Urals Energy Plc Regulatory News (UEN)

28 Sep 2007 10:13

Urals Energy Public Company Limited28 September 2007 THIS REPLACES THE ANNOUNCEMENT RELEASED AT 07.06 TODAY (RNS NUMBER 7024E) WHICHON THE FRONT PAGE INCORRECTLY STATED THE OPERATING LOSS BEFORE NON RECURRINGITEMS AS US$13.2 MILLION. THIS SHOULD HAVE READ OPERATING LOSS OF US$11.2MILLION BEFORE NON-RECURRING ITEMS. THE FULL CORRECTED ANNOUNCEMENT IS SHOWNBELOW. Urals Energy Public Company Limited ('Urals Energy' or the 'Company') Interim Results Urals Energy, a leading independent exploration and production company withoperations in Russia, today announces its interim results for the six months to30 June 2007. Highlights Strategy • Acquisitions a key cornerstone of the Urals strategy. • Continuing to assess complementary and value enhancing acquisitions aswell as delivering on operational development plans • Eastern Siberia now specifically being targeted as key growth area forUrals Energy with the aim of achieving critical mass in the region • Assets actively being identified that will provide synergies withexisting Dulisma field and capitalise on access to the Transneft ESPO andsignificant tax breaks. • Confident of funding support when required Operations • Remain on track to reach 12,000 BOPD by end 2007 and 15,000 BOPD bymid year 2008. • Production average for the period 8,859 BOPD. Currently 9,000 BOPD. • Production stable with increases expected at Dulisma, Sakahlin andKomi. • Subsequent to period end Russian Ministry of Natural Resources hasconfirmed Russian Registered Reserves higher than Urals SPE reserve figures. • New senior management team in place combining both Russian and Westernexperts, with proven capability of operational delivery and financialexperience. Financial • Revenues decreased to US$44.4 million following poor H1 07 weather,resulting in delay of shipment of cargoes. However, revenues expected toincrease significantly in second half. • Operating loss of US$11.2 million before non recurring items. OverallUS$22.2 million loss primarily driven by non-recurring items and poor weatherconditions delaying of shipment of cargoes by sea. • Enhanced balance sheet via two debt financings including Dulismadevelopment being funded through US$130 million Goldman Sachs project financeloan. Cash position at period end of US$55.9 million. • Paid down US$63.1 million debt facility and secured pre-paymentfacility on attractive terms. Outlook • Production set to increase through new development wells, fraccing andrecommencement of Dulisma production. • 7 wells to be drilled in H2 07 including two exploration andcompletion of Urals Nord exploration well currently drilling with resultsexpected shortly. • At Dulisma major development and preparatory work including clearingof land, purchasing of rigs and installation of generators and powerlines isunderway ahead of tie-in to Transneft ESPO pipeline. • Growth through 2008 with ramping up of Dulisma production andexecution of acquisition strategy. Leonid Y. Dyachenko, Chief Executive, commented: "Urals Energy continues to grow into a leading Russian independent E&P companywith a unique exposure to Eastern Siberia - a region identified as being a keyRussian oil and gas growth area. The operational performance of the company has been sound throughout the firsthalf and we have successfully rectified a number of operational issues whichwill ensure we finish the year in a stronger position. The bolstering of our Board and senior management team reflects both the growthof Urals and the recognition of our intention to become a significant Russianindependent oil and gas company. Our focus is now on operational deliverability and execution of our plansspecifically at Dulisma which, together with potential future acquisitions, willtransform Urals Energy over the next 12 to 18 months." 28 September 2007 Enquiries: Pelham PrGavin Davis +44(0)20 7743 6677 / +44(0)7910 104 660Evgeniy Chuikov +44(0)20 3008 5506 / +44(0)7894 608 606Morgan StanleyJohn Bathard-Smith +44(0)20 7425 8700 Chief Executive's Statement The first half of 2007 was characterized by positive progress through ongoingdevelopment work, combined with corrective work to reverse certain unexpectedreservoir pressure maintenance problems. This was set against the backdrop ofrobust domestic and export prices. The company is now in a position to finishthe year on a strong upward trajectory with production expected to growsignificantly in 2008/09. Operationally, the Company successfully increased average daily production atits brownfield sites from 8,982 barrels of oil per day (BOPD) at the beginningof 2007 to an average of 9,170 BOPD in June. A total of nine development wells,including side-track wells were completed, adding a net figure of 1,600 BOPD ofadditional average oil production. This increase was offset by production declines during the first quarter of 2007in some fields. The company began a program to augment pressure support systemsto reverse the decline trend. A reassessment of our reservoir maintenanceprogram was completed at two of the fields in particular where a total of sixnew injection wells in Dinyu and Petrosakh were added for pressure support whichis anticipated to increase production in H2 07 Urals continues to develop infrastructure in its greenfield, Eastern Siberiansubsidiary, Dulisma, with a focus on early infrastructure work, equipmentprocurement, development plan licensing, rig mobilization and initial drillingwork while final detailed designs are being completed. The important Transneftoil pipeline, the Eastern Siberia to Pacific Ocean (ESPO), is also progressingas planned which will allow full scale production from Dulisma in H1 2009targeting production of 30,000 by 2011. A temporary oil transport line to UstKut is once again operational and oil will flow through this shortly. Eastern Siberia has some of the best reserves in Russia and, when combined with10 year tax breaks in the region and a direct export route through Transneft'sESPO pipeline, there is a clear rational for our focus there. Our acquisition strategy is to target assets in the region which are valueenhancing and which will provide a step change opportunity through their reservebase and monetisation potential. Financially the company was impacted by shipping delays and non recurring items.These were short term difficulties and the financial outlook for the second halfis strong. Operational Update Timan-Pechora Basin In Urals' subsidiaries in Komi and Nenets, in the Russian oil region known asthe Timan-Pechora Basin, production for the H1 2007 increased from 4,971 BOPD atthe beginning of the year to an average of 5,573 BOPD in June. The Companydrilled and completed 5 wells, including two sidetracked from existingwellbores. The Company added 4 new water injection wells at its largestproducing field in Komi, Dinyu-Savinoborskaya, to augment the reservoir pressuremaintenance program and reverse a trend of declining production that wasobserved early in 2007. In H2 07 the Company plans to frac 16 additional wellswhich are anticipated to significantly lift production at year end. The Company will drill 3 sidetrack wells this year. Two of the three are alreadyproducing crude oil of approximately 70 BOPD and the third will be drilled to adeeper horizon that had oil tested in a nearby wellbore. At another of the Company's exploration plays in