VGAS.L Regulatory News (VGAS)

31 Mar 2008 07:02

Volga Gas PLC31 March 2008 31 March 2008 VOLGA GAS PLC Preliminary Results for the Year Ended 31 December 2007 Volga Gas Plc (the "Company"), is pleased to announce its maiden preliminaryresults for the year ended 31 December 2007. Highlights - Admission to AIM on 25 April 2007 raising $135 million (before expenses) - Vostochny-Makarovskoye #1 ("VM#1") production well has significantly exceeded expectations with more than 200m of gross pay in the Bobrikovsky and Evlano-Livenskiy horizons with good production rates in both - VM#1 on plan for production in 2008 - Completed the acquisition of 107km2 of 3D seismic over the Yuzhny-Ershovskoye and 160km2 on the Yuzhny-Mokrousovskoye structure. The data is now being processed and interpreted by Schlumberger and this is near completion on Yuzhny-Ershovskoye - On plan to commence drilling of the first of two sub-salt wells on the Karpenskiy licence area in summer 2008 - Successful amendment to terms of Karpenskiy Licence Agreement - Acquired Urozhainoye-2 licence at government-mandated auction for $1.7 million - First revenue delivered ahead of schedule from the successful Uzenskaya supra-salt well on Karpenskiy Licence Area ("KLA") - Uzenskaya Well #1 flowed 2.5 cubic meters of oil for just less than 30 minutes of testing (125 cubic meters a day or 788 bbls of oil per day) at API of 34 in a drillstem test - Strong cash balance of $97.5 million at period end Mikhail Ivanov, Chief Executive Officer of Volga Gas, said: "I am thrilled with the progress that has been made since the time of the IPO.Drilling results have come in significantly ahead of where we were at the timeof the IPO. The tested pay zone on the Evlano-Livenskiy horizon on VM#1 hasmore than tripled and these results alone will have a material impact on ourreserve estimates. The price of unregulated gas in to the Volga region hassurpassed our initial expectations and the Board looks to the immediate and longterm future with confidence." Volga Gas is an independent gas exploration and production company, whichcurrently holds four subsoil licenses in the Volga Region of European Russia For additional information please contact:Financial Dynamics +44 (0)20 7831 3113Billy CleggAlex Beagley KBC Peel Hunt (Nominated Adviser) +44 (0)20 7418 8900Jonathan MarrenAlina Savych The information contained in this announcement has been reviewed and verified byMr. Mikhail Ivanov, Director and Chief Executive Officer of Volga Gas plc, forthe purposes of the Guidance Note for Mining, Oil and Gas companies issued bythe London Stock Exchange in March 2006. Mr. Mikhail Ivanov holds a M.S. Degreein Geophysics from Novosibirsk State University. He has also MBA degree fromKellogg School of Management (Northwestern University). He is a member of theSociety of Petroleum Engineers. Availability of report and accounts The Group's full report and accounts will be dispatched to shareholders as soonas is practicable. Copies will also be available on the Company's websitewww.volgagas.com and on request from the Company at, 7th Floor, Phoenix House,18 King William Street, London EC4N 7HE. Annual General Meeting The annual general meeting is to be held on 17 June 2008 at 09.00. Notice ofthe AGM will be sent to shareholders with the Group's report and accounts. Chairman's Statement Volga Gas was admitted to trading on AIM in April 2007 raising $135 millionbefore expenses. The funds are being used to bring Vostochny-Makarovskoye, ourproved-undeveloped asset, into production and complete the exploration of thehighly prospective sub-salt structures on the Karpenskiy licence area. Bothblocks are in European Russia, close to domestic markets and with pipelineinfrastructure nearby. During the course of the year we have moved meaningfullyalong the road to the completion of these key objectives in the timeframe whichwe laid out at the time of the listing. Both work streams are on budget and ontime. In addition, the Uzenskaya field came on production at the end of theyear, creating revenue a year ahead of schedule, and we purchased Urozhainoye-2licence at auction. Management is delighted at the successful start to our lifeas a public company. Volga Gas was initially created to complete the exploration of the sub-saltstructures on the Karpenskiy Licence Area. Not only were we excited by thepotential of the two structures, Yuzhny-Ershovskoye and Yuzhny-Mokrousovskoye,but we were convinced that the conditions were right for the creation of anindependent gas production company in Russia. Events are beginning to prove ourthesis correct. That Gazprom's major fields are in decline is no secret. Inorder to stimulate investment in the exploration and production of gas, theRussian government has announced and begun to implement a plan