Sky Petroleum 10Q 2011 Q1 Quarterly report

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 March 31, 2011
OR
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 o 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). o Yes o 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) o Yes x No

Number of Shares outstanding at May 6, 2011: 61,868,709

INDEX

		Page No.(s)
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010	1

	Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)	2

	Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)	3

	Notes to Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item 4T.	Controls and Procedures	20

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	21

Item 4.	[RESERVED]	21

Item 5.	Other Information	21

Item 6.	Exhibits	21

SIGNATURES		22

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

NOTE: These consolidated financial statements reflect the Company’s Consolidated Balance Sheets at March 31, 2011 (unaudited) and December 31, 2010, the unaudited Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010, and unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010.

Sky Petroleum, Inc.

Consolidated Balance Sheets

	March 31, 2011			December 31, 2010
	(Unaudited)
Assets

Current assets:
Cash and cash equivalents	$	2,471,378		$	2,911,464
Other current assets		44,407			83,435
Total Current Assets		2,515,785			2,994,899

Investment in oil and gas properties, net		10,115,220			10,115,220
Fixed assets, net		15,657			9,278
Deposits and other assets		11,053			11,053

Total Assets	$	12,657,715		$	13,130,450

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable and accrued liabilities	$	305,720		$	245,418
Total Current Liabilities		305,720			245,418

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, 61,868,709 shares issued and outstanding, respectively		61,869			61,869
Additional paid-in capital		41,654,060			41,619,458
Accumulated deficit		(37,183,934	)		(36,616,295	)
Total Stockholders’ Equity		12,351,995			12,885,032

Total Liabilities and Stockholders’ Equity	$	12,657,715		$	13,130,450

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

Sky Petroleum, Inc.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
Oil revenues	$	-		$	-
Expenses:
Lease operating expenses		-			-
Depreciation		671			312
Legal and accounting		134,827			43,038
Travel		114,715			20,336
Consulting services		135,962			107,600
General and administrative		181,785			97,730
Total expenses		567,960			269,016
Net operating loss		(567,960	)		(269,016	)
Interest income		320			103
Net loss	$	(567,640	)	$	(268,913	)

Net loss per share - basic and diluted	$	(0.01	)	$	(0.00	)
Weighted average number of common shares outstanding - basic and diluted		61,868,709			58,793,709

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

Sky Petroleum, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
Cash flows from operating activities:
Net loss	$	(567,640	)	$	(268,913	)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		671			312
Share based compensation		34,603			-
Changes in operating assets and liabilities:
Accounts receivable		-			504,774
Other current assets		39,031			(2,664	)
Accounts payable and accrued liabilities		60,302			(62,648	)
Net cash (used in) provided by operating activities		(433,033	)		170,861
Cash flows from investing activities:
Purchases of fixed assets		(7,053	)		-
Net cash used in investing activities		(7,053	)		-
Net increase (decrease) in cash and cash equivalents		(440,086	)		170,861
Cash and cash equivalents at the beginning of period		2,911,464			5,024,899
Cash and cash equivalents at the end of period	$	2,471,378		$	5,195,760

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.

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.

In order to manage its off-shore Sharjah, UAE oil and gas operations, the Company established two corporations in Cyprus. Bekata Limited (“Bekata”), a wholly-owned subsidiary of Sky Petroleum, Inc. owns a 100% interest in Sastaro Limited, (“Sastaro”). In addition, on February 17, 2011, we incorporated Sky Petroleum (Albania) Inc., a Cayman Islands corporation, for the purposes of holding and operating our interests in certain concession areas in the country of Albania. Sky Petroleum (Albania) Inc. is also a wholly-owned subsidiary of Sky Petroleum, Inc.

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 February 17, 2011, Sky organized Sky Petroleum (Albania) Inc., a wholly-owned Cayman Islands corporation (Registration No. 252272) (“Sky Albania”), for the purposes of conducting business in Albania and under the PSC. Sky is in the process of registering Sky Albania as a branch in the Republic of Albania.

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.

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 has 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 take all actions required to protect our interests, our shareholders and our investment in the Mubarek Field.

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, 2010.

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 months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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 cash and cash equivalents, accounts receivable, 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.

Note 2 - 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 5,000 km2 (1.2 million acres) (the “Concession Area”), 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.

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.

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.

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. Sky also paid a signing bonus of $50,000 within 60 days of the effective date of the PSC, and which has been included in accrued liabilities as of December 31, 2010.

