Urals Energy Plc Regulatory News (UEN)

23 Sep 2005 07:01

Urals Energy Public Company Limited23 September 2005 Urals Energy Public Company Limited Interim Results for the period ended 30 June 2005 Urals Energy Public Company Limited ("Urals Energy") a leading independentexploration and production company with operations in Sakhalin Island, TimanPechora, Komi Republic and the Republic of Udmurtia, Russia, today announces itsinterim results for the half year ended 30 June 2005. These interim results are prepared under International Financial ReportingStandards ('IFRS'), Highlights Operational Highlights •Successfully listed on AIM August 2005 raising $131.1 million (gross) at a price of £2.40 •Increased production rate from 950 BOPD to 4,200 BOPD. Group oil production has since increased to 5,600 BOPD from acquisitions •Integrated Petrosakh acquisition and initiated 14 well development drilling programme •Successful acquisition of ZAO Arcticneft and OOO Urals Nord •Nefedovskoye Field drilling programme completed on time and under budget Financial Highlights •Loss before tax $689 thousand •EBITDA $5.997 million •Net loss of $1.145 million due to seasonal lag in oil sales from largest producing asset Outlook •Appraisal drilling programme targeted at increasing production to c. 11,000 BOPD in the medium term •Forward focus on exploitation and exploration of asset base targeting 226 MMBOE of risked reserve potential and 943 MMBOE of unrisked reserve potential •$41 million exploitation and exploration programme underway •Current proved and probable reserves of 89.7 MMBOE •Exploration drilling campaign to test offshore Sakhalin Island license area with first well due to spud by mid December 2005 •Opportunities for workforce rationalisation and streamlining of acquisitions •New senior management hires plus the appointment of Charles Pitman, well respected and experienced international oil executive, as non-executive director •Ongoing opportunities to capitalise on rationalisation in Russia and the CIS William R. Thomas, Chief Executive Officer, commented: "Following our successful IPO, we are in a strong position to fully exploit ourexisting asset base and to build the group organically and by acquisition into aleading player within Russia and the CIS. The outlook is very positive and wewill continue to create long term growth and value for shareholders." ENQUIRIES: PELHAM PRJames HendersonManaging Director +44-20-7743-6670 TO OUR SHAREHOLDERS: We are very pleased to issue our first report to you as a public company andlook forward to reporting to you in the future as together we build a leadingindependent oil company in Russia and the CIS. The first half of 2005 was a remarkable period of growth for Urals Energy.Having just completed the acquisition of ZAO Petrosakh in December 2004, we setout in January to complete several key objectives: (i) to integrate Petrosakh into Urals Energy and prepare for its development and exploration drilling programs;(ii) to refinance and pay the deferred acquisition payments for Petrosakh;(iii) to acquire ZAO Arcticneft and OOO Urals Nord; and(iv) to prepare and launch our Initial Public Offering on the London Stock Exchange's AIM market. I am pleased to report we accomplished all of the above and are now positionedto fully exploit both the organic growth potential of our current asset base aswell as the increasingly active M&A marketplace in Russia and the CIS. Our shareprice has also risen by 20% to £2.87 buoyed by not only high oil prices but alsothe underlying strength of the business. The offering of our shares on the AIM resulted in gross proceeds of $131.1million before fees and expenses. We sold approximately 35% of our equitycapital to new institutional investors principally in Europe. We sincerelyappreciate the support of our new shareholders and pledge to do our very best toachieve the goals and strategy we discussed during the IPO process. The consolidated financial performance of the Company for the period ending 30June 2005 was sound with loss before tax of $689 thousand. Gross revenues fromoil and oil product sales totalled $28 million and we finished the period with asolid and improving cash position of $8.9 million. EBITDA excludingextraordinary gains and foreign currency losses for the period was $5.997million. Although we do not have consolidated mid-year results from 2004 toprovide a comparison, we are encouraged by the results we achieved in the firsthalf of 2005. Group oil production for the first six months increased by approximately 3,250BOPD and averaged approximately 5,600 BOPD including our most recentacquisition, ZAO Arcticneft. Excluding Arcticneft, production averagedapproximately 4,200 BOPD. We sell our crude oil into three principal markets, Russian domestic refineries,other CIS countries (the "Near Abroad"), and world export markets in Europe andthe Far East (the "Far Abroad"). We also sell refined products to localend-users on Sakhalin Island where we operate the island's only refinery. Forthe period, crude export prices realized by the group averaged $49.23 perbarrel, crude Near Abroad prices averaged $28.90 per barrel, domestic crudeprices averaged $21.36 per barrel, and domestic product prices averaged $48.43per barrel. The combined average price for crude oil and products net of thecost of transportation, export taxes, VAT and other levies, was approximately$27.80 per barrel. Prices in all three crude markets and the domestic productmarket since the end of June 2005 have continued to rise and we expect to reporta significant improvement in our netback prices at the end of the year based oncurrent market conditions. Operations ZAO Petrosakh Petrosakh's operations comprise integrated oil producing, processing, refiningand transportation facilities. The on-shore, producing field, Okruzhnoye, currently produces oil from 14 wells,and has two injection wells, one water and one gas injection. Five wells areflowing producers and nine are produced with gas-lift. For the six months endedJune 2005, the field's average daily oil production was 2,388 BOPD. Oil qualityis light, sweet crude with a gravity of approximately 36degrees API (0.84 g/cm3), sulphur content of 0.28% and produced water of 3%. At Petrosakh, we initiated a 14 well development drilling program for theOkruzhnoye Field and completed the first well, No. 43, during early September.The well encountered two pay zones in the Pileng horizon. The upper Pileng payzone is approximately 136 meters in gross thickness, and the lower pay zone is137 meters thick with evidence of improved reservoir characteristics as comparedto prior wells. The lower Pileng pay zone only was perforated on September 3-6and is flowing at approximately 360 barrels per day. The bottom six meters ofthe upper Pileng zone is currently being perforated and incremental productionis anticipated from this zone. The flow rate from the lower Pileng zone of 360BOPD is consistent with the total well rate assumed by our independentengineers, DeGolyer and MacNaughton, in its evaluation of the Okruzhnoye Fieldfor Pileng development wells, i.e. Well No. 43. The second well in our Okruzhnoye Field development drilling program, Well No.44, has also now been drilled to a total depth of 1,856 meters. The wellencountered the Pileng producing horizon at a depth of approximately 1,546meters and based on wireline