Urals Energy Plc Regulatory News (UEN)

28 Nov 2007 07:01

Urals Energy Public Company Limited28 November 2007 Urals Energy Public Company Limited ("Urals Energy" or the "Company") Acquisition of a Major Asset in East Siberia (the "Acquisition") Urals Energy (LSE: UEN), a leading independent exploration and productioncompany with operations in Russia, announces that it has agreed to acquire a35.3% interest in OOO Taas-Yuriakh Neftegazodobycha ("Taas") and has beengranted an option to increase such interest to 39.5% in January 2009. Taas is a privately-held Russian exploration and production company with oildevelopment operations in East Siberia with licences to develop two adjacentblocks of the Srednebotuobinskoye oil, gas and condensate field in the region(the "SRB field"). The SRB field is essentially undeveloped. Taas holds (1) anoil production licence for the central block of the SRB field (the "CentralBlock"); and (2) a licence for geological prospecting, exploration andproduction of hydrocarbons in the adjacent Kurungsky allotment in East Siberia(the "Southern Block"). As part of the Acquisition, OOO Urals Energy, theCompany's operating subsidiary in Russia, will become the operator for thedevelopment of the SRB field. Urals Energy also announces that it has secured a committed, non-recourse US$500million facility for the Acquisition (the "Acquisition Loan") and has secured,on behalf of Taas, an additional committed, non-recourse US$600 million facilityfor the development of the SRB field (the "Development Loan"), both from theSavings Bank of the Russian Federation ("Sberbank"), one of the largest banks inCentral and Eastern Europe. Unless otherwise explicitly stated, the financial and operating information,reserves estimates and production forecasts of the Company contained in thispress release assume the exercise of the option to increase the Company'sinterest in Taas to 39.5%. Acquisition Highlights • The Company has agreed to acquire a 35.3% interest in Taas and has been granted an option by Finfund Limited (the "Seller") to acquire a further 4.2% interest in Taas in January 2009. • This Acquisition more than doubles the Company's net proved-plus-probable (2P) oil reserves by adding up to net 272 mmbbl, of which 94 mmbbl are classified as proved (1P), based on a reserves study of the SRB field by Degolyer & MacNaughton ("D&M"). • The acquisition price comprises US$440 million in cash and US$100 million in new shares of the Company, payable on closing, and US$50 million, plus interest, in cash or new shares of the Company, at the Seller's election, payable within five months of closing. • The exercise price for the option to acquire a further 4.2% interest in Taas will be US$70 million, plus interest, in cash or shares of the Company, at the Seller's election. • OOO Urals Energy will become the operator for the development of the SRB field under an operating agreement, and a shareholder agreement will be entered into to formalise the relationship between the new and existing shareholders of Taas (together, the "Taas Shareholders"). • The Development Loan will largely fund the development of the SRB field until tie-in to the East Siberia Pacific Ocean pipeline (the "ESPO pipeline"), currently expected to be operational in late 2009. • With this Acquisition, the Company's net production from East Siberia is expected to be 75,000 bopd by 2013, comprising 45,000 bopd from the SRB field and 30,000 bopd from the Dulisminskoye field (the "Dulisma field"). • Concurrently with the Acquisition, certain funds managed by Ashmore Investment Management Limited ("Ashmore"), a third party unrelated to the Company, have agreed to purchase a 10.5% interest in Taas from the Seller for US$175 million, which is equivalent to the price per share in Taas paid by the Company. • Following the Acquisition, the purchase by Ashmore and assuming the exercise of the Company's option to acquire a further 4.2% of Taas, the current Taas Shareholders will retain a 50.1% interest in Taas. Rationale for the Acquisition • The Acquisition enhances the Company's portfolio through the addition of substantial, attractively priced, 2P oil reserves (34.6% of which are 1P). • The Company will benefit from economies of scale by adding to its existing presence in East Siberia and achieving a critical mass in the region. • The SRB field is well-positioned to access the ESPO pipeline, which opens East Siberia to markets in the Asia-Pacific region. A tie-in to the ESPO pipeline has been approved by Transneft and is expected to be operational by late 2009. • Under Russian tax legislation, the Central Block of the SRB field benefits from a mineral extraction tax exemption through 2016 and the