- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number: 333-99455

SKY PETROLEUM, INC.

(Exact name of registrant as specified in its charter)



Nevada		32-0027992
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

401 Congress Avenue, Suite 1540 Austin, Texas		78701
(Address of principal executive offices)		(Zip Code)

(512) 687-3427

(Registrant’s Telephone Number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):



Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller Reporting Company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ Yes x No

Number of Shares outstanding at Au gust 14, 2012: 67,868,709

INDEX



		Page No.(s)
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011	3

	Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (unaudited)	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4T.	Controls and Procedures	27

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	[RESERVED]	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

SIGNATURES		29

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

NOTE: These consolidated financial statements reflect the Company’s Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011 , the unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 , and unaudited Consolidated Statements of Cash Flows for the three and six months ended June 30, 2012 and 2011 .

Sky Petroleum, Inc.

Consolidated Balance Sheets



	June 30, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	372,532		$	605,784
Restricted cash	1,500,000			1,500,000
Other current assets	222,612			53,243
Total Current Assets	2,095,144			2,159,027

Investment in oil and gas properties, net	10,205,220			10,205,220
Fixed assets, net	29,116			28,444
Deposits and other assets	14,768			14,768
Total Assets	$	12,344,248		$	12,407,459

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	686,785		$	419,095
Total Current Liabilities	686,785			419,095

Commitments and contingencies

Stockholders’ equity:
Series A Preferred stock, $0.001 par value, 10,000,000 shares authorized, none outstanding	—			—
Series B Preferred stock, no par value, 5,000,000 shares authorized, 3,863,636 issued and outstanding	7,820,000			7,820,000
Common stock, $0.001 par value, 150,000,000 shares authorized, 67,868,709 and 61,868,709 shares issued and outstanding, respectively	67,869			61,869
Additional paid-in capital	43,219,472			42,547,487
Accumulated deficit	(39,449,878		)	(38,440,992		)
Total Stockholders’ Equity	11,657,463			11,988,364

Total Liabilities and Stockholders’ Equity	$	12,344,248		$	12,407,459

The accompanying Notes are an integral part of these consolidated financial statements

Sky Petroleum, Inc.

Consolidated Statements of Operations

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Oil revenues	$	—		$	—		$	—		$	—
Expenses:
Depreciation	2,629			1,998			5,258			2,669
Legal and accounting	149,847			13,511			522,965			148,338
Travel	27,512			43,579			56,552			158,294
Consulting services	40,980			135,962			159,460			271,924
Other general and administrative	121,897			143,622			273,138			325,407
Total expenses	342,865			338,672			1,017,373			906,632
Net operating loss	(342,865		)	(338,672		)	(1,017,373		)	(906,632		)
Interest income	2,793			208			8,487			528
Net loss	$	(340,072	)	$	(338,464	)	$	(1,008,886	)	$	(906,104	)

Net loss per share - basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)
Weighted average number of common shares outstanding basic and diluted	67,104,588			61,868,709			66,450,083			61,868,709

The accompanying Notes are an integral part of these consolidated financial statements.

Sky Petroleum, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



	Six Months Ended
	June 30, 2012			June 30, 2011
Cash flows from operating activities:
Net loss	$	(1,008,886	)	$	(906,104	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	5,258			2,669
Share based compensation	37,985			69,206
Changes in operating assets and liabilities:
Other current assets	(119,369		)	33,506
Accounts payable and accrued liabilities	267,690			(29,159		)
Net cash used in operating activities	(817,322		)	(829,882		)
Cash flows from investing activities:
Purchase of fixed assets	(5,930		)	(19,858		)
Investment in Albania Oil and Gas	—			(50,000		)
Purchases of surety bond	(50,000		)	—
Net cash used in investing activities	(55,930		)	(69,858		)
Cash flows from financing activities:
Proceeds from private placement	640,000			—
Net cash provided by financing activities	640,000			—
Net decrease in cash and cash equivalents	(233,252		)	(899,740		)
Cash and cash equivalents at the beginning of period	605,784			2,911,464
Cash and cash equivalents at the end of period	$	372,532		$	2,011,724

The accompanying Notes are an integral part of these consolidated financial statements.

Sky Petroleum, Inc.

Notes to Consolidated Financial Statements

As used herein, the terms, “Sky Petroleum,” “Sky,” “the Company,” “we,” “us,” and “our” refer to Sky Petroleum, Inc. and related subsidiaries.

Note 1 - Organization and Basis of Presentation

The Company was organized on August 22, 2002 under the laws of the State of Nevada, as The Flower Valet. On December 20, 2004 the Company amended its articles of incorporation to change its name to Seaside Explorations, Inc. Subsequently, on March 28, 2005 the Company changed its name to Sky Petroleum, Inc ("Sky", "Sky Petroleum", or "the Company"). The Company has three wholly-owned subsidiaries, two incorporated in Cyprus: Sastaro Limited (“Sastaro”) and Bekata Limited (Bekata”) which owns 100% of Sastaro, of which the companies relate to our Mubarek field operations, and a third Sky Petroleum (Albania) Inc., ("Sky Petroleum Albania") a Cayman Islands corporation and qualified branch in Albania, incorporated for the purposes of holding and operating our interests in the Concession Area (as defined below) in Albania.

The Company is engaged in the exploration and development of oil and natural gas properties of others under arrangements in which we finance the costs in exchange for interests in the oil or natural gas revenue generated by the properties. Such arrangements are commonly referred to as farm-ins to us, or farm-outs by the property owners farming out to us.

On June 24, 2010 , Sky entered into a Production Sharing Contract (“PSC”) with the Ministry of Economy, Trade and Energy of Albania, acting through the National Agency of Natural Resources of Albania (“AKBN”). The PSC grants Sky Petroleum exclusive rights to three exploration blocks (Block Four, Block Five and Block Dumre) in the Republic of Albania (the “Concession Area”). The Concession Area covers approximately 1.2 million acres, representing approximately 20% of the landmass of Albania. The PSC has a seven -year term with three exploration periods. Upon commercial discovery of gas, the agreement allows for development and production periods of 25 years plus extensions at the Company's option.

On December 23, 2011 , Sky Petroleum delivered Notice of Arbitration under the Arbitration Rules of the United Nations Commission on Internal Trade Law to National Agency of Natural Resources and to the Ministry of Economy, Trade and Energy of Albania to institute an arbitration proceeding against the Ministry of Economy, Trade and Energy of Albania, acting by and through AKBN, for breach of the PSC in accordance with Article XXI of the PSC. The arbitration proceeding arises out of the alleged termination of the PSC in breach of the expressed termination provisions in Article 24 of the PSC. See "Contingencies" in the Notes to Consolidate Financial Statements for further details.

On May 18, 2005 , our wholly owned subsidiary Sastaro entered into a Participation Agreement with Buttes Gas and Oil Co. International Inc. (which we refer to as “Buttes”), a wholly-owned subsidiary of Crescent Petroleum Company International Limited (which we refer to as “Crescent”) for the financing of a drilling program in the Mubarek field. The field is an offshore region in a concession area surrounding Abu Musa Island in the Arabian Gulf. Under the terms of the Participation Agreement, the Company participated in a share of the future production revenue by contributing 25 million in drilling and completion costs related to two wells in an off-shore oil and gas project in the United Arab Emirates. The operator of the drilling program, Crescent completed the first well in 2006 and the second well in 2007 . As of December 31, 2009 , the first well produced a total of 150,413 gross barrels, and the second well produced a total of 149,471 gross barrels . Both wells terminated production in 2009 .

On December 31, 2009 , Sastaro received written notice from Buttes that Buttes unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Buttes also notified Sastaro that the Concession Agreement, dated December 29, 1969 , between the His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field was terminated. Buttes stated it handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on December 28, 2009 . Management is exercising its rights under the Participation Agreement and intends to protect our interests and our investment in the Mubarek Field. Sky continues to seek discussions with Crescent regarding the Participation Agreement.

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary corporations, after elimination of all intercompany accounts, transactions and profits.

Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q Quarterly Report pursuant to certain rules and regulations of the Securities and Exchange Commission (“SEC”). These

consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 .

In the opinion of management, the interim unaudited consolidated financial statements include all normal recurring adjustments necessary to present fairly the financial position and results of operations for each interim period shown in conformity with accounting principles generally accepted in the United States of America. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 .

The Company cannot be certain that its existing sources of cash will be adequate to meet our liquidity requirements including cash requirements that may be due under the PSC and arbitration. However, management has implemented plans to improve liquidity through slowing or stopping certain planned expenditures and improvements to results from operations. Management plans to obtain funding through equity, debt or other securities offerings. There can be no assurance that the capital raising efforts will be successful or that our results of operations will materially improve in either the short-term or long-term and accordingly, we may be unable to meet our obligations as they become due.

A fundamental principle of the preparation of financial statements in accordance with generally accepted accounting principles is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. The Company's consolidated financial statements have been prepared on a going concern basis and do not reflect any adjustments that might specifically result from the outcome of this uncertainty.