electric logs appears to be oil bearing from 1,554to 1,740 meters for a gross oil column of 186 meters. Preparations for wellperforating and testing have begun. After completion of Well No. 44, further development drilling of the OkruzhnoyeField will now be deferred until we have completed the acquisition andinterpretation of an onshore 3D seismic program which is scheduled to beginshooting over the Okruzhnoye Field in November 2005. We have also decided toupgrade and convert Petrosakh's Gregory Wilson 120T workover rig for use as adrilling rig for future development wells. This rig conversion should result insignificant cost savings over the life of the program. We have initiated thepurchase of the necessary equipment and expect development drilling tore-commence in the second quarter of 2006. In addition, we are working toevaluate the potential effects of fracture stimulation of the Pileng and Borskyformations. Another important project for Petrosakh now underway is the mobilization ofdrilling equipment for the exploration of the Pogranichny Block offshoreSakhalin Island. We have modified our plans to include two drilling rigs, theDeutag T-2000 rig and a local Russian rig owned by a Sakhalin-based drillingcontractor. This second rig is now being upgraded with improved mud cleaningequipment, new diesel engines and cement pumps. With this rig, we intend todrill two wells to test the East Okruzhnoye prospect which DeGolyer andMacNaughton estimates contains unrisked potential resources of approximately 49million barrels of oil. By using an upgraded Russian rig, we expect to reducemobilization and drilling times and cut well drilling costs significantly.Mobilization of the rig to location will start by 1 October 2005 and the firstwell is scheduled to spud by early December 2005. The Deutag T-2000 rig is now being mobilized to Sakhalin Island. Approximately70%of the 165 rail cars carrying the rig components are now enroute by railroador already at the Port of Vostochny on the Pacific Coast of Russia. From PortVostochny, the rig will be shipped by barge and ferry to Sakhalin Island and theOkruzhnoye Field site. First deliveries are expected in mid-October 2005 andmobilization of the T-2000 should be completed by mid-November 2005. The T-2000will be used first to drill the Vitnitskaya prospect from a well-siteapproximately 40 kilometres south of the Okruzhnoye Field. Petrosakh hascompleted about 80% of a 40 kilometre temporary road with bridge crossings alongthe coastline to the drilling location. DeGolyer and MacNaughton estimate theVitnitskaya prospect contains unrisked potential resources of approximately 51million barrels. Drilling this prospect requires a large land rig like theT-2000. The Vitnitskaya prospect is located approximately 3.5 kilometres fromthe shoreline and total measured depth for the well is expected to beapproximately 5,000 meters. Depending on the results of the Pogranichny Blockexploration program, and following the drilling of the Vitnitskaya prospect, weintend to move the T-2000 north to a position approximately 15 kilometres southof the Okruzhnoye Field to test the Severo Rymnikskaya prospect. This prospecthas a DeGolyer and MacNaughton estimated unrisked potential resource ofapproximately 196 million barrels. The advantages of adding a second rig to our exploration program include overallcost savings, the assurance that we can meet our license drilling requirements,and deploying our equipment where it is best utilized. The logistics ofmobilizing the T-2000 rig have been a challenge for both us and our contractors.Our project team's performance has been superb and we fully expect to deliverthe rig in time for this year's drilling season. Chepetskoye NGDU ZAO Chepetskoye NGDU was created in 1993 as a stand-alone production company forthe purpose of developing three discovered fields in the Northwestern area ofthe Udmurtia Republic, Nefedovskoye, Zotovskoye and Potapovskoye. Developmentactivities began for these three fields in 2000. On 4 October 2004, the Companyacquired a 100% interest in Chepetskoye from one of its principal shareholders. For the six months ended June 2005, Chepetskoye's average daily oil productionwas 846 BOPD. Oil quality produced is a sweet crude with a gravity ofapproximately 29 API. At Chepetskoye NGDU, the 2005 drilling program for the Nefedovskoye Field wasfinished on time and under budget resulting in new oil production ofapproximately 361 BOPD. Acquisition of the 3D seismic program for thePotapovskoye Field is underway and should be completed by the end of the year.Following the interpretation of the 3D program, development drilling of thePotapovskoye Field is scheduled to begin in the second quarter 2006. ZAO Arcticneft At ZAO Arcticneft, we have moved quickly to integrate this new acquisition intoUrals Energy. Shortly after closing the deal, we installed new management atArcticneft and secured control over operations at both the administrative officein Murmansk and the oilfield located on Kolguyev Island in the Barents Sea. Oneof our first actions was to evaluate the power supply for the field and workcamp and order a two megawatt Caterpillar gas-electric generator set so thatArcticneft can cease burning refined diesel products. The generator is expectedto arrive in November. We are moving forward with a workforce rationalization at Arcticneft tostreamline the organization and reduce costs. This reduction in force isexpected to be completed by the end of the third quarter. We are planning to boost production at the Peschanoozerskoye Field through acombination of improved pressure maintenance, artificial lift installation, wellworkovers, development drilling and, eventually, fracture stimulation.Artificial lift equipment for six wells has been purchased and is being shippedto Kolguyev Island. Prior to the commencement of our drilling program, we planto complete a comprehensive geologic model and reservoir study of the field tohigh grade development well locations. We expect the drilling program tocommence early in the third quarter next year. As was disclosed during the IPO process, we entered a settlement agreement withOOO Start to resolve certain outstanding litigation and the return of propertyof Arcticneft. All payments under this agreement have been made and the finalcourt orders are now being executed by the relevant government agencies. New Acquisitions & Corporate Finance We have used some of the proceeds of the IPO to pay down certain debt anddeferred acquisition payments resulting in a net debt reduction of $46.5million. Total group debt has consequently been reduced to $26 million. Tomaintain balance sheet flexibility and ensure we have adequate financialcapacity for future acquisitions, we are continuing negotiations with lendersfor a stand-by corporate revolving debt facility. We expect this to be in placeby the end of the year. The Russian and CIS M&A marketplace continues to be very active, and assets thatwould have a meaningful impact to Urals Energy are continuing to becomeavailable. We are evaluating several such opportunities and intend to pursuethose that meet our investment criteria. Corporate As our Chairman has announced separately, we are very pleased that CharlesPitman has agreed to join the Board of Directors. Charles is a highlyexperienced oil executive with an international reputation and adds