ATP OIL & GAS CORP

Income taxes during interim periods are based on the estimated annual effective income tax rate plus any significant, unusual or infrequently occurring items that are recorded in the period the specific item occurs. We compute income taxes using an asset and liability approach, which results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial basis and the tax basis of those assets and liabilities. As of March 31, 2012 and December 31, 2011, for U.S., Netherlands, and Israel tax provision purposes, we have provided valuation allowances for the entirety of our net deferred tax assets based on our cumulative net losses coupled with the uncertainties surrounding our future earnings forecasts. We recognized deferred tax assets only to the extent we expect to be able to offset deferred tax liabilities. The U.K. supplementary charge of corporation tax was increased from 20% to 32%, effective March 24, 2011, and Royal Assent was received on July 19, 2011. Accordingly, the U.K. rate increase has been reflected in the income tax provision for the three months ended March 31, 2012 (but not as of March 31, 2011), and all U.K. deferred tax assets and liabilities subject to the supplementary charge of corporation tax have been updated to reflect the 32% rate as of March 31, 2012 and December 31, 2011. We recognized income tax expense related to our U.K. operations of $10.6 million and $9.1 million, respectively, for the three months ended March 31, 2012 and 2011. The worldwide effective income tax rates for the three months ended March 31, 2012 and 2011 were (8.7%) and (8.8%), respectively.

Commodity Derivatives - The fair values of our derivative contracts are classified as Level 3 because they are measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our option pricing models are industry-standard and consider various inputs including forward commodity price estimates, volatility and time value of money. The pricing variables are sensitive to market volatility as well as changes in future price forecasts and regional price differences. Significant changes in the quoted forward prices for commodities generally lead to corresponding changes in the fair value measurement of our oil and gas derivative contracts. Significant changes in the volatility factors utilized in our option-pricing model can cause significant changes in the fair value measurements of our oil and gas derivative contracts.

Fair Value of Debt – The estimated fair value of our long-term debt is $1.8 billion at March 31, 2012. These estimated fair values are classified as Level 2 because in our calculation the unadjusted quoted prices for recent sales of our debt are from markets which are not active.

During the first quarter of 2012 we placed on production the fourth well (the Mississippi Canyon “MC” 942 A-3), at the Telemark Hub. This well had originally been scheduled to begin production in late 2010 but was delayed due to the moratorium that was imposed on drilling in the Gulf of Mexico related to the Deepwater Horizon incident. This is the fourth well to be placed on production at the Telemark Hub and is the last one in the initial development phase. After placing this fourth well on production, a recompletion operation was begun on another well, the MC 941 A-2, at the Telemark Hub to establish production from another productive sand. This operation, which was originally expected to be completed in the first quarter of 2012, is now expected to be completed during the second quarter of 2012. We have been notified by Shell Pipeline Company LP, the operator of the Mars pipeline, that it intends to temporarily shut in the pipeline to allow for the tie-in of a new offsetting platform. As a result, we estimate production at our Telemark Hub could be shut-in for up to two weeks during the second quarter of 2012.

Since May 2010 when the federal government imposed the first of a series of moratoriums on drilling in the Gulf of Mexico, we have faced unprecedented difficulties in obtaining permits to continue our development programs. Prior to the moratoriums, we anticipated developing and bringing to production three additional wells at our Telemark Hub and two additional wells at our Gomez Hub by the end of 2010. Because of the moratoriums and permitting delays, it has taken until the first quarter of 2012 for us to bring to production the three additional wells at the Telemark Hub and the two wells planned for the Gomez Hub have been postponed. The new Telemark wells have taken longer to complete and bring to production than originally planned and one of them has not produced at rates that were previously projected. We are currently recompleting this well in hopes of bringing on a new sand and increasing production; however, this operation which in mid-March had been expected to be completed in the first quarter of 2012 has encountered downhole difficulties and is now expected to be completed in the second quarter of 2012. In addition, we have incurred capital and operating costs higher than we expected primarily due to additional regulations imposed since the Deepwater Horizon incident and the requirement to perform sidetracks on two of the wells.

Historically, we have funded our acquisition and development activities through a combination of bank borrowings, proceeds from equity offerings, cash from operations, the sale or conveyance of interests in selected properties, vendor financings, and proceeds of forward sales of our production in the financial derivatives market. Our ongoing cash requirements consist primarily of servicing our debt and other obligations and funding development of our oil and gas reserves. During the three months ended March 31, 2012, we paid cash for capital expenditures for oil and gas properties of approximately $197.2 million and we obtained additional financing from term loans and other sources as discussed below.

Production in the first quarter of 2012 is lower than in the fourth quarter of 2011 primarily due to a workover operation on a well at our Telemark Hub and due to normal production declines. In late February 2012, we completed the Mississippi Canyon (MC) 942 A-3 well, the fourth well at our Telemark Hub. Shortly thereafter, we began a workover operation at the MC 941 A-2 well, where we have been required to temporarily shut in production while an additional oil sand, the B sand, is completed. The completion operation is expected to conclude during second quarter 2012, and we expect a substantial increase in the well’s productivity afterward. Upon completion of this operation, we also intend to conduct a sleeve shift operation at the MC 941 A-1 well, which is expected to add production of approximately 1.5 MBoe per day during second quarter 2012. We expect the sleeve shift operation at MC 941 A-1 to be substantially less complex and therefore faster than the recompletion operation at MC 941 A-2.