to increasedomestic regulated gas prices by approximately 25% per annum until 2011, whenthey should reach netback parity. We are already beginning to see unregulatedgas prices in the Volga Region in excess of $100/mcm on the newly-implementedelectronic trading platform. Concurrently, we are witnessing significantincreases in European gas prices with Gazprom expected to achieve average salesprices in excess of $300/mcm in 2008. All these events point to the righteconomic backdrop against which to build a significant gas exploration andproduction business in Russia. None of the above would matter if we were not able to turn our potential in toresults. To this end 2007 has laid the groundwork and solid foundations forwhat we expect to be a very exciting and highly newsworthy 2008. The fieldworkis complete over the two deep structures and Schlumberger are close to finishinga comprehensive set of seismic studies which will allow us to start drilling twodeep exploration wells on the Karpenskiy Licence Agreement. OnVostochny-Makarovskoye, well #1 has significantly exceeded our expectations,more details of which are contained in the Operations Review. More importantly,work is well underway and the initial orders have been placed for the gasprocessing facility, which will allow us to produce gas and condensate beforethe end of 2008 as indicated at the time of IPO. Meanwhile, first revenue has been delivered ahead of schedule from thesuccessful Uzenskaya supra-salt well on Karpenskiy. The low cost supra-saltdrilling campaign is due to restart in mid-2008 and is focused on deliveringadditional early cash flow to the Company. We also successfully acquired the Urozhainoye-2 licence during the year.Located only 15 kilometers to the north of the Karpenskiy licence area, theoperating synergies mean that we should be able to deliver additional value toshareholders with little additional management input. We continue to review andparticipate in other merger and acquisition opportunities where we believe thatwe can deliver meaningful value to shareholders. We start the year with a significant cash balance of US$97.5 million and a busywork programme ahead of us. We are working to ensure that Volga Gas maintains asignificant cash cushion before we start to generate meaningful cash fromVostochny-Makarovskoye. We are well positioned to fund our work programme. This has been made possible by the hard work and dedication of a small team ofemployees who have worked tirelessly throughout the year to deliver theimpressive results which we are now able to report. I would like to thank themfor their hard work. Volga Gas now begins an exceedingly exciting period in its short history. Theboard looks to the year ahead with confidence. Alexey V. Kalinin Chairman Chief Executive's Review Volga Gas concentrated this year on two value-adding areas; firstly, to ensurethat production, and hence cash-flow, starts from the Vostochny-Makarovskoyefield ("VM") by end-2008, as promised; secondly, to undertake the geologicalstudies which will allow us to maximize the chances of drilling success on thetwo deep structures on the Karpenskiy Licence Area ("KLA"), where we will startdrilling during 2008. With the funds raised from our successful IPO andAdmission to AIM, and after a productive year of operations we are nowwell-placed to meet both these objectives on time. In addition, we havesuccessfully commenced production on the Uzenskaya field, delivering revenue,albeit limited, a year ahead of plan. We also acquired the Urozhainoye-2Licence Area at government-mandated auction. We raised $135 million at IPO before expenses, this is sufficient to meet ourkey objectives. Bringing VM in to production by end-2008 is expected to providethe cash-flow needed to allow the Group to further develop its other assets.Thus, during the year we have started production drilling and concurrentlyacquiring the equipment for the gas processing plant. At the time of thisreport, we have successfully completed drilling operations at VM #1, furtherdetails of which can be found in the Operations Review. The results haveexceeded our initial expectations. Plans for surface facilities arewell-advanced such that we fully-expect that they will be operational byend-2008. We are excited that a year following our Admission to AIM we are on the verge ofdrilling the highly-prospective sub-salt structures on the KLA. These sub-saltstructures have the potential to significantly increase the value of the Group.Earlier in the year we completed the acquisition of 267km2 of 3-D seismic overthe Yuzhny-Ershovskoye and Yuzhny-Mokrousovskoye sub-salt structures. That datawas handed over to Schlumberger for processing and interpretation. At the dateof this report, that task is almost complete on Yuzhny-Ershovskoye. They