30 Mar 2010 07:00
30 March 2010
VOLGA GAS PLC
Full year results for the year ended 31 December 2009
Volga Gas Plc ("Volga Gas", the "Group" or the "Company"), the oil and gas exploration and production group operating in the Volga Region of European Russia, is pleased to announce its annual results for the year ended 31 December 2009.
Operational Highlights
·; Development of the supra salt Uzenskaya oil field in the Karpenskiy Licence Area ("KLA") completed. Seven successful wells drilled, and drilling obligations have been fulfilled
·; Group production, all from the KLA, averaged 1,267 barrels of oil per day ("bopd"). Average sale price of $25.23 (2008: $25.18), increasing to $30.05 in 2H 2009
·; In the sub-salt Grafovskaya #1 ("G-1") well, a gross 300 metre oil and condensate column of low estimated permeability has been intersected at a depth of 4,000-4,300 metres. The potential reservoir and other deeper zones will be subject to further evaluation. The well has reached a depth of over 5,200 metres and drilling continues to explore deeper zones
·; First phase development drilling on Vostochny Makarovskoye ("VM") gas/condensate field completed. Two wells tested and are ready for production
·; Agreement to acquire a 75% interest in gas processing facilities for the VM field development signed in March 2010 and is moving towards completion
·; Combined Russian classification C1/C2 recoverable reserves of 68 million barrels of oil equivalent on Uzenskoye and VM
Financial Highlights
·; Revenues increased to $11.6 million (2008: $0.6 million); EBITDA profit of $3.0 million (2008: loss of $5.9 million); Profit before tax of $0.9 million (2008: loss of $10.1 million) after exploration expenses of $1.5 million (2008: $5.6 million)
·; Net cash inflow from operations in 2009 was $4.0 million (2008: outflow of $15.9 million)
·; Capital expenditure on exploration and development was $23.7 million (2008: $48.5 million)
·; Year end cash and bank deposits increased to $33.6 million (2008: $23.1 million) after net proceeds of a share placing of $26.6 million (2008: nil)
Current trading and outlook
·; Oil production since 1 January 2010 has averaged 1,163 bopd as unusually severe snow conditions caused disruptions to oil transportation by customers. Production capacity remains at 1,300 bopd and is expected to increase above 1,500 bopd after installation of water injection
·; Commencement of production from VM subject to completion of the gas plant acquisition and installation of additional facilities
·; Results from G-1 will be evaluated and the forward sub-salt exploration strategy will be established
·; Planned exploration/appraisal well in the Urozhainoye-2 licence area in 2H 2010
Mikhail Ivanov, Chief Executive of Volga Gas commented:
"2009 was an important year for Volga Gas. We have fulfilled the licence commitments on our key Karpenskiy block and have achieved sustainable production that gives us positive operating cash flow. There is still much to accomplish, namely completion of the VM field development, evaluation of the G-1 well results and enhancement of our understanding of the sub-salt hydrocarbon resources in our licence areas. We remain committed to delivering growing value to our shareholders."
For additional information please contact:
| Volga Gas plc |
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| Mikhail Ivanov, Chief Executive Officer | +7 (495) 721 1233 |
| Tony Alves, Chief Financial Officer | +44 (0) 20 8622 4451 |
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| Oriel Securities |
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| Natalie Fortescue | +44 (0)20 7710 7600 |
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| Financial Dynamics |
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| Billy Clegg | +44 (0)20 7831 3113 |
| Ed Westropp |
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| Alex Beagley |
|
Editors' notes:
Volga Gas is an independent oil and gas exploration and production company operating in the Volga region of European Russia. The company has 100% interests in its four licence areas.
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 also has an 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 14 June 2009 at 09:00. Notice of the AGM will be sent to shareholders with the Group's report and accounts.
Chairman's Statement
Having been through a challenging period late in 2008 and early 2009, the economic environment in Russia stabilized during 2009. There has been a strong recovery in global oil prices, which were reflected in the prices achieved by Volga Gas in 2009. The Russian Ruble reversed some of its steep declines but remains at a level far lower than seen up to mid 2008. The developments in the Russian gas market in terms of demand and pricing were significantly better than the consensus expectations early in the year.
We believe that Volga Gas has performed well in face of the challenges. Our fields are advantageously located and our costs are sufficiently low for us to achieve good returns even at low oil prices. Most importantly, we have fulfilled our licence commitments on the Karpenskiy and Vostochny Makarovskoye licences and have sufficient funds to meet the commitments due in other licence areas during 2010.