The following production bonuses will also be due and payable as follows:

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. Sky Petroleum has 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 $1,500,000. Sky requested a meeting with ABKN on March 29, 2011 to present a proposed Works Program for the First Exploration Period as well as obtaining the $1.5 million bank guarantee. A meeting was not able to be scheduled and as such on May 6, 2011, Sky notified ABKN that among other things, the bank guarantee is being finalized and will be delivered within 10 days to ABKN. In addition, on April 5, 2011, Sky paid $50,000 towards the $100,000 allocation for training and education for the first year Exploration period.

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 “Consultant Agreement”) with Orsett Ventures Inc., a British Virgin Islands company (the “Consultant”). The Consultant Agreement was amended on June 29, 2010 (Amendment #1) and on October 8, 2010 (Amendment #2). Under the terms of the Agreement, Sky Petroleum retained Consultant as an independent consultant to use Consultant’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 Consulting Agreement terminated under its term on April 30, 2011.

First Qualifying Transaction

Pursuant to Amendment #1, Sky Petroleum agreed to pay the Consultant 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 the Consultant 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 Preferred Series B Stock. As of December 31, 2010, all fees and common and preferred shares were paid and tendered.

The fair market value of the 3 million common shares of 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 March 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.

Total consultant costs of $9,840,000 along with other payments related to the investment totaling $275,220 are included in the investment in oil and gas properties totaling $10,115,220 as of March 31, 2011.

The Company’s investment in the Albania exploration blocks as of March 31, 2011 was $10,115,220. 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, and $225,220 for fees related to evaluations and assessments of the concession area. 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 the Consultant 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.

Since the Mubarek H2 well was completed in the second quarter of 2006, it has produced a total of approximately 150,413 gross barrels through December 31, 2009. Since the Mubarek K2-ST4 well was completed in the second quarter of 2007, it has produced a total of approximately 149,471 gross barrels through December 31, 2009. 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, 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 have 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 has 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, H2 and K2-ST4, 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. There was one final lift of 1,521 barrels in April 2010, resulting in revenues of $85,570 for the year ended December 31, 2010.

As of March 31, 2011 and December 31, 2010, respectively, the Company's investment in the Mubarek field oil and gas properties was zero.

Note 3 -Investment in Non-Affiliated Entity

In 2007, the Company acquired a minority stake in the development of an oilfield in the Komi Republic of the Russian Federation by acquiring a 3.9% interest, subject to dilution, in Pechora Energy through its UK parent company, Concorde Oil & Gas Plc. (which we refer to as “Concorde”). This acquisition was essentially a carried interest as the Company will not be required to contribute additional funds as Concorde intends to fund the field development through debt and production revenues rather than further shareholder equity. In addition, as the market prices are not readily available, and management does not have significant influence, the investment was accounted for as a cost method investment.

On December 31, 2009, Concorde entered into binding agreements with its majority shareholder, Kuwait Energy Company (“KEC”), under which KEC will acquire Concorde’s principal operating subsidiaries, Pechora Energy Company and all other subsidiaries in return for shares of KEC and contingent earn-out notes, subject to the fulfillment of certain future operating conditions. This transaction is due to Concorde’s pre-tax loss of $30 million for the year ended March 31, 2009, along with other economic conditions, and the need for additional capital. The completion of this transaction is subject to a number of conditions, including regulatory consents, bank consent, and approval of KEC shareholders. Because KEC is a private company and related share information is not available, the market value of the proposed shares is not readily available. In addition, the Company does not possess the required information to determine a reasonable amount of shares to be obtained and potential earn-out note repayments without incurring excessive costs.

Evidence of loss in value that might indicate impairment of investments in companies is assessed to determine if such evidence represents a loss in value of the Company’s investment that is other than temporary. Examples of key indicators include a history of operating losses, negative earnings and cash flow outlook, and the financial condition and prospects for the investee’s business segment or geographic region. If evidence of an other than temporary loss in fair value below carrying amount is determined, impairment is recognized. In the absence of market prices for the investment, discounted cash flows are used to assess fair value. As the Company will more likely than not be required to sell the securities in order to recoup its investment, an impairment loss of $1 million was recorded in operations for the year ended December 31, 2009.

Note 4 - 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 March 31, 2011 and December 31, 2010, respectively.

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 (the "Series B Preferred Shares").