haveundertaken an almost exhaustive series of processes to determine the mosteffective well location. The comparative cost of work at this stage compared todrilling costs makes this a highly-effective use of funds. We started selling oil from test production on Uzenskaya well #1 on the KLA inNovember 2007; achieving first revenue a year ahead of plan. Albeit limited,the cash flow it will generate is expected to at least partially cover ourmodest cash burn. We have acquired 140km2 of 3-D seismic over five furthersupra-salt structures with a view to re-commence drilling operations in summer2008. It is our intention to deliver early cash-flow from this exploration/appraisal drilling activity. The acquisition of the Urozhainoye-2 licence in October via government-mandatedauction for $1.7 million highlighted a number of our key aims. Our localknowledge meant that we were well placed to identify the licence area'spotential value. It is located approximately 15km from the northern edge of theKLA, creating significant synergies with our existing operations on KLA and thePre-Caspian Licence Area. Like both those licence blocks Urozhainoye-2 islocated close to excellent pipeline and other transportation infrastructurewhich directly feed high-demand markets, enabling us to generate quick cash flowonce production starts. Early in 2008 we obtained amendments to our Karpenskiy licence agreementremoving historical breaches we inherited from LUKoil; this brings all ourfields in to compliance with their licence obligations. We monitor closely theperformance of all our operations against the terms of the licence agreements,be that in terms of work programmes or environmental requirements. Our task hasbeen made considerably easier by the amendment to the terms of Karpenskiylicence agreement. Our other three licences have been recently issued and areall valid for 20-25 years from date of issue. The price of unregulated gas delivered in to the Volga region, as reflected onMezhregiongas' electronic trading platform, has outpaced our initialexpectations with the price of gas delivered to the region in excess of US$100/mcm. After a warm winter in 2006/07 this current winter has again shown thatthe demand/supply balance to the west and south of Russia remains tight. Theconditions to build a significant independent gas company in Russia arestrengthening; Volga Gas aims to take advantage of these conditions. All of the above has been delivered with a small team of professionals workingsmartly. Volga Gas has a culture of delivering on our commitments with a smallteam of great people working hard - this culture will be reinforced in the yearahead. The coming year promises to be a busy and exciting one for the team; I amconfident that they will continue to deliver great results on schedule and onbudget. Mikhail Ivanov Chief Executive Officer Operational Review Operations overview The Company focused on two principal areas in 2007: exploration activities onYuzhny-Ershovskoye and Yuzhny-Mokrousovskoye, on the Karpenskiy Licence Area ("KLA"), and secondly, bringing Vostochny-Makarovskoye in to production byend-2008, as promised. In addition, we have drilled two exploration wells onthe Uzenskaya supra-salt field and brought it in to production a year ahead ofplan. As winter arrived we started acquiring 3-D seismic over the supra-saltstructures on the KLA and 2-D seismic acquisition over the Pre-Caspian LicenceArea. Karpenskiy Licence Area In early 2008 we successfully amended the terms of the Karpenskiy LicenceAgreement. The Company inherited certain licence breaches when it acquired thelicence from a LUKoil subsidiary. The amended licence agreement requires theCompany to finalize the acquisition of 400km2 of 3-D seismic and drill a furthernine exploration and/or production wells over the next two years. With therecent acquisition of 140km2 of 3-D seismic over a number of supra-saltstructures in the south of KLA the Company is expected to fully-satisfy itsseismic acquisition requirements. Our forthcoming sub and supra-salt drillingprogramme is expected to fully-satisfy the drilling requirements. Sub-salt The Company acquired 107km2 and 160km2 of 3-D seismic over theYuzhny-Ershovskoye and Yuzhny-Mokrousovskoye structures during 2007. The datafrom both structures has been delivered to Schlumberger for extensiveprocessing, including pre-stack depth migration, and interpretation. Based onthis information it is expected that the first of two deep wells will be spuddedin summer 2008, with the second well to follow thereafter. The Yuzhny-Ershovskoye structure has the following potential resourcesassociated with it: Prospective Resources Low Estimate Best Estimate High Estimate Risk FactorCondensate (mbbls) 18,851 42,394 59,827 0.23Gas (bcm) 15.3 34.5 48.6 0.23*Each of the Company's