Note 2 - Summary of Significant Accounting Policies

The consolidated financial statements included herein, presented on the accrual basis, in accordance with accounting principles generally accepted in the United States of America and stated in US dollars, have been prepared by the Company, pursuant to the

rules and regulations of the SEC.

Nature of Operations

The Company's focus is on the acquisition, development and exploitation of long-lived oil and natural gas reserves and, to a lesser extent, exploration for new oil and natural gas reserves. The Company's business activities are currently carried out in off-shore Sharjah, UAE, and in concession areas in Albania.

Investments

Investments in non-affiliated companies with a less than 20% ownership interest, no significant influence, and market prices are not readily available, are accounted for under the cost method.

Property and Equipment

Oil and natural gas properties:

The Company uses the full cost method of accounting for its oil and natural gas producing activities. Accordingly, all costs associated with acquisition, exploration, and development of oil and natural gas reserves, including directly related overhead costs, are capitalized. Management and service fees received under contractual arrangements, if any, are treated as reimbursement of costs, offsetting the costs incurred to provide those services.

Depletion is provided using the units-of-production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measure based upon their relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the carrying value of the assets is reduced accordingly. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins.

Under the full cost method of accounting, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed a calculated “ceiling”. The ceiling limitation is the discounted estimated after-tax future net cash flows from proved oil and natural gas properties. In calculating future net cash flows, current prices and costs are generally held constant indefinitely.

The net book value of oil and natural gas properties, less related deferred income taxes is compared to the ceiling on a quarterly and annual basis. Any excess of the net book value, less related deferred income taxes, is generally written off as an expense. Under rules and regulations of the SEC, all or a portion of the excess above the ceiling may not be written off if, subsequent to the end of the quarter or year but prior to the release of the financial results, prices have increased sufficiently that all or a portion of such excess above the ceiling would not have existed if the increased prices were used in the calculations.

As of June 30, 2012 , the net carrying value of the Company's investment in the Mubarek wells was $ 0 .

As of June 30, 2012 , the Company has incurred $ 10,205,220 in acquisition and development costs for oil and gas projects in Albania. These costs relate to the Production Sharing Contract with the Ministry of Economy, Trade and Energy of Albania approved as of December 17, 2010 .

Sales of proved and unproved properties are accounted for as an adjustment of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and natural gas reserves, in which case the gain or loss is recognized.

Other Property and Equipment:

Maintenance and repairs are charged to operations. Renewals and betterments are capitalized to the appropriate property and equipment accounts.

Upon retirement or disposition of assets other than oil and natural gas properties, the cost and related accumulated depreciation are removed from the accounts with the resulting gains or losses, if any, recognized in income. Depreciation of other property and equipment is computed using the straight-line method based on the estimated useful lives of the property and equipment.

Income Taxes

We follow the new guidance issued within Topic No.740, Income Taxes , for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

Undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign countries.

The Company's wholly owned subsidiaries have prepared required foreign tax returns that were due for the years ended December 31, 2005 through 2010 totaling approximately $ 33,000 has been included for potential tax liabilities, penalties and interest which will be due upon filing the returns with the appropriate countries.

In 2006 , the Financial Accounting Standards Board ("FASB") issued new guidance within Accounting Standards Codification (“ASC”)Topic No. 740 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. ASC Topic No. 740 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted this topic as of January 1, 2007 , as required.

Stock-Based Compensation

The Company measures all share-based payments, including grants of employee stock options, using a fair-value based method in accordance with the FASB ASC Topic No. 505 Equity and Topic No. 718 (formerly SFAS No. 123R) Share-Based Payments .

The cost of services received in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the grant date fair value of those awards amortized over the requisite service period.

Basic and Diluted Net Loss Per Share

Net loss per share is presented in accordance FASB ASC Topic No. 260 Earnings Per Share . Basic net loss per share is computed based on the weighted average shares of common stock outstanding for the period. Common stock equivalents which represent stock options (approximately 2,400,000 stock options), have been excluded from the computation of diluted net loss per share at as their effect is anti-dilutive.

Use of Estimates in the Preparation of Consolidated Financial Statements

Preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The oil and natural gas reserve estimates, and the related future net cash flows derived from those reserves, are used in the determination of depletion expense and the full cost ceiling test and are inherently imprecise. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes.

FASB ASC Topic 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available (Level 1 ). If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters (Level 2 ). Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer's creditworthiness, among other things, as well as unobservable parameters (Level 3 ). Any such valuation adjustments are applied consistently over time.

Cash Equivalents and Restricted Cash

For purposes of the consolidated statements of cash flows, the Company considers all demand deposits, money market accounts and certificates of deposit purchased with an original maturity of three months or less to be cash equivalents.

On August 10, 2011 , the Company delivered a bank guarantee in the form of a letter of credit under the terms of the PSC with AKBN. In connection with the bank guarantee, Sky Petroleum deposited cash proceeds in excess of 105% of the principal balance of the $ 1,500,000 promissory note with Texas Citizens Bank N.A. to secure payment under the letter of credit. Subsequently, $ 1,500,000 was transferred to a certificate of deposit (“CD”) with the issuing bank. The issuing bank has the right of offset with the CD for any amounts used under the letter of credit.

On April 30, 2012 , the Company paid approximately $ 112,000 to the Tribunal for estimated costs which are included in other current assets on the Consolidated Balance Sheets as of June 30, 2012. Both Sky and AKBN were required to pay the advances, however AKBN has failed to deliver its portion of the advance. If AKBN does not make the required payment, the Tribunal can request the advance be made by Sky ("the claimant"), however the Tribunal will proceed on the basis of the claimant's deposit on the condition that the claimant furnishes additional funds when the existing deposit becomes exhausted. The Tribunal will contact the claimant once a further advance is required.

Revenue Recognition

Oil and natural gas revenues are recorded using the sales method, whereby the Company recognizes oil and natural gas revenue based on the amount of oil and natural gas sold to purchasers. As of June 30, 2012 and December 31, 2012 , the Company did not have any oil or natural gas imbalances recorded. The Company does not recognize revenues until they are realized or realizable and earned. Revenues are considered realized or realizable and earned when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller's price to the buyer is fixed or determinable; and (iv) collectability

is reasonably assured.

Recent Accounting Pronouncements

In May 2011 , the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . ASU 2011-04 is intended to result in convergence between United States Generally Accepted Accounting Principles ( U.S. GAAP ) and International Financial Reporting Standards ( IFRS ) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying U.S. GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity's net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used, and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. This ASU is effective for interim and annual periods beginning after December 15, 2011 . The adoption of this ASU is not expected to have a significant impact on the Company's fair value measurements, financial condition, results of operations, or cash flows.

Note 3 - Investment in Oil and Gas Properties

Blocks Four, Five and Dumre in Albania:

On June 24, 2010, Sky Petroleum executed a PSC, covering three exploration blocks, Four, Five, and Dumre in the Republic of Albania totaling approximately 1.2 million acres representing approximately 20% of the landmass of Albania. Under the terms of the PSC, Sky Petroleum has agreed to undertake exploration work on the blocks during the following three exploration periods over the next seven years commencing on the effective date of the PSC (January 3, 2011).

Under the terms of the PSC, Sky Petroleum was obligated to, among other things, (a) establish an office in Albania (established), (b) pay a signing bonus of $50,000 (paid); (c) prepare an exploration work program and budget (completed), (c) designate three members to a nine member Exploration Advisory Committee, (completed), (d) provide AKBN with a bank guarantee for $1,500,000 to guarantee expenditures during the first exploration period within 90 days of the Effective Date (the “AKBN Bank Guarantee”) (guarantee has been provided) and (e) commence performance of a minimum work program (commenced).

First Exploration Period : The first exploration period is an initial period of two years in which Sky Petroleum has agreed to undertake geological and geophysical (“G&G”) preparations, including but not limited to acquisition of technical data, interpretation of geological, geophysical and well data, and conducting regional geological and structural studies (mapping, balanced cross sections); seismic reprocessing and seismic acquisition, with minimum expenditure commitments totaling $1,500,000 .

Second Exploration Period: Provided that Sky Petroleum has completed the minimum first exploration period work program or paid AKBN the minimum expenditure amount, Sky Petroleum may elect to extend the exploration period into a second exploration period of three years. During the second exploration period, Sky Petroleum will undertake G&G; seismic acquisition and an exploration drilling program with minimum expenditure commitments totaling $2,650,000 .

Third Exploration Period: Provided that Sky Petroleum has completed the minimum second exploration period work program or paid AKBN the minimum expenditure amount, if, as approved by the AKBN, there are special circumstances which require more time for the contractor to perform adequate exploration activity, Sky Petroleum may elect to extend the exploration period into a third exploration period of two years. During the third exploration period, Sky Petroleum will undertake G&G; seismic acquisition and an exploration drilling program with minimum expenditure commitments totaling $3,150,000 .