The Series B Preferred Shares have the following preferences, qualifications, rights, and restrictions:

●

Series B Preferred Shares shall not be entitled to receive preference or priority to any cash dividend on the Common Shares. In event of a dividend, holders of Series B Preferred Shares shall be entitled to a proportionate share of any such dividend as though such holders of the Series B Preferred Shares were the holders of the number of Common Shares or other capital stock of the Company into which such holders’ Series B Preferred Shares are convertible as of the record date fixed for the determination of the holders of Common Shares entitled to receive such dividend.

●	Series B Preferred Shares shall have no liquidation preference in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

●	Series B Preferred Shares will be non-voting, except with respect to amendments of the Certificate of Designation that adversely affect the rights of the holders of the Series B Preferred Shares.

●	Each Series B Preferred Share shall be convertible into 4.4 Common Shares (as adjusted for stock splits, reverse stock splits, stock dividends, stock reclassifications or stock reorganizations of the Common Shares).

●	Series B Preferred Shares shall not be converted by any holder, in whole or in part and the Company shall not give effect to any such conversion of Series B Preferred Shares for a period of twelve (12) months from the date of initial issuance.

●

Series B Preferred Shares shall not be converted by any holder, in whole or in part, and the Company shall not give effect to any such conversion of Series B Preferred Shares, if, after giving effect to such conversion, the holder, together with any affiliate (including any person or company acting jointly or in concert with such holder), would in the aggregate beneficially own, or exercise control or direction over, that number of voting securities of Company which is 4.99% or greater of the total issued and outstanding voting securities of the Company during the ninety day period ending on the date of conversion, immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that upon any holder of Series B Preferred Shares providing the Company with sixty-one (61) days notice (the “Waiver Notice”) that such holder would like to waive the Beneficial Ownership Limitation, the Beneficial Ownership Limitation will be of no force or effect with regard to all or a portion of the Series B Preferred Shares as referenced in the Waiver Notice.

●	Series B Preferred Shares shall contain customary anti-dilution provisions in the event of any stock split, stock dividend, capital reorganization or reclassification of the capital stock of Company.

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 March 31, 2011, and December 31, 2010, respectively, 3,863,636 shares of Series B Preferred Stock were outstanding.

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 June 29, 2010, the Company issued 450,000 stock options under the Non-U.S. Plan and 200,000 incentive stock options under the U.S. Plan. The options are exercisable at $0.18 per share, with vesting over the next three years, and are valued at $69,684 and $31,316, respectively. On August 17, 2010 and October 6, 2010, the Company issued 150,000 and 300,000 stock options respectively, under the Non-U.S. Plan to two directors exercisable at $0.50 and $.85, respectively, per share with vesting over the next three years with a total value of $314,234. In addition, the directors were issued 25,000 and 50,000, respectively, common shares valued at $12,250 and $42,500, respectively based on the quoted market price at date of issuance.

For the quarters ended March 31, 2011 and 2010, the Company recorded $34,602 and $0, respectively, 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 during the quarters ended March 31, 2011 or 2010 therefore, the intrinsic value of options exercised during those periods is $0. 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 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.

The 2010 stock options fair value was determined using the following attributes and assumptions for each separate issuance: share prices ranging from $0.18 to $0.85, risk-free interest rates of approximately 1.77% to 2.1%, expected dividend yields of 0%, expected life between 4.5 and 6 years, and expected volatility of 186% to 203%. The Company estimates forfeitures based on historical experience. As of March 31, 2011, there was $331,596 of unrecognized compensation expense related to non-vested stock option agreements, which is expected to be expensed between April 1, 2011 and October 6, 2013.

A summary of stock options outstanding as of March 31, 2011, 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		650,000		7.17	$	0.18		–	$	–
$	0.50		300,000		5.86	$	0.50		50,000	$	0.50
$	0.85		300,000		6.52	$	0.85		–	$	–
$	1.00		400,000		1.63	$	1.00		400,000	$	1.00
$	1.29 - $1.88		800,000		3.78	$	1.44		800,000	$	1.44

The aggregate intrinsic value of exercisable options as of March 31, 2011 is $0. The aggregate intrinsic value of options outstanding as of March 31, 2011, is $195,000.