Timan-Pechora, the Urals Nordsubsidiary spudded its first exploration well in the Nadezhdinskiy block inApril and, as at the time of this release, had drilled to a depth of 3,650metres in a 3,750 metre TD program. This well is targeting the Devonianlimestone which found oil bearing pay in the analogous fields in the same basin. Udmurtia At CNGDU production dropped, beginning the six-month period at 1,046 BOPD, andending the period at 888 BOPD. The reason for the decrease is primarily due toreservoir pressure decline on the Potapovskoye field. The Company is nowevaluating an enhanced oil recovery project with water injection for thereservoir and believe this will rectify the problem. Sakhalin At the Company's subsidiary, Petrosakh, operations were focused on intensiveprocessing and interpretation of 3D seismic data as well as drilling oneproducing well and three injection wells to increase oil recovery from thisgeologically complex reservoir. This has resulted in the successfulstabilization of production at 2,712 BOPD from 2,981 BOPD The use of recently reprocessed 3D seismic is helping to pinpoint prospectiveareas in the onshore block and exploration plays in the offshore block. We now expect to increase production as a result of positive trends noted thusfar and additional wells to be drilled during the second half of 2007 and in2008. East Siberia Production will resume shortly at Dulisma following repairs to the temporary oilevacuation route by the downstream operator. Despite this, Dulisma remains on track to produce and ship oil to the TransneftESPO in H1 2009 and preparatory work has continued as planned. A majorregulatory milestone was reached in the first half of the year with Russia'sCentral Committee approving Dulisma's Field Development Plan. Field work highlights include the successful mobilization and rig-up of theCompany's new 160-tonne mobile drilling rig on the first completed drilling pad,where up to 9 wells can be drilled. The Company has also ordered a second 225tonne mobile drilling rig for delivery during the 1st quarter of 2008. Besidesdrilling activities, the Company also constructed a new 100 man field camp andtwo -2.5 MW electric generators, cleared land for the Central ProcessingFacility (oil processing for shipment to Transneft) and cleared the area for thefield camp. Tendering for key advance procurement items has been made and the Companycontinues to add staff as we grow in the region. Financial Results Revenues for the first half were impacted as a result of late winter icebreak-up and severe June weather resulting in the Company only being able toship a limited amount of stored crude for export at its two large islandproducers. This represents only a timing delay in our mid-year accounting, asthese inventories were subsequently cleared after the 30 June closing period.The prevailing high export price levels will be fully reflected in our 2007full-year results. Partly as a result of these delays net revenues decreased byUS$14.0 million as compared to the six months ended 20 June 2006. Selling, General and Administrative expenses increased during the six monthsended 30 June 2007 by US$16.1 million. This was primarily due to settlement ofunvested stock for the former CEO who resigned during the first half. Inaddition, SG&A expenses increased as a result of full six months consolidationof Dulisma in the current financial statements. As a result of this and theaforementioned factors the Company reported a loss of US$22.2 million driven bynon-recurring items and the poor weather conditions delaying shipment of cargoesby sea. Without these non-recuring items the loss is reduced to US$13 million. The Company has successfully enhanced its balance sheet via two debt financingsin the first half. In March, the Company received the final tranche of itsUS$130 million project financing for Dulisma, underwritten by Goldman Sachs,through a total return swap structure using Standard Bank as the lender ofrecord. In addition, in June the Company restructured its senior borrowing baseby repaying in full US$51.1 million outstanding under the five-yearreserve-based loan facility and related US$12 million mezzanine note, andreplaced it with a five-year, revolving pre-payment facility provided by theCompany's export off-taker Petraco S.A. This has resulted in substantialsavings to the Company, due to the non-amortizing nature of the revolver, andthat it is at a cost lower than the debt that was retired. Interest expenses increased primarily because of interest accrued for theGoldman Sachs loan of US$16.1 million and the accelerated accretion of theissuance costs under BNP Paribas RBL facility due to early prepayment as well asacceleration of the accretion and discount associated with the warrants underthe BNP Paribas Subordinated Loan. Interest income increased during the sixmonths of 2007 as compared to six months of 2006 primarily due to the largeamount of cash on deposit at Dulisma from the project finance facility closed inthe first quarter of the year. Cash generated from operations decreased because of the decrease in net revenuesand the increase in SG&A expense. Operating cash outflows before changes inworking capital were improved by the cash received from Petraco under the 5 yearrevolving prepayment agreement and an increase in other taxes payable, whichwere fully paid in July 2007. The increase in outflows from investment activityprimarily represents an increase in development activity in Dulisma ofapproximately US$14.4 million and exploration drilling of a first well onNadezhdenskoye oil field of approximately US$3.0 million. Proceeds from borrowings, net of borrowing costs, were composed of the US$130million proceeds from the Goldman Sachs and Standard Bank loan, a US$14 milliondraw down under the BNP Paribas RBL facility, and US$2 million drawn from anoverdraft facility organised by ZAO BNP Paribas Bank Moscow. This additionalUS$14 million draw down was used to repay a US$12 million subordinated BNPParibas loan in June 2007. The remaining funds were used to settle the ZAO BNPParibas overdraft in July 2007. Management and Personnel Key management changes have been made throughout the first half of the yearreflecting the growth of the company and its focus on becoming a key Russianbusiness. Two new members were admitted to the Board, Alexei Ogarev, theCompany's VP for Government Relations, as an executive member, and anon-executive member, Robert Maguire, the former Global Head of Energy forMorgan Stanley and now Partner for International Oil and Gas investment atCarlysle -Riverstone. Chuck Pitman remains as Chairman of the Board. As the Company matures, progressing from its start-up phase of assetconsolidation and its IPO, to a company focused on developing its array ofupstream assets and meeting further strategic acquisitions, strengthening of theRussian composition of the senior management has been emphasised. The companyalso employs first-class, experienced senior Western managers who have bothRussian and international experience in delivering major oil projects. We nowhave a team capable of executing our aggressive development plans. Following the resignations of William Thomas as CEO in April, and of StephenBuscher as CFO in August, Leonid Dyachenko was appointed as the new CEO andVladimir Sidorovich as CFO. Mr. Dyachenko is an original founder of the firstUrals Energy