividing funds flow from
operations by the weighted average number of shares outstanding. Netback per
barrel equals sales revenue, less royalties and production expenses, divided
by total equivalent sales volumes. Management uses these non-GAAP measurements
for its own performance measures and to provide its shareholders and investors
with a measurement of the Company's efficiency and its ability to fund a
portion of its future growth expenditures.

    Oil and Natural Gas Conversions

    In this MD&A, natural gas volumes have been converted to barrels of oil
equivalent (boe) on the basis of six thousand cubic feet (mcf) to one barrel
(bbl) of oil. This conversion factor is based on an energy equivalency
conversion method primarily applicable at the burner tip and is not intended
to represent a value equivalency at the wellhead. Boe may be misleading,
particularly if used in isolation.

    Comparative Figures

    Certain comparative figures have been reclassified to conform to the
current period's presentation.


    
    Highlights
    Year ended December 31,

                                        2007            2006            2005
    Production
      Oil (bbls/d)                     6,026           1,489             513
      Natural gas (mcf/d)                116               -               -
      Total (boe/d)                    6,045           1,489             513

    Financial (thousands of
     Canadian dollars except
     per share amounts)
      Oil and natural gas
       revenue                        91,232          23,478           2,004
      Net loss                        (6,432)         (3,343)         (2,544)
        Per share - basic(1)        $  (0.18)       $  (0.13)       $  (0.11)
        Per share - diluted(1)      $  (0.18)       $  (0.13)       $  (0.11)
      Funds flow from operations      38,703           8,006          (3,172)
        Per share - basic(1)        $   1.05        $   0.30        $  (0.14)
        Per share - diluted(1)      $   1.01        $   0.29        $  (0.13)
      Total assets
       (end of period)               176,888         101,722          41,834
      Working capital
       (end of period)                28,774          28,406          19,931
      Long-term debt
       (end of period)                16,917               -               -

    Weighted average shares
     outstanding (000s)(1)
      Basic                           36,730          26,429          23,134
      Diluted                         38,201          28,034          24,839
    Outstanding shares
     (end of period) (000s)(1)
      Basic                           39,732          31,781          23,350
      Diluted                         42,198          35,120          27,830
    

    Note:
    (1) Restated to reflect two-for-one stock split in September 2006.


    During the year ended December 31, 2007, Petro Andina continued
development drilling and facilities construction in the El Corcobo Norte (ECN)
field, and proceeded with delineation drilling at the Cerro Huanul Sur (CoHS)
and Puesto Pinto (PP) fields which were discovered in late 2006. All of these
areas are located in the CNQ-7/A Concession (CNQ-7/A) operated by the Company,
in which Petro Andina has a 50 percent working interest. CNQ-7/A continues to
represent the majority of the Company's production and capital activity.
    The Company was awarded the Gobernador Ayala III Concession (GA III) on
May 29, 2007. Petro Andina has a 70 percent working interest in GA III. In
July 2007 the Company assumed operatorship of the Gobernador Ayala CNQ-7
Concession (CNQ-7) in which it holds a 47.48 percent working interest.
Drilling on the GA III and CNQ-7 concessions commenced in the third quarter of
2007. Production from CNQ-7 commenced in September 2007. As of December 31,
2007, commercial production from GA III had not commenced.
    Substantially all of Petro Andina's current production operations are
located in Argentina. Petro Andina acquired various Canadian non-operated oil
and natural gas properties at the end of December 2006 but these properties
are not material to the Company's results.
    In May 2007, Petro Andina completed its initial public offering of
6.7 million common shares at $9.00 per share for total gross proceeds of
$60.3 million ($55.7 million net after agents' fees and other expenses). The
Company's shares commenced trading on the Toronto Stock Exchange on May 23,
2007. In September 2007, Petro Andina also closed a US$100 million senior
first lien secured credit facility with Macquarie Bank Limited (Macquarie)
with an initial borrowing capacity of US$28 million. As of December 31, 2007 a
total of US$18 million had been drawn on this facility.


    
    Results of Operations

    Production and Netback

                      2007                2006              2005(1)
                     Total               Total               Total
    -------------------------------------------------------------------------
    Average daily
     production
     (boe/d)
    Argentina        6,023               1,489                 513
    Canada              22                   -                   -
    -------------------------------------------------------------------------
    Total            6,045               1,489                 513
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                 Per                 Per                 Per
                    ($000s)      boe    ($000s)      boe    ($000s)      boe
                    -------      ---    -------      ---    -------      ---
    Oil and
     natural
     gas
     revenue      $ 91,232  $  41.35  $ 23,478  $  43.19  $  2,004  $  42.42
    Royalties
     and
     turnover
     taxes         (14,513)    (6.58)   (3,280)    (6.03)     (340)    (7.19)
    -------------------------------------------------------------------------
    Net revenue     76,719     34.77    20,198     37.16     1,664     35.23
    Production
     expenses       21,014      9.53     6,904     12.70       643     13.61
    -------------------------------------------------------------------------
    Netback       $ 55,705  $  25.24  $ 13,294   $ 24.46  $  1,021  $  21.62
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Note:
    (1) Until September 30, 2005, the Company's operations were considered by
        Management to be in the pre-production stage. Accordingly, net
        revenues after royalties and operating expenses were capitalized. The
        financial results for 2005 include only volumes and net revenues
        earned in the fourth quarter.
    


    Petro Andina acquired its Canadian non-operated oil and natural gas
properties on December 29, 2006. Therefore, there are no comparatives for the
previous year.

    Oil and Natural Gas Revenue

    Oil and natural gas revenue for the year ended December 31, 2007
increased by 289 percent to $91,232,000 from $23,478,000 in 2006. The increase
was due to a 306 percent increase in sales volumes in 2007 compared to 2006,
slightly offset by a four percent decrease in the average sales price.
    Substantially all of the Company's Argentine production is from the
operated CNQ-7/A Concession in which it holds a 50 percent working interest
and is operator. Production has increased significantly due to the successful
development activity undertaken by Petro Andina over the past year. The
average production by area was as follows:


    
                                        2007            2006            2005
    -------------------------------------------------------------------------
    Average daily oil production
     (bbls/d)
      CNQ-7/A
        El Corcobo Norte (ECN)         4,312             839              24
        Cerro Huanul Sur (CoHS)          376              32               -
        Puesto Pinto (PP)                458               9               -
        Jaguel Casa de Piedra (JCP)      804             599             428
    -------------------------------------------------------------------------
                                       5,950           1,479             452
      CNQ-7                               71               -               -
      Other                                2              10              61
    -------------------------------------------------------------------------
      Total                            6,023           1,489             513
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    For the year ended December 31, 2007, the average sales price was
$41.35 per barrel compared to $43.19 in 2006. Argentine oil sales are subject
to an export tax or export retention factor which has the effect of limiting
the realized sales price for the Company's production. Until November 16,
2007, the export tax was applied ranging from 25 percent up to 45 percent
depending on the price of WTI, commencing at WTI prices greater than US$32 per
barrel. On November 16, 2007, the Argentina government announced fiscal regime
changes under which it would forthwith retain all of the increase in crude oil
prices over an international reference price of US$60.90 per barrel.
    Petro Andina sells all of its crude domestically, to Argentina-based
refiners. Domestic crude is priced through the application of a related
adjustment called the export parity factor. This parity factor, negotiated
within the industry, has previously had the effect of equalizing crude price
realizations between the domestic and export markets.
    The Company had been selling its oil production in Argentina to buyers
under terms of crude oil sales contracts that were indexed to the Medanito
marker crude blend. The contracts provided Petro Andina with a net sales price
for its crude oil that was determined by a WTI reference price, less the
export parity factor, transportation, quality adjustments from the Medanito
marker price, and other market conditions that prevailed at the time of
negotiation of the contract. Prior to December 31, 2007, sales contracts
typically had a six month term. The Company's last such contract expired on
December 31, 2007 and has been renewed on a 30 day evergreen basis pending
clarification of certain terms of the new fiscal regime.
    At the time of publication of the resolution, Petro Andina conducted a
preliminary analysis of the fiscal regime changes, with the assumption that
the export retention factor would be applied with the same effect to domestic
crude sales. Based on the information available at that time, it appeared that
Petro Andina's net sales price under its existing sales contract would be
capped at approximately US$38.00 per barrel, on a go-forward basis, at times
when the reference price exceeded US$60.90 per barrel. For purposes of
comparison, Petro Andina's net sales price was US$40.89 per barrel for the
quarter ended September 30, 2007 and was US$38.32 per barrel for the nine
months then ended. The related WTI reference prices were approximately
US$75.70 per barrel and US$68.00 per barrel respectively during these periods.
Petro Andina's net sales price may also be influenced by other variables
subject to commercial negotiation with the buyer. Petro Andina is continuing
to sell its crude under the terms of its 2007 sales contract until such time
as the industry reaches agreement upon any changes to the domestic pricing
regime.

    Royalties and Turnover Taxes

    Total royalties and turnover taxes were $14,513,000 for the year ended
December 31, 2007, compared to $3,280,000 in the same period of 2006. The
average royalty rate in 2007 was 16 percent, compared to 14 percent in the
comparable period of 2006.
    In Argentina, royalties are being paid to the provincial governments at
12 percent which is the rate that applies to an exploitation concession.
However, in 2007 the Company has also accrued an additional royalty provision
due to uncertainty regarding the date that the exploitation rate of 12 percent
was effective.
    Early in 2006, CNQ-7/A was still considered an exploration concession and
production was subject to a 15 percent royalty rate. In March 2006, Petro
Andina applied to the Federal Secretary of Energy to convert 303.5 square
kilometres of CNQ-7/A around the Company's producing fields into an
exploitation concession. The Company was advised that legal precedent in
Argentina provides the federal regulator with a period of 60 days to object to
the filing. If no objection is made, then the operator is permitted to reduce
royalties paid to the 12 percent applicable to an exploitation concession.
Because no objection was received, in mid-May 2006, 60 days after this
application was made, the rate used in computing the royalty was reduced to
12 percent. However, the responsibility for the granting of exploitation
concessions was subsequently transferred to provincial control. In March 2007
the Company received notice from the Province of Mendoza claiming royalty
adjustments to increase the royalty to 15 percent retroactive to May 2006. The
claim was made by a different provincial government department from that
responsible for granting exploitation concessions. While Petro Andina has
received assurance from expert advisors and regulators that the same 60-day
precedent previously applied by the federal regulator will apply, the change
in administrative jurisdiction introduces an element of uncertainty concerning
the timing of the royalty rate reduction. To address this uncertainty, the
Company has accrued an additional royalty amount for the period commencing May
2006 equal to one-half of the difference (1.5 percent) between the exploration
and exploitation royalty rates. This accrual is planned to continue until the
bureaucratic process related to the granting of the exploitation concession is
complete and the matter is resolved.
    The Company's Argentine sales are also subject to turnover taxes imposed
by the provinces. These taxes are accounted for as royalty expense.