At the end of the First Exploration Period or the Second Exploration Period, Sky Petroleum has the right, subject to AKBN approval, to extend such period by one year . In such a case, the duration of the Second Exploration Period or the Third Exploration Period shall be reduced to one year . Sky Petroleum may terminate the PSC at the end of any exploration period.

to approval by AKBN, which approval shall not be unreasonably withheld or delayed. Sky Petroleum and AKBN will share profits from any commercial production of oil (after cost recovery by Sky Petroleum) based on a sliding scale formula, in which Sky Petroleum's share of profits will range from 96% to 100% . All available production is subject to a 10% royalty tax and Sky Petroleum's profits are subject to a 50% Albania tax on petroleum profits.

Sky Petroleum will relinquish to AKBN 25% of the Concession Area, as designated by Sky Petroleum, within 180 days after the end of each of the First Exploration Period and the Second Exploration Period and all remaining acreage of the Concession Area at the end of the Third Exploration Period, that is not then subject to a Discovery or in a Production Area. Sky Petroleum will not be required to relinquish areas included in a Discovery Area or in Production Area.

In addition, to the work program undertakings, Sky Petroleum has also agreed to allocate $100,000 for training and education during each year of the Exploration period. On April 5, 2011 , Sky paid $50,000 towards the $100,000 allocation for training and education for the first year exploration period related to the Albania concession area. Sky also paid a signing bonus of $50,000 in 2010 .

Production Bonuses:


•	$150,000 on start-up of production from the Contract Area


•	$250,000 when average daily crude oil production over any consecutive ninety-day period reaches fifteen thousand ( 15,000 ) Barrels of oil per day


•	$500,000 when average daily crude oil production over any consecutive ninety-day period reaches thirty thousand ( 30,000 ) Barrels of oil per day.

Bank Guarantee : On December 17, 2010 , a copy of the document evidencing final approval of the Council of Ministers of the Republic of Albania was published in the Fletoren Zyrtare. The PSC became effective 10 working days after publication of the document on January 3, 2011 . Under the terms of the PSC, Sky Petroleum agreed to provide a bank guarantee within 90 days of the effective date of the PSC in an amount to guarantee expenditures during the first exploration period totaling $1,500,000 . Since the ratification, there have been numerous changes in personnel and officials at AKBN that have caused delays in completing our undertakings and satisfying our obligations under the PSC in a timely manner. Notwithstanding the above, Sky Petroleum delivered the bank guarantee on August 10, 2011 to AKBN. The bank guarantee was issued as a Letter of Credit in the name of AKBN.

Under the terms of the Letter of Credit, AKBN can submit a demand accompanied by a statement stating that the principal is in material breach of its obligations under the underlying contract; a copy of a notice to the Company (dated at least thirty ( 30 ) days prior to the date of your demand), informing the Company of a material breach of its Work Program obligations under the PSC (as defined below), the nature and quantum of the material breach and of its intention to demand payment under the Letter of Credit if the material breach is not remedied within fifteen ( 15 ) days; and a signed declaration stating that the Company has failed to remedy the material breach detailed in your notice by the date specified.

The Letter of Credit is effective through February 22, 2013 . The principal under the Letter of Credit shall be reduced every month or three months, as agreed between AKBN and the Company during the First Exploration Period, as defined under the PSC, by an amount equal to the sum spent by the Company on its Work Program obligations, as defined under the PSC, during such month or three months, such reductions to be effected in accordance with monthly or quarterly written statements issued by AKBN to the Company. As of June 30, 2012 the letter of credit was $1,500,000 .

Sky Petroleum or an affiliated entity designated by Sky Petroleum will serve as operator under the Agreement. Sky Petroleum intends to use affiliated entities to hold and operate the Concession Area. Sky Petroleum Albania was organized for the purpose of holding and operating the Concession Area.

Consulting Agreement - On May 18, 2010 , Sky Petroleum entered into a Consultant Agreement for Business Development in the Republic of Albania (the “Orsett Agreement”) with Orsett Ventures Inc., a British Virgin Islands company (“Orsett”). The Orsett

Agreement was amended on September 29, 2010 (“Amendment # 1 ”) and on October 8, 2010 (“Amendment # 2 ”). Under the terms of the Orsett Agreement, Sky Petroleum retained Orsett as an independent consultant to use Orsett's experience, expertise, qualifications and expertise to acquire and negotiate the acquisition of oil and gas properties and projects in the Republic of Albania. The Orsett Agreement terminated under its term on April 30, 2011 .

Pursuant to the Amendment # 1 , Sky Petroleum agreed to pay Orsett in connection with the execution and delivery of the PSC $700,000 and 1.5 million shares of common stock, all of which was paid and tendered, respectively as of December 31, 2010 .

Pursuant to Amendment # 2 , Sky agreed to pay Orsett for additional services, $ 150,000 , an additional 1.5 million shares of common stock; and 3,863,636 shares of newly designated Series B Preferred Stock. Following notification of approval by the Council of Ministers for the Republic of Albania of the PSC, the Company issued the Series B Preferred Stock. As of December 31, 2010 , all fees and common and preferred shares were paid and tendered.

The fair market value of the total 3 million common shares issued to Orsett was approximately $1,170,000 , and the fair market value of the 3,863,636 shares issued for Preferred Series B Stock of $7,820,000 have been included in oil and gas investments as of December 31, 2011 . The fair value of the preferred stock was determined using quoted market prices along with internally developed models that primarily use, as inputs, observable market-based parameters, and other valuation adjustments made to ensure that financial instruments are recorded at fair value.

Orsett and its affiliates, agents and representatives, are subject to ongoing obligations of confidentiality and covenants of non-compete and non-interference under the terms of the Orsett Agreement between Sky Petroleum and Orsett dated May 18, 2010 , as amended. Notwithstanding the expiration of the Orsett Agreement on April 30, 2011 , Orsett and its affiliates, agents and representatives, are subject to confidentiality undertakings for a period of three years following the expiration of the term. In addition, Orsett and its affiliates, agents and representatives have agreed not to circumvent any opportunities of Sky Petroleum.

Total Orsett Agreement costs of $9,840,000 along with other payments related to the investment totaling $365,220 are included in the investment in oil and gas properties totaling $ 10,205,220 as of June 30, 2012 . On June 25, 2012, the Company issued a stop order notice to its transfer agent under which the transfer agent was instructed to: not to remove the restrictive legends from the share certificates representing the Orsett Shares; not to effect or facilitate the transfer, assignment, conveyance or sale of any of the Orsett Shares; and not to effect the conversion of the Series B Preferred Stock into shares of common stock of the Corporation, unless the transfer agent receives the expressed written instructions of the Secretary of the Registrant.

The Company's investment in the Albania exploration blocks as of June 30, 2012 was $ 10,205,220 . This investment consisted of acquisition costs related to the PSC totaling $50,000 , and $ 850,000 for fees to consultants for locating and negotiating the Company's investment in the Albania exploration blocks, $265,220 for fees related to evaluations and assessments of the concession area, and $50,000 towards the $100,000 allocation for training and education for the first year exploration period. In addition, 3 million shares of common stock with a fair value of $ 1,170,000 , plus 3,863,636 Preferred Shares Series B with a value of $7,820,000 , were issued to Orsett for expertise provided to the Company in acquiring and negotiating the acquisition of oil and gas properties.

Mubarek Field Operations:

On May 18, 2005 , the Company entered into a Participation Agreement with Buttes, whereby the Company provided cash in the amount of $25,000,000 , to be used for drilling costs associated with two oil wells located in the Arabian Gulf in exchange for a variable percentage of future production revenue. Pursuant to the Participation Agreement, the Company provided capital to Buttes in developmental increments. Upon commencement of production, which occurred in May 2006 , the Company was to receive a preferred 75% of combined production revenue until such time as the Company recouped its total investment, and thereafter an incremental decrease of production revenue to 40% , until the Company has recouped two times its initial investment, and thereafter at 9.2% .

As of June 30, 2008 , Buttes incurred drilling costs totaling approximately $53,219,000 , exceeding the original cost estimates and funding by the Company of $25,000,000 , and thus reducing the Company's preferred share of combined production revenue from 75% to 35.25% until such time as the Company has recouped its total investment, and thereafter an incremental decrease of production revenue to 18.84% until the Company has recouped two times its initial investment, and thereafter at 4.33% .

The Company's operating costs are capped at $3.00 per barrel and royalty fees are 14.5% of gross production revenues under the Participation Agreement.

On December 31, 2009 , Sastaro received written notice from Buttes that Buttes had unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Buttes also notified Sastaro that the Concession Agreement, dated

December 29, 1969 , between the His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field was terminated. Buttes stated that it handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on December 28, 2009 .

Buttes notified Sastaro that the Participation Agreement between Sastaro and Buttes is terminated. Under the terms of the Participation Agreement, the Registrant, through Sastaro, contributed $25 million in drilling and completion costs related to two in-fill wells for the right for the Registrant to participate in a share of their future production revenue.

As a result of these events, and as of December 31, 2009 , the investment in the wells was impaired to zero .

As of June 30, 2012 and December 31, 2011 , the Company's investment in the Mubarek field oil and gas properties was zero .

