31 Mar 2009 07:00
[31 March 2009]
VOLGA GAS PLC
Results for the Year Ended 31 December 2008
Volga Gas Plc (the 'Company'), the independent oil and gas exploration and production company, which currently holds four subsoil licenses in the Volga Region of European Russia, is pleased to announce its results for the year ended 31 December 2008.
Operational Highlights
Three producing oil wells successfully completed and in production on the supra salt Uzenskaya oil field in the Karpenskiy Licence Area ("KLA").
Further supra-salt exploration drilling under way.
Completed interpretation of 3-D seismic on the sub-salt prospects in KLA.
Rig on location to commence drilling the first sub-salt well during 2009.
Resolution of threatened legal action on the Vostochny Makarovskoye ("V-M") Licence.
First phase of development drilling on the V-M gas/condensate field completed. Two out of three wells were tested at commercial rates.
Gas and condensate production to commence from V-M in mid-2009.
Financial Highlights
Loss of $10.1 million before tax. Capital expenditure of $48.5 million, including $20.4 million advance payment for the gas processing joint venture.
Cash balance of $23.1 million at year end.
Post Balance Sheet Event
Recently announced reserve estimates take the combined Russian classification C1/C2 reserves to 7.2 BCM (230 BCF) of gas and 26.2 million barrels of liquids on Uzenskaya and V-M alone.
Mikhail Ivanov, Chief Executive Officer of Volga Gas, said:
"2008 started with unexpectedly good results from our VM-1 well on the V-M field. In the KLA we had further positive exploration and development drilling results on our supra salt Uzenskaya oil field as well as very encouraging results from the 3-D seismic data on our sub-salt exploration projects. There were also significant challenges to be met: the threatened legal action over V-M, which was resolved in November 2008; the sharp decline in oil prices especially in the Russian domestic market; and, more recently, a disappointing result from the VM#4 well. To meet these challenges we are endeavouring to manage our costs rigorously and to enhance our production to enable us to make positive returns even with depressed oil and gas prices. Meanwhile, we look forward to furthering our sub-salt exploration efforts both in the KLA and in the Pre-Caspian Licence, both of which remain potentially the key value transforming assets for the company."
For additional information please contact:
| Financial Dynamics | +44 (0)20 7831 3113 |
| Billy Clegg | |
| Alex Beagley | |
| KBC Peel Hunt (Nominated Adviser) | +44 (0)20 7418 8900 |
| Jonathan Marren | |
| Matt Goode |
The information contained in this announcement has been reviewed and verified by Mr. Mikhail Ivanov, Director and Chief Executive Officer of Volga Gas plc, for the purposes of the Guidance Note for Mining, Oil and Gas companies issued by the London Stock Exchange in March 2006. Mr. Mikhail Ivanov holds a M.S. Degree in Geophysics from Novosibirsk State University. He has also MBA degree from Kellogg School of Management (Northwestern University). He is a member of the Society of Petroleum Engineers.
Availability of report and accounts
The Group's full report and accounts will be dispatched to shareholders as soon as is practicable. Copies will also be available on the Company's website www.volgagas.com and on request from the Company at, Ground Floor, 17-19 Rochester Row, London SW1P 1QT.
Annual General Meeting
The annual general meeting is to be held on 18 June 2009 at 09.00. Notice of the AGM will be sent to shareholders with the Group's report and accounts.
Chairman's Statement
Volga Gas is distinctive for operating entirely in European Russia, close to domestic markets and with pipeline and logistical infrastructure nearby. Our four licence blocks encompass proven oil, gas and condensate in shallow and medium depth horizons and major gas and condensate exploration targets in deep sub-salt horizons. At the start of 2008 it was our intention to advance our exploration and development projects with a view to achieving near term production and to move towards the drilling of our deep high impact exploration targets.
Throughout 2008 we made good progress towards meeting these key objectives. But we have also had to meet some serious challenges in the course of the year. Firstly, we faced a potential law suit seeking to unwind our purchase of the Vostochny Makarovskoye field. However, as announced on 12 November 2008, the court case was withdrawn and we reached a resolution agreement with Trans Nafta which is more extensively described in the Operating Review. Secondly, and more seriously in the short term, the global economic downturn and the associated sharp falls in commodity prices have made for a difficult environment for all oil and gas companies and also for the Russian economy.
The sharp decline in the Ruble exchange rate against the US Dollar has set back the progress of achieving netback parity in regulated domestic gas prices. To the best of our knowledge the policy of 25% per annum increases in Ruble denominated gas prices remains in place. In the short term, the economic downturn in Russia will have impacted both the demand and prices paid in the unregulated gas market. Similarly, domestic economic conditions have also impacted the demand and pricing of crude oil in Russia.
Volga Gas, however, is well placed to withstand these challenges. Our fields are advantageously located and our costs are sufficiently low for us to achieve acceptable returns even at the current very low prices. We will be able to complete the development of our production projects to benefit immediately from an eventual recovery in oil and gas prices. Most importantly, we have the necessary capital to fulfill our current licence commitments.
Key achievements for the Company in 2008 include success with our development drilling of the supra-salt wells on the Uzenskaya oil field in the Karpenskiy Licence Area and two successful wells on the Vostochny Makarovskoye gas-condensate field. We have commenced full-time production from Uzenskaya and hope to follow suit at Vostochny Makarovskoye during 2009. These fields should enable the Company to achieve the important milestone of financial self-sustainability before the end of the 2009.
Volga Gas was originally created to explore the sub-salt structures on the Karpenskiy Licence Area. Not only are we excited by the potential of the two structures, Yuzhny-Ershovskoye and Yuzhny-Mokrousovskoye, but our initial evaluation of the sub-salt potential in the nearby Pre Caspian licence area is showing equally compelling prospectivity.
Of course, we need to turn our potential into results. During 2008 we have laid the foundations for the drilling of our first sub-salt well. Interpretation of the 3-D seismic data over the two main prospects in the Karpenskiy Licence area was completed and we have identified a location (Grafovskoye) on which we plan to drill an exploration well on the Yuzhny-Ershovskoye prospect. Furthermore, we have secured a suitable rig for this well and have received the necessary official consents for the well ("Passport"). On the Pre-Caspian licence, we have acquired and interpreted 2-D seismic and are seeing some highly interesting results.