    Production Expenses

    In 2007, production expenses increased by 204 percent to $21,014,000 from
$6,904,000 in 2006. On a unit of production basis, production expenses
averaged $9.53 per barrel in 2007 compared to $12.70 in 2006. The Company's
average costs per unit in Argentina are decreasing as volumes increase and
operating efficiencies are realized.
    Trucking costs accounted for $2.95 per barrel or 31 percent of Argentine
production expenses in 2007, compared to $4.51 per barrel or 36 percent in
2006. Trucking is required to transport emulsion from single-well batteries to
infield processing facilities, as well as to deliver clean oil from the field
processing facilities to market. In 2007, the Company's field staff were
successful in reducing trucking costs by increasing trucking efficiency,
making road improvements and installing field satellite and flow-line systems.
    Petro Andina and its partner in CNQ-7/A, Repsol-YPF S.A., are
constructing an 81-kilometre sales pipeline from the CNQ-7/A area to the
Puesto Hernandez pipeline terminal. From that location, the Company will be
able to deliver oil volumes to the Atlantic coast via the Oldelval pipeline
system, or north to the Lujan de Cuyo refinery at Mendoza. Commissioning of
the pipeline is scheduled for the second quarter of 2008. The Corporation
intends to utilize an existing bridge to make a pipeline connection over the
Rio Colorado. The Company believes that it has adequate trucking capacity to
move all of its growing production to market until the pipeline is
commissioned. Operation of the pipeline is expected to reduce trucking costs
on a unit of production basis over time.
    On October 17, 2007, the Secretary of Energy announced an increase in
mineral lease rates, also known as the canon in Argentina. The new rates will
apply to the Company's CNQ-7/A and CNQ-7 concessions. It is estimated that the
new rates will increase production expenses by less than $1,000,000 in 2008.

    Interest Income

    For the year ended December 31, 2007, interest income was $1,395,000
compared to $601,000 in 2006. Average cash balances were significantly higher
in 2007 than in 2006 due to the net $38.6 million raised in the Company's
private equity placement in October 2006, as well as the net $55.7 million
raised in May 2007 from the Company's initial public offering.

    General and Administrative Expenses (G&A)

    Total G&A for 2007 was $10,290,000 compared to $5,730,000 in 2006. The
single largest component of G&A expense is staff costs which increased by
$2,640,000 from $2,983,000 in 2006 to $5,623,000 in 2007. Higher staffing
requirements are directly related to increased activity levels in Argentina,
as well as the corporate governance processes in Canada associated with
becoming a publicly-traded company. Argentina bank taxes were also $1,829,000
higher in 2007 compared to 2006 as a direct result of increased activity
levels. Argentina bank taxes are levied at 0.6 percent of the value of every
bank transaction, and therefore have increased as the levels of production
cash flow and capital spending have increased.

    Stock-Based Compensation Expense

    Stock-based compensation was $1,612,000 in 2007 compared to $286,000 in
2006. The increase in expense was a result of new options granted in 2007
which are recorded at significantly higher amounts due to the increase in
value of the Company's shares and due to including volatility in the
calculation as a result of becoming a public company.

    Interest Expense

    Interest expense was $1,507,000 in 2007 compared to $815,000 in 2006.
Interest expense is comprised of cash interest at the rates designated in the
applicable loan agreements plus Argentina withholding taxes on interest which
the Company is obligated to pay in accordance with the Macquarie loan
agreement. Interest expense also includes amortization of related debt issue
costs. From August 2006 to May 2007, interest expense related to a
non-convertible $11 million debenture issued at a 12 percent interest rate.
The debenture was repaid in May 2007 from the proceeds of the Company's
initial public offering. From October to December 2007, interest expense
related to the Macquarie loan facility which has a floating interest rate.
Initial draw-downs totalling US$18 million were made on the Macquarie loan
facility in October and December 2007, at an average rate of eight percent.

    Depletion, Depreciation and Accretion Expense (DD&A)

    DD&A is calculated using the unit-of-production method based on total
estimated proved reserves. DD&A in 2007 was $42,856,000 compared to $9,727,000
in 2006. Most of the increase was a result of increased production levels. On
a unit of production basis, DD&A expense in 2007 was $19.42 per barrel
compared to $17.89 per barrel in 2006. The total DD&A rate for 2007 increased
because the Company was spending significant amounts of capital on facilities
to handle anticipated future production volumes. The DD&A rate continued to
improve in each of the last three quarters of 2007, as additional proved
reserves were recognized. The DD&A rate for the fourth quarter of 2007 was
$15.96 per barrel.

    Foreign Exchange Loss

    The Company's main exposure to foreign currency risk relates to the
pricing of Argentine oil sales, operating costs and capital costs which are
largely denominated in US dollars. The Company also holds Canadian dollars in
cash and short-term deposits with Canadian financial institutions and from
time to time converts those funds into US dollars prior to their transmittal
to Argentina. This exchange of currencies can give rise to gains and losses.
For 2007, the total foreign exchange loss was $4,500,000 compared to a loss of
$111,000 in 2006. Currently, the Company does not hedge against fluctuations
in the US dollar exchange rate.

    Income Tax Expense (Recovery)

    The Company recorded a tax expense of $2,940,000 in 2007 compared to
$569,000 in 2006. The Company's operations in Argentina have begun producing
taxable income due to successful development activity. The nominal income tax
rate in Argentina is 35 percent. As of December 31, 2007, the Company had
utilized all remaining Argentina loss carry-forwards and other tax credits
from prior years to offset current tax expense for 2007. Commencing in 2008,
the Company expects to pay cash taxes in Argentina. The Company does not
recognize any benefit for its Canadian tax losses.


    
    Capital Expenditures

    (thousands of Canadian dollars)     2007            2006            2005
    -------------------------------------------------------------------------
    Geological and geophysical      $  4,334        $  3,619        $    295
    Property acquisition                  21           1,225             626
    Drilling and completion           46,341          16,098           4,992
    Well equipment and facilities     52,713          13,780           2,488
    Other                              1,275             957           1,724
    -------------------------------------------------------------------------
                                    $104,684        $ 35,679        $ 10,125
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Argentina                       $104,651        $ 34,604        $  9,451
    Canada                                33           1,075             674
    -------------------------------------------------------------------------
                                    $104,684        $ 35,679        $ 10,125
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The Company continued to expand its drilling activity throughout 2007.
During the year, the Company drilled wells as follows:

    -------------------------------------------------------------------------
                           2007                2006                2005
                     Gross       Net     Gross       Net     Gross       Net
    -------------------------------------------------------------------------
    CNQ-7/A
      ECN              108      54.0        32      16.0         1       0.5
      CoHS              13       6.5         2       1.0         1       0.5
      PP                21      10.5         3       1.5         -         -
      JCP                6       3.0         7       3.5        13       6.5
      Other              8       4.0         2       1.0         1       0.5
    -------------------------------------------------------------------------
                       156      78.0        46      23.0        16       8.0
    GA III              10       7.0         -         -         -         -
    CNQ-7                7       3.3         2       0.9         -         -
    CN-VI A/B            -         -         1       1.0         -         -
    -------------------------------------------------------------------------
                       173      88.3        49      24.9        16       8.0
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    During 2007, the Company spent $19,111,000 on construction of the ECN oil
handling facilities and field pipeline system. The ECN facility was
commissioned in August 2007. Construction of the oil sales pipeline from
CNQ-7/A to the Puesto Hernandez pipeline terminal commenced in July 2007 and a
total of $12,841,000 had been spent on construction of the pipeline by
December 31, 2007. In 2007, Petro Andina also spent $2,374,000 on the
steamflood pilot project at CoHS.


    
    Summary of Quarterly Results (Unaudited)

                                              Three months ended
                                    Dec. 31,  Sept. 30,   June 30,   Mar. 31,
                                       2007       2007       2007       2007
    --------------------------   ----------- ---------- ---------- ----------
    Production
      Oil (bbls/d)                    8,063      6,627      5,604      3,752
      Natural gas (mcf/d)                93         98        128        146
      Total (boe/d)                   8,079      6,643      5,625      3,776

    Financial (thousands of
     Canadian dollars except
     per share amounts)
      Oil and natural gas revenue    30,130     26,079     20,867     14,156
      Net income (loss)                 529     (2,142)    (3,448)    (1,371)
        Per share - basic(1)     $     0.01  $   (0.05) $   (0.08) $   (0.04)
        Per share - diluted(1)   $     0.01  $   (0.05) $   (0.08) $   (0.04)
      Funds flow from operations      8,278     13,846     10,221      6,358
        Per share - basic(1)     $     0.21  $    0.35  $    0.29  $    0.20
        Per share - diluted(1)   $     0.20  $    0.34  $    0.28  $    0.19
      Total assets (end of period)  176,888    152,150    145,251    102,288
      Working capital (end of
       period)                       28,774     32,203     58,742     16,226
      Long-term debt (end of
       period)                       16,917          -          -          -


                                    Dec. 31,  Sept. 30,   June 30,   Mar. 31,
                                       2006       2006       2006       2006
    --------------------------   ----------- ---------- ---------- ----------
    Production
      Oil (bbls/d)                    2,853      1,365        980        737
      Natural gas (mcf/d)                 -          -          -          -
      Total (boe/d)                   2,853      1,365        980        737

    Financial (thousands of
     Canadian dollars except
     per share amounts)
      Oil and natural gas revenue    11,519      5,496      3,799      2,664
      Net loss                         (168)      (386)    (1,641)    (1,148)
        Per share - basic(1)     $     0.00  $   (0.02) $   (0.07) $   (0.05)
        Per share - diluted(1)   $     0.00  $   (0.02) $   (0.07) $   (0.05)
      Funds flow from operations      5,678      1,932        566       (170)
        Per share - basic(1)     $     0.18  $    0.08  $    0.02  $   (0.01)
        Per share - diluted(1)   $     0.17  $    0.07  $    0.02  $   (0.01)
      Total assets (end of period)  101,722     55,149     43,762     42,481
      Working capital (end of
       period)                       28,406       (414)     8,531     15,131
      Long-term debt (end of
       period)                            -          -          -          -

    Note:
    (1) Restated to reflect two-for-one stock split in September 2006.