Note 4 – Restricted Cash and Bank Guarantee

On August 10, 2011 , the Company delivered a bank guarantee in the form of a letter of credit under the terms of the PSC with AKBN. In connection with the bank guarantee, Sky Petroleum deposited cash proceeds in excess of 105% of the principal balance of the $1,500,000 promissory note with Texas Citizens Bank N.A. to secure payment under the letter of credit. Subsequently, $1,500,000 was transferred to a certificate of deposit (“CD”) with the issuing bank. The issuing bank has the right of offset with the CD for any amounts used under the letter of credit.

On April 30, 2012 , the Company paid approximately $112,000 to the Tribunal for estimated costs which are included in other current assets on the Consolidated Balance Sheets as of June 30, 2012. Both Sky and AKBN were required to pay the advances, however AKBN has failed to deliver its portion of the advance. If AKBN does not make the required payment, the Tribunal can request the advance be made by Sky ("the claimant"), however the Tribunal will proceed on the basis of the claimant's deposit on the condition that the claimant furnishes additional funds when the existing deposit becomes exhausted. The Tribunal will contact the claimant once a further advance is required.

Note 5 - Stockholders' Equity

Preferred Stock

We have authorized 10 million shares of $0.001 par value Series A Preferred Stock. There were no shares of Series A Preferred Stock outstanding as of June 30, 2012 and December 31, 2011 , respectively.

On October 8, 2010 , pursuant to the terms of the Orsett Agreement, dated May 18, 2010 , as amended September 29, 2010 and October 3, 2010 , by and between the Company and Orsett, the Company filed a Certificate of Designation with the Secretary of State for the State of Nevada to designate 5,000,000 shares of the Company's preferred stock as shares of Series B Preferred Stock (the "Series B Preferred Shares").

The Series B Preferred Shares are participating with no preferences or voting rights, and shall not be converted by any holder, in whole or in part for a period of twelve months from the date of initial issuance. Each Series B Preferred Share is convertible into 4.4 shares of common stock of the Company, however, the shares may not be converted into more than 4.99% % of beneficial ownership unless the holder waives the beneficial ownership limitation with 61 days notice.

In connection with the Series B designation and the Consultant Agreement, the Company issued 3,863,636 shares, with a fair value of $7,820,000 . These shares were issued to the Consultant for expertise provided to the Company in acquiring and negotiating the acquisition of oil and gas properties in Albania. As of June 30, 2012 and December 31, 2011 , 3,863,636 shares of Series B Preferred Stock were outstanding.

On June 25, 2012, the Company issued a stop order notice to its transfer agent under which the transfer agent was instructed to: not to remove the restrictive legends from the share certificates representing the Orsett Shares; not to effect or facilitate the transfer, assignment, conveyance or sale of any of the Orsett Shares; and not to effect the conversion of the Series B Preferred Stock into shares of common stock of the Corporation, unless the transfer agent receives the expressed written instructions of

the Secretary of the Registrant.

Common Stock and Stock Options

On July 26, 2005 , the Company adopted the Sky Petroleum, Inc. Non-U.S. Stock Option Plan (the “Non-U.S. Plan”), effective as of April 1, 2005 . The Non-U.S. Plan authorizes the issuance of stock options to acquire up to 10% of the Company's issued and outstanding shares of common stock.

On August 25, 2005 , the Company adopted the Sky Petroleum, Inc. 2005 U.S. Stock Incentive Plan (the “U.S. Plan”). The U.S. Plan authorizes the issuance of stock options and other awards to acquire up to a maximum of 3,321,600 shares of the Company's common stock (less the number of shares issuable upon exercise of options granted by the Company under all other stock incentive plans on the date of any grant under the U.S. Plan). The U.S. Plan provides for the grant of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986 , as amended), options that are not incentive stock options, stock appreciation rights and various other stock-based grants.

On October 1, and December 31, 2011, the Company granted 100,000 and 250,000 stock options, respectively, under the Non-U.S. Plan. The options are exercisable at $0.18 and $0.25 per share, respectively, with vesting over the next three years and six months, respectively, and were valued at $17,326 and $36,134 , respectively. In addition, the Chief Executive Officer was approved to receive 100,000 common shares valued at $15,000 , and a consultant was was approved to receive 15,000 common shares valued at $2,700 . The common shares were both valued based on the quoted market price at date the shares were approved by the Board. The share certificates have not been issued.

The 2011 stock options fair value was determined using the following attributes and assumptions for each separate issuance: share prices ranging from $0.18 to $0.25 , risk-free interest rates of approximately 1.55% , expected dividend yields of 0% , expected life of 4 and 4.5 years, and expected volatility of 207% to 218% . The Company estimates forfeitures based on historical experience.

For the six months ended June 30, 2012 , the Company recorded $37,985 of compensation expense based on its use of the Black Scholes model to estimate the grant-date fair value of these stock option awards. No options were exercised for the three months ended June 30, 2012 . Compensation expense is based upon straight-line amortization of the grant-date fair value over the vesting period of the underlying stock option. In accordance with FASB ASC Topic No. 718 and No. 505, the fair value of each stock option grant was estimated on the date of the grant, using the Black-Scholes option-pricing model. As of June 30, 2012 , there was approximately $46,661 of unrecognized compensation expenses related to non-vested stock option agreements.

A summary of stock options outstanding as of June 30, 2012 , is as follows:



Shares Underlying Options Outstanding						Shares Underlying Options Exercisable
Range of Exercise Prices		Shares Underlying Options Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Shares Underlying Options Exercisable	Weighted Average Exercise Price
$	0.18	750,000	5.97	$	0.18	216,667	$	0.18
$	0.25	250,000	6.42	$	0.25	250,000	$	0.25
$	0.50	200,000	4.35	$	0.50	150,000	$	0.50
$	1.00	400,000	0.38	$	1.00	400,000	$	1.00
$	1.29 - $1.88	800,000	2.53	$	1.44	800,000	$	1.44

The aggregate intrinsic value of exercisable options as of June 30, 2012 is $0 . The aggregate intrinsic value of options outstanding as of June 30, 2012 is $0 .

The following is a summary of stock option activity for the three months ended June 30, 2012 and for the year ended December 31, 2011 :



	Number Of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contract Life (Years)
Balance, December 31, 2010	2,450,000		$	0.85
Options canceled	(300,000	)		(0.85	)
Options granted	350,000			0.23
Balance, December 31, 2011	2,500,000			0.76		4.35
Balance, March 31, 2012	2,500,000		$	0.76		4.11
Options canceled	(100,000	)		0.50
Balance June 30, 2012	2,400,000			0.77		3.80

Exercisable, June 30, 2012	1,816,668		$	0.95		3.15

Class A Units and Class A Warrants and Class B Units and Class B Warrants

In October 2011 , the Company initiated subscriptions agreements for a non-brokered private placement to raise $1,000,000 . Upon receipt of proceeds the Company will issue up to 4,000,000 Class A Units at $0.25 per unit to investors. Each Class A Unit consisted of one share of common stock of the Company, par value $0.001 and one Class A Warrant. Each Class A Warrant is exercisable to acquire one Class B Unit of the Company at an exercise price of $0.35 per Class B Unit until January 20, 2013 . Each Class B Unit consists of one share of common stock of the Company, par value $0.001 and one Class B Warrant. Each Class B Warrant is exercisable to acquire one common share of the Company, par value $0.001 at an exercise price of $0.60 per Class B Warrant Share until January 20, 2014. The Company received $860,000 in proceeds prior to the year ended December 31, 2011 for the offering, and received $140,000 after December, 31, 2011.The Company had received all $1,000,000 in proceeds as of June 30, 2012 . As of June 30, 2012 , 4,000,000 common shares and 4,000,000 Class A Warrants were also issued.

In connection with the offering of the Class A Units, the Corporation issued a reservation order reserving Common Shares for issuance as follows:



Warrant Class/ Exercise Price	Number of Shares Common Stock (Reserved)	Aggregate Exercise Price
Class A Warrants (US$0.35)	4,000,000	$1,400,000
Class B Warrants (US$0.60)	4,000,000	$2,400,000
Total	8,000,000	$3,800,000

In May 2012 , the Company initiated subscriptions agreements for a non-brokered private placement to raise $500,000 . Upon receipt of proceeds in May 2012 , the Company issued 2,000,000 Class A Units at $0.25 per unit to an investor. Each Class A Unit consisted of one share of common stock of the Company, par value $0.001 and one Class A Warrant. Each Class A Warrant is exercisable to acquire one Class B Unit of the Company at an exercise price of $0.35 per Class B Unit until May 14, 2013 . Each Class B Unit consists of one share of common stock of the Company, par value $0.001 and one Class B Warrant. Each Class B Warrant is exercisable to acquire one common share of the Company, par value $0.001 at an exercise price of $0.60 per Class B Warrant Share until May 14, 2014 . The Company received $500,000 in proceeds as of June 30, 2012 .

