Our Business

CAMAC Energy Inc. is engaged in the exploration, development, and production of oil and gas outside the United States, directly and through joint ventures and other ventures in which it may participate. Currently the Company has interests in OML 120/121 oil and gas leases in deep water offshore Nigeria and has recently acquired exploratory acreage in Kenya and The Gambia.

The Company was originally incorporated in Delaware on December 12, 1979 as Gemini Marketing Associates Inc., subsequently changed its name to Pacific East Advisors, Inc., and on May 7, 2007 consummated a reverse merger involving predecessor company IMPCO and ADS (the "Mergers"), in connection with which the Company changed its name to Pacific Asia Petroleum, Inc. The Company's name was changed to CAMAC Energy Inc. upon the acquisition of certain interests in oil and gas properties located offshore Nigeria in April 2010. The Company's corporate headquarters is located in Houston, Texas.

Africa Developments

Nigeria

For the three months ended June 30, 2012 and 2011, the Oyo Field had gross crude oil production from two producing wells averaging 2,786 and 4,109 barrels per day, respectively, of which the Company's net shares including Cost Oil were 441 and 1,215 barrels per day, respectively. For the six months ended June 30, 2012 and 2011, the Oyo Field had gross crude oil production from two producing wells averaging 2,867 and 4,063 barrels per day, respectively, of which the Company's net shares including Cost Oil were 454 and 1,201 barrels per day, respectively. There were no liftings of crude oil during the three months ended June 30, 2012 and one lifting of approximately 290,000 barrels of crude oil during the six months ended June 30, 2012 at a price of $123.73 per barrel. At June 30, 2012, the Company had a remaining workover commitment related to the Oyo well #5 workover of $16.8 million which was charged to expense in prior periods. This amount will be eligible for recovery as future Cost Oil revenue after payment occurs, and the rate of recovery will be affected by future production levels and other field expenditures.

In June 2012, Nigerian Agip Exploration Limited ("NAE") completed the previously announced sale of its 40% working interest in OML 120/121 to Allied Energy Plc., an affiliate of the Company. Allied has informed the Company that it plans to drill a new well in the Oyo Field commencing in the fourth quarter 2012. The new well, Oyo #7, will be designed to both increase the current production levels and test the prospective resource potential of the deeper Miocene reservoir in the field.

Kenya

In May 2012, the Company, through an indirect wholly owned subsidiary, entered into four production sharing contracts ("Kenya PSCs") with the Government of the Republic of Kenya, covering previously awarded exploration Blocks L1B and L16, and new offshore exploration Blocks L27 and L28. For all Blocks, the Company will be the operator, with the Government having the right to participate up to 20%, either directly or through an appointee, in any area subsequent to declaration of a commercial discovery. The Company is responsible for all exploration expenditures.

The Kenya PSCs for Blocks L1B and L16 each provide for an initial exploration period of two years with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company will conduct for each Block a regional geological study and acquire, process and interpret 3D seismic data. The Company has the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including the drilling of one exploratory well on each Block in each such additional period.

The Kenya PSCs for Blocks L27 and L28 each provide for an initial exploration period of three years with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company will conduct for each Block a regional geological study and acquire, process and interpret 3D seismic data. The Company has the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including the drilling of one exploratory well on each Block, in each such additional period.

In addition to the minimum work obligations, each of the Kenya PSC's require annual surface rental payments, training fund payments and contributions to local community development projects. All of the Kenya PSCs also include customary provisions including but not limited to governing law, confidentiality, force majeure, arbitration, and abandonment and decommissioning costs.

Gambia

In May 2012, the Company, through an indirect wholly owned subsidiary, signed two Petroleum Exploration, Development & Production Licenses with The Republic of The Gambia (the "Licenses"), for previously awarded exploration blocks A2 and A5 ("the Blocks"). For both Blocks, the Company will be the operator, with the Gambia National Petroleum Company (GNPC) having the right to elect to participate up to a 15% interest, following approval of a development and production plan. The Company is responsible for all expenditures prior to such approval even if the GNPC elects to participate.

The Licenses for both Blocks provide for an initial exploration period of four years with specified work obligations during that period. Prior to the end of the initial exploration period, the Company will conduct for each Block a regional geological study, acquire, process and interpret 3D seismic data, drill one exploration well to the total depth of 5,000 meters below mean sea level and evaluate drilling results, with the first two work obligations due prior to the end of the second year. The Company has the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including the drilling of one exploration well in each additional period for each Block.