Volga Gas currently operates 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 exploration targets in deep sub-salt horizons that were previously believed to be principally gas and condensate. The actual results from our first well suggest that there may also be significant oil potential.
The Group was created to explore the sub-salt structures on the Karpenskiy Licence Area ("KLA"). The highlight of 2009 operations was the commencement of drilling operations on the Group's first sub-salt exploration well.
As of the date of writing, the well has reached a depth of 5,270 metres and drilling continues. The commercial significance of any hydrocarbon bearing zones encountered has yet to be evaluated. If they prove capable of commercial production, there would be a significant contingent resource for the Group.
We have identified further high impact sub-salt exploration targets within our acreage at Yuzhny-Mokrousovskoye in the KLA and in the nearby Pre Caspian licence where the 3-D acquired in 2009 has already been processed and interpreted. This provides the opportunity to apply the understanding of the sub-salt play acquired from the first well in other high impact prospects within our existing licence areas.
Volga also achieved an important milestone in the Company's development: a first year of substantial revenues and positive cash flow. While the financial impact is currently modest, as the other assets are brought into production, the vision of Volga Gas as a sustainable and high growth oil and gas exploration and production business comes a step closer to being realised.
While the Group made progress on most fronts, it is frustrating that the Vostochny Makarovskoye field is yet to commence production. As outlined in the 2008 Annual Report, we reached an agreement to acquire a 75% interest in a gas processing facility being constructed by Trans Nafta and had in late 2008 made a RUR 600 million advance payment for this acquisition. In March 2010 the Company moved ahead to complete the purchase of the 75% interest in the gas processing facility and continues in active negotiation on operational matters.
Since the beginning of 2010, oil production from the Uzenskoye supra-salt field has been steady although recently transportation by customers has been disrupted by unusually heavy snow falls. This field continues to provide the Group with positive operating cash flow. The key activities for 2010 will include ongoing management and enhancement of the existing production, completion of the Vostochny Makarovskoye development and evaluation of the results from the sub-salt exploration drilling on the Grafovskaya #1 well. During 2010, the Group will also evaluate its forward strategy in relation to exploration of the sub-salt exploration potential in existing licence areas as well as opportunities to extend the Group's activities into new areas.
We ended 2009 with cash and bank deposits of US$33.6 million and with positive operating cash flow. Volga Gas is consequently sufficiently funded to complete planned developments and to fulfill the committed 2010 exploration work programme.
Alexey Kalinin
Chairman
Chief Executive's Review
The focus for Volga Gas in 2009 was on advancing our key exploration project and to complete first phase development of our oil reserves in the Uzenskoye field. This coincided with fulfillment of the key remaining licence commitments on the Karpenskiy Licence Area ("KLA"). These we achieved.
During 2009, the majority of the activity and investment was concentrated on drilling. We completed nine shallow supra-salt wells in the KLA and commenced drilling the Grafovskaya #1 sub-salt exploration well.
The resulting growth in oil production has enabled Volga Gas to reach a significant milestone for a young company: positive EBITDA and operating cash flow. This allows us to deploy our equity entirely in the most value-productive part of our activities - growing the asset base.
This is exemplified by the commencement of drilling of Grafovskaya #1, on the Yuzhny Ershovskoye prospect which itself was one of the original catalysts for the establishment of Volga Gas. In parallel, we have progressed with the geological and geophysical studies on opportunities to follow on from a successful outcome. Two further high impact sub-salt exploration targets have been advanced sufficiently to be ready for drilling.
Prior to undertaking this technically challenging well, we considered it vital for the Company to have sufficient financial headroom to deal with possible cost overruns. For this reason, we launched a placing of 27 million shares to raise net proceeds of US$26.6 million. Management is appreciative of the continuing support of shareholders in the placing.
We had at the beginning of the year also expected to bring the Vostochny Makarovskoye gas field into production. We did complete two production wells and installed intra-field pipelines, but the planned acquisition of a 75% interest in a gas processing unit was still under negotiation by the end of the year. As announced on 4 March 2010, this acquisition is now moving towards legal completion. We will now proceed as quickly as possible to enable the gas processing unit to commence operation and to start the first phase of production from the Vostochny Makarovskoye field.