    Fourth Quarter Results
    Production and Netback
                                     Three months ended December 31,
                                ---------------------------------------------
                                          2007                  2006
                                ---------------------- ----------------------
                                      Total                 Total
                                     ------                ------
    Average daily production
     (boe/d)
      Argentina                       8,061                 2,853
      Canada                             18                     -
    -------------------------------------------------------------------------
      Total                           8,079                 2,853
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                     ($000s)   Per boe     ($000s)   Per boe
                                     -------   -------     -------   -------
    Oil and natural gas revenue  $   30,130  $   40.54  $  11,519  $   43.88
    Royalties and turnover taxes     (4,682)     (6.30)    (1,523)     (5.80)
    -------------------------------------------------------------------------
    Net revenue                      25,448      34.24      9,996      38.08
    Production expenses               7,453      10.03      3,234      12.32
    -------------------------------------------------------------------------
    Netback                      $   17,995  $   24.21  $   6,762  $   25.76
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    During the fourth quarter of 2007, average oil production increased to
8,063 barrels per day. This was a 22 percent increase over third-quarter 2007
production of 6,627 barrels per day and a 183 percent increase over production
in the fourth quarter of 2006 of 2,853 barrels per day. While production
growth continues to be primarily from development at CNQ-7/A, fourth-quarter
2007 production also included 228 barrels of oil per day from CNQ-7.
    In the fourth quarter of 2007, average prices were $40.54 per boe,
compared to $42.67 per boe in the preceding quarter of 2007 and compared to
$43.88 per boe in the fourth quarter of 2006. The 2007 fourth quarter average
price does not reflect the full impact of the change in the Argentine fiscal
regime, as the new regulations were not announced until mid-November 2007.
Royalties and turnover taxes in the fourth quarter of 2007 were 16 percent,
compared to 13 percent in the same period of 2006, due to the additional 1.5
percent provision for exploitation royalty rates discussed previously.
    Fourth quarter production expenses were $10.03 per boe in 2007 compared
to $12.32 per boe in 2006. Average production expenses in the fourth quarter
of 2007 increased over the $9.32 per boe recorded in the third quarter of 2007
due to a number of factors, including an increase in contract operator fees
that was retroactive to May 2007 and a legislated increase in mineral lease
rates, also known as the canon in Argentina.
    General and administrative expenses in the fourth quarter of 2007 were
$3,166,000 compared to $1,525,000 in the same period of 2006. The increase was
largely due to the addition of staff in Canada and Argentina, as well as other
factors outlined above in the discussion of results for the year ended
December 31, 2007. Stock-based compensation expense in the fourth quarter also
increased to $627,000 in 2007 from $76,000 in 2006.
    Interest income decreased to $327,000 in the fourth quarter of 2007 from
$372,000 in the fourth quarter of 2006, due to lower cash balances. Interest
expense in the fourth quarter of 2007 was $255,000, all of which was related
to the new Macquarie loan facility. The first draws under this facility were
made in October and December 2007 and were for US$10 million and US$8 million,
respectively. Interest expense in the fourth quarter of 2006 was $579,000 all
of which was related to interest on the $11 million debenture, which was
outstanding for the entire fourth quarter.
    DD&A expense was $11,864,000 in the fourth quarter of 2007 compared to
$4,298,000 in the same quarter of 2006. This is a result of increased
production levels. On a per unit basis, DD&A expense in the fourth quarter of
2007 was $15.96 per barrel compared to $16.37 per barrel in 2006.
    In the fourth quarter, Petro Andina earned income before taxes of
$2,168,000 in 2007 compared to $1,348,000 in 2006. Net income for the fourth
quarter was $529,000 in 2007 compared to a loss of $168,000 in 2006.

    Liquidity and Capital Resources

    At December 31, 2007, Petro Andina had $33.4 million of cash on hand,
compared to $37.2 million at December 31, 2006. The cash balances were
comprised of current chequing accounts and bank term deposits. Including cash,
Petro Andina had working capital of $28.8 million at December 31, 2007,
compared to $28.4 million at year-end 2006.
    On May 23, 2007, Petro Andina closed an initial public offering of
6.7 million common shares at $9.00 per share for total gross proceeds of
$60.3 million ($55.7 million net after agents' fees and other expenses).
Proceeds of the financing were applied as follows:

    
    (thousands of Canadian dollars)
                                                 As stated in the         As
                                               Prospectus at time   actually
                                                     of financing    applied
    Gross proceeds                                      $  60,300  $  60,300
    Agents' commissions and issue costs                    (4,018)    (4,618)
    -------------------------------------------------------------------------
    Net proceeds                                        $  56,282  $  55,682
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Appraisal and development drilling                  $  28,900  $  23,395
    Facilities, pipeline and other infrastructure          18,612     26,443
    Exploration activity                                    8,770      5,844
    -------------------------------------------------------------------------
    Total                                               $  56,282  $  55,682
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    In September 2007 the Company, through its subsidiary Petro Andina
Resources Ltd., entered into a US$100 million senior first lien secured credit
facility, to be provided by Macquarie Bank Limited. The first advances under
the credit facility were made in October 2007. Initial availability under the
facility is US$28 million. The borrowing base will be updated based on semi-
annual re-determinations by Macquarie that the Company's Argentine oil and
natural gas reserves will support additional lending amounts. A review by the
lender is currently underway and the Company anticipates an increase in
available funds of approximately US$17 million. The loan facility bears
interest at variable rates which, at the Company's option, will be based on
either LIBOR or U.S. prime. The loan is secured by a pledge of Petro Andina
Resources Ltd. common shares and by an assignment of the Company's collection
rights under all agreements related to its Argentine properties, including
leases, exploration and development concessions, joint venture agreements,
operating agreements and sales agreements. The loan is not convertible into
equity.
    Subsequent to the year ended December 31, 2007, on March 6, 2008,
pursuant to a bought deal financing, Petro Andina issued 2,990,000 common
shares at $12.00 per share for total gross proceeds of $35.9 million
(estimated $33.8 million after agents' fees and other expenses). The net
proceeds of the offering will be used by the Company to conduct exploration
and development activities in Argentina and in Trinidad and Tobago in 2008.

    Outstanding Share Data

    Petro Andina is authorized to issue an unlimited number of class A common
shares. As at December 31, 2007, the Company had 39.7 million outstanding
common shares compared to 31.8 million outstanding common shares at
December 31, 2006. Directors, employees and consultants have been granted
options to purchase 2.5 million common shares under the Company's stock option
plan, as disclosed in note 10 to the consolidated financial statements. All
outstanding Liquidity Entitlement Certificates (explained in note 10 to the
consolidated financial statements) expired on May 23, 2007 when the Company's
shares commenced trading on the Toronto Stock Exchange.

    Contractual Obligations

    In the normal course of business, Petro Andina has entered into
arrangements and incurred obligations that will impact the Company's future
operations and liquidity. These commitments primarily relate to debt
repayments, exploration work commitments under various international
agreements, operating leases related to office space and abandonment
obligations.
    Additional disclosure of the Company's debt repayment obligations and
significant commitments can be found in notes 8 and 17 to the audited
consolidated financial statements. The following table summarizes the
Company's commitments as at December 31, 2007:


    
                                    Payments due by period(1)
    -------------------------------------------------------------------------
    (thousands of                                2009-      2011-     There-
     Canadian dollars)    Total        2008       2010       2012      after
    -------------------------------------------------------------------------
    Long-term
     debt(2)         $   17,843  $    1,784  $  14,274  $   1,785  $       -
    Exploration work
     commitments
      Argentina          10,409       8,426      1,983          -          -
      Trinidad and
       Tobago(3)         35,071      16,911     16,491      1,669          -
    Operating leases      1,619         796        823          -          -
    Asset retirement
     obligations(4)       3,948           6          -          -      3,942
    -------------------------------------------------------------------------
                     $   68,890  $   27,923  $  33,571  $   3,454  $   3,942
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Notes:
    (1) Payments denominated in foreign currencies have been translated at
        the December 31, 2007 exchange rates.
    (2) Long-term debt represents principal payments only, based on the
        current terms of the credit facility. The repayment terms may be
        varied throughout the term of the facility. Future interest payments
        have not been included since interest rates are not known at
        this time.
    (3) The commitment amounts for Trinidad and Tobago are for the initial
        four-year exploration period and do not include production bonuses
        and other payments that will vary depending on production levels, due
        to the uncertainty of their amount and timing.
    (4) The asset retirement obligations represent Management's best estimate
        of the undiscounted cost and timing of future dismantlement, site
        restoration and abandonment obligations based on engineering
        estimates and in accordance with existing legislation and industry
        practice.
    


    Business Environment and Risks

    The Company's operations are subject to the risks normally inherent in
the operation and development of oil and natural gas properties. There can be
no assurance that the Company's future exploration and development efforts
will result in the discovery and development of additional commercial
accumulations of oil and natural gas. The following risk factors also apply.

    Competition

    There is considerable competition in the worldwide crude oil and natural
gas industry, including in Argentina, Trinidad and Tobago and Canada where
Petro Andina's assets and activities are located. Operators more established
than the Company, with access to broader technical skills, larger amounts of
capital and other resources, are active in the industry in all three countries
in which the Company has secured interests. This represents a significant risk
for the Company, which must rely on internally generated cash flow, borrowings
and access to capital markets for funding of its activities.

    Industry Conditions

    Certain commercial affairs specific to the Company, as well as general
market conditions and trends, could have a material impact on the Company's
business, financial condition and results of operations. The Federal
Government of Argentina has implemented controls for domestic fuel prices and
has placed a tax on crude oil and natural gas exports. An amount equivalent to
the export tax has historically been applied to domestic sales, which has had
the effect of limiting the actual realized price for domestic sales of crude
oil in Argentina. Any change to these government imposed restrictions could
have a material impact on Petro Andina's business, financial condition and
results of operations.

    Marketability of Production

    The marketability of the Company's production depends in part upon a
variety of factors, some of which are beyond Petro Andina's control. These
factors include the Company's ability to transport its crude oil to market,
access processing facilities and refining capacity and obtain required
regulatory approvals. Other factors include the nature of the crude oil the
Company produces, the availability, proximity and capacity of production
gathering systems and pipelines, federal and provincial control and regulation
of crude oil and natural gas production, transportation and export and
government intervention in the internal energy demand and supply balance. If
marketability factors change, the impact on the Company's ability to generate
revenues and operate profitably could be substantial.

    Unions

    Oil and natural gas activity in Argentina is largely unionized thereby
exposing Petro Andina to union activity including strikes, shut-downs, labour
negotiations and other actions outside of the Company's direct control, which
may have a material adverse effect on the operations of the Company.