licences is wholly-owned, therefore gross reserves and resources are equal to netreserves and resources. Source: Schlumberger Supra-salt The Company drilled two exploratory wells on shallow supra-salt structures inthe south of the licence area during the year and discovered the Uzenskayafield. The first, Uzenskaya #1 flowed at an equivalent of 788 barrels of oilper day in a drill stem test. The second, Uzenskaya #2 tested high rates ofwater in the Jurassic and Triassic layers, confirming good collector propertiesand has been liquidated. Production from Uzenskaya #1 has been kept below 100 barrels of oil per day tolimit the production of free gas. The well was drilled at the top of thestructure and hit a small gas cap as well as the underlying oil. The surfacefacilities will be upgraded during the course of 2008 to allow the Company toutilize the gas which should lead to increased oil production rates. The Company has completed the acquisition of 140km2 of 3-D seismic over sixidentified structures (including Uzenskaya). The drilling programme willrecommence in mid-2008 once this data has been processed and interpreted. The Uzenskaya field has no SPE standard reserves associated with it. Theestimation of reserves under SPE standards will be undertaken once all nineexploration wells have been drilled on the identified supra-salt structures. Vostochny-Makarovskoye Licence Area The Company acquired 20km2 of 3-D seismic over the Vostochny-Makarovskoyelicence area during 3Q 2007 to enable us to develop a better reservoir model.Immediately after this was acquired well Vostochny-Makarovskoye #1 was spudded.The well was designed to target the Bobrikovsky and Evlano-Livenskiy horizons. The Bobrikovsky horizon was cored and tested between 1587m and 1623m (TVD MSL).The open hole test yielded 40-70 mcm/day (1413-2472mcf/day) of gas. The Evlano-Livenskiy horizon proved to be considerably more promising than wehad originally anticipated. The original discovery well drilled in 1989-90, byLUKoil-Nizhnevolzhskneft encountered a 47m gross pay zone with gas down to2,322m (TVD MSL) in the Evlano-Livenskiy horizon. The gas-water contact was notestablished. The gross-pay zone has now been confirmed to exceed 160m. Due tothe absence of impermeable shale zones in the reservoir gross and net pay arealmost identical. The inferred open hole test results are summarized below:Interval Tested Gas CondensateDepth mcm/day mcf/day t/day bbl/day (TVD MSL)2275.0 - 2295.0 34 1,200 - -2296.0 - 2313.0 54 1906 - -2315.0 - 2332.0 24 847 9 742334.0 - 2350.0 19 671 13 1072350.0 - 2372.5 40 1412 29 2382375.0 - 2402.0 76 2670 72 5902408.7 - 2442.0 20 706 92* 754* * The condensate test results have been estimated from the previousinterval's test results and may change significantly following cased holetesting. The well has been cased and is about to be perforated; cased hole testing isexpected to take a few months. We also identified the Eletsky layer at 2091-2107m (TVD MSL) which contains gas. During open hole testing it flowed at 2mcm/day (71mcf/day); however, furthertesting will be required to identify the potential of this layer after acidstimulation. There are no SPE reserves associated with the Eletsky layer. The current BK Eurasia rig is contracted to drill a further four more wells onceit has finished with completion on VM#1. We have pre-ordered approximately 80% of the surface infrastructure required toprocess up to 500mcm/day of gas. Throughput capacity can be increased throughadding additional lines. We expect to upgrade the facility such that it canprocess up to approximately 3mmcm/day (1bcm per annum) during the course of 2008and 2009. The Vostochny-Makarovskoye Licence Area has the following proved, probable, andpossible reserves associated with it (the reserves will be upgraded after thesecond well has been drilled): Net Proved Proved & Probable Proved, Probable & PossibleReservesCondensate (mbbls) 3,886 18,892 52,283Gas (bcm) 2.1 7.2 18.3 Source: Schlumberger Pre-Caspian Licence Area The Pre-Caspian Licence Area has no SPE standard reserves associated with it.As of the date of this report Volgogradneftegeophysika has acquired 500km of 2-Dseismic over the northern part of licence area. An additional 100 km will beacquired prior to starting processing and interpretation to identify structures. A further 400 km will be acquired over the southern sector of the licence overthe winter of 2008-2009. The results of this seismic will be processed and interpreted during 2008 and2009 and will provide a base for further seismic studies and possiblyexploration drilling. Urozhainoye-2 The Urozhainoye-2 Licence Area has no SPE standard reserves associated with it.On 7 September 2007 the Company acquired Urozhainoye-2 at government mandatedauction for approximately US $1.7 