During the first quarter of 2010, we have continued to enjoy net positive operating cash flow and have fulfilled all of our obligations on the licences where we have recognised reserves and prospective resources. Our planned capital expenditure for 2010 totals $14.0 million, including the portion of the Grafovskaya #1 well cost falling in 2010. The Group is thus well positioned to move quickly to bring Vostochny Makarovskoye into production as and when the commercial and legal arrangements over the gas processing facilities have been resolved.
We now have Russian C1 recoverable reserves of 45.4 million barrels of oil equivalent and a further 22.3 million barrels equivalent of C2 recoverable reserves contained in just two fields. 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.
Mikhail Ivanov
Chief Executive Officer
Operational Review
Operations overview
The Group's two principal activities in 2009 were: preparation for and commencement of drilling of Grafovskaya #1, the Group's first major sub-salt exploration well in the KLA, and development of the Uzenskoye supra-salt oil field, also in the KLA. We also completed processing of the 3-D seismic over the second sub-salt prospect area in the KLA and acquired and processed 3-D seismic on the Pre Caspian Licence area.
At Uzenskoye we already have achieved a steady level of production that provides the Group with a valuable source of cash generation while we seek to bring our other field, Vostochny Makarovskoye, into production and while we undertake the beginning of what we hope will become an extended campaign of sub-salt exploration in our licences.
Karpenskiy Licence Area
Early in 2008 we amended the terms of the Karpenskiy Licence Agreement, thereby resolving certain licence breaches the Group inherited when it acquired the licence from a LUKoil subsidiary. The amended licence agreement requires the Group to finalize the acquisition of 400km2 of 3-D seismic and drill a further ten exploration or production wells over the next two years. By the start of 2009 we had already fulfilled our seismic obligations and the drilling programme of 2009, which we report below, completed the remaining licence commitments.
Sub-salt exploration
There are two main sub-salt prospect areas in the KLA the Yuzhny-Ershovskoye and Yuzhny-Mokrousovskoye structures. Pre-drilling evaluation of these structures was concluded during the first half of 2009. A brand new western deep drilling rig operated by Evrasia was mobilised late in 2008 and was assembled early in 2009 on location ready to commence drilling Grafovskaya #1, our first sub-salt exploration well on the Yuzhny-Ershovskoye structure.
Drilling operations on Grafovskaya #1 commenced on 28 August 2009 and the drilling of the first 3,900 metres, including a 3,000 metre salt section was accomplished far more rapidly than planned. Having set casing at 3,900 metres, the well was drilled on through the first of two target zones that were, on seismic sections, identified as potential carbonate reservoirs.
Within the first section, a total column of over 300 metres was found to exhibit shows of light oil and condensate within a dolomitised carbonate formation that also exhibited some zones with both fracture and matrix porosity. Initial open hole logging was unable to determine conclusively the productive capability of this reservoir and we decided to conduct further tests after completing the drilling operations including various methods that may improve productivity.
After the first carbonate section, drilling continued through a 600 metre shale sequence before entering a second carbonate sequence at 5,000-5,070 metre depth where gas shows were recorded. We plan to collect some further data from this layer after completing the drilling.
Drilling has continued through into a Devonian carbonate layer starting at a depth of approximately 5,200 metres. The commercial potential of this layer is yet to be evaluated. We expect to continue to drill a further 100-200 metres.
Supra-salt development
During 2009, activity was concentrated on completing initial development drilling on the Yuzhny Uzenskoye oil field and to evaluate further supra-salt prospects close to the Uzenskoye field production facilities. A total of seven supra-salt wells were drilled in this area during 2009 which, together with the commencement of drilling on Grafovskaya #1, completed the drilling commitments within the Karpenskiy licence terms.
The drilling programme included five development wells (including Uz. #6-bis, drilled as a sidetrack of Uz. #6 which did not at first encounter the productive reservoir). These wells, were progressively put on production in the course of 2009, enabling the Group to achieve its first year of sustained, albeit modest scale, production. Starting with a single well producing at approximately 300 barrels of oil per day in January 2009, there are now five wells on permanent production. With output increasing through the earlier part of the year, production averaged just over 1,050 barrels per day in the first half of 2009, while second half production was sustained at 1,484 barrels per day.
Exploration drilling in the area included additional 3-D seismic and two exploration wells, V.Uz #7 and V.Uz. #10. Although these wells found oil in a cretaceous sandstone formation, the pay encountered was considered sub-economic and the wells have been abandoned.
During 2009 we also upgraded the surface infrastructure, including the installation of a second separator unit, and additional storage tanks. This allows routine maintenance and testing operations on individual wells to be undertaken without disrupting the flow from other wells.