    Changes in Argentine Law

    In the fourth quarter of 2004 the Federal District of Buenos Aires
introduced regulations intended to prevent corporations resident in the
District from avoiding taxes by relocating the ownership of Argentine assets
to offshore jurisdictions ("Resolution 7"). Petro Andina obtained an exemption
to Resolution 7 in 2005. Since that time, the Company has found there to be no
impediments to its day-to-day activity. Any change to Resolution 7 or the
availability of an exemption for the Company could have a material adverse
impact on Petro Andina's business.
    The Government of Argentina passed Hydrocarbon Law 26.197 in January
2007, whereby jurisdiction over the granting of new exploration and
exploitation concessions was transferred to the provincial governments. The
change of hydrocarbons administration will require producing companies to deal
more extensively with the provincial governments which are more directly
involved in the day-to-day affairs of operations within their jurisdictions.

    Stage of Development

    There are additional risks associated with an investment in Petro Andina
related to the nature of the Company's business and its early stage of
development. These risks include, but are not limited to, availability of
subsequent financing, competition in the industry, potential liability for
damages arising during operations, governmental regulation, availability of
oil and gas markets, fluctuating commodity prices, conflicts of interest,
industry conditions and risks of foreign operations.

    Off-Balance Sheet Arrangements

    The Company did not enter into any off-balance sheet transactions in
2007.

    Financial Instruments and Other Instruments

    The Company did not utilize financial instruments such as hedges or swaps
in 2007.

    Related-Party Transactions

    The Company did not enter into any related-party transactions in 2007.

    Critical Accounting Estimates

    The preparation of consolidated financial statements in accordance with
Canadian GAAP requires Management to make judgments, assumptions and estimates
that affect the financial results of the Company. Management reviews its
estimates regularly but new information and changed circumstances may result
in actual results or changes to estimated amounts that differ materially from
current estimates. The Company believes the following are the most critical
accounting estimates in preparing its consolidated financial statements.

    Full cost accounting

    The Company follows the full cost method of accounting for its crude oil
and natural gas properties. Accordingly, all costs related to the exploration
for and development of crude oil and natural gas reserves, whether successful
or not, are capitalized. The capitalized costs and future capital costs are
depleted on the unit-of-production method based on estimated proved reserves.
Costs of significant unproved properties, net of impairments, are excluded
from the depletion and depreciation calculation. Properties excluded from the
depletion calculation are assessed periodically to ascertain whether
impairment has occurred.
    The carrying amount of crude oil and natural gas properties may not
exceed their recoverable amount (the "ceiling test"). The costs are assessed
to be recoverable if the sum of the undiscounted cash flows expected from the
production of proved reserves and the lower of cost and market of unproved
properties exceeds the carrying value of the crude oil and natural gas assets.
If the carrying value of the crude oil and natural gas assets is not assessed
to be recoverable, an impairment loss is recognized to the extent that the
carrying value exceeds the sum of the discounted cash flows expected from the
production of proved and probable reserves and the lower of cost and market of
unproved properties. The cash flows are estimated using future product prices
and costs and are discounted using a risk-free rate of interest.
    The alternative method of accounting for crude oil and natural gas
properties is the successful efforts method. The major difference in applying
the successful efforts method is that exploratory dry holes and geological and
geophysical exploration costs are charged against net earnings in the year
they are incurred rather than being capitalized. The use of the full cost
method usually results in higher capitalized costs and higher DD&A rates than
the successful efforts method.

    Crude oil and natural gas reserves

    The Company retains qualified independent reserves evaluators to evaluate
the Company's proved and probable crude oil and natural gas reserves. In 2007,
all of Petro Andina's reserves were evaluated by GLJ Petroleum Consultants
Ltd., who are qualified independent reserves evaluators.
    The estimation of reserves involves the exercise of judgment. Forecasts
are based on engineering data, expected rates of production and the timing of
future capital expenditures, all of which are subject to major uncertainties
and interpretations. The Company expects that over time its reserve estimates
will be revised upward or downward based on updated information such as the
results of future drilling, testing and production levels. Reserve estimates
can have a significant impact on net earnings, as they are a key component in
the calculation of DD&A and for determining potential asset impairment. For
example, a revision to the reserve estimate would result in a higher or lower
DD&A charge to net earnings. Downward revisions to reserve estimates could
also result in a write-down of crude oil and natural gas properties.

    Asset retirement obligation (ARO)

    The Company is required to recognize a liability for future abandonment
and site restoration costs associated with the Company's crude oil and natural
gas properties in accordance with existing laws, contracts or other policies.
The fair value of the estimated ARO is recorded as a long-term liability, with
a corresponding increase in the carrying amount of the related asset known as
the asset retirement cost, which is depleted on a unit-of-production basis
over the life of the reserves. The liability is adjusted each reporting period
to reflect the passage of time, with the accretion charged to earnings, and
for revisions to the estimated future cash flows. Actual costs incurred upon
settlement of the obligations are charged against the liability.
    The ARO is based on estimated costs, taking into account the anticipated
method and extent of restoration consistent with legal requirements,
technological advances, industry practices and the possible use of the site.
Since these estimates are specific to the sites involved, there are many
individual assumptions underlying the Company's total ARO amount. These
individual assumptions can be subject to change based on experience.
Restoration technologies and costs are constantly changing, as are regulatory,
political, environmental, safety and public relations considerations. The
Company estimates future retirement costs based on current estimates adjusted
for inflation and credit risk. These estimates for inflation and credit risk
are also subject to management uncertainty.

    Future income tax

    The Company follows the liability method of accounting for income taxes.
Under this method, future tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using substantially enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
effect of a change in income tax rates on future income tax liabilities and
assets is recognized in income in the period that the change occurs. Future
income tax assets are only recognized to the extent that it is more likely
than not that sufficient future taxable income will be available to allow the
future income tax assets to be realized.
    The determination of the Company's income and other tax liabilities
requires interpretation of complex laws and regulations from multiple
jurisdictions. Rates are also affected by legislative changes. All tax filings
are subject to audit and potential reassessment after the lapse of
considerable time. Accordingly, the actual income tax liability may differ
significantly from that estimated and recorded in the financial statements.

    Stock-based compensation

    The Company records stock-based compensation expense using the fair value
method. The fair value of an option is calculated at the grant date, and
expensed equally over the vesting term of the option. The Company records the
cumulative stock-based compensation as a contributed surplus. When options are
exercised, contributed surplus is reduced and share capital is increased by
the amount of accumulated stock-based compensation for the exercised option.
Any consideration received on the exercise of stock options is credited to
share capital.
    The determination of stock-based compensation expense is based on
assumptions regarding stock volatility, risk-free interest rates and the term
of the options. These assumptions, by their nature, are subject to measurement
uncertainty. An increase in volatility, the risk-free rate or the term would
increase the calculated expense.

    Legal, environmental remediation and other contingent matters

    In respect of these matters, the Company is required to both determine
whether a loss is probable based on judgment and interpretation of laws and
regulations and determine if such a loss can reasonably be estimated. When any
such loss is determined, it is charged to earnings. Management continually
monitors known and potential contingent matters and makes appropriate
provisions by charges to earnings when warranted by circumstances.

    Changes in Accounting Policy

    Effective January 1, 2007, Petro Andina adopted the new accounting
standards set out in the Canadian Institute of Chartered Accountants' (CICA)
Handbook section 3855 "Financial Instruments - Recognition and Measurement",
section 3865 "Hedges" and section 1530 "Comprehensive Income". These standards
have been adopted prospectively. See note 3 to the consolidated financial
statements.

    Impact of New Accounting Pronouncements

    The CICA has issued the following accounting standards which became
effective for the Company on January 1, 2008: Handbook section 3862 "Financial
Instruments - Disclosures", section 3863 "Financial Instruments -
Presentation" and section 1535 "Capital Disclosures". These new accounting
standards require the Company to provide additional disclosures relating to
its financial instruments and capital. It is not anticipated that the adoption
of these new accounting standards will impact the amounts reported in the
Company's financial statements as they relate primarily to disclosure.
    In January 2006, the CICA Accounting Standards Board adopted a strategic
plan for the direction of accounting standards in Canada. As part of that
plan, accounting standards in Canada for public companies are expected to
converge with International Financial Reporting Standards (IFRS) by the end of
2011. The Company continues to monitor and assess the impact of convergence of
Canadian GAAP and IFRS.

    Control Environment

    The Chief Executive Officer and Chief Financial Officer (the "Disclosure
Officers") are responsible for establishing and maintaining disclosure
controls and procedures to ensure that information required by Petro Andina is
accumulated, recorded, processed and reported to the Company's management to
allow timely decisions regarding required disclosure. The Disclosure Officers
have evaluated the effectiveness of the Company's disclosure controls and
procedures as at December 31, 2007. As a result of this evaluation, the
Disclosure Officers have concluded that the Company's disclosure controls and
procedures have been designed and are operating effectively to provide
reasonable assurance that material information related to Petro Andina is made
known to them by others within the Company.
    The Disclosure Officers are responsible for designing internal controls
over the Company's financial reporting in order to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes, in accordance with Canadian
GAAP. The Disclosure Officers also evaluated the design of Petro Andina's
internal controls over financial reporting as at December 31, 2007 and
concluded that the design of internal controls over financial reporting is
effective.
    It should be noted that while the Disclosure Officers believe that the
Company's disclosure controls and procedures provide a reasonable level of
assurance that they are effective, and that the internal controls over
financial reporting are adequately designed, they do not expect that the
disclosure controls and procedures and internal controls over financial
reporting will prevent all errors and fraud. A control system, no matter how
well conceived or operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.