We started 2009 with a cash balance of US$23.1 million and so are well positioned to fund our development work programme. However, if we were to accelerate the drilling of our sub-salt exploration well, the Company would require additional funding.
Finally, we pay tribute to the hard work and dedication of the small team of employees who have worked tirelessly throughout the year to deliver the impressive results which we are now able to report. I would like to thank them for their hard work. The end of 2008 saw the departure of our Chief Financial Officer, Alistair Stobie. We thank him for his hard work and welcome his successor, Tony Alves to the company. Tony has been closely involved with Volga Gas from an early stage and has the experience to carry on Alistair's good work.
Alexey V. Kalinin
Chairman
Chief Executive's Review
The focus for Volga Gas in 2008 was on advancing our key exploration and production projects; firstly, to ensure that production, and hence cash flow, begins from the Vostochny-Makarovskoye ('VM') field and from the supra salt Uzenskaya field in the Karpensky Licence Area ("KLA"); secondly, to complete the geological studies on the two deep sub-salt structures on the KLA, and to prepare for the drilling of our first sub-salt exploration well there.
We have also had to deal with a serious legal challenge, a resolution of which has been agreed, and a sudden and sharp deterioration of the external business environment. We are confident that we can withstand these challenges and have made good progress in creating a profitable and self-sustaining business, while in parallel pursuing the high impact exploration ventures which were the original motivation for the foundation of the company.
During 2008, the majority of the activity and investment was concentrated on developing our production assets.
Drilling on Uzenskaya delivered better than anticipated results, confirming a high quality light oil resource. As a result of this drilling activity, as recently announced, we were able to record Russian classification C1 and C2 recoverable reserves on Uzenskaya of 1.9 million tones (approximately 13.9 million barrels). During 2008 we completed three production wells on this field and each of these flowed at rates of between 2,220 and over 4,000 barrels of oil per day on open hole tests, demonstrating very good reservoir characteristics. We intend to manage the production from this reservoir very carefully to ensure maximum recovery of the oil in place.
On VM, our initial results were extremely encouraging. As reported in the 2007 Annual Report, we found a gross gas-condensate column of close to 200 metres in the VM#1 well. This well tested at commercial flow rates and led to a Russian reserve C1/C2 classification of 7.141 billion cubic metres plus 1.528 million tones (12.2 million barrels) of condensate which was approved by the State Committee for Mineral Resources in November 2008. We also commenced the construction of the required gas processing facility for the first stage of production with the aim of starting production before the end of 2008.
During the year, however, there was a legal challenge raised by a shareholder of Trans Nafta, the company from which we purchased the V-M licence, seeking to have our purchase unwound. This threatened legal action was later withdrawn and we entered into a resolution agreement with Trans Nafta involving the creation of a gas processing joint venture in which Volga Gas will have a 75% interest. The establishment of this joint venture will require a balancing payment by Volga Gas substantially covered by a prepayment of 600 million Rubles (approximately $20.4 million) made by Volga Gas in November 2008. Final details of the structure of the joint venture and legal completion of the asset transfer are still being negotiated.
The threatened legal action obviously set back our plans for first production from V-M. First production from the field is awaiting completion of construction and commissioning of the Dobrinskoye gas plant, which is the main asset in the gas processing joint venture and through which our gas and condensate production will flow. We are now hoping to achieve first production early in the second half of 2009.
Meanwhile we drilled two further wells on V-M with mixed results as we detailed in recent announcements. We will cover this more extensively in the Operational Report below, but in summary we recognize that there is some risk that reserve estimates on the field may be subject to future revision. We intend to re-examine the technical data on the field and incorporate new data from an extended period of production from the existing wells in order to provide a new estimate of recoverable gas and condensate reserves by the end of 2009.
Our deep sub-salt exploration projects, both in the KLA and in the Pre-Caspian Licence Area are as exciting as ever. During 2008 we completed processing of the new 3-D seismic data that we acquired in 2007 over the two main exploration prospects identified in the KLA. This has refined our picture of the potential targets and, we believe, has reduced the geological risk associated with the prospects. Based on this data we have selected a location to drill our first well. We have also secured and mobilized a suitable rig to drill a 5,000 metre sub-salt well, although as yet we have not made a firm commitment to start drilling.
In the Pre-Caspian Licence Area, analysis of the 1,000 km of 2-D seismic data, which we acquired during 2008, has confirmed a large exploration target in the sub-salt play. We now propose to shoot 3-D seismic over this structure with the aim of facilitating an exploration well within the next 12 months.
As a result of this activity we now have a total of six productive wells on our two fields and expect to add further production wells in the course of 2009. Based on current plans and assuming no exploration success, Volga Gas should by the end of 2009 achieve daily production of 300,000 m3 (approximately 12 million cubic feet per day) of gas and 2,000 barrels per day of oil and condensate.
Naturally, the revenue and cash flow deriving from this production will largely depend on the price we realize for our oil, condensate and gas sales. In common with the rest of the industry, domestic oil prices in Russia are currently depressed. In the Russian gas market the increases in regulated gas prices continue but the sharp devaluation of the Ruble against the US dollar has led us to expect lower US dollar realizations for our short term gas production. Nevertheless, we are endeavouring to keep our costs low in order to achieve profitability and to be able to benefit from a future recovery in prices. Meanwhile, lower levels of activity in the oil industry and the weak Ruble have some beneficial impacts on the costs of our ongoing exploration and development activities.
We now have Russian C1 Recoverable Reserves of 43.2 million barrels of oil equivalent and a further 25.0 million barrels equivalent of C2 Recoverable Reserves contained in just two fields. Our C3 Prospective Resources, based on just one of the three sizeable sub-salt prospects we have mapped within our licence blocks, are 394 million barrels of oil equivalent. This solid base of reserves and resources gives us confidence that we can continue to build Volga Gas into a successful and profitable independent exploration and production company and to create sustainable value for our shareholders.