In addition to the minimum work obligations, the Licenses require annual rental payments and training and resource fees. Each of the Licenses also include customary provisions including but not limited to governing law, confidentiality, force majeure, arbitration, and abandonment and decommissioning costs.

Asia Developments

China

As of June 30, 2012, our active operations in China were focused on gas reserves exploration and development, where the Company has operated the Zijinshan Gas Block located in Shanxi province since 2009. The Company has drilled a total of four exploration wells and has not yet declared any net proved reserves for this area. In October 2011, the Company retained a financial advisor to assist in the identification and evaluation of opportunities to monetize its Zijinshan gas asset.

On July 23, 2012, the Company signed a definitive share sale and purchase agreement to divest its interest in the Zijinshan Gas Block in China. This transaction was completed on August 6, 2012. See Note 13 of Notes to Unaudited Consolidated Financial Statements for the agreed terms of this transaction.

The Company ceased all active enhanced oil recovery and production operations in 2010, including consideration of the Chifeng agreement area in Inner Mongolia for a possible enhanced oil recovery and production project. In February 2011, the Board of Directors of Dong Fang approved dissolution of Dong Fang, the operating company. Effective June 20, 2011 a settlement agreement with the noncontrolling interest parties provided for settling of all claims and disputes, termination of existing contracts and agreements, transfers of related patent application rights to Mr. Li Xiang Dong, disposition of remaining assets and liabilities, and agreement to liquidate Dong Fang. As of June 30, 2012 all patent application rights had been transferred to Mr. Li Xiang Dong and the remaining assets and liabilities had been transferred, settled or disposed of, as applicable.

Results of Operations

The following discussion pertains to the Company's results of operations, financial condition, liquidity and capital resources and should be read together with our unaudited consolidated financial statements and notes to unaudited consolidated financial statements as well as our Annual Report on Form 10-K for the year ended December 31, 2011.

Three months ended June 30, 2012, compared to the three months ended June 30, 2011:

Revenues. We had no revenues for the three months ended June 30, 2012, as compared to $20,017,000 for the three months ended June 30, 2011. There was no lifting in the current period. During the three months ended June 30, 2012 and 2011, the average gross production from the Oyo Field was 2,786 and 4,109 barrels per day, respectively, and the Company's share of average daily net production was 441 and 1,215 barrels per day, respectively. The revenue per barrel on crude oil sold during the three months ended June 30, 2011 was $112.83.

Lease operating expenses and production costs. Lease operating expenses consist of personnel costs and contractor charges directly associated with the production of oil. Our lease operating expenses in the three months ended June 30, 2012 were $1,000 as compared to $2,417,000 for the three months ended June 30, 2011. The $2,416,000 decrease was primarily due to technical services cost of $1,653,000 and workover cost of $736,000 related to well #5 in the Oyo Field in the prior period.

Exploratory expenses. Exploratory expense consists of salaries and personnel costs related to exploration activities, drilling costs for unsuccessful wells, costs for acquisition of seismic data and other lease related costs charged to expense. Our exploratory expenses in the three months ended June 30, 2012 were $710,000 as compared to $250,000 for the three months ended June 30, 2011. The $460,000 increase was due to higher salaries and benefits expense of $314,000 and higher other lease related costs related to our recent Kenya and The Gambia lease acquisitions of $234,000 in the current period, partially offset by lower other costs of $88,000.

Depreciation, depletion and amortization expenses. Depreciation, depletion and amortization expenses consist of depletion of oil reserves and depreciation of leasehold improvements, furniture and fixtures and computer equipment. Our depreciation, depletion and amortization expenses in the three months ended June 30, 2012 were $35,000 as compared to $6,941,000 for the three months ended June 30, 2011. The $6,906,000 decrease was primarily due to the lifting in the prior period. There was no lifting in the current period.

General and administrative expenses. General and administrative expenses consist primarily of salaries and related personnel costs of executive management, finance, accounting, legal and human resources, consulting projects and insurance. Our general and administrative expenses in the three months ended June 30, 2012, were $3,201,000 as compared to $4,228,000 for the three months ended June 30, 2011. The $1,027,000 decrease was due to lower salaries and benefits expense of $1,440,000, partially offset by higher stock-based compensation of $276,000 and higher other costs of $137,000. The lower salaries and benefits expense primarily is due to officer resignations in the prior period.

Six months ended June 30, 2012, compared to the six months ended June 30, 2011:

Revenues. Our revenues for the six months ended June 30, 2012 were $5,672,000 as compared to $20,017,000 for the six months ended June 30, 2011. The $14,345,000 decrease was due to lower volumes sold in 2012, primarily related to timing of liftings and lower production volumes. During the six months ended June 30, 2012 and 2011, the average gross production from the Oyo Field was 2,867 and 4,063 barrels per day, respectively, and the Company's share of average daily net production was 454 and 1,201 barrels per day, respectively. The revenue per barrel on crude oil sold during the six months ended June 30, 2012 and 2011 was $123.73 and $112.83, respectively.