and the current public company, and has acted as the GeneralDirector for all operations, with each unit head reporting to him on a dailybasis. His appointment is, therefore, a logical step in the evolution of UralsEnergy as a significant Russian operator. Mr. Sidorovich has long expertise inthe Russian market, having acted as Finance Director for such companies as RAOUES, and most recently Tambeyneftegas. Given the rapid growth of the Russiancapital markets, and in particular, the shift in dynamics of liquidity betweenWestern and Russian debt markets, his appointment reflects a natural change infocus by the Company toward tapping the increasingly robust Russian market. Operationally, two critical appointments have been made. In August, KerryKendrick was named as COO. Mr. Kendrick has over 26 years of upstream oil andgas operations experience in the Middle East, South America, the US domesticand, most recently, in Western Siberia where he was Director General of a TNK-BP- Occidental Oil and Gas Corp joint venture. In February, Stephen Kirton washired as Vice President for Subsurface Technical Services. Mr. Kirton has 26years of total upstream oil and gas experience with 16 years in Russia and CIScountries. Finally, in August Vyacheslav Rovneiko, also an original founder of UralsEnergy, was appointed as Senior VP for Acquisition Strategy. Mr Rovneiko hasbeen involved in the company's business development and identification ofacquisition opportunities since the Company's inception. Outlook With a rebalancing of management and enhancement of our operational expertise incritical areas, the Company is well-positioned to execute its acquisition,development and exploration strategy. In the second half of 2007, the Companyplans to drill seven wells, conduct a major fracture stimulation campaign in theKomi region, and complete the exploration well at Urals Nord. Overall the company is in a strong position for growth with Dulisma set tosignificantly increase production once it ties in to the ESPO. Importantly, we have received endorsement of our SPE reserve figures from theRussian Ministry of Natural Resources and can now focus on capitalising on oursignificant reserve base. Further value enhancing acquisition opportunities continue to be explored inaddition to a particular focus on ensuring operational effectiveness andexecution of the development plan across all Urals assets. Urals Energy Public Company Limited Interim Condensed Consolidated Balance Sheets (unaudited) (presented in US$ thousands) 30 June 2007 31 December 2006 Note AssetsCurrent assetsCash and cash equivalents 4 55,930 33,082Financial derivatives 9 19,130 -Accounts receivable and prepayments 28,196 24,717Current income tax prepayments 3,614 4,401Inventories 42,763 26,679Total current assets 149,633 88,879 Non-current assetsProperty, plant and equipment 630,963 595,800Other non-current assets 11,325 16,073Total non-current assets 642,288 611,873 Total assets 791,921 700,752 Liabilities and equityCurrent liabilitiesAccounts payable and accrued expenses 16,950 10,033Income tax payable 3,054 3,281Other taxes payable 11,826 9,620Short-term borrowings and current 9 144,132 22,965portion of long-term borrowingsAdvances from customers 46,519 30,913Current liabilities before warrants classified as 222,481 76,812liabilitiesWarrants classified as liabilities 3,185 3,516Total current liabilities 225,666 80,328 Long-term liabilitiesLong-term borrowings 9 - 40,844Long term finance lease obligations 1,384 1,192Dismantlement provision 3,614 3,327Deferred tax liability 112,417 111,787Other long term liabilities 347 298Total long-term liabilities 117,762 157,448 Total liabilities 343,428 237,776 EquityShare capital 641 633Share premium 408,135 401,448Translation difference 30,294 22,445Retained earnings 7,979 37,022Equity attributable to shareholders 447,049 461,548of Urals Energy Public Company LimitedMinority interest 1,444 1,428Total equity 448,493 462,976 Total liabilities and equity 791,921 700,752 MEMORANDUM NOTE:Total equity 448,493 462,976Warrants classified as liabilities 3,185 3,516 451,678 466,492 Approved on behalf of the Board of Directors on 27 September 2007 ____________________________ ___________________________ L.Y. Dyachenko V.G. Sidorovich Chief Executive Officer Chief Financial Officer The accompanying notes on pages 8 to 20 are an integral part of these interimcondensed consolidated financial information Urals Energy Public Company Limited Interim Condensed Consolidated Statement of Income (unaudited) (presented in US$ thousands) Six months ended 30 June: Note 2007 2006 Gross revenues 56,922 78,444Less: excise taxes (539) (430)Less: export duties (11,976) (19,576) Revenues 44,407 58,438 Operating costsCost of production 7 (36,694) (39,876)Selling, general and administrative expenses 8 (29,910) (13,785) (66,604) (53,661) Total operating costs Operating (loss) profit (22,197) 4,777 Finance income (expense)Interest income 9 1,450 765Interest expense 9 (12,531) (4,250)Foreign currency gains 2,846 4,319Change in fair value of financial derivatives 9 1,112 (3,314) (7,123) (2,480) Total finance expense (29,320) 2,297 (Loss) profit before taxIncome tax benefit (charge) 265 (1,821) (29,055) 476 (Loss) profit for the period (Loss) profit for the period attributable to: (12) 90 - Minority interest- Shareholders of Urals Energy Public Company Limited (29,043) 386 (Loss) profit per share of profit attributable toshareholders of Urals Energy Public Company Limited:- Basic (loss) profit per share (in US dollar per share) (0.2450) 0.0042- Diluted (loss) profit per share (in US dollar per share) (0.2450) 0.0041 Weighted average shares outstanding attributable to:- Basic shares 118,546,479 91,891,653- Diluted shares 118,546,479 93,390,285 The accompanying notes on pages 8 to 20 are an integral part of these interimcondensed consolidated financial information Urals Energy Public Company Limited Interim Condensed Consolidated Statements of Cash Flows (unaudited) (presented in US$ thousands) Six months ended 30 June: 2007 2006 Cash flows from operating activities(Loss) profit before income tax (29,320) 2,297Adjustments for:Depreciation and depletion 7,900 7,784Change in fair value of financial derivatives 9 (1,112) 3,314Share-based payments 6,695 2,285Interest income 9 (1,450) (765)Interest expense 9 12,531 4,250Foreign currency gains (2,846) (4,319)Other (124) 373 Operating cash flows before changes in working capital (7,726) 15,219 (11,122) (3,680) (Increase) in inventories(Increase)/decrease in accounts receivables and prepayments (1,944) 1,427Increase/(decrease) in accounts payable and accrued expenses 7,079 (1,608)Increase in advances from customers 15,606 146Increase in other taxes payable 2,465 268 Cash generated from operations 4,358 11,772 Interest received 579 685Interest paid (3,208) (4,949)Income tax paid (876) (1,151) 853 6,357 Net cash generated from operating activities Cash flows from investing activitiesPurchase of property, plant and equipment (33,780) (18,958)Purchase of intangible assets (822) -Acquisitions of subsidiaries, net of cash acquired - (127,735) (34,602) (146,693) Net cash used in investing activities Cash flows from financing activitiesProceeds from borrowings, net of borrowing costs 142,289 12,000Repayment of borrowings (65,054) (18,165)Repayment of promissory notes - (15,088)Purchase of financial derivative 9 (20,457) -Finance lease principal payments (211) (207)Cash proceeds from issuance of ordinary shares, net of - 197,988associated costsNet cash generated from financing activities 56,567 176,528Effect of exchange rate changes on cash and cash equivalents 30 221Net increase in cash and cash equivalents 22,848 36,413Cash and cash equivalents at the beginning of the period 33,082 32,334Cash and cash equivalents at the end of the period 55,930 68,747 The accompanying notes on pages 8 to 20 are an integral part of these interimcondensed consolidated financial information Urals Energy Public Company Limited Interim Condensed Consolidated Statements of Changes in Shareholders' Equity(unaudited) (presented in US$ thousands) Share Share Retained Equity Minority Total equity capital premium earnings attributable to interest Shareholders of Urals Energy Cumulative Public Company Translation Limited Adjustment Balance at 1 January 460 201,355 (2,296) 2,714 202,233 1,199 203,4322006 Effect of currency - - 13,991 - 13,991 77 14,068translationProfit for the period - - - 386 386 90 476 Total recognized income - - 13,991 386 14,377 167 14,544(loss) Issuance of shares 173 194,961 - - 195,134 - 195,134Share-based payment - 2,285 - - 2,285 - 2,285 Balance at 30 June 2006 633 398,601 11,695 3,100 414,029 1,366 415,395 Balance at 1 January 633 401,448 22,445 37,022 461,548 1,428 462,9762007 Effect of currency - - 7,849 - 7,849 28 7,877translationLoss for the period (29,043) (29,043) (12) (29,055) Total recognized income - - 7,849 (29,043) (21,194) 16 (21,178)(loss) Issuance of restricted 8 (8) - - 0 - 0stockExercise of options - 20 - - 20 - 20Share-based payment - 6,675 - - 6,675 - 6,675 Balance at 30 June 2007 641 408,135 30,294 7,979 447,049 1,444 448,493 The accompanying notes on pages 8 to 20 are an integral part of these interimcondensed consolidated financial information Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 1: Activities Urals Energy Public Company Limited ("Urals Energy" or the "Company" or "UEPCL")was incorporated as a limited liability company in Cyprus on 10 November 2003.Urals Energy and its subsidiaries (the "Group") are primarily engaged in oil andgas exploration and production in the Russian Federation and processing of crudeoil for distribution on both the Russian and international markets. The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34,CY-1066, Nicosia, Cyprus. UEPCL's shares are traded on the AIM Market operatedby the London Stock Exchange. The Group comprises UEPCL and the following subsidiaries: Effective ownership at: 30 June 2007 31 December 30 June 2006 31 December 2006 2005Exploration and productionZAO Petrosakh ("Petrosakh") Sakhalin 97.2% 97.2% 97.2% 97.2%ZAO Arcticneft ("Arcticneft") Nenetsky 100.0% 100.0% 100.0% 100.0%OOO CNPSEI ("CNPSEI") Komi 100.0% 100.0% 100.0% 100.0%ZAO Chepetskoye Udmurtia 100.0% 100.0% 100.0% 100.0%NGDU ("Chepetskoye")OOO Dinyu ("Dinyu") Komi 100.0% 100.0% 100.0% 100.0%OOO Michayuneft ("Michayuneft") Komi 100.0% 100.0% 100.0% 100.0%OOO Oil Company Irkutsk 100.0% 100.0% 100.0% -Dulisma ("Dulisma")OOO Lenskaya Irkutsk 100.0% 100.0% 100.0% -Transportnaya Kompaniya ("LTK")OOO Nizhneomrinskaya Neft Komi 100.0% 100.0% - - Management companyOOO Urals Energy Moscow 100.0% 100.0% 100.0% 100.0%Urals Energy (UK) Limited United Kingdom 100.0% 100.0% 100.0% 100.0% ExplorationOOO Urals-Nord ("Urals-Nord") Nenetsky 100.0% 100.0% 100.0% 100.0%TradingUENEXCO Limited ("UENEXCO") Cyprus 100.0% 100.0% 100.0% 100.0% UENEXCO Limited only operated during the first quarter of 2006 after which alltrading operations were transferred to UEPCL. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 2: Seasonality The Group's largest producing subsidiaries, ZAO Petrosakh and ZAO Arcticneft,operate on Sakhalin and Kolguev Islands, respectively, and are not connected tothe State owned pipeline monopoly, Transneft. Accordingly, the majority oftheir production is exported by tanker. Due to severe weather conditions,shipping tankers can generally only load during the period of June through earlyDecember. Outside this period, oil is either stored or processed and sold onthe local market. During the six months ended 30 June 2007, Petrosakh andArcticneft produced 66.9 and 20.4 thousand tons of crude oil, respectively, andsold 51.9 and 0.6 thousand tons of crude oil and oil products, respectively.During the six months ended 30 June 2006, Petrosakh and Arcticneft produced 74.5and 23.8 thousand tons of crude oil, respectively, and sold 66.0 and 22.0thousand tons of crude oil and oil products, respectively. During 2007 crudeoil export sales from ZAO Petrosakh in June 2007 and from ZAO Arcticneft beganin July 2007. Crude oil and oil products in stock at 30 June 2007 were 21.6thousand tons and 32.5 thousand tons in Petrosakh and Arcticneft, respectively,and 8.6 thousand tons and 11.2 thousand tons, respectively, at 31 December 2006. Note 3: Basis of Presentation The consolidated interim condensed financial information has been prepared inaccordance with International Accounting Standard No. 34, Interim FinancialReporting ("IAS 34"). This consolidated interim condensed financial informationshould be read in conjunction with the Company consolidated financial statementsas of and for the year ended 31 December 2006 prepared in accordance withInternational Financial Reporting Standards ("IFRS"). Except as discussedbelow, the 31 December 2006 consolidated balance sheet data has been derivedfrom audited financial statements. At 31 December 2006, the consolidated balance sheet included a current liabilityof $2.367 million for other taxes. In this interim condensed consolidatedfinancial information, this amount has been included within other taxes payableas management believes that such classification more appropriately representsthe nature of this balance. For the six months ended 30 June 2006, the Group reclassified $0.258 million ofpayroll expense into selling, general and administrative expenses that wereformerly incorrectly classified as cost of production. Use of estimates. The preparation of consolidated interim condensed financialinformation in conformity with IFRS requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and the disclosure of contingent assets and liabilities as of thereporting date and during the reporting period. Estimates have principally beenmade in respect to fair values of assets and liabilities, impairment provisions,asset retirement obligation and deferred income taxes. Actual results maydiffer from such estimates. Exchange rates. The official rate of exchange of the Russian rouble to the USdollar ("USD") at 30 June 2007 and 31 December 2006 was 25.82 and 26.33 Russianroubles to USD 1.00, respectively. Any translation of Russian rouble amounts toUS dollars or any other hard currency should not be construed as arepresentation that such Russian rouble amounts have been, could be, or will inthe future be converted into hard currency at the exchange rate shown or at anyother exchange rate. Through early 2006, the Russian rouble was not a convertible currency in mostcountries outside of the former Soviet Union and, further, the Group wasrequired to convert 10 percent of its hard currency proceeds into Russianroubles. During the first half of 2006, substantially all restrictions for hardcurrency transactions were lifted and the rights of the government of theRussian Federation and those of the Central Bank of the Russian Federation toimpose such restrictions were waived. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 4: Liquidity Restrictions on cash and cash equivalents. As discussed in Note 9, at 30 June2007, $48.2 million of the Group's cash and cash equivalents is restricted foruse by its subsidiary, Dulisma, and is therefore unavailable for use for othergeneral corporate purposes. Dulisma may use such cash and cash equivalents forboth operating and investing purposes. Liquidity. In the first quarter of 2007, production at certain of the Group'ssubsidiaries fell below the assumptions embedded in the BNP Paribas ReserveBased Facility (Note 9). As a result of the drop in production, principalrepayments under the BNP Paribas Reserve Based Facility were accelerated. InJune 2007, the Group committed to repay the BNP Paribas Reserve Based Facilityand to repurchase the warrants issued in connection with the subordinated loanfrom Paribas. As a result of the issues outlined above and others, during and subsequent tothe six months ended 30 June 2007, the Group experienced liquidity issues thatimpacted its ability to make settlements with its vendors and to execute itsdevelopment plan. The Group recognized an operating loss of $22.2 million forthe six months ended 30 June 2007 and net cash from operations of $0.9 millionfor the same period. Net cash from operations included $15.6 million ofadvances from customers. Additionally, at 30 June 2007, the Group's currentliabilities exceeded its current assets by $76.0 million. As a result, theGroup was not in compliance with a financial covenant under its loan agreementwith Standard Bank plc. Although the Group received an extension of the periodallowed to correct the noncompliance in September 2007, such borrowings wereclassified as current at 30 June 2007. Finally, as discussed above, of theGroup's cash and cash equivalents balance of $55.9 million at 30 June 2007,$48.2 million is not available for general corporate purposes. To address these matters, management has reviewed its investment program for2007 and decreased its investment activity in exploration and infrastructureimprovements. Simultaneously, management is actively negotiating withcommercial lending institutions and other investors to secure additional generalpurpose financing. In September 2007, the Group restructured short-termadvances from customers of $46.5 million at 30 June 2007 into a long-termborrowing arrangement (Note 9). Additionally, in September 2007, the Groupobtained a non-binding commitment to extend $40 million (RR 1.02 billion) incredit from a customer (Note 9). Management believes that the steps taken asoutlined above are sufficient to ensure that the Group has sufficient resourcesto continue as a going concern for at least twelve months from 30 June 2007. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 5: Accounting Policies Except as discussed below, the principal accounting policies followed by theGroup are consistent with those disclosed in the financial statements for theyear ended 31 December 2006. Certain new standards and interpretations have been published that are mandatoryfor the Group's accounting periods beginning on or after 1 January 2007 or laterperiods and which the Group has not early adopted. Adoption of IFRS 7. Effective 1 January 2007, the Group adopted IFRS 7,Financial Instruments: Disclosures ("IFRS 7"). IFRS 7 introduces newrequirements and guidelines regarding the disclosures of financial instruments.The Group will disclose in its annual consolidated financial statements thecomplete information required by IFRS 7. The adoption of IFRS 7 does not haveany impact on the classification and valuation of the Group's financialinstruments. Adoption of IFRIC 8. Effective 1 January 2007, the Group adopted IFRIC 8, Scopeof IFRS 2 ("IFRIC 8"). IFRIC 8 introduces guidance for accounting fortransactions in which the entity cannot identify specifically some or all of thegoods or services received in exchange for equity instruments. The adoption ofIFRIC 8 did not have any impact on the Group's disclosures, financial positionor results of operations. Adoption of IFRIC 10. Effective 1 January 2007, the Group adopted IFRIC 10,Interim Financial Reporting and Impairment ("IFRIC 10"). IFRIC 10 prohibitsreversal of an impairment loss recognised in a previous interim period inrespect of goodwill or an investment in either an equity instrument or afinancial asset carried at cost. The adoption of IFRIC 10 did not have anyimpact on the Group's disclosures, financial position or results of operations. Other new standards and interpretations that did not significantly affect theGroup's financial position and results of operations when adopted on 1 January2007 are: IFRIC 7, Applying the Restatement Approach under IAS 29 (effective forannual periods beginning on or after 1 March 2006); and IFRIC 9 Reassessment ofEmbedded Derivatives (effective for annual periods beginning on or after 1 June2006). Certain new standards and interpretations have been published that are mandatoryfor the Group's accounting periods beginning after 1 January 2007 or laterperiods and which the Group has not early adopted. These new standards andinterpretations are not expected to significantly affect the Company's financialstatements when adopted: IAS 23, Borrowing Costs (revised March 2007; effective for annual periodsbeginning on or after 1 January 2009); IFRS 8, Operating Segments (effective forannual periods beginning on or after 1 January 2009); IFRIC 11, IFRS 2-Group andTreasury Share Transactions (effective for annual periods beginning on or after1 March 2007); IFRIC 13, Customer Loyalty Programs (effective for annual periodsbeginning on or after 1 July 2008); and IFRIC 14, IAS 19 - The Limit on aDefined Benefit Asset, Minimum Funding Requirements and their Interaction(effective for annual periods beginning on or after 1 January 2008). IFRIC 12, Service Concession Arrangements ("IFRIC 12"), is effective for annualperiods beginning on or after 1 January 2008). IFRIC 12 is not expected tosignificantly affect the Group's financial statements. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 6: Equity Share-based payments. In February 2006, the Group's Board of Directors approveda Restricted Stock Plan (the "Plan") authorizing the Compensation Committee ofthe Board of Directors to issue restricted stock of up to five percent of theoutstanding shares of the Group. Restricted stock grants entitle the holder toshares of stock for no consideration upon vesting. There are no performanceconditions beyond continued employment with the Group. Upon adoption, the Groupgranted awards of 1,332,360 shares of restricted stock. In January 2007, the Group granted an additional 2,074,944 shares of restrictedstock. The total costs associated with the restricted stock granted during the sixmonths ended 30 June 2007 and 2006 were $14.48 million and $6.58 million,respectively, based upon the market value of the Group's shares on the date ofgrant. Such amounts are being recognized over the vesting period of therespective awards. During the six months ended 30 June 2007 and 2006, $6.70million and $2.29 million, respectively, of expense related to share-basedpayments were recognized in the consolidated statements of income. Such expensefor the six months ended 30 