considerabledepth to the board. He is the former President and Chairman of Amoco EurasiaPetroleum Company, and Regional President - BP Amoco Caspian/Middle East/Egypt/India. Today, Charles also serves as a member of the board of directors ofApache Corporation. We have significantly strengthened our senior management team since the IPO. Twoof our most important appointments are Henry A. Wolski as Senior Vice President- Exploration & Production and Grigory B. Kazakov as Vice President - Finance &Accounting. Henry Wolski has 14 years operating experience in Russia and Kazakhstan andspeaks fluent Russian. Most recently he was responsible for operations withPetroKazakhstan. He is well-prepared to manage our very active drilling andproduction operations. Since his arrival in July, he has enhanced our existingoperating group with several new managers with whom he has worked before and whocollectively represent the kind of professionals we seek: Russians with trainingand skills that meet international standards. Grigory Kazakov is a CPA with several years of experience at both YUKOS andPricewaterhouseCoopers responsible for accounting functions, systemsimplementation and transaction services. Grigory is leading the effort toupgrade our accounting and management reporting systems and provide world-classMIS capabilities for our Russian activities. While ensuring that we continue to create a highly skilled and appropriatelyresourced management team, we continue to focus on strict control of G&A costs.Stephen Buscher, Senior Vice President and CFO, will report on our progress onmanaging G&A costs at the end of the year. As we move forward from our IPO, the outlook for Urals Energy and itsshareholders is very positive with development activities proceeding as plannedand an exciting exploration drilling campaign now in preparation on SakhalinIsland. Our balance sheet is strong and production and cash flow are increasing.We have excellent assets and an outstanding management team - together they makeus unique and should create long term growth and value for our shareholders. William R. ThomasChief Executive Officer 23 September 2005 Urals Energy Public Company Limited Management's Discussion and Analysis of Results of Operations for the Six Months Ended June 30, 2005 The following management discussion and analysis of operations and financialresults for Urals Energy should be read in conjunction with the unauditedinterim consolidated financial statements for the first six months ended June30, 2005. The information contained herein is derived from the managementstatements prepared in accordance with International Financial ReportingStandards and International Accounting Standard No. 34, Interim FinancialReporting. Key methods of our financial reporting are described within the notesaccompanying the financial statements. There are certain forward lookingstatements contained herein, however investors are warned that actual resultsmay differ. Overview Activities Urals Energy and its subsidiaries (the ''Group'') are primarily engaged in oiland gas exploration and production in the Russian Federation and processing ofcrude oil for distribution on both the Russian and international markets. Urals Energy Holdings Limited (''Urals Energy'', or the ''Company'') wasincorporated as a limited liability company in Cyprus on 10 November 2003. TheCompany was formed to act as a holding company for the shareholders' investmentsin the Russian oil and gas exploration and production sector. The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34,CY-1066, Nicosia, Cyprus. In July 2005, the Company changed its name to Urals Energy Public CompanyLimited. At 30 June 2005, the Group employed approximately 585 people, and comprised thefollowing subsidiaries: Entity Nature Jurisdiction Economic interest at 30 June 2005ZAO Petrosakh Exploration & Sakhalin 97.2% productionOOO CNPSEI Exploration & Komi 100.0% productionZAO Chepetskoye Exploration & Udmurtia 100.0%NGDU productionOOO Urals Energy Management Moscow 100.0% OOO Urals-Nord Exploration Nenetsky 100.0% Urals Energy (UK) Corporate Services UK 100.0%Limited Operations of Group Subsidiaries ZAO Petrosakh Petrosakh was founded in 1991 as a Russian-U.S. joint venture to develop theOkruzhnoye field on the Eastern coast of Sakhalin Island. In 1993 andsubsequently in 1997, Petrosakh was licensed to produce oil from the Okruzhnoyefield for a period of 20 years. The Administration of Sakhalin Oblast currently controls a 2.84% minorityownership interest in Petrosakh which is held by its wholly-owned subsidiary,Sakhalin Oil Company. The Company acquired full control of the other 97.16%ownership interest in Petrosakh on 19 November 2004 from Alfa Eco. As part ofthe agreement to acquire Petrosakh, the Company agreed to pay to the seller,Alfa, a perpetual royalty payment for any commercial quantities of oil producedand landed from the currently non-producing offshore areas covered by thelicense for the Pogranichniy Block equal to $0.25 per tonne ($0.03 per barrel). Petrosakh's operations comprise integrated oil producing, processing, refiningand transportation facilities. Most production facilities and equipment wereimported from the United States and Canada. Petrosakh also has a rail terminalfacility at Pervomaisk and its operational centre is located at the Okruzhnoyefield site. Oil is transported by infield pipelines to a central processingplant with a capacity of 8,200 BOPD. Following processing, oil is either sent toexport oil storage tanks or to Petrosakh's refinery directly adjacent to theprocessing plant. Crude oil is exported by means of a pipeline which runs from the export tankfarm to the sea bed and marine loading facility located approximately half akilometre offshore. Marine exports from the Okruznhoye field site are seasonaldepending on the presence of pack-ice which accumulates during the wintermonths. The typical navigation season is June through November. The refinery has a capacity of 4,100 BOPD of diesel, gasoline, kerosene and fueloil (mazut). It was originally designed and built by Russell Industries Inc. ofTulsa, Oklahoma and then re-constructed at the Okruzhnoye field site with HudsonEngineering of Houston, Texas as primary contractor. To transport refined products for sale to local markets, Petrosakh owns a fleetof 12 tanker trucks and a gravel-surfaced road that connects Okruzhnoye to thePervomaisk rail terminal. At Pervomaisk, Petrosakh has a tank farm with productstorage of 5,000 barrels, and rail loading racks to transfer products ontorailcars for shipment to its customers, primarily located in Yuzhno-Sakhalinsk. The on-shore, producing field, Okruzhnoye, currently produces oil from 14 wells,and has two injection wells, one water and one gas injection. Five wells areflowing producers and nine are produced with gas-lift. For the six months endedJune 2005, the field's average daily oil production was 2,388 BOPD. Oil qualityis light, sweet crude with a gravity of approximately 36degrees API (0.84 g/cm3), sulphur content of 0.28% and produced water of 3%. ZAO Chepetskoye NGDU ZAO Chepetskoye NGDU was created in 1993 as a stand-alone production company forthe purpose of developing three discovered fields in the Northwestern area ofthe Udmurtia Republic, Nefedovskoye, Zotovskoye and Potapovskoye. Developmentactivities began for these three fields in 