The following is a summary of stock option activity for the quarter ended March 31, 2011 and the year ended December 31, 2010:

	Number Of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contract Life (Years)
Balance, December 31, 2009		1,350,000		1.20
Options cancelled		–		–
Options granted		1,100,000		.41
Options exercised		–		–
Balance, December 31, 2010		2,450,000	$	.85
Options cancelled		–		–
Options granted		–		–
Options exercised		–		–
Balance, March 31, 2011		2,450,000	$	.85		4.92

Exercisable, March 31, 2011		1,250,000	$	1.26		3.16

Note 5 - Income Taxes

For the quarter ended March 31, 2011, 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 March 31, 2011, the Company has accumulated operating losses totaling approximately $32 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 March 31, 2011. 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 March 31, 2011 and December 31, 2010.

All of the Company’s current oil and gas activities 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 due 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 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 6 - Subsequent Events

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.

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. Sky Petroleum has 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 $1,500,000. Sky requested a meeting with ABKN on March 29, 2011 to present a proposed Works Program for the

First Exploration Period as well as obtaining the $1.5 million bank guarantee. A meeting was not able to be scheduled and as such on May 6, 2011, Sky notified ABKN that among other things, the bank guarantee is being finalized and will be delivered within 10 days to ABKN.

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 analyses 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 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, 2010, filed with the SEC on March 30, 2011. 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 Securities and Exchange Commission (which we refer to as 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. Critical accounting policies, the policies the Company believes are most important to the presentation of its consolidated financial statements and require the most difficult, subjective and complex judgments, are outlined below in “Critical Accounting Policies,” and have not changed significantly.

Overview and Plan of Operation

Our primary business is to identify opportunities to either make direct property acquisitions or to fund exploration or development of oil and natural gas properties of others under arrangements in which we will 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. We may also make investments or acquire other energy related projects or businesses.

copy of the document evidencing approval by the Council of Ministers of the Republic of Albania of the PSC was published in the Fletoren Zyrtare on December 17, 2010, and the PSC became effective ten working days thereafter on January 3, 2011. 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.

The PSC has a seven year term with three exploration periods commencing on the effective date. 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. Two wells and additional G&G will be undertaken in the subsequent 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.

Block Four is located in south east Albania, bordering Greece. The exploration block covers an area of approximately 2,264 km2 (540,000 acres). The block has a total of four identified prospects or leads.

Block Five is located in south west Albania next to the Adriatic Sea and covers an area of approximately 2,076 km2 (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 623 km2 (149,000 acres).

Under the terms of the PSC, the Company has agreed to undertake exploration work on the blocks during the three exploration periods over the next seven years commencing on the effective date.

First Exploration Period: The first exploration period is an initial period of two years in which Sky Petroleum has agreed to undertake G&G, 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.

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.

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 may be 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.

The Company’s investment in the Albania exploration blocks as of December 31, 2010 was $10,115,220. This investment consisted of acquisition costs related to the PSC totaling $50,000, $850,000 for fees to consultants for locating and negotiating our investment in the Albania exploration blocks, and $225,220 for fees related to evaluations and assessments of the concession area. In addition, 3,000,000 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 the Consultant for expertise provided to the Company in acquiring and negotiating the acquisition of oil and gas properties in Albania.

On May 18, 2005, the Company, through its wholly-owned subsidiary Sastaro Limited (“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 (the “Participation Agreement”). The project is located in the Ilam/Mishrif reservoir of the Mubarek Field area near 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 in-fill wells in an off-shore oil and gas project in the United Arab Emirates. The operator of the drilling program, Crescent, secured a drilling rig and began drilling the first well, Mubarek H2, which was completed during the second quarter of 2006 at a total depth of 15,020 feet (drilled depth). The second well Mubarek K2-ST4 was completed on October 4, 2007, with a total depth of 13,533 feet. Since the Mubarek H2 well was completed in the second quarter of 2006, it has produced a total of approximately 150,413 gross barrels through December 31, 2009. Since the Mubarek K2-ST4 well was completed in the second quarter of 2007, it has produced a total of approximately 149,471 gross barrels through December 31, 2009. 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 have 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 take all actions required to protect our interests, our shareholders and our investment in the Mubarek Field.

Other Projects

On October 14, 2009, we entered into a non-binding letter of intent to invest in and acquire Suntera Resources’ interests in two onshore oil and gas blocks in Nigeria. The letter of intent expired in April 2010.