million. The licence area covers 354km2 andis located approximately 15km to the north of the Company's Karpenskiy LicenceArea and is in close proximity with up to 30 gas/condensate/oil fields. Thesefields include Preobrazhanskoye, Lyubimovskoye and Gorchakovskoye fields ofSaratovneftegas. The licence area is principally an exploration asset. Notwithstanding, thelicence area has had one well drilled on it in 1990 which discovered theSobolevskoye field which has Russian category C1 recoverable reserves of 0.8million barrels of oil. The well produced more than 1,200 bbls/day of oil and55mcm/day (1,942mcf/day) of gas at 8mm choke whilst on test production. There are no C2, C3 reserves as no proper seismic was previously acquired acrossthe licence area but D1 recoverable resources of 49 million barrels of oilequivalent were estimated. The Company will publish SPE standard reserves oncompletion of initial exploration. As of the date of this report the Company has acquired 45 km of 2-D seismic overthe area. M. Yu. Ivanov Chief Executive Officer Financial Review Results for the year The Group recorded a loss of $2.6 million for the year ended 31 December 2007(2006: Loss $1.3 million). No dividends have been paid or proposed for the year(2006: none). Issue of share capital During the year to 31 December 2007, the Company issued 22.9 million shares,generating $125.1 million in net proceeds (2006: $15.8 million through variousinstitutional placements).Institutional Placing April, May 2007 22.5 million shares US$135 millionRestricted Share Agreements March, May, December 2007 0.4 million shares US$0 million Admission to AIM The Company's shares were admitted to trading on AIM, a market operated by theLondon Stock Exchange on 25 April 2007. On the same date, the Company closed theplacement of 20.8 million ordinary 1p shares priced at US$6.00 per share,raising US$125 million before expenses. On 25 May 2007 the Company placed a further 1.7 million ordinary 1p shares atUS$6.00 per share, subject to the terms of an over-allotment option raising afurther US$10 million before expenses. Cash flow Group net cash outflow from operating activities was $5.1 million (2006: $0.9million), consisting principally of general and administrative expenses incurredto run the Group's operations and expensed exploration and evaluationactivities. As at 31 December 2007, the Group held cash balances of $97.5 million (2006:$3.3 million). The Group intends to fund its operating expenditures using a combination of cashflow from operations and cash-on-hand. The Group will also consider raisingcapital through debt issuances to more fully explore and develop its asset base. The Group is currently capable of producing approximately 100 barrels of oil perday from one producing well in the Uzenskaya field. The Group's production isbeing sold on the domestic crude oil markets. The Group's financial statements are presented on a going concern basis. Capital expenditure Capital expenditures for the year totalled $12.9 million (2006: $25.6 millionincluding acquisitions), comprising: 2007 2006 (US$ million) (US$ million)Oil & Gas Exploration Assets 1.2 23.7Oil & Gas Exploration Assets (Work in Progress) 3.4 0.0Oil & Gas Producing Assets 5.8 0.0Licence Acquisition Costs (via auction) 1.9 1.5Real Estate Assets 0.5 0.0G&A Assets 0.1 0.0Total 12.9 25.2 Turnover The Group generated $0.02 million in turnover from the sale of 653 barrels ofcrude oil. An additional 1,190 barrels of crude oil production was held as crudeoil inventory as of the balance sheet date. Crude oil sales were made into thedomestic market during the period. Operating loss The operating loss for the year was $8.4 million (2006: $1.0 million) whichincludes charges relating to share based payments of $3.9 million (2006: $0.0million). Loss before and after tax The Group recognised a loss before tax of $2.8 million (2006: Loss $1.3 million)and after tax loss of $2.6 million (2006: Loss $1.4 million). This includesother income of $5.6 million (2006: (-$0.4 million) of which, US$0.9 million hasbeen realized and US$2.8 million fair valued from a number of non-deliverableforward US$/RUR contracts used to manage the Group's foreign exchangeobligations. Alistair StobieChief Financial Officer VOLGA GAS plc IFRS CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT FOR THE YEAR ENDED 31 DECEMBER 2007 Group Balance Sheet (presented in US$ 000) At 31 December: Notes 2007 2006Non-current assetsIntangible assets 2 34,114 25,295Property, plant and equipment 3 5,940 38Other non-current assets 4 2,612 332Deferred tax assets 645 117 43,311 25,782Current assetsCash and cash equivalents 97,539 3,328Derivative financial instruments 2,756 -Inventories 5 145 -Other receivables 6 2,661 1,070 103,101 4,398Total assets 146,412 30,180Equity 1,037 579 