2000. On 4 October 2004, the Companyacquired a 100% interest in Chepetskoye NGDU from one of its principalshareholders. For the six months ended June 2005, Chepetskoye NGDU's average daily oilproduction was 846 BOPD. Oil quality produced is a sweet crude with a gravity ofapproximately 29 API. Because Chepetskoye sells its oil into the Transneftsystem, all sales volumes are effectively considered as Urals Blend orapproximately 32.8 API. For the six months ended 30 June 2005, the Nefedovskoyefield produced at an average rate of 292 BOPD from 11 producing wells. SinceJanuary 2005, three wells have been re-perforated and three new developmentwells drilled, producing at a sustained rate of between 100 to 150 BOPD and costan average of approximately $400,000. The field's daily production has increasedto approximately 550 BOPD as of 30 June 2005. For the six months ended 30 June2005, the Zotovskoye field produced at an average rate of 520 BOPD from 13producing wells. The Company does not have any plans for further developmentdrilling at this time. Only one well is currently producing at the Potapovskoyefield, and for the six months ended 30 June 2005, produced at an average rate of33 BOPD. The Potapovskoye field has significant undeveloped potential and theCompany estimates that a development drilling programme could increasePotapovskoye field production to a peak rate of approximately 3,000 BOPD by2010. Chepetskoye sells its oil into three primary markets as directed by theCompany's marketing coordinator in Moscow: domestic Russian refineries (Moscowand Ryazan refineries), near-abroad countries (Belarus and Ukraine) and exportdestinations (far-abroad) such as Germany and the Black Sea. For 2004,approximately 55% was sold domestically, 10% to near-abroad destinations, and35% to export markets. OOO CNPSEI OOO CNPSEI was formed in 1990 and is headquartered in Ukhta, Komi Republic,approximately 750 kilometers northeast of Moscow. Its two subsoil licenses werere-issued in 2002 for the Yuzhno-Tebukskoye and the Sosnovskoye fields. Urals Energy acquired control over 100% of the stock of CNPSEI in October 2004.Management of the Company has substantial operational experience in the KomiRepublic and is confident that further opportunities to expand in the regionwill become available to complement its operations at CNPSEI. For the six months ended June 2005, CNPSEI's average daily oil production was1,015 BOPD. Oil produced is a sweet crude with a gravity of approximately 35API. Because CNPSEI sells its oil into the Transneft system, all sales volumesare effectively considered as Urals Blend or approximately 32.8 API. CNPSEI sells its oil into three primary markets: domestic Russian refineries(Moscow and Ryazan refineries), near-abroad countries (Belarus and Ukraine) andexport destinations (far-abroad) such as Germany and the Black Sea. For 2004,approximately 55% was sold domestically, approximately 10% to near-abroaddestinations, and approximately 35% to export markets. The Company controls themarketing of oil from CNPSEI as part of its overall oil marketing programme fromthe central office in Moscow in order to achieve the highest available price. The Company believes the Yuzhno-Tebukskoye field to be fully developed and isworking to improve production and recovery factors by optimising the placementand stroke rate of downhole pumping units and maximizing water injection rates.For the six months ended 30 June 2005, the field produced an average rate ofapproximately 600 BOPD. For the six months ended 30 June 2005, the Sosnovsky field produced at anaverage rate of approximately 415 BOPD. The Company believes the field to bedeveloped fully and is working to improve production and recovery factors byoptimising the placement and stroke rate of downhole pumping units, andmaximizing water injection rates. The Company's goal through such methods is tomaximise current oil production rates and to increase the overall recoveryfactor, thereby increasing the value of the field. OOO Urals Nord Urals Nord is a Russian limited liability company that holds geological studylicenses to five blocks in the Northern part of the Timan Pechora Basin:Alfinsky, Nadezhdinsy, West Sorokin, Fakel and Belugin. The Company acquired100% of OOO Urals Nord via two separate acquisitions of 50% in March and April2005. The Company is currently processing and evaluating seismic surveys to determineits future exploration programme. A significant amount of 2D seismic data isavailable over all blocks. In 2004, the Company re-processed and re-interpreteda total of 490 kilometres of existing 2D seismic over the Alfinsky block. Basedupon the re-mapping of the structure a quantitative risk analysis and resourcepotential calculation is being conducted. During February 2005, 198 kilometres of new 2D seismic was acquired over theNadezhdinsky block. Structure maps are expected to be completed in early summerwhich will be used to carry out a risk assessment with the view to drilling anexploration well in 2006. Production and Sales Urals Energy's financial position is dependent on oil prices, both internationalwhere most of the Group production is sold and to a lesser extent domestic andthe Company's ability to produce and sell oil. Export prices realized by theGroup averaged $49.23 per barrel in the first half of 2005. Near abroad crudeprices realized by the Company averaged $28.90 per barrel for the first half ofthe 2005, while domestic crude averaged $21.36. Domestic refined product pricesaveraged $48.43 per barrel for the same period. Production of barrels of crude oil by production company for the first sixmonths ended 30 June 2005 were: Entity Production (Bbls)Petrosakh 432,158CNPSEI 183,230Chepetskoye NGDU 153,950 Volumes of refined products at Petrosakh, revenues and prices recieved perbarrel for the first months ended 30 June 2005 were: Sales Volumes Revenues Revenues (Bbls) ($ thousands) ($/Bbls)Fuel Oil 75,375 1,617 21.46Diesel 22,950 1,458 63.54Kerosene 24,000 1,214 50.57Gasoline H-80 16,050 936 58.31Gasoline B-1 4,350 213 48.98Gasoline B-2 9,900 501 50.59 Sales of oil and oil products for the first six months of 2005 in thousands ofbarrels were: Entity Crude Crude Near Crude Products Crude and Export Abroad Domestic Domestic Product TotalPetrosakh 210.2 - 23.0 152.6 385.8CNPSEI 70.1 5.8 105.2 - 181.1CNGDU 54.6 7.3 88.6 - 150.5Total 334.9 13.1 216.7 152.6 717.4 Oil and oil products gross revenues for the first six months of 2005 in $thousands were: Entity Crude Crude Crude Products All Crude Export Near Abroad Domestic Domestic and ProductPetrosakh 11,050 - 744 7,391 19,186CNPSEI 3,023 162 2,073 - 5,259CNGDU 2,416 218 1,812 - 4,445Total 16,489 380 4,629 7,391 28,889 Oil and oil products average gross revenues per barrel for the first six monthsof 2005 were: Entity Crude Crude Near Crude Products All Crude Export Abroad Domestic Domestic and ProductPetrosakh 52.56 - 32.42 48.43 49.73CNPSEI 43.14 27.77 19.71 - 29.04CNGDU 44.25 29.79 20.45 - 29.54Total 49.23 28.90 21.36 48.43 40.27 Oil and oil products average net-backs per barrel for the first six months of2005 were: Entity Crude Crude Near Crude Products All Crude Export Abroad Domestic Domestic and ProductPetrosakh 33.57 - 25.41 34.95 33.63CNPSEI 27.26 26.04 16.70 - 29.04CNGDU 27.51 16.18 17.33 - 29.54Total 31.26 20.56 17.88 34.95 27.81 Financial Performance for the Six Months Ending