In connection with the offering of the Class A Units, the Corporation issued a reservation order reserving Common Shares for issuance as follows:



Warrant Class/ Exercise Price	Number of Shares Common Stock (Reserved)	Aggregate Exercise Price
Class A Warrants (US$0.35)	2,000,000	$	700,000
Class B Warrants (US$0.60)	2,000,000	$	1,200,000
Total	4,000,000	$	1,900,000

Note 6 - Income Taxes

For the three months ended June 30, 2012 , the Company had net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At June 30, 2012 , the Company has accumulated operating losses totaling approximately $ 39.5 million . The net operating loss carry forwards will begin to expire in 2020 if not utilized. The Company has recorded net operating losses in each year since its inception through June 30, 2012 . Based upon all available objective evidence, including the Company’s loss history, management believes it is more likely than not that, the net deferred assets will not be fully realized. Therefore, the Company has provided a valuation allowance against its deferred tax assets at June 30, 2012 and December 31, 2012 .

The Company’s oil and gas properties are located offshore off the coast of Sharjah, UAE and in Albania, and there are no income taxes due as no earnings or dividends were distributed or repatriated.

Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign countries.

The Company’s wholly owned subsidiaries have prepared the required foreign tax returns for the years ended December 31, 2005 through December 31, 2008 . Foreign taxes of approximately $ 33,000 have been recorded for tax years 2005 through 2008 , and are included in accrued expenses. Management has engaged qualified firms to identify and prepare foreign tax returns for filing for the years ended 2011, 2010 and 2009 . The Company believes amounts due, if any, would not be material due to changes in Cyprus tax laws during those periods, and due to net operating losses from foreign operations carried forward .

Note 7 - Contingencies

On November 4, 2011 , AKBN delivered a letter to Sky Petroleum that was untranslated. Sky Petroleum received an English translation on November 9, 2011 . The AKBN letter alleged material breach of the PSC and providing notice of termination pursuant to Section 24.2(a) of the PSC. AKBN alleges breaches for failures to commence its initial working program, deliver a bank guarantee, open an office in Albania and establish an Exploration Advisory Committee. Section 24.2(a) of the PSC requires that AKBN provide 120 days notice prior to termination and provides that the PSC can be terminated only if Sky Petroleum has failed to commence to remedy such breach within a reasonable period of time. Sky Petroleum is not in breach of any of these terms. Management believes that the allegations are without merit and the letter was issued in bad faith. Sky Petroleum responded to AKBN on November 10, 2011 , and provided AKBN notice of its intent to institute an arbitration proceeding under the terms of the PSC against AKBN for breach of the PSC.

On November 18, 2011 , Sky Petroleum's legal counsel delivered to the National Agency of Natural Resources of Albania notice that the alleged termination of the PSC was made in breach of the PSC and that Sky Petroleum intended to institute an arbitration proceeding in accordance with Article XXI of the PSC.

Article XXI of the PSC provides that any dispute, controversy, claim or difference of opinion, arising out of or relating to the PSC or the breach, termination or validity of the PSC shall be finally and conclusively settled by arbitration in accordance with the UNCITRAL Arbitration Rules. The appointing authority for the arbitrators shall be the President of the Court of International Arbitration of the International Chamber of Commerce in Paris, France (the “Appointing Authority”). The arbitration shall take place in Zurich (Switzerland).

The dispute will be arbitrated before a panel of three arbitrators ("Tribunal"), all of which have been appointed.

Sky Petroleum is not in breach of any of its obligations under the PSC. Management believes that the allegations of AKBN are without merit.

Sky Petroleum is seeking the following relief:



•	an order that the PSC has not been validly terminated and that it remains in full force and effect; and
•	monetary damages that include, but are not limited to, the lost revenue due to Sky Petroleum under the terms of the PSC, estimated to be in excess of one billion dollars.

On January 10, 2012, Sky Petroleum filed a complaint (Case No.: A-12-CA-023-S S) with the United States District Court, Western District of Texas, Austin Division (the “Court”) for declaratory and injunctive relief against the Ministry of Economy, Trade, and Energy of Albania, acting by and through AKBN (collectively, the “Defendants”). The action for declaratory and injunctive relief under the Foreign Sovereign Immunities Act and the Albania-America Bilateral Investment Treaty sought to compel arbitration of the dispute between Sky Petroleum and the Defendants (collectively, the “Parties”) under the PSC and to preserve the status quo ante between the Parties pending completion of arbitration under the United Nations Commission on International Trade Law.

On January 19, 2012, Sky Petroleum, through legal counsel and a corporate representative, appeared before the Court to argue the merits of Sky Petroleum's Motion for Preliminary Injunction and on January 20, 2012, the Court delivered an Order and Preliminary Injunction (i) granting Sky Petroleum's preliminary injunction to maintain the status quo between the Parties pending arbitration, (ii) enjoining the Defendants and all persons acting in concert with them from awarding, transferring, or otherwise disposing of any rights to explore, develop and/or produce petroleum on the Contract Area until a final arbitration award is issued, (iii) ordering the Defendants to remove from their website or other publicly available documents all references to the Contract Area being “free” or otherwise available for new contractors until a final arbitration award is issued, and (iv) ordering the Parties to arbitrate their dispute with the United Nations Commission on International Trade Law according to the terms of the PSC. Additionally, the Court ordered that Sky Petroleum only be required to post a surety bond of $50,000 in lieu of the $500,000 surety bond that the Court had previously requested. On January 25, 2012, the Company deposited $50,000 to the Registry of the Court for the Austin Division of the United States District Court for a required surety bond related to the Order.

On February 28, 2012, Sky Petroleum petitioned the Albanian Appeal Court, Tirana, to seek to enforce the Order and Preliminary Injunction granted by the United States District Court, Western District of Texas, Austin Division. On March 1, 2012, the Appeal Court refused to recognize the Order in Albania.

Accordingly, Sky Petroleum intends to continue to vigorously pursue its rights and remedies against the Defendants under the mandatory arbitration provision in Article 21 of the PSC.

A Statement of Claim was filed with the Tribunal on April 24, 2012, by the Company. The Statement of Defense was filed by AKBN on June 22, 2012. Sky Petroleum filed its Statement of Reply on August 3, 2012.

On April 30, 2012, the Company paid approximately $112,000 to the Tribunal for estimated costs which are included in other current assets on the Consolidated Balance Sheets as of June 30, 2012. Both Sky and AKBN were required to pay the advances, however AKBN has failed to deliver its portion of the advance. If AKBN does not make the required payment, the Tribunal can request the advance be made by Sky ("the claimant"), however the Tribunal will proceed on the basis of the claimant's deposit on the condition that the claimant furnishes additional funds when the existing deposit becomes exhausted. The Tribunal will contact the claimant once a further advance is required.

Note 8 - Subsequent Events

A procedural calender was issued by the Tribunal for Arbitration proceedings. A Statement of Claim was filed with the Tribunal on April 24, 2012, by the Company. The Statement of Defense was filed by AKBN on June 22, 2012. Sky Petroleum filed its Statement of Reply on August 3, 2012.

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the exhibits attached hereto contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 . Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our business and matters that may occur in the future. These statements relate to analysis and other information

that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors, which could cause actual events or results to differ from those, expressed or implied by the forward-looking statements, including, without limitation:


•	risks related to our limited operating history;


•	risks related to our properties and proposed operations in Albania;


•	risks related to changes in policies and procedures and personnel at administrative and regulatory agencies in Albania;


•	risks related to our ability to perform under the terms of our production sharing contract;


•	risks related to government regulations and approvals in the countries in which we operate;


•	risks and uncertainty related to our legal rights under the participation agreement for the Mubarek Field;


•	risks related to our financing and development activities;


•	risks related to the historical losses and expected losses in the future;


•	risks related to our dependence on our executive officers;


•	risks related to fluctuations in oil and natural gas prices;


•	risks related to exploratory activities, drilling for and producing oil and natural gas;


•	risks related to liability claims from oil and gas operations;


•	risks related to accessing the oil and natural gas markets;


•	risks related to legal compliance costs;


•	risks related to the unavailability of drilling equipment and supplies;


•	risks related to competition in the oil and natural gas industry;


•	risks related to period to period comparison of our financial results;


•	risks related to our securities;


•	risks related to our ability to raise capital or enter into joint venture or working interest arrangements on acceptable terms; and


•	political, social and cultural risks associated with operations and conducting business in foreign countries.

This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the sections titled “Risk Factors”, “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2011 , filed with the Securities and Exchange Commission (which we refer to as the “SEC”) on June 30, 2012 . Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. Our management has included projections and estimates in this Quarterly Report, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our

competitors with the SEC or otherwise publicly available. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law.

We qualify all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.

Management’s Discussion and Analysis

This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See “Forward-Looking Statements” above.

This discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes. The discussion and analysis of the financial condition and results of operations are based upon the unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis, the Company reviews its estimates and assumptions. The estimates were based on historical experience and other assumptions that the Company believes to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but the Company does not believe such differences will materially affect our consolidated financial position or results of operations.