June 2007 includes $3.0 million of expense relatedto restricted stock granted to the Group's former chief executive officer, whoresigned in April 2007 (Note 10). As part of the former chief executiveofficer's severance package, all unvested restricted stock grants wereimmediately vested. As of 30 June 2007, unvested restricted stock grants and their respectivevesting dates are presented in the table below. Date of Grant January 2008 January 2009 January 2010 Total February 2006 260,625 260,625 - 521,250January 2007 548,268 548,267 548,265 1,644,800 Total 808,893 808,892 548,265 2,166,050 At 30 June 2007, restricted stock grants for 811,105 shares were fully vestedand issued. At 31 December 2006, no restricted stock grants were vested. Earnings per share. For the six months period ended 30 June 2007, basic anddiluted earnings per share and the corresponding weighted average sharesoutstanding used in each calculation are identical as all potentially dilutiveinstruments are antidilutive for the periods presented. For the six months period ended 30 June 2006, the diluted number of share iscalculated by adjusting the weighted average number of ordinary sharesoutstanding to assume conversion of all dilutive potential ordinary shares. TheCompany has three categories of dilutive potential ordinary shares: restrictedstock, warrants and share options. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 7: Cost of Production Six months ended 30 June: 2007 2006Unified production tax 14,203 16,744Depreciation and depletion 7,900 7,784Wages and salaries including payroll taxes 6,614 6,788Materials 3,165 2,702Cost of purchased crude oil 34 2,324Other taxes 1,075 968Other 3,703 2,566 Total cost of production 36,694 39,876 Note 8: Selling, General and Administrative Expenses Six months ended 30 June: 2007 2006Wages and salaries 13,362 4,506Share-based payments 6,695 2,285Audit and professional consultancy fees 3,114 2,024Transport, loading and storage services 3,057 2,517Office rent and other expenses 1,566 596Other 2,116 1,857 Total selling, general and administrative expenses 29,910 13,785 Included within wages and salaries and share-based payments for the six monthsended 30June 2007 are $5.3 million and $2.5 million, respectively, related toseverance costs for a key executive (Note 10). Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 9: Borrowings Long-term borrowings. Long-term borrowings were as follows at 30 June 2007 and31 December 2006: 30 June 2007 31 December 2006Standard Bank plc 127,944 -BNP Paribas Reserve Based Loan Facility 14,000 51,054BNP Paribas Subordinated Loan - 10,570Other 188 185Subtotal 142,132 61,809Less: current portion of long-term borrowings (142,132) (20,965) Total long-term borrowings - 40,844 Standard Bank plc.. In January 2007, the Group entered into a new loan agreementto fund the development of the Dulisminskoye field in Irkutsk Region, EasternSiberia. Goldman Sachs, as Arranger, and Standard Bank plc, as the funding bank,have committed to provide a total of US$130 million in financing. The debtfacility is secured by 100 percent of the Group's ownership of Dulisma. Thisdebt financing is dedicated to fund in Urals Energy's commitment to develop theoil reserves at its Dulisminskoye field. The Company incurred additional loanorganisation fees, which are recorded net in the financial statements and whichare amortised over the life of the loan. The terms of the loan include an interest rate of 725 basis points over thethree month LIBOR rate of which LIBOR plus 300 basis points are payablequarterly, with the remainder accruing and being capitalized to loan principaluntil the loan matures in 2011 or when all principal and accrued interest is duein a single payment. The loan may be prepaid at any time with certain penaltiesif it is repaid before January 2009. Concurrent with entering into the loan agreement, the Group entered into anagreement with Goldman Sachs under which Goldman Sachs agreed to make paymentsto the Group equal to the cash portion of the interest under the loan agreementfrom 9 February 2007 to 9 February 2009. The Group paid Goldman Sachs $20.4million for agreeing to make these payments to the Group as the interest comesdue. Goldman Sach's assumption of this liability was recognized as a financialderivative asset in the Group's consolidated balance sheet, valued at inceptionat its cost of $20.4 million. The Group recognizes interest expense on the principal balance of the loanagreement at the coupon rate of LIBOR plus 7.25 percent per annum. Amortizationof loan organisation fees is also recorded within interest expense.Additionally, at each balance sheet date, the carrying value of the financialderivative is adjusted to its fair value by reference to current market ratesfor similar instruments. Any change in the fair value of the financialderivative, other than those caused by cash payments received, is recordedwithin the consolidated income statement. Included within the Group's cash balance of $55.9 million at 30 June 2007 is$48.2 million received under the agreement with Standard Bank plc. This amountis designated exclusively for expenditures at the Group's subsidiary Dulisma.Accordingly, such amount is not available for general corporate expenditures. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 9: Borrowings (Continued) At 30 June 2007, the Group was not in compliance with a financial covenantrequiring the maintenance of a minimum current ratio under its loan agreementwith Standard Bank plc. Although the Group received a waiver for this covenantviolation in September 2007 (Note 4), IFRS requires that such borrowings beclassified as current at 30 June 2007 as the waiver had not yet been obtained onthat date. BNP Paribas Reserve Based Loan Facility. In November 2005, the Group enteredinto a five year, revolving Reserve Based Loan Facility with BNP Paribas,underwritten to a maximum commitment of $100.0 million. The facility is dividedinto a senior tranche of $59.0 million that bears interest at LIBOR plus 5.0 %and a junior tranche of $10.0 million priced at LIBOR plus 6.25 %. The weightedaverage interest rate of the facility at 30 June 2007 and 31 December 2006 was11.20% and 10.82%, respectively. Both tranches are payable on quarterly basisand mature in December 2010. The facility is collateralized by liens onproperty, plant and equipment of subsidiaries and includes certain financial andother covenants under the facility, including the maintenance of a minimumcurrent ratio and a maximum ratio of total borrowings to EBITDA. At 30 June2007, the Group was in compliance with all its covenants under the facility. In August 2007, the Group fully repaid the Reserve Based Loan. As part of theagreement reached with BNP Paribas to settle the loan in full, the Group alsocommitted to repurchase the warrants issued in connection with the SubordinatedLoan at a price equal to 1.02046 times the U.S. dollar to British Pound exchangerate times the higher of either one British Pound or the difference between GBP3.03 and the average market price of the Group's shares during the period from19 June 2007 to the date of repurchase. No warrants were repurchased at thedate of these financial statements. BNP Paribas Subordinated Loan. In January 2006, the Group obtained a $12.0million subordinated loan from BNP Paribas (the "Subordinated Loan"). TheSubordinated Loan bears