    
    Petro Andina Resources Inc.
    Consolidated Balance Sheets

    As at December 31
    (thousands of Canadian dollars)                          2007       2006

    ASSETS

    Current assets
      Cash and cash equivalents                         $  33,407  $  37,214
      Accounts receivable                                  24,821     15,164
      Prepaids and other current assets                     1,154        389
    -------------------------------------------------------------------------
                                                           59,382     52,767

    Long-term receivables (note 5)                          9,633      6,486

    Future income tax (note 12)                             6,211      2,866

    Property, plant and equipment (note 6)                101,662     38,864

    Deferred financing costs (note 3)                           -        739

    -------------------------------------------------------------------------
                                                        $ 176,888  $ 101,722
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities
      Accounts payable and accrued liabilities          $  29,253  $  13,361
      Debenture payable (note 7)                                -     11,000
      Current portion of long-term debt (note 8)            1,355          -
    -------------------------------------------------------------------------
                                                           30,608     24,361

    Long-term debt (note 8)                                15,562          -

    Asset retirement obligation (note 9)                    1,610        544
    -------------------------------------------------------------------------
                                                           47,780     24,905
    Shareholders' equity
      Share capital (note 10)                             143,655     86,405
      Contributed surplus (note 11)                         2,071        598
      Deficit                                             (16,618)   (10,186)
    -------------------------------------------------------------------------
                                                          129,108     76,817
    -------------------------------------------------------------------------

                                                        $ 176,888  $ 101,722
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Commitments and Contingency (notes 17 and 18)
    Subsequent Events (note 19)
    See accompanying Notes to the Consolidated Financial Statements

    Approved by the Board:

    (Signed)  "Ron Miller"                    (Signed)  "David Holm"
    Director                                  Director



    Petro Andina Resources Inc.
    Consolidated Statements of Loss, Comprehensive Loss and Deficit

    For the year ended December 31
    (thousands of Canadian dollars,
     except per share amounts)                               2007       2006
    -------------------------------------------------------------------------

    Revenue
      Oil and natural gas revenue                       $  91,232  $  23,478
      Royalties and turnover taxes                        (14,513)    (3,280)
    -------------------------------------------------------------------------
                                                           76,719     20,198
      Interest income                                       1,395        601
    -------------------------------------------------------------------------
                                                           78,114     20,799

    Expenses
      Production                                           21,014      6,904
      General and administrative                           10,290      5,730
      Stock-based compensation                              1,612        286
      Interest                                              1,507        815
      Gain on disposal of equipment                          (173)         -
      Depletion, depreciation and accretion                42,856      9,727
      Foreign exchange loss                                 4,500        111
    -------------------------------------------------------------------------
                                                           81,606     23,573

    Loss before taxes                                      (3,492)    (2,774)

    Income tax expense (recovery) (note 12)
      Current                                               6,285          -
      Future                                               (3,345)       569
    -------------------------------------------------------------------------
                                                            2,940        569

    Net loss and comprehensive loss for year               (6,432)    (3,343)

    Deficit, beginning of year                            (10,186)    (6,843)
    -------------------------------------------------------------------------

    Deficit, end of year                                $ (16,618) $ (10,186)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Basic and diluted net loss per common share         $   (0.18) $   (0.13)

    See accompanying Notes to the Consolidated Financial Statements



    Petro Andina Resources Inc.
    Consolidated Statements of Cash Flows

    For the year ended December 31
    (thousands of Canadian dollars)                          2007       2006
    -------------------------------------------------------------------------

    Operating activities
      Net loss                                          $  (6,432) $  (3,343)
      Add (deduct) non-cash items
        Depletion, depreciation and accretion              42,856      9,727
        Non-cash component of interest expense                773        349
        Future tax expense (recovery)                      (3,345)       569
        Stock-based compensation                            1,612        286
        Expenses paid by issue of common shares                61        110
        Unrealized foreign exchange loss                    3,351        308
        Gain on disposal of equipment                        (173)         -
    -------------------------------------------------------------------------
      Funds from operations                                38,703      8,006
      Net change in non-cash working capital                1,163     (9,890)
    -------------------------------------------------------------------------
                                                           39,866     (1,884)
    -------------------------------------------------------------------------

    Investing activities
      Acquisition of capital assets                      (104,684)   (34,654)
      Proceeds from disposal of equipment                     271          -
      Loan receivable                                          91       (163)
      Net change in non-cash working capital                 (881)     4,115
    -------------------------------------------------------------------------
                                                         (105,203)   (30,702)
    -------------------------------------------------------------------------

    Financing activities
      Issue of common shares                               61,668     42,967
      Share issue costs                                    (4,618)    (2,562)
      Proceeds from (repayment of) debenture              (11,000)    11,000
      Proceeds from long-term debt facility                17,843          -
      Financing costs                                        (960)    (1,088)
      Net change in non-cash working capital                  (12)        12
    -------------------------------------------------------------------------
                                                           62,921     50,329
    -------------------------------------------------------------------------

    Increase (decrease) in cash and cash equivalents
     for year                                              (2,416)    17,743

    Impact of foreign exchange on foreign
     currency-denominated cash balances                    (1,391)      (162)

    Cash and cash equivalents, beginning of year           37,214     19,633
    -------------------------------------------------------------------------

    Cash and cash equivalents, end of year              $  33,407  $  37,214
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary Disclosure of Cash Flow Information (note 13)

    See accompanying Notes to the Consolidated Financial Statements



    Petro Andina Resources Inc.
    Notes to the Consolidated Financial Statements
    For the year ended December 31, 2007
    (tabular amounts in thousands of Canadian dollars,
    unless otherwise stated)

    1.  Nature of Operations

    Petro Andina Resources Inc. (Petro Andina or the Company) is a
    Calgary-based oil and natural gas exploration and production company
    whose activities are conducted primarily in South America and the
    Caribbean. The Company was incorporated on July 10, 2003 under the laws
    of the province of Alberta.

    2.  Summary of Significant Accounting Policies

    a)  Basis of presentation

    These consolidated financial statements have been prepared in accordance
    with Canadian generally accepted accounting principles and include the
    accounts of the Company and its wholly owned subsidiary, Petro Andina
    Resources Ltd.

    b)  Management estimates and measurement uncertainty

    The timely preparation of financial statements requires that management
    make estimates and assumptions and use judgment regarding assets,
    liabilities, revenues and expenses. Such estimates primarily relate to
    unsettled transactions and events as of the date of the financial
    statements. Accordingly, actual results may differ from estimated
    amounts.

    Amounts recorded for depletion, depreciation and accretion, asset
    retirement costs and obligations and amounts used for ceiling test and
    impairment calculations are based on estimates of oil and natural gas
    reserves, commodity prices and future costs required to develop and
    produce those reserves. By their nature, estimates of reserves and the
    related future cash flows are subject to measurement uncertainty, and the
    impact of differences between actual and estimated amounts on the
    financial statements of future periods could be material.

    Provisions for contingent liabilities are subject to uncertainty
    regarding both the likelihood of their outcome as well as their recorded
    value.

    c)  Foreign currency translation

    The Company uses the temporal method for translating its foreign currency
    accounts and integrated foreign subsidiary to Canadian dollars. Under
    this method, all monetary asset and liability accounts are translated to
    Canadian dollars using the exchange rate in effect at the balance sheet
    date and non-monetary assets and liabilities are translated at the
    exchange rate in effect when the assets were acquired or obligations
    incurred.

    Revenues and expenses are translated to Canadian dollars at the monthly
    average exchange rate, except for depletion, depreciation and accretion,
    which are translated at the same rate as the related balance sheet items.
    Foreign currency gains and losses are included in income.

    d)  Cash and cash equivalents

    Cash and cash equivalents consists of cash in the bank, less outstanding
    cheques, and deposits with an original maturity of less than three
    months.

    e)  Property, plant and equipment

        (i)   Oil and natural gas properties

        The Company follows the full cost method of accounting for oil and
        natural gas operations, whereby all costs related to the acquisition,
        exploration and development of oil and natural gas reserves are
        capitalized. Such costs include lease acquisition costs, geological
        and geophysical costs, carrying charges of undeveloped properties,
        costs of drilling both productive and non-productive wells, the cost
        of oil and natural gas production equipment and overhead charges
        directly related to exploration and development activities.

        Capitalized costs, together with estimated future capital costs
        associated with proved reserves, are depleted and depreciated using
        the unit-of-production method based on gross (before royalty) proved
        reserves of oil and natural gas as determined by independent
        engineers. For purposes of this calculation, reserves and production
        are converted to equivalent units of oil based on relative energy
        content of six thousand cubic feet of natural gas to one barrel of
        oil. Costs of unproved properties, net of impairments, are excluded
        from the depletion and depreciation calculation.

        The Company reviews the carrying amount of its oil and natural gas
        properties ("the properties") relative to their recoverable amount
        ("the ceiling test") for each cost centre at each annual balance
        sheet date, or more frequently if circumstances or events indicate
        impairment may have occurred. The recoverable amount is calculated as
        the undiscounted cash flow from the properties using proved reserves
        and expected future prices and costs. If the carrying amount of the
        properties exceeds their recoverable amount, an impairment loss is
        recognized in depletion equal to the amount by which the carrying
        amount of the properties exceeds their fair value. Fair value is
        calculated as the cash flow from those properties using proved and
        probable reserves and expected future prices and costs, discounted at
        a risk-free interest rate. Properties excluded from the depletion
        calculation are assessed separately and periodically to ascertain
        whether impairment has occurred.

        Proceeds from the disposition of oil and natural gas properties are
        applied against capitalized costs except for dispositions that would
        change the rate of depletion and depreciation by 20 percent or more,
        in which case a gain or loss would be recorded.

        (ii)  Other capital assets

        Administrative capital assets are depreciated over their estimated
        useful lives at annual rates ranging from 10 percent to 100 percent.
        Leasehold improvements are amortized on a straight-line basis over
        the remaining lease term. Prior to its sale, the service rig was
        depreciated straight-line over its estimated useful life of three
        years.

    f)  Asset retirement obligation

    The Company records a liability for the fair value of legal obligations
    associated with the retirement of long-lived tangible assets in the
    period in which they are incurred, normally when the asset is purchased
    or developed. On recognition of the liability there is a corresponding
    increase in the carrying amount of the related asset, known as the asset
    retirement cost, which is depleted on a unit-of-production basis over the
    life of the reserves. The liability is adjusted each reporting period to
    reflect the passage of time, with the accretion charged to earnings, and
    for revisions to the estimated future cash flows. Actual costs incurred
    upon settlement of the obligations are charged against the liability.

    g)  Stock-based compensation

    The Company has an incentive stock option plan for employees, officers,
    directors and consultants as described in note 10. The Company records
    stock-based compensation expense using the fair value method. The fair
    value of an option is calculated at the grant date, and expensed over the
    vesting term of the option. The Company records the cumulative stock-
    based compensation as a contributed surplus. When options are exercised,
    contributed surplus is reduced and share capital is increased by the
    amount of accumulated stock-based compensation for the exercised option.
    Any consideration received on the exercise of stock options is credited
    to share capital.

    h)  Revenue recognition

    Revenues associated with the sale of crude oil, natural gas and liquids
    owned by the Company are recognized when title passes from the Company to
    an external party.