Overview and Plan of Operation

Albania projects :

On June 24, 2010, Sky entered into a PSC, effective January 3, 2011, with the Ministry of Economy, Trade and Energy of Albania, acting through the National Agency of Natural Resources of Albania (“AKBN”). The PSC grants Sky Petroleum exclusive rights to three exploration blocks (Block Four, Block Five and Block Dumre) in the Republic of Albania (the “Concession Area”). The Concession Area covers approximately 1.2 million acres, representing approximately 20% of the landmass of Albania. The PSC has a seven-year term with three exploration periods. Upon commercial discovery of gas, the agreement allows for development and production periods of 25 years plus extensions at the Company’s option. To date, there have been more than ten identified prospects including three significant evaluation wells in each block: Palokastra well in Block Four , Kanina well in Block Five , and a Dumre well in Block Dumre.

Block Four is located in southeast Albania, bordering Greece. The exploration block covers an area of approximately 540,000 acres. The block has a total of four identified prospects or leads.

Block Five is located in southwest Albania next to the Adriatic Sea and covers an area of approximately 498,000 acres. The block has a total of five identified prospects or leads.

Block Dumre is located immediately north of the Kucova oil field and covers an area of approximately 149,000 acres.

Commitments on the blocks during the first exploration period of two years include geology and geophysics (“G&G”), reprocessing of existing seismic and additional seismic acquisition with minimum expenditure commitments totaling $1,500,000 . Two wells and additional G&G will be undertaken in the subsequent exploration periods. During the second exploration period, Sky Petroleum will undertake G&G; seismic acquisition and an exploration drilling program with minimum expenditure commitments totaling $2,650,000 .

At the end of the first or second exploration period, Sky Petroleum shall have the right, subject to AKBN approval, to extend such periods by one year, reducing the later periods by one year.

Provided that Sky Petroleum has completed the minimum second exploration period work program or paid AKBN the minimum expenditure amount, if, as approved by the AKBN, there are special circumstances which require more time for the contractor to perform adequate exploration activity, Sky Petroleum may elect to extend the exploration period into a third exploration period of two years. During the third exploration period, Sky Petroleum will undertake G&G; seismic acquisition and an exploration

drilling program with minimum expenditure commitments totaling $3,150,000 .

If during the exploration periods, Sky Petroleum discovers petroleum accumulations capable of commercial production within the Concession Area (a “Discovery Area”); it can submit to AKBN a development plan and commence development of the Discovery Area. Sky Petroleum will have production rights of 25 years for each field (a “Production Area”) from the date of initial commercial production, which maybe extended, at Sky Petroleum's option, for successive periods of five years on the same conditions, subject to approval by AKBN, which approval shall not be unreasonably withheld or delayed. Sky Petroleum and AKBN will share profits from any commercial production of oil (after cost recovery by Sky Petroleum) based on a sliding scale formula, in which Sky Petroleum's share of profits will range from 96% to 100% . All available production is subject to a 10% royalty tax and Sky Petroleum's profits are subject to a 50% Albania tax on petroleum profits.

Business and Exploration Activities

Since June 24, 2010, the Ministry of Economy, Trade and Energy of Albania and AKBN has been subject to multiple transitions in leadership. Since June 24, 2010, each of Mr. Dritan Prifti, Mr. Ilir Meta and Mr. Nasip Naco have served as the Minister of the Ministry of Economy, Trade and Energy of Albania, and AKBN has had several Executive Directors, including Mr. Taulant Musabelliu, Mr. Gjergj Thomai and Mr. Besjan Pesha. Since the ratification of the PSC, Sky Petroleum has patiently sought guidance from AKBN on the nature, scope and timing of deliverables through several meetings and exchanges with AKBN officials.

Mr. Pesha was appointed as Executive Director of AKBN on June 27, 2011, and management of Sky Petroleum met with Mr. Pesha and members of AKBN on July 15, 2011 to discuss Sky Petroleum’s undertakings and commitments under the PSC. On July 22, 2011, Sky Petroleum received a fax from AKBN that improperly canceled a scheduled July 25, 2011 planning presentation and improperly stated that AKBN intended to take the necessary steps to terminate the PSC based on Article 24.2(a) , citing Sky Petroleum’s failure to deliver the bank guarantee. Sky Petroleum responded by objecting to AKBN’s cancellation of the July 22, 2011 meeting and proposed that AKBN withdraw its mandate to termination the PSC. Sky Petroleum was advised by legal counsel in Albania that the correspondence from AKBN was not properly approved and did not constitute appropriate notice under the PSC or AKBN protocol. Under the terms of Section 24.2(a) of the PSC, Sky Petroleum has 120 days to remedy any alleged breach of the PSC. On August 10, 2011, Sky Petroleum management met with AKBN and delivered the bank guarantee to AKBN in the form of a letter of credit from Texas Citizens Bank, N.A.

Under the terms of the PSC, Sky Petroleum was obligated to, among other things, (a) establish an office in Albania (established), (b) pay a signing bonus of $50,000 (paid); (c) prepare an exploration work program and budget (completed), (c) designate three members to a six member Exploration Advisory Committee (provided), (d) provide AKBN with a bank guarantee for $1,500,000 to guarantee expenditures during the first exploration period within 90 days of the Effective Date (the “AKBN Bank Guarantee”) (provided) and (e) commence performance of a minimum work program (commenced).

On August 22, 2011, Sky Petroleum reported that it engaged a consulting team to make field development recommendations for their Albanian prospects. A technical team led by Tim Parson, formerly Occidental Oil Co., analyzed technical data and made recommendations for three of the ten Sky Petroleum prospects in Albania. Based on the analysis, oil shows in Palokastra indicate potential for further drilling "up-dip" and oil shows in Kanina show potential for further testing of fractured intervals independently and with more detailed isolation.

Summarizing the data, Dumre has deepening potential given that a VSP at 6,015 m showed "potential seismic reflector at 6,250m" in 1995. TD is 6,119m in 5/3/2004 hole and 7" casing cement channeled up to ~ 800m restricting 7" cut-and-pull options to drill greater than ' 5 3/4 side-track around top-of-fish at 5,942m but there is potential to drill a ' 5 3/4 side-track for geological information that will reach carbonates and prove a reservoir for later development. Seismic unreliability through salt has made predicting top carbonate difficult historically.

Sky Petroleum is in the process of refining exploration and development plans based on the technical team analysis.

Pathfinder, a Schlumberger company, commenced theoretical planning for extended reach side-tracks and determined that initial engineering indicates all three wells are drillable. A detailed engineering proposal will be undertaken when various feasibility studies have been completed.

The consulting team is commencing additional analysis on technical data on seven additional prospect areas for future exploration and development. The long-term goal of the technical analysis is to confirm reserve potential of 875 million barrels of oil equivalent (MMBOE) with a potential market value of between $1 billion to $3 billion based on expected P90 reserves of approximately 105 MMBOE at $10 to $30 per barrel of oil equivalent (BOE). Ongoing work and analysis is in progress.

On September 19, 2011, the Company participated in the First US-Albania Investment Forum in New York, NY. The US-Albania Investment Forum featured a delegation led by HE Sali Berisha, Prime Minister, Government of Albania, and also included Hon Edmund Haxhinasto, Deputy Prime Minister and Minister of Foreign Affairs, Hon Nasip Naco, Minister of Economy, Trade and Energy and Hon Sokol Olldashi, Minister of Public Works and Transportation. The Albanian Honorary Consul, HE Dritan Mishto opened the forum and described the current investment climate in Albania and the country's efforts to attract foreign direct investment. Information presented at the First U.S.-Albania Investment Forum can be reviewed at Sky Petroleum's website at www.skypetroleum.com .

On November 18, 2011, Sky Petroleum's legal counsel delivered to the National Agency of Natural Resources of Albania notice that the alleged termination of the PSC was made in breach of the PSC and that Sky Petroleum intended to institute an arbitration proceeding in accordance with Article XXI of the PSC.

On December 23, 2011, Sky Petroleum delivered Notice of Arbitration under the Arbitration Rules of the United Nations Commission on Internal Trade Law to National Agency of Natural Resources and to the Ministry of Economy, Trade and Energy of Albania to institute an arbitration proceeding against the Ministry of Economy, Trade and Energy of Albania, acting by and through AKBN, for breach of the PSC in accordance with Article XXI of the PSC. The arbitration proceeding arises out of the alleged termination of the PSC in breach of the expressed termination provisions in Article 24 of the PSC.

The dispute will be arbitrated before a panel of three arbitrators ("Tribunal"), all of which have been appointed.

Sky Petroleum is not in breach of any of its obligations under the PSC. Management believes that the allegations of AKBN are without merit.

Sky Petroleum is seeking the following relief:



•	an order that the PSC has not been validly terminated and that it remains in full force and effect; and
•	monetary damages that include, but are not limited to, the lost revenue due to Sky Petroleum under the terms of the PSC, estimated to be in excess of one billion dollars.