In 2008, we acquired a minority stake in the development of an oilfield in the Komi Republic of the Russian Federation by acquiring a 3.9% interest, subject to dilution, in Pechora Energy through its UK parent company, Concorde Oil & Gas Plc. (which we refer to as “Concorde”). On December 31, 2009, Concorde entered into binding agreements with the majority shareholder-Kuwait Energy Company (“KEC”). The agreement is to exchange Concorde’s principal operating subsidiary-Pechora Energy Company and all other subsidiaries, in exchange for shares of KEC and contingent earn-out notes, all of which are subject to the fulfillment of certain future operating conditions. This exchange was due to Concorde’s pre-tax loss of $30 million for the year ended March 31, 2009, along with other economic conditions, and the need for additional capital. The completion of this transaction is subject to a number of conditions, including regulatory consents, bank consent, and approval of KEC shareholders. Because KEC is a private company and related share information is not available, the market value of the proposed shares is not readily available. In addition, the Company does not possess the required information to determine a reasonable amount of shares to be obtained and potential earn-out note repayments without incurring excessive costs.

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 March 31, 2011 and March 31, 2010 (all amounts in approximation)

We had no revenues from operations for the three months ended March 31, 2011 and no revenues from operations for the three months ended March 31, 2010. We do not anticipate having any revenues from operations until we are able to successfully complete exploration and development work in the Concession Area. Revenue from operations, if any, will be dependent on our ability to obtain adequate financing and develop wells in the Concession Area.

Our total expenses increased to $567,960 for the three months ended March 31, 2011, from $269,016 for the three months ended March 31, 2010, an increase of $298,944 or 111%. The increase in total expenses was attributable to increased activity related to the Concession Area, organizational development and capital raising efforts, and expenses associated with our organization of Sky Albania for the purposes of conducting business in Albania and under the PSC. During the three months ended March 31, 2011, we incurred legal and accounting expenses of $134,827 ($43,038, Q1 2010); travel expenses of $114,715 ($20,336, Q1 2010); consulting services expenses of $135,962 ($107,600, Q1 2010); and general and administrative expenses of $181,785 ($97,730, Q1 2010). We had income from interest of $320 for the three months ended March 31, 2011, compared to $103 for the three months ended March 31, 2010.

We had a net loss of $567,640 for the three months ended March 31, 2011, as compared to a net loss of $268,913 for the three months ended March 31, 2010.

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 approximately $2,471,000 at March 31, 2011.

Since inception, we have financed our cash flow requirements through the issuance of common stock and preferred stock and our working interest in the Mubarek Field. As we expand our activities, 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.

Recently, the poor conditions in the U.S. housing market and the credit quality of mortgage backed securities have caused a loss of confidence in the broader U.S. and global credit and financial markets, resulting in the collapse of, and 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 a number of financial institutions and have 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 to fund our future operations. 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 three months ended March 31, 2011 was $433,033 as compared to net cash provided by operating activities of $170,861 for the comparable period in 2010, a decrease of $603,894. This decrease in cash provided by operations is a result of collecting accounts receivable related to the lift in the Mubarek wells in 2009, and increased expenses in 2010 related to travel, professional fees, and rent expense. Net cash used in investing activities during the three months ended March 31, 2011 was $7,053 for the purchase of fixed assets as compared to $-0- for the comparable period in 2010.

Total assets as of March 31, 2011, were approximately $12,658,000 compared to total assets of approximately $13,130,000 as of December 31, 2010. Stockholders' equity as of March 31, 2011 was approximately $12,352,000 compared to stockholders’ equity of approximately $12,885,000 as of December 31, 2010. The decrease in assets and stockholder’s equity was primarily related to cash used in operations for the quarter ended March 31, 2011.

As of March 31, 2011, we had current assets of approximately $2,516,000 including cash and cash equivalents of approximately $2,471,000. We had current liabilities of approximately $306,000, resulting in working capital of approximately $2,210,000 as of March 31, 2011, as compared to approximately $2,749,000 as of December 31, 2010.

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 will provide a bank guarantee for $1,500,000 within 90 days of the effective date of the PSC to guarantee expenditures during the first exploration period. 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 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.`

Since the Mubarek H2 well was completed in the second quarter of 2006, it has produced a total of 150,413 gross barrels as of December 31, 2010. Since the Mubarek K2-ST4 well was completed, it has produced a total of 149,471 gross barrels as of December 31, 2010. Revenues provided from these wells were $85,570 for the year ended December 31, 2010 and $-0- for the quarter ended March 31, 2011. We expect no revenue from production in 2011 and will not have any revenue from our properties until we complete exploration and development programs, which may take a significant amount of time and investment.