interest at LIBOR plus 5.0% (10.34% percent and 10.37%percent at 30 June 2007 and 31 December 2006, respectively) and is repayable on10 November 2010. Attached to the Subordinated Loan were warrants to purchaseup to two million of the Group's common stock for £3.03. The warrants areexercisable at any time and expire in November 2010. The Group used theproceeds from the Subordinated Loan to repay a loan from Bank Zenit of $12.0million. In June 2007 the Group repaid the Subordinated Loan in full. Management estimated the value of the warrants to be $1.75 million at issuance.As the exercise price of the warrants is denominated in a currency other thanthe Group's functional currency, the warrants are classified as a liability andadjusted to fair value at each reporting date, with the change in fair valuerecorded within the consolidated income statement. As the warrants areexercisable at any time, this amount was recorded within current liabilities inthe Group's consolidated balance sheet. During the six months periods ended 30June 2007 and 2006, respectively, the change in the fair value of outstandingwarrants resulted in a gain of $0.33 million and an expense of $3.31 million,respectively. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 9: Borrowings (Continued) Scheduled maturities of long-term borrowings outstanding were as follows: Scheduled maturities at 30 June 2007 31 December 2006One year 142,132 20,965Two to five years - 40,844Thereafter - - Total long-term borrowings 142,132 61,809 Short-term borrowings. Short-term borrowings were as follows at 30 June 2007and 31 December 2006: 30 June 31 December 2006 2007BNP Paribas Revolving Facility 2,000 2,000Current portion of long-term borrowings 142,132 20,965 Total short-term borrowings andcurrent portion of long-term 144,132 22,965 Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 9: Borrowings (Continued) BNP Paribas Revolving Facility. In November 2006, the Group entered into arevolving loan agreement with BNP Paribas for a maximum of $2 million with amaximum maturity of 3 months and bearing interest of LIBOR plus 4.0% (9.37%percent). This facility was repaid in full in July 2007.Petraco RevolvingPrepayment Agreement. In July 2007, the Group entered into a five year revolvingprepayment agreement with Petraco. Under the terms of the agreement,prepayments shall be made in one or more advances against specified futuredeliveries of agreed volumes of crude oil to be sold to Petraco. The totalaggregate amount of all prepayments outstanding at any given time shall notexceed the lower of 70% of the estimated value of the aggregate estimateddeliveries under the off-take contract for the next succeeding eight monthperiod or $50 million. Each individual prepayment advance must be reimbursedvia the specified deliveries which must occur within eight months from the dateof the relevant advance. All prepayment amounts outstanding as of 1 January2009 shall be reimbursed in full before any additional prepayments may berequested or made, provided that following the full reimbursement of suchoutstanding prepayments, additional prepayments may be requested and madethereafter through expiration of the agreement in July 2012. The agreement doesnot have any financial covenants but does contain cross-default provisions inthe event the Group is in default of any of its other borrowing agreements.Interest on the prepayments accrues at LIBOR plus 4.75% on prepayments for whichthe related volumes have not been delivered, and LIBOR plus 1.00% on prepaymentsfor which the related volumes have been delivered, in order to mirror normalcommercial payment terms. The maximum amount of the facility may not exceed thelower of 70% of the estimated value of the aggregate estimated deliveries underthe off-take contract for the next succeeding eight month period or $50 million. ImpexOil. In September 2007, the Group entered into a revolving credit line forup to RR 1.02 billion with Impex Oil, a customer of the Group on the Russiandomestic market. Borrowings under the credit line accrue interest at 12.0percent per annum, payable monthly, are due in full in February 2009, and aresecured by a pledge of the Group's production from its subsidiaries Chepetskoye,Dinyu, Michayuneft, CNPSEI, and OOO Nizhneomrinskaya Neft. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 9: Borrowings (Continued) Interest expense and income. Interest expense and income for the six monthsended 30 June 2007 and 2006 comprised the following: Six months ended 30 June: 2007 2006 Short-term borrowingsBank Zenit - 127BNP Paribas Moscow 56 - Total interest expense associated with short-term borrowings 56 127 Long-term borrowingsBNP Paribas Subordinated Loan- interest at coupon rate 628 492- commitment fees 26 -- accretion of issuance costs and discount associated with warrants 1,694 174BNP Paribas Reserve Based Loan Facility- interest at coupon rate 2,176 3,330- commitment fees 348 -- accretion of issuance costs 2,127 374Goldman Sachs- interest at coupon rate 5,567 -- accretion of issuance costs 457 - Total interest expense associated with long-term borrowings 13,023 4,370 Finance leases 136 80Less: capitalised borrowing costs (1,267) (793)Other interest 583 466Total interest expense 12,531 4,250 Total interest income (1,450) (765) Total finance costs, net 11,081 3,485 Capitalized borrowing costs. The rate used for capitalization of borrowingcosts for the six months periods ended 30 June 2007 and 2006 were 12.11 percentand 10.31 percent, respectively. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 10: Balances and Transactions with Related Parties For the purposes of these financial statements, parties are considered to berelated if one party has the ability to control the other party, is under commoncontrol, or can exercise significant influence over the other party in makingfinancial or operational decisions as defined by IAS 24, Related PartyDisclosures, which also treats key management personnel as related parties. Inconsidering each possible related party relationship, attention is directed tothe substance of the relationship, not merely the legal form. Balances and transactions with related parties. Six months ended 30 June: 2007 2006Interest expense (income), net (64) (64)Rental fees paid - 259 As of: 30 June 2007 31 December 2006 Accounts and notes receivable 712 708Loans and advances receivable 1,148 1,983Interest receivable 269 206Accounts payable to contractors 291 863 Accounts receivable and accounts payable. The Group purchases certaingeological and other technical services from and leases office space tocompanies owned by directors and management. The resulting accounts receivableand payable balances are unsecured and are expected to be settled in cash or, inthe case of accounts receivable, by the provision of services. Loans and advances receivable. Loans receivable comprise balances denominatedin U.S. dollars and are receivable from companies owned by directors ormanagement. Loans receivable bear interest at 10 percent per annum. Advancesreceivable comprises a $0.8 million advance to an executive of the Group. Compensation to senior management. The Group's senior management team comprises10 people whose compensation totalled $16.049 million and $6.778 million for thesix months periods ended 30 June 2007 and 2006, respectively, including salaryand bonuses of $9.374 million and $4.493 million respectively, and stockcompensation of $6.675 million and $2.285 million, respectively, and no othercompensation was paid for both periods. Additionally, included in loans andadvances receivable at 30 June 2007 and 31 December 2006 were loans receivableof $0.06 million and $0.955 million, from the Group's senior management team. Resignation of key executive. In April 2007, one of the Group's key executivesresigned. In connection with his resignation, the executive receivedtermination benefits totalling approximately $7.8 million, comprisingapproximately $2.5 million of expense associated with accelerating the vestingof 430,140 shares of restricted stock originally scheduled to vest between 2007and 2010 and termination payments and other miscellaneous cash benefitstotalling approximately $5.3 million. The expenses associated with accelerated vesting and the other miscellaneouscash benefits were recorded within share-based payments and wages and salariesin selling, general and administrative expenses in the interim condensedconsolidated financial information (Note 8). Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 11: Contingencies, Commitments and Operating Risks Operating environment. The Russian Federation continues to display somecharacteristics of an emerging market economy. These characteristics include,but are not limited to, the existence of a currency that is not yet fullyconvertible in most countries outside of the Russian Federation, and relativelyhigh inflation. The tax and customs legislation within the Russian Federation issubject to varying interpretations and changes that can occur frequently. The future economic direction of the Russian Federation is largely dependentupon the effectiveness of economic, financial and monetary measures undertakenby the Government, together with tax, legal, regulatory, and politicaldevelopments. Sales and royalty commitments. In accordance with the sale purchase agreementto acquire Petrosakh, the Group agreed to pay a perpetual royalty to theprevious shareholders of $0.25 per ton of crude oil produced from the currentlyunproved off-shore licensed area. There was no production from the area in2006. Oilfield licenses. The Group is subject to periodic reviews of its activitiesby governmental authorities with respect to the requirements of its oil fieldlicenses. Management of the Group correspond with governmental authorities toagree on remedial actions, if necessary, to resolve any findings resulting fromthese reviews. Failure to comply with the terms of a license could result infines, penalties or license limitations, suspension or revocations. Managementbelieves any issues of non-compliance will be resolved through negotiations orcorrective actions without any materially adverse effect on the financialposition or the operating results of the Group. Management believes that proved reserves should include quantities, which areexpected to be produced after the expiry dates of the Group's productionlicenses. These licenses expire between 2008 and 2067, with the most significantlicenses expiring between 2012 and 2067. The principal licenses of the Group and their expiry dates are: Field License holder License expiry date Okruzhnoye Petrosakh 2012Peschanozerskoye Arcticneft 2067Dinyu-Savinoborskoe Dinyu 2018Dulisminskoye Dulisma 2019 Management believes the licenses may be extended at the initiative of theCompany and management intends to extend such licenses for properties expectedto produce subsequent to their license expiry dates. Management currently does not believe that any of its significant exploration orproduction licenses are at risk of being withdrawn by the licensing authorities. Additionally, management currently plans to complete all the requiredexploration or development work, as appropriate, within the timetablesestablished in the licenses. Urals Energy Public Company Limited Selected Notes to the Interim Condensed Consolidated Financial Information(unaudited) (in US dollars, tabular amounts in US$ thousands, except as indicated) Note 11: Contingencies, Commitments and Operating Risks (continued) Taxation. Russian tax, currency and customs legislation is subject to varyinginterpretations, and changes, which can occur frequently. Management'sinterpretation of such legislation as applied to the transactions and activityof the Group may be challenged by the relevant regional and federal authorities.Recent events within the Russian Federation suggest that the tax authorities maybe taking a more assertive position in their interpretation of the legislationand assessments, and it is possible that transactions and activities that havenot been challenged in the past may be challenged. As a result, significantadditional taxes, penalties and interest may be assessed. Fiscal periods remainopen to review by the authorities in respect of taxes for three calendar yearspreceding the year of review. Under certain circumstances reviews may coverlonger periods. Management believes that its interpretation of the relevant legislation isappropriate and the Group's tax, currency and customs positions will besustained. Where management believes it is probable that a position cannot besustained, an appropriate amount has been accrued for in these financialstatements. Insurance policies. In August 2006, the Group insured all of its major assets,including oil in stock, against a variety of risks and purchased insurance inrespect of certain personnel, including casualty, medical and travel insurancefor losses of up to $90 million. Also, a liability insurance policy coveringhazardous objects was put in place, including environmental liability, with atotal limit of $7.8 million. The associated expenses are included withinselling, general and administrative expenses in the consolidated incomestatement. Restoration, rehabilitation and environmental costs. The Group companies haveoperated in the upstream and refining oil industry in the Russian Federation formany years and its activities have had an impact on the environment. Theenforcement of environmental regulations in the Russian Federation is evolvingand the enforcement posture of government authorities is continually beingreconsidered. The Group periodically evaluates its obligation related thereto.The outcome of environmental liabilities under proposed or future legislation,or as a result of stricter enforcement of existing legislation, cannotreasonably be estimated at present, but could be material. Under the currentlevels of enforcement of existing legislation, management believes there are nosignificant liabilities in addition to amounts which are already accrued andwhich would have a material adverse effect on the financial position of theGroup. Legal proceedings. The Group is involved in a number of court proceedings (bothas a plaintiff and a defendant) arising in the ordinary course of business. Inthe opinion of management, there are no current legal proceedings or otherclaims outstanding, which could have a material effect on the result ofoperations or financial position of the Group and which have not been accrued ordisclosed in these consolidated financial statements. Other capital commitments. At 30 June 2007, the Company had no significantcontractual commitments for capital expenditures. This information is provided by RNS The company news service from the London Stock Exchange