On January 10, 2012, Sky Petroleum filed a complaint (Case No.: A-12-CA-023-SS) with the United States District Court, Western District of Texas, Austin Division (the “Court”) for declaratory and injunctive relief against the Ministry of Economy, Trade, and Energy of Albania, acting by and through AKBN (collectively, the “Defendants”). The action for declaratory and injunctive relief under the Foreign Sovereign Immunities Act and the Albania-America Bilateral Investment Treaty sought to compel arbitration of the dispute between Sky Petroleum and the Defendants (collectively, the “Parties”) under the PSC and to preserve the status quo ante between the Parties pending completion of arbitration under the United Nations Commission on International Trade Law.

Accordingly, Sky Petroleum intends to continue to vigorously pursue its rights and remedies against the Defendants under the mandatory arbitration provision in Article 21 of the PSC.

On April 30, 2012, the Company paid approximately $112,000 to the Tribunal for estimated costs which are included in other current assets on the Consolidated Balance Sheets as of June 30, 2012. Both Sky and AKBN were required to pay the advances, however AKBN has failed to deliver its portion of the advance. If AKBN does not make the required payment, the Tribunal can request the advance be made by Sky ("the claimant"), however the Tribunal will proceed on the basis of the claimant's deposit on the condition that the claimant furnishes additional funds when the existing deposit becomes exhausted. The Tribunal will contact the claimant once a further advance is required.

Accordingly, Sky Petroleum intends to continue to vigorously pursue its rights and remedies against the Defendants under the mandatory arbitration provision in Article 21 of the PSC.

The Company's investment in the Albania exploration blocks as of June 30, 2012 was $10,205,220 . This investment consisted of acquisition costs related to the PSC totaling $50,000 , and $850,000 for fees to consultants for locating and negotiating the Company's investment in the Albania exploration blocks, $850,000 for fees related to evaluations and assessments of the concession area, and $50,000 towards the $100,000 allocation for training and education for the first year exploration period. In addition, 3 million shares of common stock with a fair value of $1,170,000 , plus 3,863,636 Preferred Shares Series B with a value of $7,820,000 , were issued to Orsett for expertise provided to the Company in acquiring and negotiating the acquisition of oil and gas properties.

Mubarek Field Operations:

On May 18, 2005, our wholly owned subsidiary Sastaro entered into a Participation Agreement with Buttes Gas and Oil Co. International Inc. (which we refer to as “Buttes”), a wholly-owned subsidiary of Crescent Petroleum Company International Limited (which we refer to as “Crescent”) for the financing of a drilling program in the Mubarek field. The field is an offshore region in a concession area surrounding Abu Musa Island in the Arabian Gulf. Under the terms of the Participation Agreement, the Company participated in a share of the future production revenue by contributing $25 million in drilling and completion costs related to two wells in an off-shore oil and gas project in the United Arab Emirates. The operator of the drilling program, Crescent completed the first well in 2006 and the second well in 2007. As of December 31, 2009, the first well produced a total of 150,413 gross barrels, and the second well produced a total of 149,471 gross barrels. During the second quarter of 2010 , there was one final lift for 1,521 barrels. No further production from the Mubarek wells is expected due to the abandonment of the wells by the operator.

On December 31, 2009 , the Company received written notice from Buttes that Buttes unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Buttes also notified Sastaro that the Concession Agreement, dated December 29, 1969, between the His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field (the “Concession Agreement”) was terminated. Buttes stated that it handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on December 28, 2009 . Management is exercising its rights under the Participation Agreement and intends to protect our interests and our investment in the Mubarek Field. Sky continues to seek discussions with Crescent regarding the Participation Agreement.

As warranted, there can be no assurance that we will successfully implement our business strategy or meet our goals during the next twelve months, if ever.

Comparison of the Statement of Operations for the three months ended June 30, 2012 and June 30, 2011

We had no revenues from operations for the three months ended June 30, 2012 and June 30, 2011 , respectively. We do not anticipate having any further revenues from operations until we are able to successfully conclude arbitration with AKBN and complete exploration and development work in the Concession Areas. Revenue from operations, if any, will be dependent on our ability to obtain adequate financing and develop wells in the Concession Area.

We had a net loss of $340,072 for the three months ended June 30, 2012 , and a net loss of $338,464 for the three months ended June 30, 2011 .

For the three months ended June 30, 2012 , total expenses increased to $342,865 from $338,672 for the three months ended June 30, 2011 , an increase of $4,193 or 1% , which related primarily to increases in legal expenses of $136,336 , net of decreases in travel expenses of $16,067 , other general and administrative expenses of $21,725 , and consulting expenses of $94,982 .

During the three months ended June 30, 2012 , we incurred legal and accounting expenses of $149,847 ( $13,511 , Q2 2011); travel expenses of $27,512 ( $43,579 , Q2 2011); consulting services expenses of $40,980 ( $135,962 , Q2 2011); and general and administrative expenses of $121,897 ( $143,622 Q2 2011). We had income from interest of $2,793 for the three months ended June 30, 2012 , compared to $208 for the three months ended June 30, 2011 .

Comparison of the Statement of Operations for the six months ended June 30, 2012 and June 30, 2011

We had a net loss of $1,008,886 for the six months ended June 30, 2012 , and a net loss of $906,104 for the six months ended June 30, 2011 .

For the six months ended June 30, 2012 , total expenses increased to $1,017,373 from $906,632 for the six months ended June 30, 2011 , an increase of $110,741 or (12)% , which related primarily to increases in legal expenses of $374,627 , net of decreases in travel expenses of $101,742 , other general and administrative expenses of $52,269 , and consulting expenses of $112,464 .

During the six months ended June 30, 2012 , we incurred legal and accounting expenses of $522,965 ( $148,338 , Q2 2011); travel expenses of $56,552 ( $158,294 , Q2 2011); consulting services expenses of $159,460 ( $271,924 , Q2 2011); and general and administrative expenses of $273,138 ( $325,407 , Q2 2011). We had income from interest of $8,487 for the six months ended June 30, 2012 , compared to $528 for the six months ended June 30, 2011 .

The Company is reducing all operating expenses throughout the remainder of 2012, until the arbitration proceedings are completed.

We anticipate that we will incur significant costs in connection with the arbitration and may seek third-party arbitration funding to satisfy such expenditures.

Liquidity and Capital Resources

A component of our operating plan is the ability to obtain additional capital through additional equity and/or debt financing to fund our Albania projects. Our only source of internal operating cash flow historically has been derived from our participation interest in the Mubarek Field, which ceased production at the end of 2009 . We had cash on hand of $372,532 , and a restricted CD of $1,500,000 as of June 30, 2012 .

Since inception, we have financed our cash flow and capital requirements through the issuance of common stock and preferred stock. We expect to continue to experience net negative cash flows from operations. Additionally we anticipate obtaining additional financing to fund operations and exploration and development activities through common stock or preferred stock offerings, debt financings and bank borrowings, to the extent available, or to obtain additional financing to the extent necessary to augment working capital. In addition, we have cut expenses by reducing consulting fee compensation by one half and suspending directors fees.

Recently, the poor economic conditions have caused a loss of confidence in the broader U.S. and global credit and financial markets, resulting in government intervention in, major banks, financial institutions and insurers and creating a climate of greater volatility, less liquidity, widening of credit spreads, a lack of price transparency, increased credit losses and tighter credit conditions. The current credit and financial markets have had a significant material adverse impact on the financial market and the valuation of equity securities. It has also negatively affected a number of financial institutions and has limited access to capital and credit for many companies. These disruptions could, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations in the future. Our access to additional capital may not be available on terms acceptable to us or at all.

We expect to rely upon additional financing or arrangements with working interests, third-party litigation funding or other arrangements to fund our future operations and working capital requirements. If costs increase substantially or we incur greater losses than expected, our operations will be reliant upon equity financings to continue into the future. The current market conditions could make it difficult or impossible for us to raise necessary funds to meet our capital requirements. If we are unable to obtain financing through equity investments, we will seek multiple solutions including, but not limited to, credit facilities or debenture issuances.

Net cash used in operating activities during the six months ended June 30, 2012 was $817,322 as compared to net cash used in operating activities of $829,882 for the comparable period in 2011 , a decrease of $12,560 . This decrease in cash used in operations is a result of expenses in 2012 related to various travel, consulting and general and administrative expenses, offset by expenses related to arbitration. Net cash used in investing activities during the six months ended June 30, 2012 , was $ 55,930 , compared to $69,858 for the same period in 2011 , for the purchase of fixed assets. Net cash provided by financing activities was $640,000 for the six months ended June 30, 2012 , compared to $0 for the same period in 2011 .

Total assets as of June 30, 2012 , was $12,344,248 compared to total assets of $12,407,459 as of December 31, 2011 . Stockholders' equity as of June 30, 2012 was $11,657,463 compared to stockholders’ equity of $11,988,364 as of December 31, 2011 . The decrease in assets and stockholders’ equity was primarily related to cash used in operations for the six months ended June 30, 2012 .

As of June 30, 2012 , we had current assets of $2,095,144 , including cash and cash equivalents of $372,532 . We had current liabilities of $686,785 . The Company had $1,408,359 of working capital at June 30, 2012 compared to $1,739,932 at December 31, 2011 .