In the latter part of 2009, it was decided to choke back production from some of the higher productivity wells in order to preserve reservoir pressure and prevent early water break-through. During 2010 we plan to convert two of the existing wells, which are on the edge of the field, into water injectors which will then enable higher levels of production to be sustained for the longer term.
The Yuzhny Uzenskoye field, while of modest scale, is very profitable. It was developed at a cost of $1.91 per barrel of C1 reserves and benefits from very low production costs, which in 2009 averaged $0.71 per barrel. The oil is sold directly at the field facilities. During 2009 the average sales price was $25.23 per barrel and after paying Mineral Extraction Tax ("MET"), gross profitability averaged $14.52 per barrel. Prices in the second half of 2009 were higher than in the first half, during the second half of 2009 average sales price was $30.20 per barrel and gross profitability after MET averaged $18.03 per barrel. The Group achieved an even better cash benefit as both the VAT receipts on sales and the MET liabilities were available to offset against unrecovered VAT paid on historic capital expenditure.
Vostochny-Makarovskoye Licence Area
The Group completed its first phase three well drilling programme on the Vostochny Makarovskoye field early in 2009. As we reported in the 2008 Annual Report, there are two completed and tested wells on the field ready to commence production.
During early 2009, intra field pipelines were laid between the well locations to the boundary of the Dobrinskoye gas facility in preparation for initial production. Actual commencement of production has been delayed pending completion of the acquisition by the Group of a 75% interest in the gas processing unit ("GPU") that is being constructed approximately 7km from the Vostochny Makarovskoye licence area. As outlined in the Chairman's and CEO's Reports above, completion of this acquisition is ongoing. Before the GPU can become fully operational, it will be necessary to transfer a sulphur treatment unit from the VM licence area to the GPU. This process, with the required regulatory approvals, is expected to take up to nine months. Meanwhile, it may be possible to commence long term test production from the VM field during 2010.
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.
Pre-Caspian Licence Area
Following interpretation of an initial 1000 km of 2-D seismic data acquired in 2008, we agreed with the licensing authorities to exchange our remaining 2-D seismic commitment for 78 km2 of 3-D seismic data over a potential sub-salt prospect identified by our initial work.
The new 3-D seismic data was acquired during 2009 and processing and interpretation largely completed by the end of the year. There is a commitment under the licence terms, for a well to commence drilling before the end of 2011. The Pre-Caspian Licence Area has no reserves associated with it.
Urozhainoye-2
On 7 September 2007 the Group acquired Urozhainoye-2 at government mandated auction for approximately US $1.7 million. The licence area covers 354km2. It is located approximately 15km to the north of the Group'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 2009 we completed processing and interpretation of 350 km of 2-D seismic we acquired during 2008. The licence terms include a committed well during 2010. The current plan is to drill an offset well to the Sobolevskoye discovery well to attempt to prove up additional reserves and to enable a development plan for this field to be drawn up. The Group currently has no reserves or resources allocated to this Licence.
Oil, gas and condensate reserves
The Group's Russian category C1 and C2 recoverable oil, gas and condensate reserves are presented in the table below. The reserves on the Yuzhny Uzenskoye field have recently been approved by the State Committee for Reserves as follows and represent the remaining recoverable reserves as at 1 January 2010. The reserves attributed to the Vostochny Makarovskoye field are unchanged from the numbers approved by the State Committee for Reserves in November 2008.
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| Recoverable reserves category | ||
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| C1 | C2 | C1+C2 |
| Vostochny-Makarovskoye |
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| Natural Gas (BCM) | 164.5 | 87.5 | 252.1 |
| Condensate (mmT) | 8.3 | 3.9 | 12.2 |
| Total (mmboe) | 35.8 | 18.5 | 54.2 |
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| Yuzhny Uzenskaya (Karpenskiy Licence supra salt) |
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| Crude Oil (mmT) | 9.7 | 3.8 | 13.5 |
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| Group total | C1 | C2 | C1+C2 |
| Gas (bcf) | 164.5 | 87.5 | 252.1 |
| Condensate (mmbbl) | 8.3 | 3.9 | 12.2 |
| Crude oil (mmbbl) | 9.7 | 3.8 | 13.5 |
| Total (mmboe) | 45.4 | 22.3 | 67.7 |
Mikhail Ivanov
Chief Executive Officer
Financial Review
Results for the year
During 2009 our operations were primarily in an exploration and development phase although we also benefited from a period of sustained and growing production from the shallow oil reserves in the KLA. The Group recorded net income after minority interests of $0.2 million for the year ended 31 December 2009 (2008: net loss of $10.3 million). No dividends have been paid or proposed for the year (2008: none).