June 2005 Investments in Operations For the period, the Company had gross revenues of $28.0 million, and netrevenues of $22.0 million. The gross margin, net revenues minus the cost ofproduction, was $8.4 million, or 38.3% of net revenues. Earnings beforeinterest, corporate income taxes, depreciation, depletion and amortisationexpenses (adjusted for extraordinary gains and foreign currency loss) was $6.0million, or 27.3% of net revenues. Operating income was $2.2 million, 10% of netrevenues, resulting in a loss before taxes of $689 thousand. The net loss forthe period was $1.1 million. For the period, the company had negative cash flow from operations of $14million plus an additional cost of $1.7 million for interest and taxes,resulting in a net cash flow used in operations of negative $15.7 million. Thenegative cash flow from operations was primarily due to a working capitalmismatch of revenues with cash payments in Petrosakh of $12 million andseasonality in Petrosakh which resulted in an increase in crude oil inventory at30 June 2005 of $ 1 million. The remainder relates to changes in prepaidexpenses, accounts payable and other. Net capital expenditures during the period amounted to $4.3 million and wereprimarily related to the development work at Petrosakh and Chepetskoye. Acquisitions Expenditures for acquisitions, excluding interest charged to deferred payments,amounted to $14.4 million, related to the Petrosakh, Urals Nord and Arctineftacquisitions. The Company agreed to acquire 97.16% of Petrosakh on 19 November 2004. As partof the sale-purchase agreement the Company agreed to certain deferred paymentobligations including a deferred payment for the purchase of shares for $9.9million and the guarantee of loans from the seller to Petrosakh of $11.1million. On 27 April the Company paid $6 million, and on 31 May the Company paid$3.9 million and with that payment satisfied all remaining obligations to thesellers. On 28 March the Company acquired 50% of the participation interests in OOO UralsNord from an affiliate of one of the shareholders as part of the contribution bysuch shareholder to the equity of the Company pursuant to a shareholdersagreement dated 28 July 2004. On 25 April the Company acquired the remaining 50%interest in OOO Urals Nord from certain third parties for an agreedconsideration of $14.9 million payable in cash by 27 October 2005. $1.5 millionwas paid toward this purchase on 6 June, and the remaining amount was paid intwo tranches of $9.5 and $3 million on 23 August 2005 and 2 September 2005,respectively. The Group incurred $837 thousand of additional cost due to seismicinterpretation work of the reserves. Urals Nord holds five exploration licensesfor Beluginisky, Zapadno-Sorokinskiy, Fakelniy, Nadezhdinskiy and Alfinskiy oilfields. The Company, OAO Arkhangelskgeoldobycha and OOO LUKoilkaliningradmorneft enteredinto an agreement on 11 July 2005 for the acquisition of shares in Arcticneft bythe Company. In order to secure an exclusive right to this acquisition, theCompany entered into an agreement with LUKoil on 24 May, at which time it paidthe seller a deposit of $3.0 million. On 11 July, $16.5 million was paid to theseller. On 25 August an additional $10.3 million was paid into Arcticneft torefinance its indebtedness to LUKoil. A final payment of $7.2 million must berepaid on or before 1 October. Liquidity and Capital Resources The net figure of negative $34.7 million from net cash flow from operationscombined with capex plus cash paid in support of acquisitions was offset byincreased borrowings of $32.0 million and cash received for the sale of equityin the amount of $18.4 million. In March Chepetskoye NGDU and CNPSEI borrowed a combined $12.0 million from BankZenit. The loan is a 5-year bullet amortization loan secured against certainphysical assets of Chepetskoye NGDU and CNPSEI. In June ZAO Petrosakh borrowedan additional $20.0 million from BNP Paribas. The loan matures on December 31,2006, and is a pre-payment secured against the export receipts of ZAO Petrosakh. In May the Company issued 23,585 shares to Nafta (B) NV for a totalconsideration of $25 million. The share issuance was settled with a cashcontribution of $18,4 million and a conversion of $6,6 million in existing debtof the Company to Nafta (B) NV. Taxes The Company pays a variety of taxes, these include export duties, excise taxes,unified production taxes, VAT, Pension, Federal Income and Others. For the firstsix months ended 30 June 2005, the taxes paid and accrued in $ thousands were: Tax Item Accrued First 6 Months Paid First 6 Months 2005 2005Export Duties 6,047 6,047Excise Tax 321 388Value Added Tax 1,834 1,850Unified Petroleum Tax 5,588 5,357Pension Fund, Other Social 467 436Other 201 429Federal Income 895 317TOTAL TAXES 15,353 14,824 Export duties are set according to a regressive tax schedule and applied to theexport of all crude oil. For the first six months, the average export duties forthe Company was 36.7%. Excise taxes on domestic refined products sold averaged4.35%. Accrued income tax expenses for the period are primarily due to incometax accrued at Petrosakh and Chepetskoye NGDU on standalone bases. The effectivetax rate for those entities is a result of the application of the RussianFederal statutory income tax rate of 24%. However, due to the consolidation ofother entities having net losses in their individual accounts, plus additionalaccrual of expenses related to purchase accounting (primarily revaluing of oiland gas properties to fair value, resulting in additional depletion charges tothe income statement), there was a loss before taxes. Therefore, for the periodthere exists a positive accrual of federal income taxes applied to a net lossbefore tax figure. 23 September 2005 CONSOLIDATED BALANCE SHEET AT (unaudited) in US $ thousands 30 June 31 December 2005 2004 Cash and cash equivalents 8,897 1,421Accounts receivable and prepayments 15,563 3,706Inventories 3,511 2,247TOTAL CURRENT ASSETS 27,971 7,374 Property, plant and equipment 114,210 100,622Other non-current assets 4,254 292TOTAL NON-CURRENT ASSETS 118,464 100,914TOTAL ASSETS 146,435 108,288 Accounts payable and accrued expenses 2,389 3,019Taxes payable 2,446 1,917Short-term borrowings and current portion 20,776 38,815of finance lease obligationsAdvances from customers 135 5,102Amounts due for acquisition of 12,460 9,899subsidiariesTOTAL CURRENT LIABILITIES 38,206 58,752 Long-term finance lease obligations and 25,446 1,556borrowingDismantlement provision 920 950Deferred tax liability 17,961 17,751TOTAL LONG TERM LIABILITIES 44,327 20,257TOTAL LIABILITIES 82,533 79,009 TOTAL EQUITY 63,902 29,279TOTAL EQUITY AND LIABILITIES 146,435 108,288 Appoved on behalf of the Board of Directors on 23 September 2005 William R. Thomas Stephen M. BuscherChief Executive Officer Chief Financial Officer CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) in US $ thousands 1 January to 30 June 2005 RevenuesGross revenues 28,002Less: excise taxes and export duties (6,047)Net revenues 21,955 Operating CostCost of production (13,544)Selling expenses (1,966)General and administration expenses (4,238)Operating result 2,207 Finance costs (2,727)Foreign currency losses, net (192)Other non-operating gains, net 23Result before tax and minority interests (689) Income tax (charge)/benefit (456) Net result (1,145)Attributable to minority