    Revenue as reported represents the Company's share and is presented
    before royalty payments to governments and other mineral interest owners.
    Revenue, net of royalties represents the Company's share after royalty
    payments to governments and other mineral interest owners.

    i)  Income taxes

    The Company follows the liability method of accounting for income taxes.
    Under this method, future tax assets and liabilities are determined based
    on differences between financial reporting and tax bases of assets and
    liabilities and are measured using substantially enacted tax rates and
    laws that will be in effect when the differences are expected to reverse.
    The effect of a change in income tax rates on future income tax
    liabilities and assets is recognized in income in the period that the
    change occurs. Future income tax assets are only recognized to the extent
    that it is more likely than not that sufficient future taxable income
    will be available to allow the future income tax assets to be realized.

    j)  Joint ventures

    Substantially all of the Company's exploration and development activities
    are conducted jointly with others and accordingly the accounts reflect
    only the Company's proportionate interest in such activities.

    k)  Per share information

    Per share information is calculated on the basis of the weighted average
    number of common shares outstanding during the fiscal period. Diluted per
    share information reflects the potential dilution that could occur if
    securities or other contracts to issue common shares were exercised or
    converted to common shares. Diluted per share information is calculated
    using the treasury stock method that assumes any proceeds received by the
    Company upon the exercise of in-the-money stock options would be used to
    buy back common shares at the average market price for the period.

    l)  Deferred financing costs

    Deferred financing costs are amortized using the effective interest rate
    method as described in note 3.

    m)  Comparative figures

    Certain comparative figures from previous periods have been reclassified
    to conform to the current year's presentation.

    3.  Changes in Accounting Policy

    Effective January 1, 2007, the Company adopted new accounting standards
    set out by the Canadian Institute of Chartered Accountants (CICA) in
    Handbook section 3855 "Financial Instruments - Recognition and
    Measurement", section 3865 "Hedging" and section 1530 "Other
    Comprehensive Income".

    Under the new standards, financial instruments designated as held for
    trading and available for sale are carried at their fair values. Other
    financial instruments such as loans and receivables, financial
    liabilities and those designated as held to maturity are initially
    recorded at fair value, and subsequently carried at their amortized cost.
    All derivatives are carried in the consolidated balance sheet at their
    fair value, including derivatives designated as hedges. The effective
    portion of unrealized gains and losses on cash flow hedges is carried in
    Other Comprehensive Income, a component of Shareholders' Equity on the
    consolidated balance sheet, with any ineffective portions of gains and
    losses on hedges taken into income immediately. Changes in the fair value
    of hedges and the related changes in the carrying value of the hedged
    items are taken into income immediately.

    The Company has no derivative financial instruments or hedges. The
    Company has classified its non-derivative financial instruments as loans
    and receivables and financial liabilities. These are accounted for at
    amortized cost. Debt and related transaction costs are measured at fair
    value at inception and subsequently measured at amortized cost.
    Transaction costs are included as a component of the amortized cost of
    the Company's debt balance.

    These standards have been adopted on a prospective basis. As a result of
    the change in accounting policy, debenture issue costs of $739,000
    previously shown as Deferred Financing Costs at December 31, 2006 were
    reclassified as a component of the amortized cost of the debenture
    balance in 2007. Debt issue costs have been amortized using the effective
    interest rate method, compared to being amortized on a straight-line
    basis over the period to maturity. This change had no material impact on
    net loss of prior years or the current period.

    4.  Impact of New Accounting Pronouncements

    The CICA has issued the following accounting standards which will be
    effective for the Company on January 1, 2008: section 3862 "Financial
    Instruments - Disclosures", section 3863 "Financial Instruments -
    Presentation" and section 1535 "Capital Disclosures".

    These new accounting standards will require the Company to provide
    additional disclosures relating to its financial instruments and capital.
    It is not anticipated that the adoption of these new accounting standards
    will impact the amounts reported in the Company's financial statements as
    they relate primarily to disclosure.

    5.  Long-Term Receivables

                                                         December   December
                                                         31, 2007   31, 2006
    -------------------------------------------------------------------------
    Argentina value added taxes                         $   6,809  $   6,323
    Receivable from partners                                2,753          -
    Loan receivable                                            71        163
    -------------------------------------------------------------------------
                                                        $   9,633  $   6,486
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Long-term receivables are comprised primarily of net credits for value
    added tax (VAT). Under current Argentine legislation, VAT credits on
    purchases can normally only be applied to offset liabilities for
    VAT payable on sales. However, for the year ended December 31, 2007 the
    Company was allowed to offset approximately $5,600,000 of accumulated
    VAT credits against its current income tax provision. The balance of the
    VAT receivable will be drawn down when the Company's taxable sales exceed
    its taxable purchases. Given the Company's current capital investment
    plans, this is not anticipated to occur in the next 12 months.
    VAT credits are not subject to expiry.

    Under the terms of the joint venture governing the Gobernador Ayala III
    Exploration Concession (GA III), the Company will finance its partners'
    share of exploration capital costs. The amounts due to Petro Andina are
    secured by an assignment of the joint venture partners' interests in
    GA III.

    A loan has been made to a company in Argentina which provides services to
    the Company. The loan is secured by equipment purchased with the proceeds
    of the loan, is repayable in 36 monthly installments commencing
    February 2007 and bears interest at 6 percent.

    6.  Property, Plant and Equipment

                                                 Accumulated
                                                   depletion,
                                               depreciation &       Net book
    December 31, 2007                   Cost    amortization           value
    -------------------------------------------------------------------------
    Oil and natural gas properties $ 151,493       $  51,602       $  99,891
    Office furniture and equipment     3,618           1,847           1,771
    -------------------------------------------------------------------------
                                   $ 155,111       $  53,449       $ 101,662
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                                                 Accumulated
                                                   depletion,
                                               depreciation &       Net book
    December 31, 2006                   Cost    amortization           value
    -------------------------------------------------------------------------
    Oil and natural gas properties $  46,875       $   9,763       $  37,112
    Service rig                          726             403             323
    Office furniture and equipment     2,559           1,130           1,429
    -------------------------------------------------------------------------
                                   $  50,160       $  11,296       $  38,864
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    During the year ended December 31, 2007 the Company capitalized
    $345,000 (2006 - $525,000) of general and administrative expenses related
    to exploration and development activities.

    Included in oil and natural gas properties at December 31, 2007 are
    $25,130,000 (December 31, 2006 - nil) of major development costs that are
    not subject to depletion.

    Future development costs on proved undeveloped reserves of $92,419,000 at
    December 31, 2007 (December 31, 2006 - $30,735,000) are included in the
    depletion calculation.

    Included in the Company's property, plant and equipment balance at
    December 31, 2007 is $1,336,000 (December 31, 2006 - $468,000) net of
    accumulated depletion relating to asset retirement obligation.

    The Company performs a ceiling test at least annually as described in
    Note 2(e). No write-down was required for the years ended
    December 31, 2007 and 2006 based on expected realized future commodity
    prices.

    The heavy oil prices used in the ceiling test at December 31, 2007 are
    listed below. The Company's externally prepared reserve report did not
    identify any significant light oil or natural gas reserves at year-end.

                                                                  US$/barrel
    2008                                                              $38.39
    2009                                                              $38.39
    2010                                                              $38.39
    2011                                                              $38.39
    2012                                                              $38.39
    Average thereafter                                                $38.39

    7.  Debenture Payable

    A non-convertible debenture was issued in August 2006 with an interest
    rate of 12 percent. The debenture was repaid on May 23, 2007 after the
    Company's initial public offering. The debt was secured by a promissory
    note, a general security agreement granting a first priority interest
    over all of the Company's present and after-acquired property, as well as
    a pledge of the Company's shares in its subsidiary.

    8.  Long-Term Debt

                                                             2007       2006
    -------------------------------------------------------------------------

    Total secured debt                                  $  17,843  $       -
    Deferred financing costs                                 (926)         -
    -------------------------------------------------------------------------
                                                           16,917          -
    Less current portion                                    1,355          -
    -------------------------------------------------------------------------
    Total long-term debt                                $  15,562  $       -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In September 2007 the Company, through its subsidiary Petro Andina
    Resources Ltd., entered into a US$100 million senior first lien secured
    credit facility, to be provided by Macquarie Bank Limited (Macquarie).
    Initial availability under the facility is US$28 million, comprising a
    US$18 million Tranche A component and a US$10 million Tranche B
    component. The first advances under Tranche A of the credit facility were
    made in October 2007.

    The Tranche A availability will be updated based on semi-annual
    re-determinations by Macquarie that the Company's oil and natural gas
    reserves will support additional lending amounts. The first update is
    expected to be completed in the first quarter of 2008. The Tranche B
    borrowing base is available until September 14, 2008.

    The loan facility bears interest at variable rates which, at the
    Company's option, will be based on either LIBOR or US prime (the
    "contract rates"). The Company may select either contract rate to apply
    to each advance for periods of 90 days at a time. The Tranche A facility
    interest rates will be LIBOR plus 2.75 percent per annum or US prime plus
    0.75 percent per annum. The Tranche B facility interest rates will be
    LIBOR plus 5.25 percent per annum or US prime plus 3.25 percent per
    annum. Interest is payable quarterly.

    The loan is secured by a pledge of Petro Andina Resources Ltd. common
    shares and an assignment of the Company's collection rights under all
    agreements related to its Argentine properties, including leases,
    exploration and development concessions, joint venture agreements,
    operating agreements and sales agreements. The loan is not convertible
    into equity.

    The loan agreement provides for repayment of the initial Tranche A
    advances of US$18 million in ten quarterly installments of US$1,800,000
    commencing on October 20, 2008. However, the amortization schedule may be
    amended and deferred based on the results of the Company's development
    plan and the Company anticipates that principal repayments will not be
    scheduled while funds continue to be advanced. The loan facility matures
    on September 14, 2011.

    The current portion of long-term debt includes principal repayments due
    in the next 12 months, net of deferred financing costs to be amortized
    over the same period.

    9.  Asset Retirement Obligation

                                                             2007       2006
    -------------------------------------------------------------------------

    Balance, beginning of year                          $     544  $     301
    Liabilities incurred during year                          992        334
    Accretion expense                                          74         24
    Change in estimate of future cash flows                     -       (115)
    -------------------------------------------------------------------------
    Balance, end of year                                $   1,610  $     544
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The total asset retirement obligation is estimated based on the Company's
    net ownership in all wells, the estimated costs to abandon and reclaim
    the wells and the estimated timing of the costs to be incurred in future
    periods. The total undiscounted amount of cash flows required to settle
    its asset retirement obligation is approximately $3,948,000 as at
    December 31, 2007 (December 31, 2006 - $1,451,000) with the majority of
    costs anticipated to occur in 2020 or later. A credit-adjusted discount
    rate of 7.5 percent and an inflation rate of 2 percent were used to
    calculate the fair value of the asset retirement obligation.