Southern Block of the SRB field benefits from a mineral extraction tax exemption through 2021 or up to a cumulative total of 25 million tonnes of oil (183 mmbls) in respect of each Block. • The Company estimates that the present value of the tax exemption will produce savings to Taas of approximately US$1,078 million (or US$1.56 per 2P barrel), assuming the D&M production profile, the price of the Urals blend crude of US$50 per barrel and a 10% discount rate. • The Acquisition provides the Company with the opportunity to benefit from the upside of significant additional possible oil and gas reserves and resources in place at the SRB field and in the East Siberia region. Company Strategy • The Company plans to leverage its unique position in East Siberia by capitalising on potential licence opportunities and acquisitions of complementary assets. • The Company will focus on project management of greenfield developments using the economies of scale and critical mass in East Siberia that result from the Acquisition. • The Company will continue exploration activities in offshore and island properties while concurrently maximising the value from the adjacent developed fields in those areas. • The Company plans to streamline its portfolio by divesting non-core assets and has scaled back certain work programmes and budgets in non-core areas to focus on the aforementioned projects. Corporate and Outlook • The Company intends to raise additional financing of around US$130 million in the near term. It is intended that this will include an equity capital raising by way of a private placement, the proceeds of which the Company will use for potential capital expenditure requirements, including participation in future complementary licence auctions, repayment of short-term loans and for general corporate and working capital purposes. • The Company will shortly post to its shareholders a circular convening a shareholders meeting (the "EGM") to seek approval for various resolutions necessary to undertake the intended equity capital raising. These will include a resolution to approve a limited waiver of pre-emption rights. In connection with the EGM, certain existing shareholders of the Company, together accounting for approximately 37.2% of the Company's issued shares, have indicated to the Company that they intend to vote in favour of the resolutions to be put to the EGM. • The Company has continued to develop its existing portfolio with a particular emphasis on operations in East Siberia. • A solid foundation for future growth will be laid in 2008 with significant production increases planned for 2009 as core assets come on-stream and link into the ESPO pipeline. • The Company intends to seek a listing on the Official List of the London Stock Exchange in 2008. Leonid Y. Dyachenko, Chief Executive of the Company, commented: "Today's acquisition further illustrates the importance of East Siberia as amajor area of focus for Urals Energy. This acquisition of a substantial and highquality asset with proven high productivity and potential upside increases ouralready strong reserves base and has the potential to more than double ourexisting mid-term production target of 30,000 bopd. Overall, Urals Energy is in a strong position for future growth. With our newand strengthened management team, our strategic priority will be the effectiveand efficient development of our substantial resource base in Eastern Russia.With our Dulisma field and this acquisition, we have access to some of the mostattractive barrels in Russia due to the associated tax exemptions, high qualitycrude and access to the ESPO pipeline." A copy of the D&M report on the oil and gas reserves of Taas (the "D&M Report")can be found on the website of the Company (www.uralsenergy.com). An analyst conference call will be held at 9:30 am GMT at which time managementwill provide background to the announcement and answer questions. Dial indetails will be circulated to analysts during the course of the morning. 28 November 2007 Enquiries: Pelham PRGavin Davis +44 (0) 20 7743 6677 / +44 (0) 7910 104 660Evgeniy Chuikov +44 (0) 20 3008 5506 / +44 (0) 7894 608 606 Morgan StanleyAlastair Maxwell +44 (0) 20 7425 8000Jon Bathard-Smith +44 (0) 20 7425 8000 1. Taas Acquisition Overview The Company today announces that it has agreed to acquire from the Seller a35.3% interest in Taas and has been granted an option to acquire a further 4.2%interest in Taas in January 2009. As part of the acquisition, OOO Urals Energy, the Company's operating subsidiaryin Russia, will become the operator for the development of the SRB field underan operating agreement with Taas (the "Operating Agreement"). The Acquisition focuses the Company's activities