Volga Gas has a culture of delivering on commitments with a small team of professionals working smartly. This culture will help us meet the challenges ahead. The coming year promises to be a challenging but exciting one for the team. I am confident that they will continue to deliver results on schedule and on budget.
Mikhail Ivanov
Chief Executive Officer
Operational Review
Operations overview
The Company's two principal areas of focus in 2008 were: exploration activities on two major sub-salt prospects in the Karpenskiy Licence Area ('KLA'), development of the Uzenskaya supra-salt oil field, also in the KLA, and development of the Vostochny-Makarovskoye ("V-M") gas-condensate field.
We have now completed processing of the 3-D seismic over the KLA and have secured a rig to start drilling our first sub-salt exploration well in 2009. At Uzenskaya we already have four productive wells and expect to add further producing wells in the course of 2009. On the V-M field, two successful development wells have been drilled and construction of the gas processing plant is near completion.
In addition, we have acquired and interpreted 2-D seismic over the Pre-Caspian Licence Area where we also see exciting sub-salt prospects.
Karpenskiy Licence Area
Early in 2008 we amended the terms of the Karpenskiy Licence Agreement, thereby curing certain licence breaches the Company inherited when it acquired the licence from a LUKoil subsidiary. The amended licence agreement requires the Company to finalize the acquisition of 400km2 of 3-D seismic and drill a further ten exploration or production wells over the next two years. We have already fulfilled our seismic obligations. The ongoing supra-salt drilling programme, which will also add to our current production, is expected to fulfill the remaining drilling commitments before the end of 2009.
Sub-salt
The Company acquired 107km2 and 160km2 of 3-D seismic respectively over the Yuzhny-Ershovskoye and Yuzhny-Mokrousovskoye structures during 2007. We completed processing and interpretation of this data during 2008. Based on this information the location for the first well (Grafovskaya #1) has been identified and the drilling passport issued. Russian category C3 reserves of 42bcm of gas (247mm BOE) and 48 million barrels of condensate and 14bcm of gas (81.2mm BOE) and 15.6 million barrels of condensate have been identified in two separate structures within the Yuzhny-Ershovskoye prospect.
The Evrasia rig has been constructed on the site of Grafovskaya #1. In order to accelerate drilling of this well, the Company will need to raise additional funding.
Supra-salt
Following on from the successful exploration well on Uzenskaya #1, the Company continued drilling on the adjacent South Uzenskaya structure, completing two successful wells in 2008 and drilling a third well which was completed after the year end. Each of these wells flowed light (45o API) oil from a high quality cretaceous sandstone reservoir. The flow rates recorded from open hole testing on each well was as follows:
| Well | Announced | Flow rates | ||
| m3/d | bbl/d | |||
| Uz#3 | Sep-08 | 353 | 2220 | open hole test |
| Uz#4 | Dec-08 | 95 | 600 | cased hole, 6mm choke |
| Uz#5 | Feb-09 | 731 | 4608 | open hole test |
We have constructed surface infrastructure, including a separator unit, storage tanks and gas fired generator utilizing associated gas. Full time production has commenced with each of the wells producing on average between 350 and 400 barrels of oil per day per well, with a 6mm choke. Given the reservoir characteristics and the strong apparent natural water drive, these production rates are expected to be maintained for several years.
Russian category C1 and C2 recoverable reserves on the Yuzhny Uzenskaya field have recently been approved by the State Committee for Reserves as follows:
| Yuzhny Uzenskaya | C1 | C2 | Total |
| (Karpenskiy Licence supra salt) | Recoverable Reserves | ||
| Crude Oil (mmT) | 0.983 | 0.886 | 1.869 |
| Total (mmboe) | 7.373 | 6.510 | 13.883 |
The Uzenskaya field has as yet no SPE standard reserves associated with it. The estimation of reserves under SPE standards will be undertaken after completion of the current drilling programme.
We are currently concluding operations on Uzenskaya #6. As announced on 30th March, the main target reservoir was not present in the well. At present, other layers are being tested and in the event that no oil producing zones are found, the well will be suspended for future use as a water injection well.
Ongoing drilling activity in the area includes an exploration well, Uzenskaya #7, currently being drilled on the Vostochny Uzenskaya prospect, approximately 7 km East of the existing field facility. Should this be successful, we plan to drill Uzenskaya #9, 10 and 11 on the Vostochny Uzenskaya structure after completing Uzenskaya #8 which will be drilled into a separate compartment of the Yuzhny Uzenskaya field.
Vostochny-Makarovskoye Licence Area
The Company undertook its first phase three well drilling programme on the Vostochny Makarovskoye field during 2008 and commenced construction of a gas processing facility for the field.
The VM #1 well was completed early in 2008. As we reported in the 2007 Annual Report, this well encountered a significantly larger gas column than previously expected, exceeding 200m in total. A series of open hole tests carried out over a 160m interval resulted in a cumulative flow rate of 267 mcm/d (approximately 9.4 mmcf/d) of gas plus 215 tonnes per day (approximately 1,763 b/d) of condensate.
The Company subsequently drilled two further wells on the field, VM#2 and VM#4. We decided to change the order of drilling and Well VM#3 will be drilled later. The VM#2 well also tested gas in the Evlano-Livenskiy layer. When cased and perforated the well initially produced formation water. The well was subsequently repaired. On a further initial test, the well flowed at a rate of 190 mcm/d of gas plus 320 b/d of condensate from a 30 metre perforated interval with a 12 mm choke.
The VM #4 well was spudded in November 2008 and completed early in February 2009. The result of this well was unexpectedly disappointing. It was drilled on the southern portion of the field close to the edge of the Probable reserve limits. VM-4 found gas and condensate on an open hole test at a depth of 2746-2755 metres in the Evlano-Livenskiy formation. Net pay measured in the well was substantially less than anticipated. Although it is capable of production, the Company has decided to suspend the well with the option in the future, pending an evaluation of the data, of sidetracking the well to a potentially more favourable bottom hole location.
Any impact of this well result on gas and condensate reserves in the VM field is yet to be estimated.
