Overview

We are an independent energy company engaged primarily in oil and gas exploration, exploitation, development and production activities.  In addition to our oil and gas operations, we engage in the active management of investments in energy industry securities and futures traded on domestic and international securities exchanges. We also seek to invest in additional energy-based growth opportunities. Our crude oil and natural gas operations consist of exploration, exploitation, development, production and acquisition efforts in the United States, principally in the onshore and offshore Gulf Coast regions of South Texas and Louisiana, as well as coal bed methane exploration and development activities in Indiana and Ohio.

We have an investment in Global Energy Development PLC (“Global”) through our ownership of approximately 34% of Global’s ordinary shares which we account for as a cost method investment. Global has exploration, development and production activities in Colombia and exploration activities in Panama and Peru.

Consistent with our previously announced energy-based diversification and growth strategy in 2006, we diversified our holdings of oil and gas assets by acquiring an investment in a junior oil and gas exploration company in Canada.

For financial information for each of our operating segments, including information regarding consolidated revenues and total assets, see “Note 16 - Other Information” contained in the Notes to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K.

We were incorporated in 1973 in the State of California and reincorporated in 1979 in the State of Delaware. Our corporate offices are located at 180 State Street, Suite 200, Southlake, Texas 76092. Our telephone number is (817) 424-2424, and our web site is accessed at www.harkenenergy.com. We make available, free of charge, on our website, our Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers, Audit Committee Charter and Nominating and Corporate Governance Committee Charter as well as our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as is reasonably practical after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC).

Oil and Gas Exploration and Production Operations

Our oil and gas operations consist of exploration, exploitation, development, production and acquisition efforts in the United States, principally in the onshore and offshore Gulf Coast regions of South Texas and Louisiana, as well as coal bed methane exploration and development activities in Indiana and Ohio. During the three years ended December 31, 2006, we drilled or participated in the drilling of 32 oil and gas wells in North America, completing 23 of the wells drilled. During 2006, we drilled or participated in the

drilling of 9 exploratory and development wells and successfully completed 6 of those wells. We are continuing to seek joint venture and farmout opportunities to explore and develop our domestic oil and gas prospect portfolio. As of December 31, 2006, we operate or own a non-operating working interest in 70 oil wells, 73 gas wells and 14 injection wells in the Gulf Coast area of the United States.  All of our proved reserves are concentrated in the Gulf Coast region of Louisiana and Texas.

Prospect Acreage - In addition to the producing property interests discussed above, we own, through certain wholly-owned subsidiaries, interests in a variety of domestic prospect acreage in the Lake Raccourci and Lapeyrouse fields of LaFourche and Terrebonne Parishes, respectively, in Louisiana and in the Old Ocean field in Matagorda and Brazoria Counties of Texas.

See Note 16 — “Other Information” in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K for financial information about our North America oil and gas interests.

Oil and Gas Customers

During 2006, two domestic customers, Shell and Chevron/Texaco, purchased approximately 35% of our consolidated revenues. During 2005, two domestic customers, Shell and Cinergy, purchased approximately 17% of our consolidated revenues. There were no domestic customers during 2004 that individually represented 10% or more of our consolidated revenues.

Oil and Natural Gas Marketing

Generally, but not always, the demand for natural gas decreases during the summer months and increases during the winter months.  Seasonal anomalies such as mild winters or hot summers sometimes lessen this fluctuation.  The spot market for oil and gas is subject to volatility as supply and demand factors fluctuate.  We may periodically enter into financial hedging arrangement with a portion of our oil and gas production.  These activities are intended to support targeted price levels and to manage our exposure to price fluctuations.  See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

Oil and Gas Properties and Locations

Production and Revenues — See also Note 18 — “Oil and Gas Disclosures” in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K for certain information about our proved oil and gas reserves.  A summary of our ownership in our most significant producing properties is as follows:

 

Average
Working Interest

 

Average Revenue
Interest

 

Lake Raccourci — Domestic

 

40

%

28

%

Lapeyrouse — Domestic

 

14

%

9

%

Raymondville — Domestic

 

27

%

19

%

Main Pass Block 35 — Domestic

 

90

%

72

%

Allen Ranch, Texas — Domestic

 

11

%

8

%
The following table shows, for the periods indicated, operating information attributable to our domestic oil and gas interests:

 

 

Year Ended December 31,

 

 

 

2002

 

2003

 

2004

 

2005

 

2006

 

Production:

 

 

 

 

 

 

 

 

 

 

 

Natural Gas (Mcf)

 

3,162,000

 

2,074,000

 

1,739,000

 

1,266,000

 

1,712,000

 

Oil (Bbls)

 

266,000

 

237,000

 

181,000

 

135,000

 

167,000

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Natural Gas

 

$

10,573,000

 

$

11,223,000

 

$

10,745,000

 

$

10,768,000

 

$

12,381,000

 

Oil

 

6,595,000

 

7,206,000

 

7,270,000

 

7,086,000

 

10,769,000

 

Total

 

$

17,168,000

 

$

18,429,000

 

$

18,015,000

 

$

17,854,000

 

$

23,150,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Unit Prices:

 

 

 

 

 

 

 

 

 

 

 

Natural Gas (per Mcf)

 

$

3.34

 

$

5.41

 

$

6.18

 

$

8.51

 

$

7.23

 

Oil (per Bbl)

 

$

24.79

 

$

30.39

 

$

40.06

 

$

52.62

 

$

64.30

 

Production costs per equivalent Mcfe

 

$

1.53

 

$

2.01

 

$

1.90