November 2008

Dear fellow Shareholders,

The third quarter of 2008 has been a turbulent period in the financial markets which has affected everyone including Lundin Petroleum. The problems in the financial sector triggered by the US subprime housing losses have set off a chain of events which has resulted in an effective failure of the world’s banking system and the necessity for major government intervention to prevent a complete meltdown. The effect on the wider economy is now unfolding with most of the world’s major economies already in recession. The dual effect of the lack of credit within the financial system, and in fact major deleveraging by the world’s banks, coupled with the impact of a recessionary world economy has sent equity markets into a tailspin with huge losses and unprecedented volatility. We have also witnessed major falls in commodity prices including crude oil with investors concerned about the impact of recessionary economies on world oil demand. Whilst I believe that we are past the worst part of the storm, the impact of the credit crisis and recessionary pressures on short term oil prices and equity values are not in my opinion yet to be fully understood. We have not yet seen the full impact of the crisis on the banking sector and it will take at least well into 2009 before we see credit markets start to open up and even longer before financial markets return to any resemblance of stability.

In the short term the oil markets will be pulled lower as demand reduces with OPEC seeking to avert the declines by reducing production to protect their national budgets. However in the longer term the picture is much clearer. The major financial stimulus measures injected into the system by world governments will ultimately trigger renewed growth particularly in the developing world. Even before the financial crisis the oil industry was struggling to supply increased demand particularly as a result of aging oil fields and declining production rates. This financial crisis and recession will simply exacerbate the problem when demand does pick-up again with the oil industry being unable to avert declining production and increased demand. The result will be a sharp rebound in commodity prices, particularly oil.

As a result Lundin Petroleum’s strategy, predicated upon a belief in higher long term oil prices, has not changed. We still believe that the companies who ultimately obtain access to reserves and production will be successful in delivering superior returns to shareholders. However what is also critical is that a company needs the financial flexibility to deal with the current scenario of limited credit availability and lower commodity prices. Companies which are faced with liquidity constraints will very quickly erode shareholder value. This is not the case with Lundin Petroleum which are in a strong financial position with:
-Strong operating cash flow even at lower oil prices.
-Committed banking facilities from a wide syndicate of relationship banks built over many years. USD 1 billion of new banking facilities were finalised last year. We forecast cash and undrawn committed bank lines of over USD 500 million at year end. The availability of these committed bank lines is not expected to be reduced even at lower oil prices. We have no requirement to refinance any of our banking lines until late 2010 and then only our USD 150 million corporate line. Our USD 850 million term financing does not mature until 2014.

I am confident that Lundin Petroleum’s financial position is robust and if necessary we can deal with an extended period of low oil prices without the need for new financing, asset sales or reduced capital expenditures. Nevertheless we are not complacent and will likely postpone capital expenditures in 2009 particularly associated with high cost production facilities and related to frontier exploration. We would like to maintain as much liquidity as possible to take advantage of unique acquisition opportunities which I will discuss later in my letter as well as retaining maximum financial flexibility.

Financial Performance
From a financial perspective the third quarter was probably one of the most successful periods in the history of Lundin Petroleum. The impact of increased oil production from the Alvheim Field during the commissioning period coupled with average oil prices of over USD 100 per barrel during the third quarter generated operating cash flow of SEK 1.5 billion (MUSD 234.0) which was up by 77 percent from the second quarter.

Lundin Petroleum generated a net profit after taxes for the nine months ended 30 September 2008 of MSEK 1,072.0 (MUSD 173.4) which is an increase of 46 percent over the comparative period of last year. Operating cash flow for the period was MSEK 2,963.1 (MUSD 479.3) and earnings before interest, tax, depreciation and amortisation (EBITDA) was MSEK 3,249.9 (MUSD 525.7) both respectively 33 percent and 34 percent over the comparative period of last year.

Production
Production for the nine months to 30 September 2008 averaged 30,700 boepd. The production for the third quarter of 2008 was 37,900 boepd which was a 41 percent increase over production in the second quarter.

The Alvheim field was the major reason for increased production in the third quarter. The field, which came onstream in June 2008, increased production during the third quarter as part of the commissioning of the field and averaged 11,500 boepd net to Lundin Petroleum. The performance of the Alvheim field and uptime from the surface facilities was ahead of expectation during the period and I am confident that the field will achieve forecast plateau production in excess of 95,000 boepd in the near future. During the third quarter production from the Broom field in the United Kingdom also performed well after the planned shutdown of the Heather host platform in the second quarter.

Production during the fourth quarter is expected to be similar to the third quarter with a planned 35 day shutdown on the Thistle platform in the United Kingdom. We maintain our 2008 production guidance of 32,500 boepd and 2009 production in excess of 40,000 boepd.