In November 2008, Russian category C1 and C2 recoverable reserves were calculated following the results of Well VM#1 and approved by State Committee for Reserves as follows:
| C1 Recoverable | C2 Recoverable | |||
| Gas | 4.661 BCM | 164.5 BCF | 2.480 BCM | 87.5 BCF |
| Condensate | 1.043 mmT | 8.3 mmbbl | 0.485 mmT | 3.9 mmbbl |
| Total | 35.7 mmboe | 18.5 mmboe | ||
| Conversion to barrels of oil equivalent ("boe") using the following conversion factors: 1 BCM gas = 5.9 mmboe; 1 tonne Condensate = 8 boe. | ||||
The current plan for the field is to commence production from the first two wells which will enable a dynamic modeling of the field's productive capacity and ultimate potential recovery. In the interim, the Company plans not to make any changes to Reserve estimates. Production is expected to commence shortly after commissioning of the gas processing plant, which is anticipated before the end of H1 2009.
Court Proceedings and Gas Processing Joint Venture
As we announced in August 2008, a claim was filed in July 2008 against our 100% owned subsidiary, Woodhurst Holdings ("Woodhurst"), and Trans Nafta. The claim, which was filed by Alexander Alexandrovich Kulyaev, a minority shareholder in Trans Nafta, in the Moscow Arbitration Court, sought to invalidate the agreement (the "Sale Agreement") pursuant to which Gaznefteservis ("GNS"), the holder of the V-M license, was sold by Trans Nafta to Woodhurst in September 2006 (the "Moscow Proceedings").
The basis of the claim was that Trans Nafta had not obtained the necessary corporate approvals to sell GNS to Woodhurst. Woodhurst responded by commencing proceedings in the High Court in London seeking an injunction to restrain the Moscow Proceedings. Woodhurst also commenced an arbitration in London seeking a declaration as to the validity of the Sale Agreement and seeking damages against Trans Nafta for breach of warranty in the event that the Sale Agreement were declared invalid by the Moscow Arbitration Court (together, the "UK Proceedings"). The parties subsequently arrived at a resolution pursuant to which, inter alia, the Moscow Proceedings and the UK Proceedings were withdrawn in November 2008.
As part of the resolution between the parties, Volga Gas and Trans Nafta agreed to combine their Gas Processing Units ("GPUs") and form a Russian Company owned through a 75:25 split. Trans Nafta's GPU is already connected to the Gazprom pipeline network. Volga Gas will be able to begin selling its gas and condensate as soon as its existing wells are tied in to the GPU.
The combined facility will have sufficient capacity to process quantities of gas and condensate previously contemplated by Phase 1 and Phase 2 of VM's development. Initially the GPU will be dedicated to processing gas and condensate produced from the V-M field and from Trans Nafta's Dobrisnkoye gas field.
In accordance with this agreement, the Company made a prepayment to Trans Nafta of RUB 600 million (approximately US$20 million) in November 2008. This prepayment substantially covers the estimated balancing payment that would fall due to 75% of the cost of constructing the GPU. The final operational framework for the joint venture and the legal transfer of the GPU assets to the joint venture have yet to be concluded. Legal closure is conditional, inter alia, on the plant being formally commissioned by 30th September 2009. Should this not be achieved within that timeframe, the Company has the right to unwind the joint venture and to seek recovery of its RUB 600 million pre-payment with accrued interest.
Pre-Caspian Licence Area
The Pre-Caspian Licence Area has no reserves associated with it. To date a total of 1000 km of 2-D seismic has been acquired. Processing and interpretation is under way. Initial results have revealed a very large sub-salt structure in a geological setting similar to the sub-salt prospects in the KLA.
The licence terms require a further 500 km to be acquired. We may propose to the licensing authorities an exchange of our remaining 2-D seismic commitment for 78 km2 of 3-D seismic data over the identified prospect. The cost of forward seismic programme is expected to be similar in either case.
The results of this seismic will be processed and interpreted during 2009 and will provide a basis for eventual exploration drilling.
Urozhainoye-2
On 7 September 2007 the Company acquired Urozhainoye-2 at government mandated auction for approximately US $1.7 million. The licence area covers 354km2 and is located approximately 15km to the north of the Company's Karpenskiy Licence Area and is in close proximity with up to 30 oil, gas and condensate fields.
The licence area is principally an exploration asset. Notwithstanding this, the licence area has had one well drilled on it in 1990 which discovered the Sobolevskoye field which has Russian C1 recoverable reserves of 800,000 barrels of oil. The well produced at 1,200 barrels per day of oil and 1.9 mmcf/d of gas with an 8 mm choke on test production.
During 2008 we acquired 350 km of 2-D seismic, fulfilling our seismic commitment on the licence. Processing and interpretation is ongoing.
M. Yu. Ivanov
Chief Executive Officer
Financial Review
Results for the year
During 2008 our operations were primarily in an exploration and development phase. The Group recorded a loss of $10.3 million for the year ended 31 December 2008 (2007: Loss $2.6 million). No dividends have been paid or proposed for the year (2007: none).
The Group generated $0.6 million in turnover from the sale of 24,545 barrels of crude oil. An additional 1,770 barrels of crude oil were held in inventory as of the balance sheet date. Crude oil sales were made into the domestic market during the period.
The operating loss for the year was $12.8 million (2007: $8.4 million) which includes exploration expenses of $5.6 million (2007: nil) and administrative expenses of $7.8 million (2007: $8.4 million). Included in the latter were expenses of $2.3 million relating to the legal issues on Vostochny Makarovskoye and in charges relating to share based payments of $1.1 million (2007: $3.9 million).
The Group recognised a loss before tax of $10.1 million (2007: Loss $2.8 million) and after tax loss of $10.3 million (2007: Loss $2.6 million). This includes net gains on foreign exchange contracts of US$1.3 million (2007: $3.5 million).
Cash flow
Group net cash outflow from operating activities was $15.9 million (2007: $5.1 million), including $5.7 million of exploration expenses and $6 million of pre-payments for equipment and services relating to the Group's exploration and development activities. The remainder of cash outflow consisted principally of general and administrative expenses incurred to run the Group's operations as well as expenditure relating to the resolution of the Vostochny Makarovskoye legal issues.