Lease operating expenses and production costs. Our lease operating expenses in the six months ended June 30, 2012 were $179,000 as compared to $26,894,000 for the six months ended June 30, 2011. The $26,715,000 decrease was primarily due to lower workover costs of $25,154,000 related to well #5 in the Oyo Field and lower technical services cost of $1,653,000. The technical services agreement related to the Oyo Field operations was terminated as of March 31, 2011.

Exploratory expenses. Our exploratory expenses in the six months ended June 30, 2012 were $1,332,000 as compared to $427,000 for the six months ended June 30, 2011. The $905,000 increase was primarily due to higher salaries and benefits expense of $642,000 and other lease related costs of $270,000 related to our recent Kenya and The Gambia lease acquisitions.

Depreciation, depletion and amortization expenses. Our depreciation, depletion and amortization expenses in the six months ended June 30, 2012 were $3,362,000 as compared to $7,007,000 for the six months ended June 30, 2011. The $3,645,000 decrease was primarily due to lower sales volumes in 2012, primarily related to timing of liftings and lower production volumes.

General and administrative expenses. Our general and administrative expenses in the six months ended June 30, 2012, were $6,018,000 as compared to $7,764,000 for the six months ended June 30, 2011. The $1,746,000 decrease was due to lower salaries and benefits expense of $1,241,000, primarily due to officer resignations in the prior period, and lower stock-based compensation of $1,249,000, partially offset by higher consulting and legal expenses of $323,000 and higher other costs of $421,000.

Segment Analysis

The following table compares revenues and net income (loss) attributable to CAMAC Energy Inc. stockholders for each of our business segments for the three and six months ended June 30, 2012 and 2011. Net (loss) income attributable to CAMAC Energy Inc. consists of our revenues less costs and operating expenses, other income (expense), income tax expense and non-controlling interests.

                                               Three Months Ended June 30,           Six Months Ended June 30,
                                                2012                 2011              2012               2011
Revenues                                                               (In thousands)
Africa                                     $            -       $       20,017     $      5,672        $   20,017
Total revenues                             $            -       $       20,017     $      5,672        $   20,017
Net (Loss) Income attributable to CAMAC
Energy Inc.
Africa                                     $         (633 )     $        9,904     $      1,171        $  (14,585 )
Asia                                                 (450 )               (705 )           (844 )          (1,396 )
Corporate                                          (2,892 )             (3,502 )         (5,598 )          (6,520 )
Net (loss) income attributable to CAMAC
Energy Inc.                                $       (3,975 )     $        5,697     $     (5,271 )      $  (22,501 )

Africa

The Company had no revenues from Africa in the three months ended June 30, 2012, as compared to $20,017,000 for the three months ended June 30, 2011. The decrease was due to no lifting in the current period, as well as lower production volumes. During the three months ended June 30, 2012 and 2011, the average gross production from the Oyo Field was 2,786 and 4,109 barrels per day, respectively, and the Company's share of average daily net production was 441 and 1,215 barrels per day, respectively. The revenue per barrel on crude oil sold during the three months ended June 30, 2011 was $112.83.

Africa revenues in the six months ended June 30, 2012 were $5,672,000 as compared to $20,017,000 for the six months ended June 30, 2011. The $14,345,000 decrease was primarily due to lower Cost Oil recovery revenue resulting from the timing of payments for workover costs related to well #5 in the Oyo Field and lower production volumes. During the six months ended June 30, 2012 and 2011, the average gross production from the Oyo Field was 2,867 and 4,063 barrels per day, respectively, and the Company's share of average daily net production was 454 and 1,201 barrels per day, respectively. The revenue per barrel on crude oil sold during the six months ended June 30, 2012 and 2011, was $123.73 and $112.83, respectively.

The Africa segment had a net loss of $633,000, for the three months ended June 30, 2012, as compared to net income of $9,904,000, for the three months ended June 30, 2011. The decrease in net income of $10,537,000 was primarily due to no lifting in the current period versus a lifting in the prior period, resulting in significant prior period net income after depletion expense.

The Africa segment had net income of $1,171,000 for the six months ended June 30, 2012, as compared to a net loss of $14,585,000, for the six months ended June 30, 2011. The increase of $15,756,000 was primarily due to decreased workover costs of $25,154,000 related to well #5 in the Oyo Field, partially offset by decreased revenues of $14,345,000 (primarily Cost Oil revenue), and decreased depletion expense of $3,593,000 related to fewer barrels sold in 2012.