In 2009, the Group generated $11.6 million in turnover (2008: $0.6 million) from the sale of 458,900 barrels of crude oil (2008: 24,545 barrels). Crude oil sales were made into the domestic market during the period. The average price realised was the equivalent of US$25.23 per barrel, with sales prices increasing steadily through the year as international oil prices recovered and the differential discounts for our crude reduced. The oil production activities generated a gross profit of $5.8 million in 2009 (2008: profit of $0.01 million), approximately $12.64 per barrel of oil sold.
The Group experienced positive EBITDA (defined as operating profit before non-cash charges, exploration expense, depletion and depreciation) of $3.0 million (2008: EBITDA loss of $5.9 million). The operating profit for the year was $0.6 million (2008: $12.8 million loss) which includes exploration expenses of $1.5 million (2008: $5.6 million) and administrative expenses of $3.7 million (2008: $7.2 million).
The Group recognised a profit before tax of $0.9 million (2008: Loss $10.1 million) and reported net income after minorities interests of $0.2 million (2008: loss of $10.3 million). These numbers include expenses of $0.4 million (2008: nil) associated with the Vostochny Makarovskoye project, net gains on foreign exchange of US$0.2 million (2007: $1.3 million) and current and deferred income tax charges of $0.7 million (2008: Tax charge of $0.3 million).
Cash flow
Group net cash flow from operating activities was $4.0 million (2008: outflow of $15.9 million), after $1.5 million of expensed exploration costs. The working capital of the Group was enhanced by a net $1.3 million (2008: $0.8 million) positive cash flow from working capital movements, including recovery of VAT on capital expenditures. Having accrued net prepayments in earlier years, the cash outflow from investing in exploration and development assets in 2009 was $20.2 million (2008: $55.7 million), somewhat less than the capital expenditure for the year.
Capital Expenditure
During 2009 a total of $23.7 million was invested in capital expenditure on the Group's licence areas (2008: $48.5 million) as detailed below:
| Year ended 31 December | 2009 | 2008 |
|
| (US$ million) | (US$ million) |
| Oil & Gas Exploration Assets | 9.8 | 2.4 |
| Development & Producing Assets | 13.7 | 25.5 |
| Real Estate Assets | 0.2 | 0.2 |
| Security deposit on acquisition of fixed assets | 0.0 | 20.4 |
| Total | 23.7 | 48.5 |
The most significant individual components of the capital expenditure were $5.6 million on the Yuzhny Uzenskoye oil field, including drilling and facilities, $5.2 million on drilling operations at Grafovskaya #1 (which continues into 2010). In addition, $4.7 million was expended early in 2009 on development drilling and field facilities for the Vostochny Makarovskoye field and a total of $1.4 million was incurred on other exploration activities.
The security deposit on acquisition of fixed assets recognised in 2008 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 2009, the Group held cash and bank deposits of $33.6 million (2008: $23.1 million) and remains debt free. In July 2009, the Company completed a placing of Ordinary Shares to raise a total of $27 million gross ($26.6 million net of expenses).
The Group intends to fund its development and exploration expenditures using a combination of cash flow from operations and cash-on-hand. The Group will consider raising additional financing to more fully explore and develop its asset base as appropriate.
The Group is currently capable of producing approximately 1,500 barrels of oil per day from six producing wells in the Uzenskoye 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 2009, the Company issued a total of 27,000,000 shares in a non-preemptive placement generating net proceeds of $26.6 million.