Capital Expenditure
During 2008 a total of $48.5 million was invested in capital expenditure on the Group's licence areas including acquisitions (2007: $12.9 million) as detailed below:
| 2008 | 2007 | |
| (US$ million) | (US$ million) | |
| Oil & Gas Exploration Assets | 0.3 | 3.1 |
| Oil & Gas Exploration Assets (Work in Progress) | 2.1 | 3.4 |
| Development & Producing Assets | 25.5 | 5.8 |
| Real Estate Assets | 0.2 | 0.5 |
| G&A Assets | 0.0 | 0.1 |
| Security deposit on acquisition of fixed assets | 22.2 | 0.0 |
| Total | 48.5 | 12.9 |
The most significant individual components of the capital expenditure were $16.1 million on the Vostochny Makarovskoye field, including drilling and plant construction. In addition, $6.4 million was expended on development drilling and field facilities for the Uzenskaya oil field.
Security deposit on acquisition of fixed assets comprises the $20.4 million of prepayment to Trans Nafta relating to the gas processing joint venture.
Balance Sheet and Financing
As at 31 December 2008, the Group held cash balances of $23.1 million (2007: $97.5 million) and remains debt free.
The Group intends to fund its operating expenditures using a combination of cash flow from operations and cash-on-hand. The Group will also consider raising additional capital to more fully explore and develop its asset base.
The Group is currently capable of producing approximately 1,200 barrels of oil per day from three producing well in the Uzenskaya field. The Group's production is being sold on the domestic crude oil markets.
The Group's financial statements are presented on a going concern basis.
Issue of share capital
During the year to 31 December 2008, the Company issued a total of 393,852 shares at par value in accordance with Restricted Share Agreements with Mikhail Ivanov, Chief Executive Officer of the Company and Alistair Stobie, at that time the Chief Financial Officer of the Company.
During the year to 31 December 2007, the Company issued 22.9 million shares, generating $125.1 million in net proceeds.
Tony Alves
Chief Financial Officer
| Volga Gas plc |
| Group Balance Sheet (presented in US$ 000) |
| At 31 December | Notes | 2008 | 2007 |
| ASSETS | |||
| Non-current assets | |||
| Intangible assets | 2 | 30,596 | 34,114 |
| Property, plant and equipment | 3 | 26,550 | 5,940 |
| Other non-current assets | 4 | 7,245 | 2,612 |
| Security deposit on acquisition of fixed assets | 4 | 20,422 | |
| Deferred tax assets | 11 | 2,003 | 645 |
| Total non-current assets | 86,816 | 43,311 | |
| Current assets | |||
| Cash and cash equivalents | 5 | 23,093 | 97,539 |
| Derivative financial instruments | - | 2,756 | |
| Inventories | 6 | 1,485 | 145 |
| Other receivables | 7 | 8,449 | 2,661 |
| Total current assets | 33,027 | 103,101 | |
| Total assets | 119,843 | 146,412 | |
| EQUITY AND LIABILITIES | |||
| Equity | |||
| Share capital | 1,045 | 1,037 | |
| Share premium (net of issue costs) | 144,682 | 143,552 | |
| Other reserves | (16,027) | 4,061 | |
| Accumulated loss | (14,142) | (3,844) | |
| Total equity | 115,558 | 144,806 | |
| 14 | - | - | |
| Current liabilities liabilities Trade and other payables | 15 | 4,745 | 1,606 |
| Trade and other payables | 8 | 2,416 | 1,336 |
| Current income tax liability | 1,869 | 270 | |
| Total current liabilities | 4,285 | 1,606 | |
| Total equity and liabilities | 119,843 | 146,412 |
Approved by the Board of Directors on 31 March 2009 and signed on its behalf by:
Mikhail Ivanov Tony Alves
Chief Executive Officer Chief Financial Officer
| Volga Gas plc |
| Group Income Statement (presented in US$ 000) |
| Year ended 31 December | Notes | 2008 | 2007 |
| CONTINUING OPERATIONS | |||
| Revenue | 617 | 19 | |
| Cost of sales | 9 | (607) | (29) |
| Gross profit/(loss) | 10 | (10) | |
| Operating and administrative expenses | 9 | (12,784) | (8,392) |
| Operating loss | (12,774) | (8,402) | |
| Interest income | 1,461 | 2,474 | |
| Interest expense | - | (373) | |
| Other gains and losses - net | 10 | 1,256 | 3,470 |
| Loss for the period before tax | (10,057) | (2,831) | |
| Current income tax | 11 | (1,600) | (270) |
| Deferred income tax | 11 | 1,358 | 528 |
| Loss for the period attributable to equity holders | (10,299) | (2,573) | |
| - Basic and diluted loss per ordinary share (in US dollars) | 0.19 | 0.06 | |
| Weighted average number of shares outstanding | 12 | 54,008,474 | 46,376,181 |
| Volga Gas plc |
| Group Cash Flow Statement (presented in US$ 000) |
| Year ended 31 December | Notes | 2008 | 2007 |
| Net cash outflow from operating activities | 13 | (15,860) | (5,137) |
| Cash flows from investing activities | |||
| Purchase of intangible assets | 2 | (8,628) | (6,987) |
| Purchase of property, plant and equipment | 3 | (24,903) | (5,928) |
| Security deposit on acquisition of fixed assets | 4 | (22,204) | - |
| Net cash used in investing activities | (55,736) | (12,915) | |
| Cash flows from financing activities | |||
| Proceeds from issue of shares (net of issue costs) | - | 125,118 | |
| Repayment and receipt of long term borrowings | - | (14,387) | |
| Net cash provided by financing activities | - | 110,731 | |
| Effect of exchange rate changes on cash and cash equivalents | (2,850) | 1,532 | |
| Net (decrease)/ increase in cash and cash equivalents | (74,446) | 94,211 | |
| Cash and cash equivalents at beginning of the year | 5 | 97,539 | 3,328 |
| Cash and cash equivalents at end of the year | 5 | 23,093 | 97,539 |
| Volga Gas plc |
| Group Statement of Changes in Shareholders' Equity (presented in US$ 000) |
| Notes | Share Capital | Share Premium | Other Reserves | Currency Translation Reserve | Accumulated Loss | Total Equity | |
| Opening equity at 1 January 2007 | 579 | 15,251 | 588 | 460 | (1,271) | 15,607 | |
| Loss for the year | - | - | - | - | (2,573) | (2,573) | |
| Share capital issued | 450 | 134,550 | - | - | - | 135,000 | |
| Share issue costs | - | (10,120) | - | - | - | (10,120) | |
| Discount on long term debt | - | - | (588) | - | - | (588) | |
| Share based payments | 8 | 3,871 | - | - | - | 3,879 | |
| Adjustments on translation of non-Dollar subsidiaries | - | - | - | 3,601 | - | 3,601 | |
| Closing at 31 December 2007 | 1,037 | 143,552 | - | 4,061 | (3,844) | 144,806 | |
| Opening equity at 1 January 2008 | 1,037 | 143,552 | - | 4,061 | (3,844) | 144,806 | |
| Loss for the year | - | - | - | - | (10,299) | (10,299) | |
| Share based payments | 8 | 1,130 | - | - | - | 1,138 | |
| Adjustments on translation of non-Dollar subsidiaries | - | - | - | (20,087) | - | (20,087) | |
| Closing equity at 31 December 2008 | 1,045 | 144,682 | - | (16,026) | (14,143) | 115,558 |
All equity and reserves are attributable to the company's equity holders
.