Share capitalShare premium (net of issue costs) 143,552 15,251Other reserves 4,061 1,048Accumulated loss (3,844) (1,271)Total equity 144,806 15,607Non-current liabilities - 13, 012 Long term loansCurrent liabilities 1,606 1,147 Trade and other payablesCurrent portion of long term debt - 414 1,606 1,561 146,412 30,180 Total liabilities and shareholders'equity Group Income Statement (presented in US$ 000) Notes Year ended 31 26 October 2005 to 31 December 2007 December 2006 Continuing operationsRevenue 19 -Cost of sales (29) -Gross loss (10) -Operating and administrative expenses (8,392) (979)Operating loss (8,402) (979)Interest expense (373) (414)Interest income 2,474 -Other gains and losses - net 7 3,470 5Loss for the period before tax (2,831) (1,388)Deferred income tax 528 117Current income tax (270) -Loss for the period attributable to equity (2,573) (1,271)holdersof the CompanyLoss per ordinary share (in US dollars) $ $- Basic and diluted 8 (0.06) (0.05) Group Cash Flow Statement (presented in US$ 000) Notes Year ended 31 26 October 2005 to 31 December 2007 December 2006Net cash inflow used in operating activities 9 (5,137 ) (920) Cash flow from investing activitiesPurchase of intangible assets 2 (6,987) (4,309)Purchase of property, plant and equipment 3 (5,928) (38)Purchase of licence and receivables - (21,297)Net cash used in investing activities (12,915) (4,347) Cash flow from Financing activitiesProceeds from issue of shares (net of issue costs) 125,118 15,830(Repayment)/receipt of long term borrowings (14,387) 13,600Net cash from financing activities 110,731 29,430 Exchange gain on cash and cash equivalents 1,532 462 Net increase in cash and cash equivalents 94,211 3,328Cash and cash equivalents at beginning of the period 3,328 - Cash and cash equivalents at end of the period 97,539 3,328 Group Statement of Changes in Shareholders' Equity (presented in US$ 000) Notes Share Share Other Currency Accumulated Loss Total Capital Premium Reserves Translation Reserve Opening equity as at 26 - - - - - -October 2005 Loss for the period - - - - (1,271) (1,271)Share capital issued 579 15,251 - - - 15,830Discount on long term debt - - 588 - - 588Adjustments on translation of - - - 460 - 460non-Dollar subsidiariesClosing equity attributable 579 15,251 588 460 (1,271) 15,607to the company's equityholders at 31 December 2006 Opening equity as at 1 579 15,251 588 460 (1,271) 15,607January 2007 Loss for the year - - - - (2,573) (2,573)Share capital issued 450 134,550 - - - 135,000Share issue costs - (10,120) - - - (10,120)Discount on long term debt - - (588) - - (588)Share based payments 8 3,871 - - - 3,879Adjustments on translation ofnon-Dollar subsidiaries - - - 3,601 - 3,601Closing equity attributableto the company's equityholders at 31 December 2007 1,037 143,552 - 4,061 (3,844) 144,806 Company Statement of Changes in Shareholders' Equity (presented in US$ 000) Notes Share Share Premium Accumulated Total Capital Profit/Loss Opening equity as at 26 October 2005 - - - - Loss for the period - - (40) (40)Share capital issued 579 15,251 - 15,830Closing equity attributable to the company's 579 15,251 (40) 15,790equity holders at 31 December 2006 Opening equity as at 1 January 2007 579 15,251 (40) 15,790 Profit for the year - - 1,448 1,448Share capital issued 450 134,550 - 135,000Share issue costs - (10,120) - (10,120)Share based payments 8 3,871 - 3,879Closing equity attributable to the company'sequity holders at 31 December 2007 1,037 143,552 1,408 145,997 1. Summary of significant accounting policies The principal accounting policies applied in the preparation of theseconsolidated financial statements are set out below. These policies have beenconsistently applied to all the years presented, unless otherwise stated. 1.1. Exploration & evaluation The Company applies the "successful efforts" method of accounting forExploration and Evaluation ("E&E") costs, in accordance with IFRS 6 "Explorationfor and Evaluation of Mineral Resources". E&E expenditure is capitalised when itis considered probable that future economic benefits will be recoverable.Until such time, E&E expenditure is expensed as incurred. E&E expenditure capitalized as intangible assets include license acquisitioncosts, geological and geophysical studies, seismic data acquisition andinterpretation, exploration drilling. Exploration and evaluation expenditurewhich is not sufficiently closely related to a specific mineral resource tosupport capitalisation is expensed as incurred. E&E assets are carried forward, until the existence, or otherwise, of commercialreserves have been determined subject to certain limitations including reviewfor indications of impairment. Once commercial reserves have been discovered, the carrying value, after anyimpairment loss, of the relevant E&E assets is