Tony Alves
Chief Financial Officer
| Group Income Statement (presented in US$ 000)
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| Year ended 31 December | Notes | 2009 | 2008 |
| CONTINUING OPERATIONS |
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|
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|
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| Revenue |
| 11,580 | 617 |
| Cost of sales | 2 | (5,775) | (607) |
| Gross profit |
| 5,805 | 10 |
| Other operating income |
|
|
|
| Exploration and evaluation eexpense | 2(a) | (1,466) | (5,598) |
| Operating and administrative expenses | 2 | (3,728) | (7,186) |
| Operating profit/(loss) |
| 611 | (12,774) |
|
|
|
|
|
| Interest income |
| 87 | 1,461 |
| Other gains and losses - net | 3 | 183 | 1,256 |
|
|
|
|
|
| Profit/(loss) for the period before tax |
| 881 | (10,057) |
|
|
|
|
|
| Current income tax | 4 | (21) | (1,600) |
| Deferred income tax | 4 | (716) | 1,358 |
| Profit/(loss) for the period before minority interests |
| 144 | (10,299) |
| Non-controlling interests |
| 88 | - |
|
|
|
|
|
| Profit/(loss) for the period attributable to equity holders |
| 232 | (10,299) |
|
|
|
|
|
| Basic and diluted profit/(loss) per share (in US dollars) | 5 | 0.004 | (0.191) |
| Weighted average number of shares outstanding |
| 66,915,354 | 54,008,474 |
The Company has elected to take the exemption under section 408 of the Companies Act 2006 to not present the parent company profit and loss account. The loss for the parent company for the year was $960,000 (2008: $1,084,000).
| GROUP STATEMENT OF COMPREHENSIVE INCOME |
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|
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| (presented in US$ 000) |
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| Year ended 31 December | Notes | 2009 | 2008 |
|
|
|
|
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| Profit/(loss) for the period attributable to equity shareholders of the Company |
| 232 | (10,299) |
| Other comprehensive income: |
|
|
|
| Currency translation differences |
| (2,036) | (20,088) |
|
|
|
|
|
| Total comprehensive income for the period |
| (1,804) | (30,387) |
| attributable to equity shareholders of the Company |
| (1,892) | (30,387) |
| Group Balance Sheet (presented in US$ 000)
|
|
|
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| At 31 December | Notes | 2009 | 2008 |
| ASSETS |
|
|
|
| Non-current assets |
|
|
|
| Intangible assets | 6 | 40,09 | 30,596 |
| Property, plant and equipment | 7 | 37,628 | 26,550 |
| Other non-current assets | 8 | 6,229 | 7,245 |
| Security deposit on acquisition of fixed assets | 8 | 19,839 | 20,422 |
| Deferred tax assets |
| 1,211 | 2,003 |
| Total non-current assets |
| 105,000 | 86,816 |
|
|
|
|
|
| Current assets |
|
|
|
| Cash and cash equivalents | 9 | 32,643 | 23,093 |
| Term bank deposit | 9 | 1,000 | - |
| Inventories | 10 | 3,614 | 1,485 |
| Other receivables | 11 | 2,952 | 8,449 |
| Total current assets |
| 40,209 | 33,027 |
|
|
|
|
|
| Total assets |
| 145,209 | 119,843 |
|
|
|
|
|
| EQUITY AND LIABILITIES |
|
|
|
| Equity |
|
|
|
| Share capital |
| 1,485 | 1,045 |
| Share premium (net of issue costs) |
| 165,873 | 139,681 |
| Other reserves |
| (12,990) | (11,025) |
| Accumulated loss |
| (13,911) | (14,143) |
| Non-controlling interest |
| (92) | - |
| Total equity |
| 140,365 | 115,558 |
|
|
|
|
|
| Long term liabilities |
|
|
|
| Asset retirement obligation |
| 164 | - |
| Total long term liabilities |
| 164 | - |
|
|
|
|
|
| Current liabilities |
|
|
|
| Trade and other payables | 12 | 3,162 | 2,416 |
| Current income tax liability |
| 1,518 | 1,869 |
| Total current liabilities |
| 4,680 | 4,285 |
|
|
|
|
|
| Total equity and liabilities |
| 145,209 | 119,843 |
Approved by the Board of Directors on 29 March 2010 and signed on its behalf by
Mikhail Ivanov Tony Alves
Chief Executive Officer Chief Financial Officer
| Group Cash Flow Statement (presented in US$ 000)
|
|
|
|
| Year ended 31 December | Notes | 2009 | 2008 |
|
|
|
|
|
| Profit/(loss) for the before tax |
| 881 | (10,057) |
|
|
|
|
|
| Adjustments to loss after tax: |
|
|
|
| Share grant expense |
| 72 | 1,138 |