The Asia segment had a net loss of $450,000 and $705,000 for the three months ended June 30, 2012 and 2011, respectively. The decrease in net loss of $255,000 is primarily due to reduced operations.

The Asia segment had a net loss of $844,000 and $1,396,000 for the six months ended June 30, 2012 and 2011, respectively. The decrease in net loss of $552,000 is primarily due to reduced operations.

Corporate

Net loss for the Corporate segment for the three months ended June 30, 2012 and 2011, was $2,892,000 and $3,502,000, respectively. The decrease in net loss of $610,000 was due to lower salaries and benefits of $1,233,000, primarily due to officer resignations in the prior period, partially offset by higher stock-based compensation of $276,000 and other higher costs of $347,000.

Net loss for the Corporate segment for the six months ended June 30, 2012 and 2011, was $5,598,000 and $6,520,000, respectively. The decrease in net loss of $922,000 was due to lower stock-based compensation of $1,249,000 and lower salaries and benefits of $870,000, primarily due to officer resignations in the prior period, partially offset by higher consulting and legal expenses of $423,000 and other higher costs of $774,000.

Liquidity and Capital Resources

As of June 30, 2012, the Company had cash and cash equivalents of $3,396,000, accounts receivable of $11,414,000, accounts payable of $15,769,000 and accrued expenses of $9,355,000.

During the six months ended June 30, 2012, net cash used in operating activities was $9,039,000 as compared to $36,240,000 for the six months ended June 30, 2011. The net reduction in cash used in operating activities of $27,201,000 was primarily due to a decrease in net loss before non-cash expenses (primarily dry hole costs, depreciation, depletion, amortization and stock-based compensation), mostly offset by the timing of working capital items.

During the six months ended June 30, 2012, net cash used in investing activities was $3,206,000 as compared to $6,464,000 in the six months ended June 30, 2011. The decrease in cash used in investing activities of $3,258,000 was partially due to the $5,000,000 payment related to the OML 120/121 Transaction in the prior period offset by the Gambia and Kenya lease bonus payments of $3,240,000 in the current period .

During the six months ended June 30, 2012, net cash provided by financing activities was $2,037,000 as compared to $25,030,000 in the six months ended June 30, 2011. The decrease of cash provided by financing activities of $22,993,000 was primarily due to the decrease in proceeds from the Promissory Note during the current period.

On June 6, 2011, CAMAC Petroleum Limited ("CPL"), a wholly owned subsidiary of the Company, executed a Promissory Note (the "Promissory Note") in favor of Allied (the "Lender"). Under the terms of the Promissory Note, the Lender agreed to make loans to CPL, from time to time and pursuant to requests by CPL, in an aggregate sum of up to $25.0 million. Interest accrues on outstanding principal under the Promissory Note at a rate of 30 day LIBOR plus 2% per annum. CPL may prepay and re-borrow all or a portion of such amount from time to time. Pursuant to the initial terms of the Promissory note, the unpaid aggregate outstanding principal amount of all loans was to mature on June 6, 2013. Subsequent to the quarter ended June 30, 2012, the Promissory Note was amended to extend the maturity date to October 15, 2013.

As of June 30, 2012, $8.0 million was outstanding. The Company has irrevocably, unconditionally and absolutely guaranteed all of CPL's obligations under the Promissory Note.

Based upon current cash flow projections, management believes that the Company will have sufficient capital resources to meet projected cash flow requirements for the next twelve months from the date of filing this report, assuming no additional participation in Oyo Field operating and development costs through such date.

Our ability to execute our business plan will also depend on whether we are able to raise additional funds through equity, debt financing or strategic alliances. Such additional funds may not become available on acceptable terms, if at all, and any additional funding obtained may not be sufficient to meet our needs in the long-term. Through June 30, 2012, substantially all of our capital had been raised through private placements and registered direct offerings of equity instruments.

Off-Balance Sheet Arrangements

We have no off balance sheet arrangements, other than normal operating leases and employee contracts, that have or are likely to have a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

Tabular Disclosure of Contractual Obligations

Please see our Annual Report on Form 10-K for the year ended December 31, 2011, Part II, Item 7 for a table summarizing the Company's significant contractual obligations as of December 31, 2011. No material changes to such information have occurred during the six months ended June 30, 2012, other than the obligations related to the Kenya PSC's and the Gambia Licenses during the initial exploration periods.