on East Siberia and transformsthe Company in terms of scale and regional critical mass. It will serve tofurther anchor the Company's operations in the region and is complementary tothe Dulisma field, enabling synergies in the operation of these assets,including sharing of key specialists. The SRB field was discovered in 1970 and over 60 appraisal wells have beendrilled, which prove significant reserves and provide important information withrespect to drilling costs and well productivity. These appraisal wells provideTaas and the Company with a thorough understanding of the underlying reservoirand substantially reduce the geological and reserves risk that is typicallyassociated with greenfield development. According to D&M, as of 31 March 2007, the SRB field had proved-plus-probable(2P) gross oil reserves of 690 mmbbl and 286 mmbbl of possible reserves and abest estimate of gross contingent resources of 47 mmbbl. The Company has alreadyidentified several potential additional upsides associated with the SRB field,including substantial gas reserves (licences to which Taas may obtain atlicensing auctions or amending existing licences to obtain gas rights), furtherdevelopment of the previously untapped Osinsky reservoir within the Taas licencearea and adjacent licence blocks, which are expected to become available atauctions in the future. The Company aims to connect to the ESPO pipeline in late 2009 and achieve peakproduction by 2013. Taas has already received Transneft approval to tie-in tothe ESPO pipeline near Lensk, located approximately 170 kilometres away from theSRB field. The Company and Taas will progress ongoing design work based on earlierconceptual plans to finalise a development plan for the SRB field. Ongoingreservoir modelling and simulation will be used to produce a development plan,which would seek to maximise oil recovery with the minimum number of wells. TheCompany's internal estimated well count and peak rate is currently lower thanthe D&M Report. As a result, the capital expenditures and operating costscurrently forecast by the Company are lower. The exact number of wells iscontingent on final well designs and reservoir studies. As described in further detail below, the Company has obtained committednon-recourse financing from Sberbank for the implementation of the developmentof the SRB field. 2. Company Operations Update The Company has continued to develop its existing portfolio throughout the year,with a particular emphasis on Sakhalin Island and the Dulisma field located inEastern Russia. Dulisma Field The Company has prepared infield roads, cleared the land for facilities,drilling pads, and rights-of-way on the Dulisma field. The tendering phase forthe central processing facility and oil export pipeline is also nearingcompletion. The work for the power generation station is approaching completionand drilling operations will resume using the Company's first drilling rig byDecember 2007. A second drilling rig is scheduled for delivery in late March toearly April 2008. The Company restored production from three of its eight wellsto approximately 250 bopd and three more are to be restored to production by theend of December, resulting in year end production of about 500 - 750 bopd. Sakhalin Island ZAO Petrosakh is on track to complete its full 2007 drilling campaign inrelation to the onshore licence with the sixth well now being drilled. Sincemid-year, the Company has drilled two wells, one of which is producing asexpected while the second is in the completion phase. A third well is beingdrilled currently and a fourth well is undergoing a work-over. Once 2007 workplans are completed, production should be between 2,600 and 2,800 bopd by theend of this year. The Company plans to drill four oil producing wells in 2008and two sidetracks will be used as water injectors for enhanced oil recovery. Komi Region and Udmurtia The Company has oil production operations on seven fields in the Komi region andthree in Udmurtia. The production from the Company's assets in Komi and Udmurtiahas remained steady at approximately 5,700 bopd. Given the Company's decision tore-focus its strategy on East Siberia, some works planned for the second half of2007 were scaled back and, as a result, the expected uplift from this programmewas not achieved. Kolguyev Island The Company has two production licences on Kolguyev Island in the Barents Sea.Production is stable at 850 bopd as there is water injection for pressuresupport in the Charkaborsky reservoir. The Company is now examining options withregard to additional exploratory and/or development drilling on the island.Exploration activity is briefly discussed below. Exploration Programme Sakhalin Island: Pogranichnoye Block Reprocessing and interpretation of 2D and 3D seismic for both the onshoreOkruzhnoye field and the Pogranichnoye block were conducted independently by twoseismic processing and analysis firms, Largeo and PetroAlliance. ThePogranichnoye block measures a total of 1,700 square kilometres in area, andexploration prospects have been identified in horizons such as the Pileng, whichis productive in the onshore Okruzhnoye field, as well as secondary prospects inthe Daginsky sandstones that are productive in the Sakhalin I and Sakhalin IIprojects located further north along the coastline. The unrisked contingent recoverable resources estimated by the two firms areapproximately 236 mmbbl. The Company is conducting studies for the next phase ofexploration and appraisal. Average distances from the shoreline to theVitnitskoye and Aprelskoye structures are between 3.5 and 5 kilometres. Plansare also underway to investigate options for exploratory drilling in 2008 and2009. Nenets Nadezhda Well In October 2007, the Company completed its exploration efforts in this blockafter drilling a 3,700 metres exploratory well in the Nenets Autonomous Regionof Russia in the north of the Timan-Pechora basin. The well was drilled to testthe Permian and lower Devonian sections that constitute the primary oil bearinghorizons in a number of offsetting fields. The well was drilled, cored, loggedand tested, and subsequently abandoned after failing to produce oil incommercial quantities. The Company does not intend to pursue any otherexploration opportunities in the area and this licence will expire in January2008. Arcticneft Paleozoic Exploration Prospects The Company is currently drilling the first of the two exploration wells to testseismic anomalies in the Permian/Carboniferous interval underlying thePeschanoozeroskoye field. The first well is a sidetrack of the initial well,which encountered oil on testing. The Paleozoic section on Kolguyev Island is anextension of the prolific Timan-Pechora basin which extends into the offshorenorth of the Russian coastline. Group Production Although the Company scaled back portions of its work programmes as itcontemplated divestitures and its refocused strategy, the total production hasremained stable near 9,000 bopd with an adjusted 2007 exit rate of 10,000 bopdmatching the actual work performed and the wells to be put on line by the end ofthe year. Management Changes As part of the Company's strategy of streamlining its portfolio, focusing ongreenfield developments in East Siberia and its enhancement of operationalexpertise in critical areas, certain key management changes have been made in2007. Mr. Vladimir Sidorovich, an experienced specialist in banking, investment,power utilities and oil and gas sectors in Russia, replaced Mr. Stephen Buscheras Chief Financial Officer in August. Also in August, the Company appointed Mr.Kerry Kendrick, a registered petroleum engineer with extensive experience asmanager of large international exploration and production projects, as ChiefOperating Officer of the Company. In addition, Mr. Mervyn Goddings has replacedMr. Henri Wolski as Senior Vice President of Operations. Mr. Goddings is acivil engineer with 30 years of oil and gas infrastructure and projectmanagement experience and most recently was a senior project manager withTNK-BP. Other A claim has been filed by a former shareholder of CNPSEI, against the Companyand CNPSEI (a subsidiary of the Company with operations in Komi) challenging thevalidity of the holding by the Company of its participation interest in CNPSEI.The Company believes that the claim is unlikely to succeed on the merits. TheCompany is contesting the claim vigorously. 28 November 2007 Appendix 1 - Further Information on the Acquisition Structure and Financing Acquisition Structure The Company will initially acquire a 32.3% interest in Taas for a price ofUS$440 million in cash and US$100 million in shares of the Company (the "FirstTranche"), due to close ("Initial Closing") no more than fifteen business daysfrom today. The Company's shares to be issued will be valued at the volumeweighted average price of shares in the Company for the five trading daysfollowing this announcement (including today) (the "VWAP"). The Company will also acquire a further 3.0% interest in Taas within 150 daysfollowing the Initial Closing for a price of US$50 million, plus interest at therate of 11.95% p.a. (the "Second Tranche"), payable in either cash or, at theSeller's election, equivalent shares in the Company calculated at the time ofissue on the same VWAP basis as described in relation to the First Trancheabove. The Company has agreed to accelerate the purchase of the Second Tranchefrom a portion