transferred to developmenttangible and intangible fixed assets. No depreciation and or amortization ischarged during the exploration and development phase. If however, commercialreserves have not been discovered, the capitalised costs are charged to expenseafter the conclusion of appraisal activities. (a) Development tangible and intangible assets Expenditure on the construction, installation or completion of infrastructurefacilities such as platforms, pipelines and the drilling of commercially provendevelopment wells, is capitalised within property, plant and equipment andintangible assets according to nature. When development is completed on aspecific field, it is transferred to production assets. No depreciation oramortization is charged during the exploration and evaluation phase. (b) Oil and gas production assets Development and production assets are accumulated generally on a field by fieldbasis and represent the cost of developing the commercial reserves discoveredand bringing them in to production together with E&E expenditures incurred infinding commercial reserves transferred from intangible E&E assets as outlinedin accounting policy above. The cost of development and production assets also includes the cost ofacquisitions and purchases of such assets, directly attributable overheads,finance costs capitalised and the cost of recognising provisions for futurerestoration and decommissioning. Where major and identifiable parts of the production assets have differentuseful lives, they are accounted for as separate items of property, plant andequipment. Costs of minor repairs and maintenance are expensed as incurred. (c) Depreciation/amortisation Oil and gas properties and intangible assets are depreciated or amortised usingthe unit-of-production method. Unit-of-production rates are based on proved andprobable reserves, which are oil, gas and other mineral reserves estimated to berecovered from existing facilities using current operating methods. Oil and gasvolumes are considered produced once they have been measured through meters atcustody transfer or sales transaction points at the outlet valve on the fieldstorage tank. (d) Impairment - exploration and evaluation assets Exploration and evaluation assets are tested for impairment when reclassified todevelopment tangible or intangible assets, or whenever facts and circumstancesindicate impairment. An impairment loss is recognised for the amount by whichthe exploration and evaluation assets' carrying amount exceeds their recoverableamount. The recoverable amount is the higher of the exploration and evaluationassets' fair value less costs to sell and their value in use. For the purposesof assessing impairment, the exploration and evaluation assets subject totesting are grouped with existing cash-generating units of production fieldsthat are located in the same geographical region. (e) Impairment - proved oil and gas production properties and intangibleassets Proven oil and gas properties and intangible assets are reviewed annually forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. An impairment loss is recognised for theamount by which the asset's carrying amount exceeds its recoverable amount. Thecarrying value is compared against the expected recoverable amount of the asset,generally by future value of the future net cash flows, expected to be derivedfrom production of commercial reserves. The cash generating unit applied forimpairment test purposes is generally the field, except that a number of fieldinterests may be grouped together where the cash flows of each field areinterdependent. 1.2. Acquisitions, Asset Purchases and Disposals Acquisitions of oil and gas properties are accounted for under the purchasemethod where the business meets the definition of a business combination. Transactions involving the purchases of an individual field interest, or a groupof field interests, that do not qualify as a business combination are treated asassets purchases, irrespective of whether the specific transactions involved thetransfer of the field interests directly or the transfer of an incorporatedentity. Accordingly, no goodwill, no deferred tax gross up arises, and theconsideration is allocated to the assets and liabilities purchased on anappropriate basis. Proceeds on disposal are applied to the carrying amount of the specificintangible asset or development and production assets disposed of and anysurplus 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 carriedat amounts which do not exceed their respective amounts recoverable in thenormal course of business. 