shareholders 77Attributable to Group shareholders (1,222)Earnings per share (USD)- basic (0.02)Diluted earnings per share (USD) (0.02) CONSOLIDATED STATEMENT OF CASH FLOW (unaudited)in US $ thousands 1 January to 30 June 2005Cash flow from operating activitiesResult before tax and minority interest (689) Total Adjustments 4,724Operating cash flow before changes in 4,035working capital Changes in working capital (18,031)Cash flow from/(used in) operations (13,996) Interest paid (1,377)Income tax paid (297)Net Cash flow used in operating activities (15,670) Cash flow used for investmentsAcquisition of subsidiaries (4,500)Purchase of property, plant and equipment (4,348)Net Cash Inflow/ (Outflow) from Investing (8,848)Activities Cash flow from financing activitiesProceeds from loans 35,001Repayment of loans (30,053)Proceeds from issuance of ordinary shares 26,215Contributions from shareholders 881Net Cash Inflow from Financing Activities 32,044 Effect of exchange rate changes (50)Net increase in cash and cash equivalents 7,476Cash and cash equivalents at beginning of 1,421the periodCash and cash equivalents at end of the 8,897period CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited) Attributable to shareholders of the Group Minority Interestin US$ thousands Note Share Share Unpaid Translation Accumulated Total capital premium capital difference deficit equityAt 31 December 209 42,172 (11,324) 1,236 (4,341) 1,327 29,2792004Issue of shares 5 50 24,950 25,000Contribution from 11,324 11,324shareholdersTranslation (511) (45) (556)difference for theperiodNet result for the (1,222) 77 (1,145)period 1 January2005-30 June 2005At 30 June 2005 259 67,122 0 725 (5,563) 1,359 63,902 NOTES TO THE INTERIM FINANCIAL INFORMATION (unaudited) Note 1 Urals Energy Public Company Limited (''Urals Energy'', or the ''Company'') wasincorporated as a limited liability company in Cyprus on 9 November 2003. TheCompany was formed to act as a holding company for the shareholders' investmentsin the Russian oil and gas exploration and production sector. Pursuant to aShareholder Agreement dated 28 July 2004, the Shareholders contributed certainassets including ZAO Chepetskoye NGDU to the Company. On 26 October 2004, theCompany acquired OOO CNPSEI and on 19 November 2004, acquired ZAO Petrosakh. InApril 2005, the Company acquired the remaining 50 percent of OOO Urals Nord. InJuly 2005, the Company completed the acquisition of ZAO Arcticneft. On 9 August 2005, the Company completed an initial public offering on the LondonAlternative Investment Market (AIM). Urals Energy and its subsidiaries (the ''Group'') are primarily engaged in oiland gas exploration and production in the Russian Federation and processing ofcrude oil for distribution on both the Russian and international markets. At 31December 2004, the Group employed approximately 585 people. The Group comprises of the following subsidiaries: Entity Nature Jurisdiction Economic interest at 30 June 2005ZAO Petrosakh Exploration & Sakhalin 97.2% productionOOO CNPSEI Exploration & Komi 100.0% productionZAO Chepetskoye Exploration & Udmurtia 100.0%NGDU productionOOO Urals Energy Management Moscow 100.0% OOO Urals-Nord Exploration Nenetsky 100.0% Urals Energy (UK) Corporate Services UK 100.0%Limited Note 2 The nature of business operations The Group's largest producing subsidiary, ZAO Petrosakh, operates on SakhalinIsland and is not connected to the State owned pipeline monopoly - Transneft,and accordingly, the majority of its production is exported by tanker. Due tosevere weather conditions, shipping tankers can only load during the period ofJune through early November. Outside this period, oil is either stored orprocessed and sold on the local market. During the period under review Petrosakhhad produced 56 thousand tons of crude oil and sold only 29 thousand tons ofcrude oil in late June 2005. The remaining crude oil will be shipped during thesecond half of the year. 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 2004 prepared in accordance withInternational Financial Reporting Standards ("IFRS"). The 31 December 2004consolidated balance sheet data has been derived from audited financialstatements. 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 and liabilities at thedate of the financial statements preparation and the reported amounts of assets,liabilities, revenues and expenses, and the disclosure of contingent assets andliabilities during the reporting period. Estimates have principally been made inrespect to fair values of assets and liabilities, impairment provisions anddeferred income taxes. Actual results may differ from such estimates. Exchange rates, restrictions and controls. The United States Dollar (''US dollaror US$'') is the presentation currency for the Company's operations as themajority of the Company's operations is conducted in US dollars and managementhave used the US dollar accounts to manage the Company's financial risks andexposures, and to measure its performance. Financial statements of the Russiansubsidiaries are measured in Russian Roubles and presented in US dollars inaccordance with SIC 30 ''Reporting currency-Translation of Measurement Currencyto Presentation Currency''. Balance sheet items denominated in foreigncurrencies have been remeasured using the exchange rate at the respectivebalance sheet date. Exchange gains and losses resulting from foreign currencytranslation are included in the determination of net income or loss. The USdollar to Russian Rouble exchange rates were 28.67 and 27.75 as of 30 June 2005and 31 December 2004, respectively. Comparative information for the first half of 2004 was not provided as theCompany was not operating at that time. Note 4 Accounting policies Except as discussed below, the principal accounting policies followed by theCompany are consistent with those disclosed in the financial statements for theyear ended 31 December 2004. New accounting developments. In December 2003, the International AccountingStandards Board ("IASB") released 15 revised International Accounting Standards("IAS"s) and withdrew one IAS standard. In 2004, the IASB published five newstandards, two revisions and two amendments to existing standards. In addition,the IFRIC issued six new interpretations in 2004. Significant changes relevantto the Group are discussed below. The revisions to IAS 1, Presentation of Financial Statements, clarify certainpresentation requirements. Most significantly, the revised standard requiresthat minority interest be presented within equity. The Company has retroactivelyreflected the revised presentation standard for equity in the consolidatedinterim condensed financial information. IAS 24, Related Party Disclosures, as revised, requires the disclosure ofcompensation of key management personnel and clarifies that such personnelinclude non-executive directors. Other revised and amended standards effective on 1 January 2005 are as follows:IAS 2, Inventories; IAS 8, Accounting Policies, Changes in Accounting Estimatesand Errors; IAS 10, Events after the Balance Sheet Date; IAS 16, Property, Plantand Equipment; IAS 17, Leases; IAS 19, Employee Benefits; IAS 21, The Effects ofChanges in Foreign Exchange Rates; IAS 27, Consolidated and Separate FinancialStatements; IAS 28, Investments in Associates; IAS 31, Investments in JointVentures; IAS 32, Financial Instruments: Disclosure