    10. Share Capital

    On September 29, 2006, the Company undertook a two-for-one split of its
    common shares. All common share numbers and per common share amounts have
    been restated to reflect the share split.

    a)  Issued and outstanding common shares

                                                 Number of shares     Amount
    Balance, December 31, 2005                         23,350,000  $  44,856
    Issued for cash - private placements                6,383,846     41,495
    Issued for cash - exercise of warrants              1,835,000      1,376
    Issued for cash - exercise of options                  38,000         96
    Allocation of contributed surplus -
     exercise of options                                        -          9
    Issued for purchase of oil and natural gas
     properties                                           157,692      1,025
    Issued to directors in lieu of compensation            16,800        110
    Share issue costs                                           -     (2,562)
    -------------------------------------------------------------------------
    Balance, December 31, 2006                         31,781,338     86,405
    Issued for cash - private placements                   29,385        191
    Issued for cash - initial public offering           6,700,000     60,300
    Issued for cash - exercise of options               1,212,334      1,177
    Allocation of contributed surplus -
     exercise of options                                        -        139
    Issued to directors in lieu of compensation             9,100         61
    Share issue costs                                           -     (4,618)
    -------------------------------------------------------------------------
    Balance, December 31, 2007                         39,732,157  $ 143,655
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    On May 10, 2007, the Company filed a prospectus to qualify the
    distribution to the public of 6,700,000 common shares at a price of
    $9.00 per share for total gross proceeds of $60,300,000. The Company's
    shares commenced trading on the Toronto Stock Exchange on May 23, 2007.

    In October 2006 the Company completed a private placement for the issue
    of 6,330,000 common shares at $6.50 per share. In December 2006,
    211,538 shares were issued for a combination of cash and oil and natural
    gas properties (see note 15).

    b)  Stock options

    The Company has a stock option plan that provides for the issuance of
    options to its directors, officers, employees and consultants to acquire
    common shares. The maximum number of options outstanding is equal to
    10 percent of the number of common shares outstanding. The options
    typically vest over a three-year period and expire five years from the
    date of grant.

                                                                    Weighted
                                                                     average
                                                      Number of     exercise
                                                        options        price
    -------------------------------------------------------------------------
    Balance, December 31, 2005                        2,645,000        $2.04
    Granted                                             239,000        $4.77
    Exercised                                           (38,000)       $2.53
    Forfeited                                          (140,000)       $1.00
    -------------------------------------------------------------------------
    Balance, December 31, 2006                        2,706,000        $2.32
    Granted                                             974,049        $8.68
    Exercised                                        (1,212,334)       $0.97
    Forfeited                                            (2,300)       $6.53
    -------------------------------------------------------------------------
    Balance, December 31, 2007                        2,465,415        $5.50
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Stock options outstanding at December 31, 2007 are as follows:

                                                  Weighted
                                                   average
                         Options      Options    remaining
    Exercise price   outstanding  exercisable  life (years)
    -------------------------------------------------------
    $0.50                 15,000       15,000          5.9
    $0.75                 31,000       31,000          1.3
    $1.50                 90,000       73,332          2.0
    $3.00                668,666      540,671          2.2
    $4.00                615,000      355,007          2.9
    $6.50                 72,000       24,004          3.8
    $6.70                700,249            -          4.2
    $11.80                95,000            -          4.4
    $13.41                16,000            -          4.6
    $14.80               150,000            -          4.7
    $16.33                12,500            -          4.9
    -------------------------------------------------------
                       2,465,415    1,039,014          3.3
    -------------------------------------------------------
    -------------------------------------------------------

    The fair value of each option granted is estimated on the date of grant
    using the Black-Scholes option pricing model with the following
    assumptions:

                                                             2007       2006
    -------------------------------------------------------------------------
    Risk-free interest rate (%)                               4.2        3.8
    Expected life (years)                                     3.0        3.0
    Expected volatility (%)                                    65          -
    Expected dividends                                          -          -

    c)  Liquidity Entitlement Certificates

    Under the terms of the October 2006 subscription agreements, the Company
    also issued a total of 6,330,000 Liquidity Entitlement Certificates that
    entitled the shareholders to receive, in respect of each common share
    subscribed for, an additional 0.10 common shares for no additional
    consideration in the event that the Company had not completed a Liquidity
    Event before December 31, 2007. All of the Liquidity Entitlement
    Certificates expired on May 23, 2007 when the Company's shares commenced
    trading on the Toronto Stock Exchange.

    d)  Per share amounts

    The weighted average number of common shares outstanding for the year
    ended December 31, 2007 was 36,730,231 (2006 - 26,429,225). The weighted
    average number of diluted common shares outstanding for the year ended
    December 31, 2007 was 38,201,048 (2006 - 28,033,813). The effect of
    including outstanding stock options and warrants is anti-dilutive to the
    net loss per share calculation.

    11. Contributed Surplus

                                                             2007       2006
    -------------------------------------------------------------------------
    Balance, beginning of year                          $     598  $     321
    Stock-based compensation expense                        1,612        286
    Options exercised                                        (139)        (9)
    -------------------------------------------------------------------------
    Balance, end of year                                $   2,071  $     598
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    12. Income Tax

    The provision for income tax expense is as follows:


                                                             2007       2006
    -------------------------------------------------------------------------
    Canada                                              $       -  $       -
    Argentina                                               2,940        569
    -------------------------------------------------------------------------
                                                        $   2,940  $     569
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The provision for income tax expense is different from the amount
    computed by applying the combined Canadian federal and provincial income
    tax rates to loss before taxes. The reasons for the differences are as
    follows:


                                                             2007       2006
    -------------------------------------------------------------------------
    Loss before taxes                                      (3,492)    (2,774)
    Canadian statutory income tax rate                     32.12%     32.12%

    -------------------------------------------------------------------------
    Income tax recovery at statutory rate               $  (1,122) $    (891)
    Effect on income taxes of:
      Non-deductible stock-based compensation                 518         92
      Non-deductible directors' fees paid with shares          19         35
      Non-deductible Argentine interest                     1,481        740
      Effect of Canadian tax rate changes                       -       (157)
      Increase in valuation allowance for Canadian
       losses not recognized                                4,751        328
      Argentine tax rate differential                         345        (53)
      Foreign exchange translation difference              (2,794)       374
      Other                                                  (258)       101
    -------------------------------------------------------------------------
                                                        $   2,940  $     569
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The following table summarizes the temporary differences that give rise
    to the Argentina future income tax asset as at December 31:

                                                             2007       2006
    -------------------------------------------------------------------------
    Loss carry-forwards                                 $       -  $     756
    Property, plant and equipment                           4,364      1,427
    Inter-company charges not paid                            943        573
    Asset retirement obligation                                31         12
    Unrealized oil sales                                      327         98
    Royalty provision                                         546          -
    -------------------------------------------------------------------------
                                                        $   6,211  $   2,866
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    At December 31, 2007, the Company had Canadian losses available to reduce
    future taxable income in Canada, as well as other cumulative tax
    deductions in excess of net book values. The income tax benefit of these
    Canadian losses and deductions has not been recognized in the financial
    statements since their recoverability is uncertain at this time. The
    total amount of these unrecognized differences is as follows:

    Loss carry-forwards                                            $   7,374
    Property, plant and equipment                                        623
    Unrealized foreign exchange losses                                12,409
    Share issue and financing costs                                    6,125
    Asset retirement obligation                                           54
    Other                                                                151
    -------------------------------------------------------------------------
                                                                   $  26,736
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Canadian loss carry-forwards will expire over the period 2014 to 2017.

    13. Supplemental Disclosure of Cash Flow Information

                                                             2007       2006
    -------------------------------------------------------------------------
    Cash interest paid                                  $     514  $     466
    Cash income taxes paid                              $       -  $       -
    Shares issued for non-cash consideration            $       -  $   1,025

    During 2007, approximately $689,000 (2006 - $192,000) of Argentine
    receivables for oil sales were settled by a non-monetary exchange of
    services and supplies.

    14. Financial Instruments and Risk Management

    The Company's financial instruments recognized in the balance sheet
    consist of cash, accounts receivable, accounts payable, accrued assets
    and liabilities, debenture payable and long-term debt. The fair values of
    these financial instruments approximate their carrying value due to their
    short-term maturity and variable interest rate features.

    a) Credit risk

    A substantial portion of the Company's accounts receivables is with
    customers and joint venture partners in the oil and natural gas industry
    and is subject to normal industry credit risks.

    b) Foreign currency risk

    The Company is exposed to foreign currency risk as the majority of its
    transactions related to capital and operating activities are denominated
    in either Argentine pesos or U.S. dollars. Long-term debt is also
    denominated in U.S. dollars. The Company has not entered into any foreign
    currency hedges or swaps.

    c) Interest rate risk

    The Company is subject to interest rate risk on its floating rate
    long-term debt. The Company has not entered into any interest rate hedges
    or swaps.

    15. Related-Party Transactions

    In December 2006 the Company acquired cash of $350,000 and various
    non-operated working interests in Canadian oil and natural gas properties
    from a company controlled by two non-executive directors of Petro Andina.
    The transaction took the form of an asset purchase, with Petro Andina
    issuing 211,538 common shares at estimated current fair market value of
    $6.50 per share for total consideration of $1,375,000. The transaction
    was recorded at fair market value, with $1,025,000 allocated to property,
    plant and equipment.

    16. Segmented Information

    The Company has corporate offices in Calgary, Canada and in Buenos Aires,
    Argentina. Prior to December 29, 2006 when the Company acquired interests
    in various Canadian non-operated properties, all of its oil and natural
    gas operations were conducted in Argentina.

                                           Year ended December, 31, 2007
                                      Canada       Argentina           Total
    -------------------------------------------------------------------------

    Oil and natural gas revenue    $     351       $  90,881       $  91,232
    Royalties and turnover taxes         (48)        (14,465)        (14,513)
    -------------------------------------------------------------------------
                                         303          76,416          76,719
    Interest income                    1,233             162           1,395
    -------------------------------------------------------------------------
                                       1,536          76,578          78,114
    Expenses
      Production                         138          20,876          21,014
      General and administrative       7,074           4,828          11,902
      Interest                         1,252             255           1,507
      Gain on disposition of
       equipment                           -            (173)           (173)
      Depletion, depreciation and
       accretion                         719          42,137          42,856
      Foreign exchange loss (gain)    13,607          (9,107)          4,500
    -------------------------------------------------------------------------
                                      22,790          58,816          81,606

    Income (loss) before taxes       (21,254)         17,762          (3,492)
    Income tax expense (recovery)          -           2,940           2,940
    -------------------------------------------------------------------------
    Net income (loss)              $ (21,254)      $  14,822      $   (6,432)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Property, plant and equipment  $   1,029       $ 100,633      $  101,662
    Capital expenditures           $      33       $ 104,651      $  104,684
    Total assets                   $  21,043       $ 155,845      $  176,888



                                           Year ended December, 31, 2006
                                      Canada       Argentina           Total
    -------------------------------------------------------------------------

    Oil and natural gas revenue    $       -       $  23,478          23,478
    Royalties and turnover taxes           -          (3,280)         (3,280)
    -------------------------------------------------------------------------
                                           -          20,198          20,198
    Interest income                      595               6             601
    -------------------------------------------------------------------------
                                         595          20,204          20,799
    Expenses
      Production                           -           6,904           6,904
      General and administrative       3,364           2,652           6,016
      Interest                           815               -             815
      Gain on disposition of
       equipment
      Depletion, depreciation and
       accretion                         233           9,494           9,727
      Foreign exchange loss (gain)      (701)            812             111
    -------------------------------------------------------------------------
                                       3,711          19,862          23,573

    Income (loss) before taxes        (3,116)            342          (2,774)
    Income tax expense (recovery)          -             569             569
    -------------------------------------------------------------------------
    Net income (loss)              $  (3,116)      $    (227)      $  (3,343)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Property, plant and equipment  $   1,710       $  37,154       $  38,864
    Capital expenditures           $   1,075       $  34,604       $  35,679
    Total assets                   $  38,158       $  63,564       $ 101,722

    Capital expenditures for 2006 included $1,025,000 of non-cash additions.