| Volga Gas plc |
| NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (presented in US$ 000) |
1. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
1.1. Oil and gas exploration assets
The Company applies the "successful efforts" method of accounting for Exploration and Evaluation ("E&E") costs, in accordance with IFRS 6 "Exploration for and Evaluation of Mineral Resources". Costs are accumulated on a field-by-field basis. Costs directly associated with an exploration well, including certain geological and geophysical costs, and exploration and property leasehold acquisition costs, are capitalised until the determination of reserves is evaluated. If it is determined that commercial discovery has not been achieved, these costs are charged to expense after the conclusion of appraisal activities. Exploration costs such as geological and geophysical, that are not directly related to an exploration well are expensed as incurred.
Capital expenditure is recognised as property, plant and equipment or intangible assets in the financial statements according to the nature of the expenditure and the stage of development of the associated field, i.e. exploration, development, production.
Once commercial reserves are found, exploration and evaluation assets are tested for impairment and transferred to development tangible and intangible assets. No depreciation and/or amortisation is charged during the exploration and evaluation phase.
(a) Development tangible and intangible assets
Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells into commercially proven reserves, is capitalised within property, plant and equipment and intangible assets according to nature. When development is completed on a specific field, it is transferred to production or intangible assets. No depreciation or amortisation is charged during the work in progress phase.
(b) Oil and gas production assets
Development and production assets are accumulated generally on a field by field basis and represent the cost of developing the commercial reserves discovered and bringing them into production together with E&E expenditures incurred in finding commercial reserves and transferred from the intangible E&E assets as described above.
The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads, finance costs capitalised and the cost of recognising provisions for future restoration and decommissioning.
Where major and identifiable parts of the production assets have different useful lives, they are accounted for as separate items of property, plant and equipment. Costs of minor repairs and maintenance are expensed as incurred.
(c) Depreciation/amortisation
Oil and gas properties intangible assets are depreciated or amortised using the unit-of-production method. Unit-of-production rates are based on proved and probable reserves, which are oil, gas and other mineral reserves estimated to be recovered from existing facilities using current operating methods. Oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the field storage tank.
(d) Impairment - exploration and evaluation assets
Exploration and evaluation assets are tested for impairment prior to reclassification to development tangible or intangible assets, or whenever facts and circumstances indicate an impairment condition may exist. An impairment loss is recognised for the amount by which the exploration and evaluation assets' carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the exploration and evaluation assets' fair value less costs to sell and their value in use. For the purposes of assessing impairment, the exploration and evaluation assets subject to testing are grouped with existing cash-generating units of production fields that are located in the same geographical region.
(e) Impairment - proved oil and gas production properties and intangible assets
Proven oil and gas properties and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped together where the cash flows of each field are interdependent, for instance where surface infrastructure is used by one or more field in order to process production for sale.
1.2. Acquisitions, asset purchases and disposals
Acquisitions of oil and gas properties are accounted for under the purchase method where the business meets the definition of a business combination.
Transactions involving the purchases of an individual field interest, or a group of field interests, that do not qualify as a business combination are treated as asset purchases, irrespective of whether the specific transactions involved the transfer of the field interests directly or the transfer of an incorporated entity. Accordingly, no goodwill or deferred tax gross up arises. The purchase consideration is allocated to the assets and liabilities purchased on an appropriate basis.
Proceeds on disposal are applied to the carrying amount of the specific intangible asset or development and production assets disposed of and any surplus is recorded as a gain on disposal in the income statement.
1.3. Inventories
Crude oil inventories are stated at the lower of cost and net realisable value. Materials and supplies inventories are recorded at average cost and are carried at amounts which do not exceed the expected recoverable amount from use in the normal course of business.
2.. Intangible assets - Group
Intangible assets represent exploration and evaluation assets such as licenses, studies and exploratory drilling, which are stated at historical cost.