| Depreciation |
| 890 | 100 |
| Other non-cash operating gains |
| - | (238) |
| Charge for provision |
| 220 | 234 |
| Foreign exchange differences |
| (220) | (1,841) |
| Total effect of adjustments |
| 962 | (607) |
| Decrease/(increase) in long-term assets |
| 770 | (5,981) |
| Operating cash flow prior to working capital |
| 2,613 | (16,645) |
|
|
|
|
|
| Working capital changes |
|
|
|
| Decrease/(increase) in trade and other receivables |
| 3,794 | (33) |
| Decrease in derivative financial instruments |
| - | 2,756 |
| Increase/(decrease) in payables |
| 6 | (327) |
| Increase in inventory |
| (2,067) | (1,611) |
| Cash flow from operations |
| 4,346 | (15,860) |
| Income tax paid |
| (389) | - |
| Net cash flow from operating activities |
| 3,957 | (15,860) |
|
|
|
|
|
| Cash flows from investing activities |
|
|
|
| Purchase of intangible assets | 6 | (7,347) | (8,628) |
| Purchase of property, plant and equipment | 7 | (12,847) | (24,904) |
| Movement in term bank deposit | 9 | (1,000) | - |
| Security deposit on acquisition of fixed assets | 8 | - | (22,204) |
|
|
|
|
|
| Net cash used in investing activities |
| (21,194) | (55,736) |
|
|
|
|
|
| Cash flows from financing activities |
|
|
|
| Proceeds from the issue of shares (net of issue costs) |
| 26,632 | - |
| Change in loans |
| 56 | - |
|
|
|
|
|
| Net cash provided by financing activities |
| 26,688 | - |
|
|
|
|
|
| Effect of exchange rate changes on cash and cash equivalents | 99 | (2,850) | |
|
|
|
|
|
| Net increase/(decrease) in cash and cash equivalents |
| 9,550 | (74,446) |
|
|
|
|
|
| Cash and cash equivalents at beginning of the year | 9 | 23,093 | 97,539 |
|
|
|
|
|
| Cash and cash equivalents at end of the year | 9 | 32,643 | 23,093 |
| Group Statement of Changes in Shareholders' Equity |
|
|
|
|
| ||
| (presented in US$ 000)
|
|
|
|
|
|
|
|
|
| Notes | Share Capital | Share Premium | Other Reserves | Accumulated Loss | Minority Interest | Total Equity |
|
|
|
|
|
|
|
|
|
| Opening equity at 1 January 2008 |
| 1,037 | 139,681 | 7,932 | (3,844) | - | 144,806 |
|
|
|
|
|
|
|
|
|
| Loss for the year |
| - | - | - | (10,299) | - | (10,299) |
| Share based payments |
| 8 | - | 1,130 | - | - | 1,138 |
| Currency translation differences |
| - | - | (20,087) | - | - | (20,087) |
| Closing equity at 31 December 2008 |
| 1,045 | 139,681 | (11,025) | (14,143) | - | 115,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Opening equity at 1 January 2009 |
| 1,045 | 139,681 | (11,025) | (14,143) | - | 115,558 |
|
|
|
|
|
|
|
|
|
| Profit for the year |
| - | - | - | 232 | - | 232 |
| Share capital issued |
| 440 | 26,560 | - | - | - | 27,000 |
| Share issue costs |
| - | (368) | - | - | - | (368) |
| Share based payments |
| - | - | 72 | - | - | 72 |
| Currency translation differences |
| - | - | (2,037) | - | - | (2,037) |
| Non-controlling interests |
| - | - | - | - | (92) | (92) |
| Closing equity at 31 December 2009 |
| 1,485 | 165,873 | (12,990) | (13,911) | (92) | 140,365 |
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 Basis of preparation
The consolidated financial statements of Volga have been prepared in accordance with International Financial Reporting Standards, as adopted by the European Union (IFRSs as adopted by the EU), IFRIC interpretations, and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
1.2 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 a 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 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 development 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 that 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.
(e) Decommissioning
Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents the estimated discounted liability (the discount rate used currently being at 10% per annum) for costs which are expected to be incurred in removing production facilities and site restoration at the end of the producing life of each field. A corresponding item of property, plant and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property, plant and equipment. The unwinding of the discount is recognised as a finance cost.
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.