    17. Commitments

    a)  Leases

        The Company is committed to payments under operating leases as
        follows:

        Year                     Office Space
        --------------------------------------
        2008                          $   796
        2009                              786
        2010                               37
        --------------------------------------
                                      $ 1,619
        --------------------------------------
        --------------------------------------

    The Company has entered into long-term commitments for four drilling rigs
    to carry out its planned exploration and development activities in
    Argentina. The terms of these contracts call for varying penalties if the
    contracts are cancelled within the next two years. The Company has an
    adequate inventory of drilling locations in Argentina on which to employ
    these rigs and, therefore, does not anticipate that any penalty charges
    will be incurred for these contracts.

    b) Exploration - Gobernador Ayala III

    On May 29, 2007, the Company signed an agreement with the Province of La
    Pampa with respect to the award of the Gobernador Ayala III Exploration
    Concession (GA III Concession). Petro Andina subsequently entered into a
    joint venture agreement under which Petro Andina operates the GA III
    Concession with a 70 percent working interest, while other parties share
    the remaining 30 percent. The two-year work commitment with respect to
    the Concession includes drilling a total of 25 exploration wells and
    acquiring 250 square kilometres of three dimensional (3D) seismic data.
    As of December 31, 2007, the seismic commitment had been fulfilled and
    nine exploration wells had been drilled.

    Under the terms of the GA III joint venture agreement, Petro Andina
    initially pays 100 percent of the capital costs and associated value
    added tax related to the two-year work commitment on the Concession. The
    amounts due to Petro Andina from its joint venture partners with respect
    to their 30 percent share of these capital costs are secured by an
    assignment of the partners' interests in GA III, and will be recovered
    out of their share of revenues less royalties and production expenses.

    c)  Exploration - Gobernador Ayala I

    In December 2007, Petro Andina signed a joint venture agreement with
    Pampetrol S.A.P.E.M. (Pampetrol), the provincial oil company of La Pampa,
    with respect to the Gobernador Ayala I Exploration Concession
    (GA I Concession). Under terms of the joint venture agreement, Petro
    Andina will operate the GA I Concession with a 50 percent working
    interest. Pampetrol will hold the remaining 50 percent. The Company will
    drill two exploratory wells at its sole expense during a six-month period
    commencing December 5, 2007. The Company will then have a three-month
    evaluation period during which it can elect to complete the earning of
    its interest by carrying out a work program. Including the cost of the
    initial two wells, this work program is estimated to be approximately
    US$2 million. Petro Andina will recover Pampetrol's share of the costs,
    including the exploration expense, out of production from the
    GA I Concession. As of December 31, 2007, no work had yet commenced
    on GA I.

    18. Contingency

    In March 2006 Petro Andina applied to the Federal Secretary of Energy in
    Argentina to convert 303.5 square kilometres of the CNQ-7/A Concession
    around the Company's producing fields into an exploitation concession.
    The Company was advised that legal precedent in Argentina provides the
    federal regulator with a period of 60 days to object to the filing. If no
    objection is made, then the operator is permitted to reduce royalties
    paid from 15 percent to the 12 percent applicable to an exploitation
    concession. Because no objection was received, in mid-May 2006, 60 days
    after this application was made, the rate used in computing the royalty
    was reduced to 12 percent. However, the responsibility for the granting
    of exploitation concessions was subsequently transferred to provincial
    control. In March 2007, the Company received notice from the Province of
    Mendoza claiming royalty adjustments to increase the royalty to
    15 percent retroactive to May 2006. The claim was made by a different
    provincial government department from that responsible for granting
    exploitation concessions. While Petro Andina has received assurance from
    expert advisors and regulators that the same 60-day precedent previously
    applied by the federal regulator will apply, the change in administrative
    jurisdiction introduces an element of uncertainty concerning the timing
    of the royalty rate reduction. To address this uncertainty, the Company
    has decided to accrue an additional royalty amount for the period
    commencing May 2006 equal to one-half of the difference (1.5 percent)
    between the exploration and exploitation royalty rates. This amount of
    $1,550,000 has been accrued in the year ended December 31, 2007. This
    accrual is planned to continue until the bureaucratic process related to
    the granting of the exploitation concession is complete and the matter is
    resolved.

    19. Subsequent Events

    a)  Exploration commitment in Trinidad and Tobago

    In January 2008 Petro Andina entered into a Joint Venture Agreement to
    acquire a 50 percent working interest in two onshore exploration blocks
    in Trinidad and Tobago. Under the terms of the agreement, Petro Andina
    will be operator of the Central Range Shallow and Central Range Deep
    Blocks, which are subject to Production Sharing Contracts (PSCs). Petro
    Andina has entered into the Joint Venture Agreement with Voyager Energy
    Ltd. (Voyager), a Calgary-based private company. The assignment of
    working interest and operatorship to Petro Andina through this agreement
    is subject to final approval by the Trinidad and Tobago government.

    Voyager will be the holder of the remaining 50 percent working interest
    during the exploration phase. The Petroleum Company of Trinidad and
    Tobago (Petrotrin) has the right to participate for a 35 percent working
    interest in any development on the Central Range Shallow Block and for a
    20 percent working interest in any development on the Central Range Deep
    Block. The PSCs provide for an initial exploration phase of four years
    with the option for the parties to enter into two single-year exploration
    phases beyond the initial phase.

    The PSCs have minimum work commitments in the first four-year term of the
    contracts that total 100 kilometres of two-dimensional seismic,
    250 square kilometres of 3D seismic, one deep well drilled to a minimum
    depth of 12,000 feet and three shallow wells drilled to 4,500 feet or
    less. Upon final approval by the government of Trinidad and Tobago, Petro
    Andina and its partner will each pay a US$2.75 million signature bonus.
    Petro Andina will then carry the first US$5 million of Voyager's seismic
    acquisition costs during the exploration phase. The Company's total
    commitments in the initial exploration phase, including the Voyager
    carry, are estimated to be as follows:

                                               Capital      Other      Total
    -------------------------------------------------------------------------
    2008                                     $  15,316  $   1,595  $  16,911
    2009                                        10,458      1,482     11,940
    2010                                         2,974      1,577      4,551
    2011                                             -      1,669      1,669
    -------------------------------------------------------------------------
                                             $  28,748  $   6,323  $  35,071
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    These amounts do not include production bonuses and other payments that
    will vary depending on production levels, due to the uncertainty of their
    amount and timing. Amounts denominated in foreign currencies have been
    translated at the December 31, 2007 exchange rate.

    b)  Equity financing

    On March 6, 2008, the Company issued 2,990,000 common shares at a price
    of $12.00 per share, for gross proceeds of $35,880,000.


    About Petro Andina Resources Inc.

    Petro Andina is engaged in the exploration for and development and
production of oil and natural gas in Argentina and, to a lesser extent, in
Canada. The Corporation has also recently announced the execution of a Joint
Venture Agreement allowing Petro Andina to explore blocks in Trinidad and
Tobago. The Corporation is continuing to develop its existing reserves and to
conduct appraisal and exploration drilling on its 529,000 acre (297,000 acre
net) land position in the Neuquén basin. Petro Andina is headquartered in
Calgary, Canada.

    This news release does not constitute an offer to sell securities, nor is
    it a solicitation of an offer to buy securities, in any jurisdiction. All
    sales will be made through registered securities dealers in jurisdictions
    where the offering has been qualified for distribution. The securities
    offered are not, and will not be, registered under the securities laws of
    the United States of America, nor any state thereof and may not be sold
    in the United States of America absent registration in the United States
    or the availability of an exemption from such registration.

    The Toronto Stock Exchange has not received and does not accept
    responsibility for the adequacy or accuracy of this news release.

    Forward-Looking Statements

    Certain statements regarding Petro Andina Resources Inc. including
    management's assessment of future plans and operations, may constitute
    forward-looking statements under applicable securities laws and
    necessarily involve known and unknown risks and uncertainties, most of
    which are beyond Petro Andina's control. These risks may cause actual
    financial and operating results, performance, levels of activity and
    achievements to differ materially from those expressed in, or implied by,
    such forward-looking statements.

    Such risks and uncertainties include, but are not limited to: the impact
    of general economic conditions in Canada and Argentina; industry
    conditions including changes in laws and regulations including adoption
    of new environmental laws and regulations, and changes in how they are
    interpreted and enforced, both in Canada and Argentina; competition; the
    lack of availability of qualified personnel; fluctuations in commodity
    prices; the results of exploration and development drilling and related
    activities; imprecision in reserve estimates; the production and growth
    potential of Petro Andina's assets; fluctuations in foreign exchange or
    interest rates; the ability to access sufficient capital from internal
    and external sources; and obtaining required approvals of regulatory
    authorities, both in Canada and Argentina. Many of these risk factors are
    discussed in further detail in the Corporation's short form prospectus
    dated February 29, 2008 on file with Canadian securities commissions.
    Readers are also referred to the risk factors described in other
    documents that Petro Andina files from time to time with securities
    regulatory authorities.

    Accordingly, Petro Andina gives no assurance nor makes any
    representations or warranty that the expectations conveyed by the
    forward-looking statements will prove to be correct and actual results
    may differ materially from those anticipated in the forward-looking
    statements. Petro Andina undertakes no obligation to publicly update or
    revise any forward-looking statements.
    





For further information:

For further information: Melesia Kasha, Investor Relations, Petro Andina
Resources Inc., Phone: (403) 237-1700, Fax: (403) 265-8216; William R.A. Hogg,
Vice President, Finance and Chief Financial Officer, Petro Andina Resources
Inc., Phone: (403) 237-1701, Fax: (403) 265-8216

Organization Profile

PETRO ANDINA RESOURCES INC.

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