| Work in progress -exploration and evaluation | Exploration and evaluation | Development | Total | |
| At 1 January 2007 | 570 | 24,725 | - | 25,295 |
| Additions | 3,361 | 3,106 | 520 | 6,987 |
| Transfers | - | (21,215) | 21,215 | - |
| Exchange adjustments | 41 | 1,791 | - | 1,832 |
| At 31 December 2007 | 3,972 | 8,407 | 21,735 | 34,114 |
| Work in progress -exploration and evaluation | Exploration and evaluation | Development | Total | |
| At 1 January 2008 | 3,972 | 8,407 | 21,735 | 34,114 |
| Additions | 2,065 | 261 | 139 | 2,465 |
| Disposals | - | - | 4 | 4 |
| Exchange adjustments | (965) | (1,424) | (3,598) | (5,987) |
| At 31 December 2008 | 5,072 | 7,244 | 18,280 | 30,596 |
3. Property, plant and equipment - Group
Movements in property, plant and equipment, for the years ended 31 December 2008 and 2007 are as follows:
| Development assets | Work in progress | Subtotal - assets under construction | Producing assets | Land & Buildings | Other | Total | |
| Cost | |||||||
| At 1 January 2007 | - | - | - | - | - | 38 | 38 |
| Additions | 5,334 | - | 5,334 | - | 528 | 66 | 5,928 |
| Transfers | (1,658) | - | (1,658) | 1,658 | - | - | - |
| At 31 December 2007 | 3,676 | - | 3,676 | 1,658 | 528 | 104 | 5,966 |
| Accumulated depreciation | |||||||
| At 1 January 2007 | - | - | - | - | - | - | |
| Depreciation | - | - | - | (8) | - | (19) | (27) |
| At 31 December 2007 | - | - | - | (8) | - | (19) | (27) |
| Exchange adjustments | - | - | - | - | - | 1 | 1 |
| At 31 December 2007 | 3,676 | - | 3,676 | 1,650 | 528 | 86 | 5,940 |
| Development assets | Work in progress | Subtotal - assets under construction | Producing assets | Land & Buildings | Other | Total | |
| Cost | |||||||
| At 1 January 2008 | 3,676 | - | 3,676 | 1,658 | 528 | 104 | 5,966 |
| Additions | 24,568 | 539 | 25,107 | 296 | 207 | 3 | 25,613 |
| Transfers | (4,039) | - | (4,039) | 4,039 | - | - | - |
| At 31 December 2008 | 24,205 | 539 | 24,744 | 5,993 | 735 | 107 | 31,579 |
| Accumulated depreciation | |||||||
| At 1 January 2008 | - | - | - | (8) | - | (19) | (27) |
| Depreciation | - | - | - | (86) | - | (14) | (100) |
| At 31 December 2008 | - | - | - | (94) | - | (33) | (127) |
| Exchange adjustments | (3,763) | (83) | (3,846) | (925) | (119) | (12) | (4,902) |
| At 31 December 2008 | 20,442 | 456 | 20,898 | 4,974 | 616 | 62 | 26,550 |
4. Other non-current assets - Group
| 31 December 2008 | 31 December 2007 | |
| VAT recoverable | 7,209 | 2,612 |
| Other non-current assets | 36 | - |
| Total other non-current assets | 7,245 | 2,612 |
| Security deposit on acquisition of fixed assets | 20,422 | - |
Management believes that it will not be able to recover VAT specific to license and e&e contractors' payments until these licenses are revenue producing. Therefore this VAT is classified as a non-current asset.
The construction advance of $20.4 million relates to an advance paid by the company to Trans Nafta for the Group's share of costs associated with the construction of a Gas Processing Unit ("GPU") to be jointly owned by the Company and Trans Nafta. The payment reflected in the Cash flow statement differs from the amount shown in the non-current assets due to the forex exchange difference.
In October 2008, the Group a reached resolution in relation to a legal claim regarding its 2006 purchase of Gaznefteservice from Trans Nafta. As part of the resolution between the parties, the Group and Trans Nafta entered into a preliminary sale and purchase agreement under which the parties agreed to combine their GPUs, both of which were under construction at the time of the legal action. The combined GPU will be owned and operated on a 75/25 basis by the Group and Trans Nafta.
In accordance with this preliminary agreement, the Group made an advance to Trans Nafta of RUR600 million (approximately US$20.4 million). Management considers this advance will substantially cover the Group's 75% share of the cost of constructing the GPU. On completion of the GPU, Trans Nafta will register the asset with the authorities. When the completed GPU is registered, a final sale and purchase agreement will be entered into and title to the 75% of the completed GPU will pass to the Group.
The final legal form of ownership of the GPU assets has not been determined.
5. Cash and cash equivalents - Group
| 31 December 2008 | 31 December 2007 | |
| Cash at bank and on hand | 22,753 | 91,507 |
| Short-term bank deposits | 340 | 6,032 |
| Total cash and cash equivalents | 23,093 | 97,539 |
An analysis of Group cash and cash equivalents by bank and currency is presented in the table below:
| Bank | Currency | 31 December 2008 USD$ 000 | 31 December 2007 USD$ 000 |
| Cyprus | |||
| Bank of Cyprus | RUR | 3 | 55,100 |
|
| USD | 8 | 1 |
| United Kingdom | |||
| The Royal Bank of Scotland | USD | 19,196 | 26,570 |
|
| GBP | 20 | 268 |
| Russian Federation | |||
| Unicreditbank | RUR | 432 | 14,712 |
| Other banks | RUR | 409 | 876 |
| Unicreditbank | USD | 3,025 | 12 |
| Total cash and cash equivalents |
| 23,093 | 97,539 |
6. Inventories - Group
| 31 December 2008 | 31 December 2007 | |
| Production & other spares | 1,462 | 114 |
| Crude oil inventory | 23 | 31 |
| Total inventories | 1,485 | 145 |
7. Other receivables - Group
| 31 December 2008 | 31 December 2007 | |
| Prepayments, including construction advances made to suppliers | 8,314 | 2,480 |
| Other accounts receivable | 135 | 181 |
| Total other receivables | 8,449 | 2,661 |
8. Trade and other payables - Group
| 31 December 2008 | 31 December 2007 | |
| Trade and other payables | 2,416 | 1,099 |
| Value added tax provision | - | 237 |
| Total | 2,416 | 1,336 |
9. Cost of sales, operating and administrative expenses - Group
| Year ended 31 December 2008 | Year ended 31 December 2007 | |
| Cost of sales | 607 | 29 |
| Operating and administrative expenses | 12,784 | 8,392 |
| Total costs and expenses | 13,391 | 8,421 |
Total costs and expenses are analysed as follows:
| Year ended 31 December 2008 | Year ended 31 December 2007 | |
| Exploration & evaluation (a) | 5,598 | 1,893 |
| Legal expenses (b) | 2,536 | 156 |
| Directors' emoluments and other benefits (c) | 2,162 | 4,417 |
| Salaries (d) | 858 | 368 |
| Consulting service | 428 | 577 |
| Taxes other than payroll | 390 | 72 |
| Audit fees | 285 | 318 |
| Financing costs | 234 | - |
| Travel and transport | 232 | 88 |
| Rent & communications | 178 | 125 |
| Depreciation | 100 | 27 |
| Insurance | 22 | 112 |
| Other | 368 | 268 |
| Total costs and expenses | 13,391 | 8,421 |
(a) Exploration & evaluation
During 2008 expenditure on seismic studies on the Pre-Caspian license area and the supra-salt study of the Karpenskiy licence was expensed as management believes that the expenditure is not related closely enough to specific oil and gas reserves to allow its capitalisation in accordance with IFRS 6 "Exploration for and evaluation of Mineral Resources".