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. As a result, we have not had any cash flow from these wells since the second quarter of 2010; however we intend to pursue our rights under the agreement.

Over the next twelve months, we anticipate that our working capital requirements will increase. Although we believe that existing capital will be sufficient to sustain operations, we anticipate that we may raise additional capital through equity, debt or other securities offerings during 2011 to fund exploration and working capital requirements. Alternatively, we may explore joint venture, work-in or other arrangements for exploration, development or other activities on our projects

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.

There was a severe deterioration in global credit and equity markets in 2007 through 2010. This resulted in the need for government intervention in major banks, financial institutions and insurers and also resulted in greater volatility, increased credit losses and tighter credit conditions. These disruptions in the credit and financial markets have had a significant material adverse impact on a number of financial institutions and have limited access to capital and credit for many companies. While market conditions have generally improved in 2010, access to capital and credit remains limited compared to capital markets before the deterioration in 2007. As our operating plan includes reliance on equity financings in order to fund future additional prospects, these current market conditions could make it difficult or impossible for us to raise necessary funds to meet our operating plan. 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.

Currently, we have cash assets of $2,343,779 with HSBC, a bank in the United Arab Emirates. We do not expect these deposits to be affected by the current financial conditions and we do not anticipate that the bank in which they are deposited will fail. Management continues to monitor the state of the financial markets and will make adjustments to the investment of cash assets based on the current and anticipated capital requirements of the Company, the stability of the markets, the rate of return on time deposits, money market accounts and bonds, and the levels of protection provided by such investments.

During the quarter ended March 31, 2011, 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:

On June 24, 2010, Sky entered into a PSC with the Ministry of Economy, Trade and Energy of Albania, acting through the National Agency of Natural Resources of Albania. 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 Block Four, Kanina well in Block Five, and a Dumre well.

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.

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 may be 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.

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 organized a Cayman Island corporation to hold and operate the Concession Areas.

In addition, to the work program undertakings, Sky Petroleum has also agreed to the following:

Education and Training Program: Sky Petroleum has agreed to allocate $100,000 for training and education during each year of the Exploration period.

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. Sky Petroleum has agreed to provide a bank guarantee of $1,500,000 within 90 days of the effective date of the PSC in an amount to guarantee expenditures during the First Exploration Period. Sky requested a meeting with ABKN on March 29, 2011 to present a proposed Works Program for the First Exploration Period as well as obtaining the $1.5 million bank guarantee. A meeting was not able to be scheduled and as such on May 6, 2011, Sky notified ABKN that among other things, the bank guarantee is being finalized and will be delivered within 10 days to ABKN.

Consulting Agreements:

Within five business days of the valid execution and delivery of the Second Qualifying Agreement, Sky Petroleum agreed to issue an additional 1,136,364 Series B Preferred Shares and pay $150,000 to the Consultant. The Second Qualifying Agreement is defined in amended and restated Schedule C to Amendment No. 2 to the Consultant Agreement. The agreement provides for privatization and acquisition of assets, rights, wells, concessions, rigs, storage facilities, equipment, licenses, permits, data and other assets of Albpetrol Sh.a (“Albpetrol”), and of properties, concessions, rights and permits for oil production (excluding Block 4, Block 5 and Block Dumre previously acquired by Sky Petroleum) as may be negotiated between Sky Petroleum and Albpetrol or between Sky Petroleum and the Ministry of Economy, Trade and Energy of the Republic of Albania (the “Second Qualifying Assets”); and execution of definitive Production Sharing Agreements in the form mandated in the “Petroleum Law”, No. 7746, date 28.07.1993 and the document “Albanian Legislation and the Framework for Petroleum Exploration and Production” related to the Second Qualifying Assets that vest all rights to the Second Qualifying Assets in Sky Petroleum. The Consulting Agreement terminated under its terms on April 30, 2011.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4T - 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, 2010 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 first quarter ended March 31, 2011, 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.

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, 2011.

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

None

Item 3 - Defaults Upon Senior Securities

None

Item 4 – [RESERVED]

Item 5 - Other Information

None

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 Chief Executive Officer (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)

	Date: May 16, 2011

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Sky Petroleum (SKPI) 10-Q2011 Q1 Quarterly report

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