of the proceeds of any asset sales and/or equity placings madeafter the Initial Closing. In addition, the Company has an option (the "Option") to acquire an additional4.2% interest in Taas in January 2009 for a price of US$70 million, plusinterest at the rate of 11.95% p.a. from the Initial Closing, payable in eithercash or, at the Seller's election, equivalent shares in the Company calculatedat the time of issue on the same VWAP basis as described in relation to theFirst Tranche above. The price to be paid by the Company (for each of the First Tranche, SecondTranche and Option) is fixed as at signing and is not subject to adjustmentafter signing or any closing in respect of indebtedness, working capital orotherwise. Ashmore has agreed to purchase a 10.5% interest in Taas at the same time as theInitial Closing (the "Ashmore Purchase"). The price to be paid by Ashmore,US$175 million in cash, represents the same price per share in Taas as that paidby the Company. In the event of certain contingencies, Ashmore has been grantedthe right to put its shares in Taas to the Company no earlier than one year fromthe Initial Closing for an amount equal to the price paid for them plus interestat the rate of 14% p.a. to be satisfied in cash or, at Ashmore's option, 50% incash and 50% in shares in the Company valued at a price determined by theaverage closing price of the Company's shares in the two-week period followingthe Initial Closing. The existing shareholders of Taas will retain a 50.1% interest in Taas followingcompletion of the First Tranche, Second Tranche and Ashmore Purchase and theexercise of the Option. Financing of the Acquisition The Company is financing substantially all of the cash element of the FirstTranche with the Acquisition Loan (the remainder of the cash element is beingfinanced from the Company's existing resources), which has an initial term ofone year, extendable by a further two years, and an interest rate of 14% p.a.(the interest due for each year is to be prepaid at the beginning of each year).The Acquisition Loan is secured by a pledge to Sberbank of the shares in Taas tobe acquired by the Company and by Ashmore; in addition, certain of the Company'slargest shareholders, who are also members of the Company's management, arepledging their shares in the Company to Sberbank. The borrower under the Acquisition Loan will be OOO Urals Energy (which willthen on-lend the proceeds to the Company). There is no direct recourse to theCompany in respect of the Acquisition Loan (other than in respect of the pledgesdescribed above). Taas Debt Financing Development Loan In order to provide for the development of the oilfields covered by Taas'slicences, the Company and the Seller have secured financing for Taas in the formof the Development Loan. The Development Loan has an initial term of one year, extendable by a furthersix years, and an interest rate of 12% p.a. (the interest due for the first twoyears is to be prepaid at the beginning of the term). The Development Loan issecured by a secondary pledge to Sberbank of the shares in Taas to be acquiredby the Company and Ashmore and by a pledge to Sberbank of the interests in Taasheld by the other Taas Shareholders. The Taas Shareholders other than Ashmore (which has the right but no obligation)have agreed to lend to Taas, pro rata to their respective interests in Taas,such amounts of the Development Loan that are not provided by Sberbank. Suchamounts are to be provided in two tranches of up to US$300 million each. The borrower under the Development Loan will be Taas. Other than as described inthe paragraph above and pursuant to the obligation to fund Taas' interestpayment obligations as described below, there is no direct recourse to theCompany in respect of the Development Loan. Shareholder debt financing In order to provide for working capital for Taas, the Seller and the Companyhave agreed to lend to Taas RUR885 million within one month of the InitialClosing (as to 50.1% and 49.9% of the loan respectively). In order to support the development, working capital and other needs of Taas, ifrequired, all of the Taas Shareholders have agreed to lend to Taas, pro rata totheir respective holdings in Taas, amounts representing the interest that is dueon all loans (from whatever sources and including the Development Loan) to Taasat any time such interest is payable. Shareholder capital contributions The Seller has agreed to make a capital contribution of US$90 million to Taasimmediately prior to the Initial Closing to repay certain bank debt of Taas. Inorder to assist the Seller's cash flow in funding this contribution, the Companyhas agreed to grant the Seller a two-year unsecured loan in the amount of