and Presentation; IAS 33,Earnings per Share; IAS 36, Impairment of Assets; IAS 38, Intangible Assets: andIAS 39, Financial Instruments: Recognition and Measurement. The adoption ofthese revised and amended standards has not had a material effect on the Group'sfinancial position, statements of income or of cash flows. Accounting policies significant to the Group that were adopted or modified on 1January 2005 are discussed below. Business combinations. The Company accounts for business combinations inaccordance with the provisions of IFRS 3, Business Combinations ("IFRS 3"). IFRS3 applies to accounting for business combinations where the agreement date is onor after 31 March 2004. Upon acquisition, the Group initially measures both itsshare and the share of any minority shareholders in the acquiree's identifiableassets, liabilities and contingent liabilities at their fair values as at theacquisition date. For business combinations where the agreement date is on orafter 31 March 2004, goodwill is not amortized but rather tested for impairmentannually at the cash generating unit level unless an event occurs during theyear which requires the goodwill to be tested more frequently. Intangibles withindefinite useful lives acquired in those business combinations are notamortized and are tested annually for impairment to ensure the carrying valuedoes not exceed the recoverable amount regardless of whether an indicator ofimpairment is present. Non-current assets held for sale and discontinued operations. The Group accountsfor non-current assets held for sale and discontinued operations in accordancewith IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. IFRS5 replaced IAS 35, Discontinuing Operations. Assets or disposal groups that areclassified as held for sale are presented separately on the balance sheet andare carried at the lower of the carrying amount and fair value less costs tosell. Additionally, the results of discontinued operations are shown separatelyon the face of statement of income. On 1 January 2005, the Group early-adopted IFRS 6, Exploration for andEvaluation of Mineral Resources. This standard provides guidance on accountingfor costs incurred in the exploration for and evaluation of mineral resources.Adoption of the standard did not have a material effect on the Group and did notresult in changes of the Group's accounting policies. Note 5 Issue of shares Number of Share capital Share premium shares US$ thousands US$ thousandsAt 31 December 2004 40,000,000 209 42,172 Issuance of shares to Nafta 9,434,000 50 25,950B - 15 June 2005At 30 June 2005 49,434,000 259 67,122 Subsequent to 30 June 2005 Conversion of shareholder 3,650,480 19 9,654loans to equity - 2 August2005Placement under the initial 26,666,700 143 113,636public offering - 9 August2005Placement under RP Explorer 2,929,651 16 9,984Master Fund - 9 August 2005Placement under Green shoe 4,000,050 22 17,305arrangements - 17 August2005 At 23 September 2005 86,681,183 459 217,701 All share numbers are presented after the effect of a 1 for 400 share splitapproved on 18 July 2005. In June 2005, the Company issued 9,434,000 ordinaryshares to Nafta (B) NV, a company owned by one of the shareholders for totalconsideration of $ 25,000 thousand. The share issuance was settled with a cashcontribution of $ 18,380 thousand and conversion of $ 6,620 thousand in existingdebt of Nafta B. In July 2005, the Company entered into a convertible preferred note agreementwith RP Explorer Master Fund for up to $ 15.0 million. The Company has issued $ 10.0 million, 10.0 percent subordinated, unsecured ''A'' notes. The notes areissued at 100.0 percent and accrete daily up to 117.0 percent on maturity. On 9August 2005 these notes were converted into 2,929,651 ordinary shares at a 20.0percent discount to the IPO issue price. On 2 August 2005, the Company converted its loans with Radwood Business Inc.,Polaris Business Limited, Citara International Limited, Fantin Finance Limitedand Texas Oceanic Petroleum LLC (who collectively at 31 December 2004, provided$ 9.3 million, Libor plus 2.0 percent unsecured notes to the Company,) to3,650,480 ordinary shares. On 9 August 2005 the Company placed 26,667,000 new ordinary shares at an issueprice of 240 pence per share on an Alternative Investment Market operated by theLondon Stock Exchange ("AIM"). On 17 August 2005 Morgan Stanley Securities Limited, the Company's stabilisingmanager fully exercised the over-allotment option in the amount of 4,000,050 newshares. As a result of the exercise, the free float of shares in the Company hasincreased from 32% to 35% (upon the expiration of RP Capital's lock-up andorderly markets restriction, 39%) and the issued share capital of the Companyhas increased to a total of 86,681,183 shares. The gross proceeds of the placingnow total approximately $131 million. Note 6 Segment information The Group operates in one business segment which is crude oil exploration andproduction. The Group assesses its results of operations and makes its strategicand investment decisions based on the analysis of its profitability as a whole.The Group operates within one geographical segment, which is the RussianFederation. Note 7 Acquisition of subsidiaries On 25 April 2005, the Company acquired the remaining 50.0% interest in OOO UralsNord ("Urals Nord") for the total consideration of $14,837 thousand. On thatdate $1,500 thousand was paid immediately in cash and $12,500 thousand ispayable in October 2005. The Group incurred $837 thousand of additional costrelated to seismic review of the license areas. Urals Nord holds 5 explorationlicenses for Beluginisky, Zapadno-Sorokinskiy, Fakelniy, Nadezhdinskiy andAlfinskiy oil fields. Urals Nord has been consolidated from the date ofacquisition, the purchase price being assigned to unproved oil and gas propertyincluding in property, plant and equipment. Note 8 Pledged assets and changes in contingent liabilities The dismantlement provision represents the net present value of the estimatedfuture obligation for dismantlement, abandonment and site restoration costswhich are expected to be incurred at the end of the production lives of the oiland gas fields. The discount rate used to calculate the net present value of thedismantling liability was 13.0 percent. Environmental regulations and their enforcement are under development bygovernmental authorities. Consequently, the ultimate dismantlement, abandonmentand site restoration obligation may differ from the estimated amounts and thisdifference could be significant. Note 9 Cost of sales 1 January 2005 to 30 June 2005Unified production tax 5,588Depreciation and depletion 3,790Wages and salaries including payroll 2,270taxesMaterials 1,088Other taxes 416Exploration expense 251Other 662(Reverse)/ write down of inventories (521)Total cost of sales 13,544 Within the exploration expense line $251 thousand represents a write-off of thegeological and geophysical works performed by Chepetskoye in 2003 and 2004,which were recorded at 31 December 2004 in the books as a deferred expenseswithin the line "Non-current assets". Note 10 Borrowings and loans Short term loans Name of bank Borrower Interest rate Currency 30 June 31 December 2005 2004Related party loans UEPCL LIBOR +2% $ 12,300 27,493Current portion of Petrosakh 8.16% fixed 8,000 -long term debtAlfa Eco M Petrosakh 9.8% fixed RR - 10,993Current