| Year ended 31 December 2008 | Year ended 31 December 2007 | |
| Seismic studies | 5,553 | 1,777 |
| Ecological monitoring | 45 | 116 |
| 5,598 | 1,893 |
(b) Legal expense
An amount of $2,366,000 is included in legal expenses in 2008 in respect of the 2008 court proceedings brought by Alexander Kulyaev to purchase of Gaznefteservice from Trans Nafta in 2006. The costs include legal and other consultation services related to preparation for the court proceedings. The court proceedings were withdrawn in November 2008 following resolution of the matter.
10. Other gains and losses - Group
| Year ended 31 December 2008 | Year ended 31 December 2007 | |
| Realised gain on forward currency contract | 4,179 | 949 |
| Gain on forward currency contracts | - | 2,756 |
| Foreign exchange loss | (3,160) | (235) |
| Other gains | 237 | - |
| Total other gains and losses | 1,256 | 3,470 |
Realised gains on forward currency contracts for the years ended 31 December 2008 includes net gain of $560,000 from two open forward currency contracts recognised in 2007 on fair value and net gain of $3,619,000 from new forward currency contracts settled during the reporting period.
11. Current and Deferred income tax - Group
| Year ended 31 December 2008 | Year ended 31 December 2007 | |
| Current income tax | (1,600) | (270) |
| Net deferred income tax | 1,358 | 528 |
| (242) | 258 |
Income tax benefit represents the effect of corporate profit tax provision in the amount of $900,000 and deferred tax accrual in the amount of $1,358,000.
The weighted average applicable tax rate was 21.7% (2007: 10.1%). The increase is caused by a change in the profitability of the group's subsidiaries in the respective countries.
Deferred taxation is attributable to the temporary differences that exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.
12. Earnings per share - Group
Loss per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary and diluted shares in issue during the year excluding ordinary shares purchased by the company and held as treasury shares.
| Year ended 31 December 2008 | Year ended 31 December 2007 | |
| Net loss attributable to equity shareholders (per share) | 0.19 | 0.06 |
| Basic weighted number of shares | 54,008,474 | 46,376,181 |
13. Cash flows used in operating activities - Group
| Year ended 31 December 2008 | Year ended 31 December 2007 | |
| Loss for the period before tax | (10,057) | (2,831) |
| Adjustments to loss before tax: | ||
| Share grant expense | 1,138 | 3,871 |
| Depreciation | 100 | 27 |
| Other non-cash operating gains | (237) | - |
| Charge for provision | 234 | - |
| Interest accrued | - | (94) |
| Gain on forward contract | - | (2,756) |
| Foreign exchange differences | (1,841) | 235 |
| Total effect of adjustments | (608) | 1,283 |
| Increase in long-term assets | (5,981) | - |
| Operating cash outflow prior to working capital | (16,645) | (1,548) |
| Working capital changes | ||
| Increase in trade and other receivables | (33) | (4,510) |
| Decrease in derivative financial instruments | 2,756 | - |
| Increase in payables | (327) | 1,066 |
| Increase in inventory | (1,611) | (145) |
| Net cash outflow from operating activities | (15,860) | (5,137) |
14. Contingencies and Commitments
(a) Pre-Caspian Gas Company
(i) Karpenskiy Licence Area
In accordance with the amended Karpenskiy Licence Agreement ("Amended KLA") PGK is required to acquire 400 km2 of 3D seismic studies and to drill 14 wells. At the balance sheet date the Company had acquired 402.7 km2 of 3D seismic studies, thereby completing the license requirements on 3D acquisition. As at the balance sheet date seven of the committed wells have been drilled. Management currently estimates that expenditure to drill the balance will be approximately US$10,000,000.
(ii) Pre-Caspian Licence Area
In accordance with the license agreement for the Pre-Caspian license area, PGK is required to acquire an additional 500 km of 2D seismic in 2009. At balance sheet date the company had acquired 1000km. The cost of seismic acquisition in 2009 is expected to be US $1,478,000. The Company may apply for exchange of existing 2D acquisition obligations to 3D seismic acquisition. The overall cost of seismic acquisition is expected to remain the same.
(iii) Urozhainoye Licence Area
There are no capital commitments in respect of the Urozhainoye Licence Agreement for 2009.
(b) Gaznefteservice- Vostochny-Makarovskoye Licence Area
In accordance with the Vostochny Makarovskoye licence agreement, GNS must drill at least one well by July 2008. As of balance sheet date two wells have been completed. As of balance sheet date approximately US $512,449 remained to be paid under the drilling contract with BK Eurasia.
15. Post-Balance Sheet Events
Results of drilling
On 3 February 2009 the Group announced the results of Well #4, a development well on the Vostochny Makarovskoye field that had commenced drilling in November 2008. Net gas pay measured in the well was substantially less than anticipated and management has suspended the well pending full evaluation of the results. The impact of the results of the well on estimated gas and condensate reserves in the Vostochny-Marakovskoye field is yet to be estimated. The immediate plan for the field is to commence production from the first two wells early in 2H 2009.
In accordance with the successful efforts method of accounting, the costs associated with the well (US$ 3,425,000) continue to be capitalised as 'development assets'
Executive Share Option Plan - grant of options
On 14 January 2009, the Company announced its intention to grant 568,732 thousand share options to Tony Alves, CFO, under the 2008 Executive Share Option Plan. The options are due to vest in 8 semi annual tranches over a period of 4 years providing certain performance conditions related to the Company's share price are met. The options are intended to have an exercise price of £1.00 representing the quoted market price in Volga Gas plc.