US$90million at an interest rate of 10.50% p.a., US$70 million of which will be madeavailable within 150 days of the Initial Closing and the remainder of which willbe made available within 450 days of the Initial Closing (the "US$90 millionLoan"). The Company believes that the Development Loan, together with projectedavailable cash flow, will be sufficient to finance the currently projecteddevelopment needs of Taas. However, in case such funding is insufficient, all ofthe Taas Shareholders have agreed to make a capital contribution of US$100million to Taas, pro rata to their respective holdings in Taas, on theDevelopment Loan being fully drawn (and this undertaking is a condition to theDevelopment Loan). Sale and Purchase Agreement The sale and purchase agreement for the Acquisition (the "SPA") is between theCompany (as a purchaser), Ashmore (as a purchaser) and the Seller. The Company has conducted an extensive due diligence review of Taas and hasreceived from the Seller certain warranties in the SPA. These warranties arelimited in their scope and application (in particular in relation to Taas'licences and the financial position of Taas). Most warranties are qualified bythe awareness of the Seller. Any claims under the SPA must be brought within nine months of the relevantclosing. The overall limit for such claims is US$25 million (subject to thewarranties relating to the title to the Taas shares and Taas' licences, forwhich the overall limit is the consideration payable) and the Company will notbe able to bring a claim under the SPA where the Company already has actual orconstructive knowledge of the matter forming the basis of the claim. There is notax indemnity. The Company has a very limited right to terminate the Acquisitionprior to the Initial Closing (even if, for example, a defect in theparticipation interests or the business of Taas is discovered after signing). Shareholders' Agreement From the Initial Closing, the Taas Shareholders' relationship will be regulatedby a joint venture agreement governed by English law (the "SHA"). The SHAprovides for, amongst other matters, management and board appointments, decisionmaking (including measures designed to protect the position of the Company),equity contributions in addition to the debt financing obligations describedabove (including an obligation to maintain Taas' net assets position at thelevel required by the Development Loan), financial reporting, contracting andshare transfer restrictions. In particular, the Taas Shareholders have agreed to establish aCyprus-incorporated holding company and transfer their interests in Taas to theholding company in consideration for shares in the holding company. Thistransfer will be subject to the approval of the Russian Federal Anti-monopolyService, which will not be sought until after the Initial Closing. Under the SHA, the Seller has the right to buy back the Company's interest inTaas for the then outstanding amount of the Acquisition Loan if the Company isin default thereunder or the Acquisition Loan cannot be repaid in full atmaturity. The Taas Shareholders (including the Company) have granted each other customarypre-emption rights on share transfers in the form of a right of first offer. Inaddition, the Taas Shareholders have a right to exit from Taas by tagging alltheir shares in Taas to a sale by another Taas Shareholder to any third party. The SHA continues in force in relation to the Company for two years or until theexisting shareholders of Taas effect an exit (whichever is later). In addition,if at any time Ashmore's interest in Taas reduces below 2%, the measuresdesigned to protect the position of the Company (so called "reserved matters")will no longer apply. The enforceability of agreements such as the SHA may present challenges insofaras their provisions conflict with provisions of Russian law. The parties to theSHA have therefore agreed to modify the charter of Taas to incorporate theprotective provisions of the SHA that are consistent with the mandatoryprovisions of Russian law. Specific provisions and how they are to beincorporated are subject to further negotiations. Operating Agreement OOO Urals Energy will become the operator for the SRB field under the OperatingAgreement. As part of this, OOO Urals Energy will have the right to implementthe development plan (once agreed). The ultimate decision-making and the agreement of the development plan and thebusiness plan will remain with the Taas Shareholders (including the Company). If the Development Loan is called in for early repayment (whether or not thatobligation is met), the Operating Agreement will terminate (and another operatorwill need to be appointed); there are also other circumstances, some