Exploration
The highlight of the year was our major oil discovery in the Russian sector of the Caspian with the Morskaya exploration well. We encountered 32 degree API oil in two sandstone reservoirs at less than 1,400 metres in depth which tested at a combined rate of 2,500 bopd on restricted choke. We have now calculated that the Morskaya structure which is 130 square kilometres in areal extent contains between 110 and 450 million barrels of recoverable oil in the Lagansky block with a mid case estimate of 230 million barrels. Indeed the discovery is twice this size with only about 50 percent of the structure contained in the Lagansky block. A discovery of this size will certainly require further appraisal with 3D seismic ongoing and another well planned for next year. However the discovery is clearly material even in the context of other major discoveries made in the Russian sector of the Caspian Sea.

Despite the fact that the recent Laganskaya exploration well found limited hydrocarbons, the Lagansky block still has further exciting exploration potential. The Petrovskaya exploration well which is on trend and updip of the Morskaya discovery has estimated potential resources of 300 million barrels of recoverable oil and will be drilled in 2009.

In Norway we have drilled two further successful wells in 2008 following the major Luno discovery in 2007. The Nemo appraisal well in PL148 was successful confirming recoverable reserves of about 20 million barrels. The Pi North exploration well was an oil discovery in PL292 which is located close to existing infrastructure controlled by operator BG. Both projects are being progressed with a view to potential submissions of plans of development. We recently spudded our first appraisal well on the Luno discovery which we hope will realise the upside potential in this exciting discovery. Indeed we have increased the resource potential in PL338 to 200 to 500 million barrels of recoverable oil after having identified potential updip extensions to the Luno discovery. These extensions will be tested with an exploration well in the first half of 2009. Lundin Petroleum controls a major exploration acreage position close to the Luno discovery and using technical information obtained from Luno will drill at least one further exploration well in PL359 to the south of Luno in 2009.

The results of our 2008 drilling programme in Sudan have been disappointing. We are now analysing the technical results of the dry wells before deciding upon a future work programme.

The nature of exploration is that we will drill dry holes. However we are pleased with our exploration success over the past couple of years particularly in Russia and Norway which I expect will contribute to a material increase in booked reserves at the end of this year. We will continue to explore with an active programme of drilling in 2009 with wells in Norway, Russia, Vietnam, Congo and Kenya. However we will be closely monitoring our exploration budgets in view of lower commodity prices and the financial crisis.

Mergers and Acquisitions
Over the past four years, since Lundin Petroleum acquired the North Sea assets of DNO, we have been frustrated by our inability to find suitable asset or corporate acquisition targets at acceptable prices. Our view was that deals were being completed at aggressive values not necessarily related to oil price assumptions but because buyers were willing to give value for a combination of probable and possible reserves, contingent resources, risked exploration and in some cases a strategic premium. This phenomenon was driven by the availability of abundant and cheap equity and debt capital with the market giving premiums to companies with cash flow producing assets. In the past few weeks the situation has been completely reversed. Equity and debt markets are no longer available. Commodity prices have collapsed creating a further squeeze on companies with overleveraged balance sheets. As a result we are seeing numerous acquisition opportunities from companies caught in the liquidity squeeze. Initially we saw exploration only vehicles looking to offload exploration commitments due to a lack of funding. This has been followed by development only companies who can no longer source the debt finance to bring onstream undeveloped reserves. I believe that further opportunities will become available as the effects of the liquidity shortages work their way through the system.

At Lundin Petroleum we have a strong liquidity position. However we are balancing the opportunities in the market at what we believe are very cheap asset prices with a desire to retain liquidity and keep our financial flexibility. We have acquired over the past few weeks a shareholding of close to 10 percent in the Norwegian independent company Revus Energy ASA. We are partners in their major assets being operator of the Broom field in the United Kingdom and the Luno discovery in Norway. We believed the company was trading at a significant discount to its long term core asset value and were vindicated in this respect when Wintershall made an offer for Revus at a 100 percent premium to our average acquisition price. In the case of Revus we felt comfortable as we could support our valuation from a thorough technical understanding of the assets. We believe that currently there are numerous other undervalued opportunities in the market and that this will most likely lead to further deals in the oil and gas sector over the next few months.

For similar reasons we decided in September to commence a buyback of Lundin Petroleum shares. We believe the current market value of Lundin Petroleum is at a discount to our valuation of the business. We have acquired to date as part of the buyback programme approximately 4.5 million shares in Lundin Petroleum. No decision has been made whether to acquire further shares going forward and this position will be reviewed regularly in light of market conditions.

I continue to strongly believe in the viability of the independent oil and gas sector. Lundin Petroleum has an excellent asset base with increasing reserves and production coupled with a diverse exploration portfolio. Our financial position and liquidity is strong. We will weather the storm in the financial markets even if necessary during a period of sustained low oil prices. And when the world economy starts to grow again and the world focuses upon the supply problems within our industry, then Lundin Petroleum will emerge stronger as one of the leaders in the independent oil and gas sector.

Best regards,

C Ashley Heppenstall
President & CEO