1.4. Revenue recognition Revenue comprises the fair value of the consideration received or receivable forthe sale of oil in the ordinary course of the group's activities. Revenue isshown net of value added tax, returns, rebates and discounts and aftereliminating sales within the group. (a) Sales of goods Revenue from the sale oil is recognised when goods are delivered to customersand title has transferred. Revenue is stated net of value-added tax. (b) Interest income Interest income is recognised on a time-proportion basis using the effectiveinterest method. 2. Intangible assets - Group At 31 December 2006 intangible assets consisted only of exploration andevaluation (E&E) and work in progress. Work in progress - Exploration and Development Total exploration and evaluation evaluation US$ 000 US$ 000 US$ 000 US$ 000 At 1 January 2006 - - - - Additions 570 24,725 - 25,295Disposals - - -At 31 December 2006 570 23,725 - 25,295 At 31 December 2007 intangible assets consisted of exploration and evaluationassets such as licenses, studies and exploratory drilling. Work in progress - Exploration and Development Total exploration and evaluation evaluation US$ 000 US$ 000 US$ 000 US$ 000 At 1 January 2007 570 24,725 - 25,295Additions 3,361 3,106 520 6,987Disposals - - -Transfers - (21,215) 21,215 - Exchange adjustments 41 1,791 - 1,832At 31 December 2007 3,972 8,407 21,735 34,114 3. Property, plant and equipment - Group Development assets Land & Buildings Producing assets Other TotalCost US$ 000 US$ 000 US$ 000 US$ 000 US$ 000At 1 January 2007 - - - 38 38Additions 5,334 528 - 66 5,928Disposals - - - - -Transfers (1,658) - 1,658 - -At 31 December 2007 3,676 528 1,658 104 5,966Accumulated depreciation At 1 January 2007 - - - - -Depreciation - - (8) (19) (27)At 31 December 2007 - - (8) (19) (27)Exchange adjustments - - - 1 1At 31 December 2007 3,676 528 1,650 86 5,940 Land and buildings are stated at historical cost. 4. Other non-current assets - Group 31 December 2007 31 December 2006 US$ 000 US$ 000 VAT recoverable 2,612 332 2,612 332 Management believes that it will not be able recover VAT specific to license ande&e contractors' payments until these licenses are revenue producing. Thereforethis VAT is classified as a non-current asset. 5. Inventories - Group 31 December 2007 31 December 2006 US$ 000 US$ 000Production & other 114 -Crude oil inventory 31 - 145 - 6. Other receivables - Group 31 December 2007 31 December 2006 US$ 000 US$ 000 Prepayments 2,480 1,064Other accounts financial accounts receivable 105Other accounts receivable 76 6 2,661 1,070 7. Other gains and losses - Group Year ended 31 December 26 October 2005 to 31 2007 December 2006 US$ 000 US$ 000Gain on forward currency contract 2,756 -Realized gain on forward currency contract* 949 -Foreign exchange (loss)/gain (235) 5Total other gains and losses 3,470 5 * As the result of foreign exchange transactions on sale of RUR with the RoyalBank of Scotland the Company received US$ 949,000. 8. Earnings per share - Group Loss per share is calculated by dividing the profit attributable to equityholders of the Company by the weighted average number of ordinary shares inissue during the year excluding ordinary shares purchased by the company andheld as treasury shares. Year ended 26 October 2005 to 31 December 2006 31 December 2007 US$ US$Net loss attributable to equity shareholders (per share) (0.06) (0.05) Basic weighted number of shares 46,376,181 27,042,553 9. Cash flows used in operating activities - Group Year ended 31 December 2007 26 October 2005 to US$ 000 31 December 2006 US$ 000 Loss for the period before tax (2,831) (1,388)Adjustments to loss before tax:Depreciation 27 -Interest accrued (94) 414Gain on forward contract (2,756) -Share grant expense 3,871 -Foreign exchange differences 235 (6)Operating cash outflow prior to working capital (1,548) (980)Increase in trade and other receivables (4,510) (1,087)Decrease in payables 1,066 1,147Increase in inventory (145) -Net cash outflow from operating activities (5,137) (920) 10. Investments - Company Investments in subsidiaries are accounted for at cost. The Company's subsidiaries are as follows:Name Jurisdiction Nature of Operations % Owned FromWoodhurst Holdings Ltd. Cyprus Intermediate Holding Company 100% October 2005Pre-Caspian Gas Company Russia Oil & gas exploration and 100% May 2006 developmentGaznefteservice Russia Oil & gas exploration and 100% September 2006 developmentShropak Investments Ltd Cyprus Dormant 100% June 2007Volga Gas (Cyprus) Ltd. Cyprus Intermediate Holding Company 100% August 2007 Company 31 December 2007 Additions* Disposals 31 December 2006 US$ 000 US$ 000 US$ 000 US$ 000Investments in Woodhurst Holdings 46,700 34,000 - 12,700Investments in Volga Gas (Cyprus) 51 51 - -Total investments 46,751 34,051 - 12,700 The Company funds its activities in the Russian Federation via WoodhurstHoldings, the Company's Cyprus registered subsidiary. This information is provided by RNS The company news service from the London Stock Exchange