of whichare beyond the Company's control, as a result of which the Operating Agreementwill terminate. Guarantee The performance of the financial obligations of the operator under the OperatingAgreement is guaranteed by the Company to Taas. The scope of the guaranteeincludes OOO Urals Energy's liability for losses suffered by Taas as a result ofthe improper performance of work by OOO Urals Energy's sub-contractors incircumstances where OOO Urals Energy has recommended that Taas accept such work. Appendix 2 - Further Information on Taas Organisation and History Taas was incorporated in Russia as a limited liability company on 1 November2000 to develop the SRB field. In April 2002, Taas obtained its first licence todevelop the SRB field from its parent company, OAO "Taas-Yuriakh Neft" ("TYN"),which, in turn, received its oil production licence in 1991 as the winner of astate tender organised by Russian federal and local authorities. In 2006, as aresult of TYN's decision to increase the charter capital of Taas, two Cypriotcompanies, Yakut Energy Limited and the Seller, made contributions to thecharter capital of Taas and received 37.3% and 62.2% respectively. Reserves, Resources and Production On 9 July 2007, D&M delivered an independent evaluation of Taas' reserves andcontingent resources with respect to all of Taas' currently licensed fields andareas. According to the D&M Report, as of 31 March 2007 Taas had proved,probable and possible oil reserves in the SRB field and gross contingentresources in the Osinsky reservoir as shown in the tables below. D&M has notevaluated Taas' gas reserves. The tables below represent extracts from the D&M Report for the oil reserves andresources. In addition to the information on reserves of the SRB field containedin the D&M Report, one of the tables below contain figures excerpted from thereport prepared by Miller & Lents, Ltd. for Taas on June 29, 2007 ("M&LReports"). In addition to oil reserves, the SRB field contains gas reserves,including the gas cap, associated gas and free gas. Taas does not have a licenceto develop gas reserves in the Central Block as it does in the Southern Block.However, obtaining such license would allow Taas to develop gas reserves in theSRB field. In addition, it will allow Taas to take advantage of a potential gaspipeline running parallel to the ESPO which has been recently announced by OAOGazprom, as and when such pipeline development occurs. D&M Report Total Proved (106bbl) Probable* (106bbl) Possible* (106bbl) ___________________ ___________________ ___________________SRB field 239.0 451.1 285.7 * Probable and possible reserves have not been adjusted for risk to make themcomparable to proved reserves. M&L Reports Total Proved (106bbl) Probable* (106bbl) Possible* (106bbl) ___________________ ___________________ ___________________SRB field 507.8 215.7 211.9 * Probable and possible reserves have not been adjusted for risk to make themcomparable to proved reserves. D&M Report Resources Summary ____________________________________________________________________ Low Estimate Median Estimate Best Estimate High Estimate (106bbl) (106bbl) (106bbl) (106bbl) ___________ ___________ ___________ ___________ Gross Contingent Oil 11.8 34.6 47.4 95.9Resources ________________ Notes: 1. Pg and Pe have not been applied to the volumes in this table. 2. Recovery efficiency is applied to resources in this table. 3. Contingent resources are not comparable to reserves. According to the D&M Report, the estimated future net revenue and net presentvalue attributable to the proved-plus-probable oil reserves in the SRB field areas summarised in the table below. The amounts are expressed in US Dollars inmillions, using an exchange rate of RUR 26.0 per US$1.0: D&M Report Future Net Revenue Net Present value at 10 percent (million US$) (million US$) ___________ ___________ Proved Developed Producing 82.5 49.9Proved Undeveloped 2,925.0 1,523.1Total Proved 3,007.5 1,573.0Proved-Plus-Probable* 7,272.7 2,680.1 * Values attributable to probable reserves have not been adjusted for risk tomake them comparable to values attributable to proved reserves. The SRB Field The SRB field represented a significant oil and gas discovery in 1970. The fieldhas remained essentially undeveloped until the recent construction of the ESPOpipeline which will allow access to multiple markets. According to the D&MReport, two reservoirs within the SRB field are known to be hydrocarbon-bearing:the Vendian-Lower Cambrian Botuobinsky reservoir, which is the only reservoircurrently producing, and the Lower Cambrian Osinsky reservoir, which liesapproximately 500 metres above the Botuobinsky Reservoir. During the Soviet era, a significant number of