portion of Petrosakh 13% fixed RR 111 105finance leaseliabilityAccrued interest 365 224Total 20,776 38,815 Long term debt Name of bank Borrower Interest Maturity Currency 30 June 31 December rate date 2005 2004BNP Paribas Petrosakh 8.16% fixed December $ 20,000 - 2006Less current (8,000) -portion of BNPParibasZenit Chepetskoe 11% fixed March 2010 $ 10,000 - NGDUZenit CNPSEI 11% fixed March 2010 $ 2,000 -Long term finance Petrosakh 13% fixed 1,557 1,661lease liabilityLess current Petrosakh (111) (105)portion of leaseliabilityTotal 25,446 1,556 In June 2005, Petrosakh entered into an 18-month US$ denominated credit facilityfor US$ 20,000 thousand with ZAO BNP Paribas Bank to finance Petrosakh forcertain repayment of loans from Alfa-Eco M and fund working capital and variouscapital projects of Petrosakh. This variable interest debt facility bearsinterest at LIBOR plus 5.0 percent and is repayable through December 2006. Theloan is collateralised by pledge of Petrosakh shares to ZAO BNP Paribas Bank,assignment of crude oil export contract and a floating pledge over Petrosakh'scrude oil inventories. Further, the facilities contain cross default provisions.This facility is repayable with the proceeds of the committed export contracts.As of the date of release of this management statement, the remaining principalamount due under this loan is US$ 14.2 million. In March 2005, Chepetskoye NGDU obtained a US$ 10,000 thousand, 5-year USdollar, denominated, 11.0 percent fixed interest loan from OAO Bank Zenit andCNPSEI obtained a US$ 2,000 thousand, 5-year US dollar denominated 11.0 percentfixed loan from OAO Bank Zenit. The bank loans are for funding working capitaland certain capital projects. The loans are secured by liens on various assetsof these subsidiaries and the facilities contain cross default provisions. Note 11 Capital commitments Exploration licenses-investment commitmentsIn accordance with the Pogranichnoye off-shore license agreement, Petrosakh mustconduct certain exploratory work, which includes, but is not limited to,performing seismic prospecting and drilling two exploratory wells by February2006. Management currently estimate such expenditure to approximate $ 19,000thousand. In accordance with the Pogranichnoye on-shore license agreement, Petrosakh mustconduct exploratory works including drilling two exploration wells in 2007 and2008. Other capital commitmentsAt 30 June 2005, the Company had no other significant contractual commitmentsfor capital expenditures. Note 12 Related party transactions At 30 June 2005 the Group has received unsecured borrowings from shareholdersand companies controlled by shareholders at market rates. The loans formshareholders were received to purchase Petrosakh. Name of party Relationship 30 June 31 December Currency Interest Date of 2005 2004 rate repaymentNafta B NV Controlled by - 6,822 EURO 10% February 2005 shareholderNafta B NV Controlled by 3,000 - $ 10% August shareholder 2005 Radwood Business Shareholder 500 500 $ LIBOR plus AugustInc. 2% 2005 Polaris Business Shareholder 300 300 $ LIBOR plus AugustLimited 2% 2005 Citara International Shareholder 5,000 5,000 $ LIBOR plus AugustLimited 2% 2005 Fantin Finance Shareholder 3,000 3,000 $ LIBOR plus AugustLimited 2% 2005 Texas Oceanic Shareholder 500 1,500 $ LIBOR plus AugustPetroleum LLC 2% 2005 UEN Trading Ltd Controlled by - 8,660 $ 10-15% March-December shareholder 2005Other accounts Controlled by 848 1,381 $payable shareholderLoans payable 12,300 27,493Interest payable 365 117Other accounts 848payableTotal related party 13,513 27,610borrowings Nafta B NV loan at 30 June 2005 was repaid on 17 August 2005 and other loansfrom shareholders were converted into equity on 2 August 2005. The Nafta B NVloan at 31 December 2004 was converted to equity (see Note 5). Other transactions and balances with companies controlled by shareholders are asfollows: 30 June 31 December 2005 2004Balances with related partiesAccounts receivableLoans receivable 1,230 723Accounts payableOther payable and accrued expenses 61 61 Operations with related parties 1 January 2005 to 30 June 2005 Oil salesSales of crude oil 4,399Associated volumes, tons 13,580Selling, general and admin expensesInterest expense - net 559Management fees received 214Rental fees paid included in selling, general and 172administrative expense Note 13 Subsequent evenets On 29 July 2005 the Company made a deposit of $5.25 million to KCA Deutag tosecure the T-2000 rig. On 11 July 2005, the Company concluded the acquisition ofa 100.0 percent equity interest in ZAO Arcticneft from OAO LUKOil forapproximately $ 32.5 million. An advance of $ 3.0 million was paid on 24 May2005 (in accordance with the preliminary term sheet), $16.5 million was paid oncompletion and the remaining $13.0 million is payable before September 2005. Aspart of this acquisition, approximately $7.6 million in payables of Arcticneftto LUKoil must be repaid by October 2005. In addition, the Company reached anagreement to settle a dispute between ZAO Arcticneft and OOO Start, whereby theCompany will acquire certain operating assets from Start for $3.0 million, andStart will cease any litigation against Arcticneft. Arcticneft is an oil and gasexploration and production company located on the Kolguyev Island in theNenetsky autonomous region of northern Russia. Arcticneft operates thePeschanoozerskoye onshore oil field. During 2004, it produced 73,136 tons ofcrude oil. Management are currently reviewing their fair value allocations for thistransaction, and consequently believe it is not practicable to disclose suchbalances at this time. On 6 September 2005 the Company paid Petraco $10.0 million plus accrued interestto settle an outstanding loan. REVIEW REPORT OF THE AUDITORS To the Shareholders and Board of Directors of Urals Energy Public CompanyLimited 1. We have reviewed the accompanying condensed consolidated interim balancesheet of Urals Energy Public Company Limited and its subsidiaries(the "Group")as at 30 June 2005, and the related condensed consolidated interim statements ofoperations, cash flows and changes in equity for the six months then endedpresented on pages 13 through 24. This condensed consolidated interim financialinformation is the responsibility of the Group's management. Our responsibilityis to issue a report on this condensed consolidated interim financialinformation based on our review. 2. We conducted our review in accordance with the International Standard onReview Engagements 2400. This Standard requires that we plan and perform thereview to obtain moderate assurance about whether the condensed consolidatedinterim financial information is free of material misstatement. A review islimited primarily to inquiries of company personnel and analytical proceduresapplied to financial data and thus provides less assurance than an audit. Wehave not performed an audit and, accordingly, we do not express an auditopinion. 3. Based on our review, nothing has come to our attention that causes us tobelieve that the accompanying condensed consolidated interim financialinformation has not been properly prepared, in all material respects, inaccordance with International Accounting Standard 34 "Interim FinancialReporting". PricewaterhouseCoopersMoscow, Russian Federation23 September 2005 This information is provided by RNS The company news service from the London Stock Exchange