In August 2011 , Sky Petroleum delivered a bank guarantee in a form of a letter of credit from Texas Citizens Bank, N.A. The Company has pledged a CD of $1,500,000 to secure the letter of credit.

Pursuant to the PSC, covering three exploration blocks, Four, Five, and Dumre in the Republic of Albania, or the Concession Area, the Company has committed to minimum expenditures of $1,500,000 for the first exploration period of two years. Sky provided a bank guarantee for $1,500,000 on August 10, 2011, and has paid $50,000 towards the first year's training and education. The Company is in the planning stages of the first exploration period.

Sky Petroleum anticipates that it will be required to raise capital during the remainder of 2012 to fund its ongoing working capital requirements and arbitration costs.

In October 2011, the Company initiated subscriptions agreements for a non-brokered private placement to raise $1,000,000 . Upon receipt of proceeds the Company will issue up to 4,000,000 Class A Units at $0.25 per unit to investors. Each Class A Unit consisted of one share of common stock of the Company, par value $0.001 and one Class A Warrant. Each Class A Warrant is exercisable to acquire one Class B Unit of the Company at an exercise price of $0.35 per Class B Unit until January 20, 2013. Each Class B Unit consists of one share of common stock of the Company, par value $0.001 and one Class B Warrant. Each Class B Warrant is exercisable to acquire one common share of the Company, par value $0.001 at an exercise price of $0.60 per Class B Warrant Share until January 20, 2014. The Company received $1,000,000 in proceeds as of June 30, 2012 . As of June 30, 2012 , the 4,000,000 common shares and 4,000,000 Class A Warrants were issued.

Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies searching for opportunities in the oil and gas industry. Such risks include, but are not limited to, our ability to secure a drilling rig, our ability to successfully drill for hydrocarbons, commodity price fluctuations, delays in drilling or bringing production, if any, on line, an evolving business model and unpredictable availability of qualified oil and gas exploration prospects and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and development plan, successfully identify future drilling locations, continue to rely on qualified independent consultants, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

The Company follows the full-cost method of accounting for its oil and gas operations whereby exploration and development expenditures are capitalized. Such costs may include geological and geophysical, drilling, equipment and technical consulting directly related to exploration and development activities. Costs related to unproved properties and major development projects

may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired.

During the quarter and six months ended June 30, 2012 , we had no other material transactions affecting our liquidity and capital resources other than those described above.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

Production Sharing Contract with the Ministry of Economy, Trade and Energy of Albania:

At the end of the First Exploration Period or the Second Exploration Period, Sky Petroleum has the right, subject to AKBN approval, to extend such period by one year. In such a case, the duration of the Second Exploration Period or the Third Exploration Period shall be reduced to one year. Sky Petroleum may terminate the PSC at the end of any exploration period.

Sky Petroleum will relinquish to AKBN 25 % of the Concession Area, as designated by Sky Petroleum, within 180 days after the end of each of the First Exploration Period and the Second Exploration Period and all remaining acreage of the Concession Area at the end of the Third Exploration Period, that is not then subject to a Discovery or in a Production Area. Sky Petroleum will not be required to relinquish areas included in a Discovery Area or in Production Area.

In addition, to the work program undertakings, Sky Petroleum has also agreed to allocate $100,000 for training and education during each year of the Exploration period. On April 5, 2011 , Sky paid $50,000 towards the $ $100,000 allocation for training and education for the first year exploration period related to the Albania concession area. Sky also paid a signing bonus of $50,000 in 2010 .

Production Bonuses:


•	$150,000 on start-up of production from the Contract Area


•	$250,000 when average daily crude oil production over any consecutive ninety-day period reaches fifteen thousand (15,000) Barrels of oil per day


•	$500,000 when average daily crude oil production over any consecutive ninety-day period reaches thirty thousand ( 30,000 ) Barrels of oil per day.

The PSC may be terminated by the Company by giving not less than t hirty (30) days’ written notice to AKBN, provided that no termination shall relieve the Company from any unfulfilled commitment or other obligation accrued prior to such termination.

If one of the Parties does not comply with any of the obligations stipulated in the PSC due to reasons other than Force Majeure (including, but not limited to, knowingly and intentionally providing false information to the other Party), the other Party may give notice in writing to such non-complying Party, informing it of the noncompliance and of its intention to terminate the PSC at the end of the term of six ( 6 ) Months, unless said noncompliance is rectified within said term. However, the Party responsible for the noncompliance may submit the issue to arbitration according to the provisions of Article XXI of the PSC within said period of six (6) Months, and the PSC will continue to be in force during the time the final resolution by the arbitrators has not been issued and enforced.

Except in the case of Force Majeure, the PSC may be terminated by AKBN by giving not less than one hundred and twenty (120 )

days’ written notice to the Company in the following events:

If the Company has repeatedly committed a material breach of its fundamental duties or obligations under the PSC and has been advised by AKBN of AKBN's intent to terminate the PSC pursuant to this provision, and Company has failed to commence to remedy such breach within a reasonable period of time.

On November 4, 2011, the Company received a letter alleging breaches on the PSC and providing notice of termination. The company disputes the alleged breaches and provided AKBN notice of it’s intent to arbitrate the dispute. The Company believes AKBN”s allegations are without merit. See "Contingencies" in the Notes to Consolidated Financial Statements.

Consulting Agreements:

On October 8, 2010, pursuant to the terms of the Consultant Agreement, dated May 18, 2010, as amended June 29, 2010 and October 3, 2010, by and between the Company and the Consultant, the Company filed a Certificate of Designation with the Secretary of State for the State of Nevada to designate 5,000,000 shares of the Company’s preferred stock as shares of Series B Preferred Stock. As of December 31, 2010, 3,386,636 of Series B shares have been issued related to the execution of the first qualifying transaction.

The Consulting Agreement expired on April 30, 2011.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4 - Disclosure Controls and Procedures

Disclosure Controls and Procedures

At the end of the period covered by our Annual Report for the year ended December 31, 2011 an evaluation was carried out under the supervision of and with the participation of the Company's management, including the Interim Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of the Company's disclosure controls and procedures (as defined in Rule 13a - 15(e) and Rule 15d - 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation the Interim CEO and Interim CFO have concluded that the Company's disclosure controls and procedures are adequately designed and effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Interim CEO and Interim CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the above-referenced evaluation by management of the effectiveness of our internal control over financial reporting that occurred during the quarter and six months ended June 30, 2012 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

We are not aware of any material pending or threatened litigation or of any proceedings known to be contemplated by governmental authorities which are, or would be, likely to have a material adverse effect upon us or our operations, taken as a whole. There are no material proceedings pursuant to which any of our directors, officers or affiliates or any owner of record or beneficial owner of more than 5% of our securities or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us.

We are currently involved in Arbitration proceedings regarding our Albania investment. See further information in "Contingencies" in the Notes to Consolidated Financial Statements.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors as previously disclosed in our Form 10-K, which was filed with the SEC on March 30, 2012 .

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

On May 14, 2012, the Corporation closed a non-brokered private placement and issued 2,000,000 Class A Units at $0.25 per unit to investors to raise an aggregate of $500,000 . In aggregate, the Corporation issued $2,000,000 Common Shares and $2,000,000 Class A Warrants.

The Class A Warrants are exercisable, in whole or in part, to acquire up to $2,000,000 Class B Units at $0.35 per Class B Unit until May 14, 2013 . Each Class B Unit consists of one Common Share and one Class B Warrant. Each Class B Warrant is exercisable to acquire one Common Share at an exercise price of $0.60 per Class B Warrant Share until $2,000,000 .

The Class A Units were issued in an off-shore transaction pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “ U.S. Securities Act ”), in reliance upon Rule 903 of Regulation S under the U.S. Securities Act. Neither investor was a U.S. person as defined in Rule 902(k) of Regulation S.

In connection with the closing of the Class A Unit Offering, the Corporation issued a reservation order reserving Common Shares for issuance as follows:



Warrant Class/ Exercise Price	Number of Shares Common Stock (Reserved)	Aggregate Exercise Price
Class A Warrants (US$0.35)	2,000,000	$	700,000
Class B Warrants (US$0.60)	2,000,000	$	1,200,000
Total	4,000,000	$	1,900,000

Item 3 - Defaults Upon Senior Securities

None

Item 4 – [RESERVED]

Item 5 - Other Information

Effective July 3, 2012, Tobias Gondorf resigned as interim Chief Executive Officer of the Company.

Effective August 7, 2012, Mark Rachovides was appointed as a member of the Board of Directors.

Item 6 – Exhibits



31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	SKY PETROLEUM, INC.

	By:	/s/ Karim Jobanputra
	Karim Jobanputra
	Chairman
	(On behalf of the Registrant and as Principal Executive Officer)

	By:	/s/ Michael D. Noonan
	Michael D. Noonan
	Interim Chief Financial Officer
	(Principal Financial and Accounting Officer)

	August 20, 2012

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