wells were drilled within Taas'licence boundaries of the SRB field, with penetrations of the Botuobinskyreservoir approximately equivalent to 5 km spacing. As a result, the SRB fieldhas over 60 appraisal wells located in the Central Block of which 13 were keptactive to supply oil to local markets. The cumulative oil produced from thosewells is approximately 6 mmbbls. The sum of subsurface geological, reservoir andproduction data from the appraisal and active wells removes large elements ofrisk normally associated with greenfield development. Recently, Taas has beenemploying modern western technology to re-enter wells to drill horizontally.Those newly drilled wells will be tested in the near future. The upside potential of the Acquisition is in the gas reserves in the SRB fieldas mentioned above plus further development of the previously untapped Osinskyreservoir and adjacent licence blocks that are expected to become available atstate auctions in the near future. The SRB field lies approximately 130 kilometres southwest of Mirniy, the capitalof the Russian diamond industry, a town with a population of approximately50,000 with a relatively developed infrastructure, including an airport withdaily flights to Moscow, and 140 kilometres northwest of the city of Lensk, atown with a population of approximately 30,000 and an important regionaltransport hub with a local airport for small planes and helicopters. The onlypopulated area in the vicinity of the SRB field is the Taas-Yuriakh settlement,a community of less than 1,000 people. Tax Exemption Under recently introduced tax legislation, certain fields in East Siberia,including the Republic of Sakha (Yakutia), the Irkutsk Oblast and theKrasnoyarsk Territory, are entitled to up to a 10- or 15-year mineral extractiontax exemption. Under the new law, if the volume of oil produced reaches 25million tonnes before the end of such a tax exemption, tax payment obligationsof such a company are resumed. Since the SRB field is located in the Republic ofSakha (Yakutia), it has qualified for a 10-year tax exemption in the CentralBlock and a 15-year tax exemption in the Southern Block. The limit of a25-million tonne oil production volume has been established separately for theCentral Block and the Southern Block. The Company estimates that the taxexemption will produce savings to Taas of approximately US$1,078 million in netpresent value terms, assuming a price of Urals blend crude oil of US$50 perbarrel, a discount rate of 10 percent, the income tax rate of 24 percent and theproduction and cost estimates for proved-plus-probable (2P) reserves set forthin the D&M Report. Transportation and Oil Marketing Taas has already received an approval from Transneft to tie-in to the ESPOpipeline near Lensk, located approximately 170 kilometres away from the SRBfield. The end-point of the ESPO pipeline by the end of the first phase of theESPO construction is planned to be at Skovorodino, near the Russia-China border.From there, the Company plans to transport oil by railway for sale in NorthernChina or at the port of Nakhodka on the Pacific coast. To date, no officialtransportation tariffs by the ESPO pipeline have been made available. Development of the SRB field In brief, the development of the SRB field includes three main components:drilling, infield infrastructure and an oil export system. The Company will makeevery effort to maximise the asset value, NPV, with an optimal number of wellsthat maximise oil recovery. Drilling The conceptual project design includes horizontal drilling technology amongother technologies that will be appraised with the objective of enhancing oilrecovery and minimising drilling costs. The conceptual design also includesinjection wells for water and/or gas to maintain reservoir pressure and maximiseoil recovery. Infield infrastructure and facilities The infield infrastructure and facilities component of the development planincludes a central process facility (the "CPF"), production gathering lines,reinjection lines for water and gas, electric power lines, roads and drillingpads. The CPF will be installed to match the production capacity of the wells. The CPFis used to separate clean oil for shipping via the oil export line. Some fieldgas would be used as fuel for engines and boilers while the rest is to bereinjected into the reservoir. Oil Export System The Company is planning to construct a 170 kilometre trunk oil pipeline thatwill connect the CPF to the ESPO pipeline at the connection point near Lensk. Further updates will be issued as material information on the development planfor the SRB field becomes available. This information is provided by RNS The company news service from the London Stock Exchange