1.4 Trade and other receivables
Trade and other receivables are presented at recoverable amounts. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
2. Cost of sales and administrative expenses - Group
Cost of sales and administrative expenses are as follows:
| Year ended 31 December | 2009 | 2008 |
|
| US$ 000 | US$ 000 |
| Cost of sales | 5,775 | 607 |
| Exploration & evaluation expenses | 1,466 | 5,598 |
| Operating and administrative expenses | 3,728 | 7,186 |
| Total operating and administrative expenses | 10,969 | 13,391 |
Total operating and administrative expenses are analysed as follows:
| Year ended 31 December |
| 2009 | 2008 |
|
|
| US$ 000 | US$ 000 |
| Exploration & evaluation | (a) | 1,466 | 5,598 |
| Mineral extraction tax |
| 4,465 | 280 |
| Field operating expenses |
| 327 | - |
| Depreciation & amortisation |
| 881 | 100 |
| Salaries & staff benefits |
| 908 | 858 |
| Directors' emoluments and other benefits |
| 887 | 2,162 |
| Audit fees |
| 285 | 285 |
| Taxes other than payroll and mineral extraction |
| 112 | 110 |
| Legal & consulting services | (b) | 410 | 2,964 |
| Other |
| 1,228 | 1,034 |
| Total |
| 10,969 | 13,391 |
(a) Exploration and evaluation
During 2009 expenditure on seismic studies certain drilling expenditures relating to supra-salt exploration on the Karpenskiy Licence were expensed as management considered that the expenditure was not related closely enough to specific oil and gas reserves to allow its capitalization in accordance with IFRS 6 'Exploration for and evaluation of mineral resources'. In 2008, the Exploration and evaluation expense was primarily related to seismic studies on the Pre-Caspian Licence Area and supra-salt seismic studies on the Karpenskiy Licence.
(b) Legal expense
An amount of $2,366,000 is included in legal expenses in 2008 in respect of the 2008 court proceedings brought by a minority shareholder of Trans Nafta in relation to the purchase of Gaznefteservice from Trans Nafta in 2006. The costs include legal and other consultation services related to preparation for the court proceedings. The court proceedings were withdrawn in November 2008 following resolution of the matter.
3. Other gains and losses - Group
| Year ended 31 December | 2009 | 2008 |
|
| US$ 000 | US$ 000 |
| Realised gain on forward currency contract | - | 4,179 |
| Foreign exchange gain/(loss) | 163 | ( 3,160) |
| Other gains | 20 | 237 |
| Total other gains and losses | 183 | 1,256 |
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 at fair value in 2007 and a net gain of $3,619,000 from forward currency contracts settled during 2008.
4. Current and deferred income tax - Group
| Year ended 31 December | 2009 | 2008 |
|
| US$ 000 | US$ 000 |
| Current tax: |
|
|
| Current income tax | ( 584) | ( 1,600) |
| Adjustments to tax charge in respect of prior periods | 563 | - |
| Total current tax | ( 21) | ( 1,600) |
|
|
|
|
| Deferred tax: |
|
|
| Origination and reversal of timing differences | ( 716) | 1,358 |
| Total deferred tax | ( 716) | 1,358 |
|
|
|
|
| Total tax | ( 737) | ( 242) |
5. Basic and diluted profit/(loss) per share - Group
Profit 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 2009 | Year ended 31 December 2008 |
| Net profit/(loss) attributable to equity shareholders (per share) | 0.004 | (0.191) |
|
|
|
|
| Basic weighted number of shares | 66,915,354 | 54,008,474 |
|
|
|
|
6. 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 | Producing assets | 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 |
|
| Work in progress: exploration and evaluation | Exploration and evaluation | Development | Producing assets | Total |
| At 1 January 2009 | 5,072 | 7,244 | 18,280 | - | 30,596 |
| Additions | 9,147 | 679 | 290 | 9 | 10,125 |
| Disposals | ( 197) | - | - | - | ( 197) |
| Transfers | - | ( 1,576) | - | 1,576 | - |
| At 31 December 2009 | 14,022 | 6,347 | 18,570 | 1,585 | 40,524 |
|
|
|
|
|
|
|
| Accumulated depreciation |
|
|
|
|
|
| At 1 January 2009 | - | - | - | - | - |
| Depreciation | - | - | - | ( 55) | ( 55) |
| At 31 December 2009 | - | - | - | ( 55) | ( 55) |
| Exchange adjustments | 306 | ( 252) | ( 507) | 77 | ( 376) |
| At 31 December 2009 | 14,328 | 6,095 | 18,063 | 1,607 | 40,093 |
7. Property, plant and equipment - Group
Movements in property, plant and equipment, for the years ended 31 December 2009 and 2008 are as follows:
|
| Development assets | Land & Buildings | Producing assets | Other | Total |
| Cost |
|
|
|
|
|
| At 1 January 2008 | 3,676 | 528 | 1,658 | 104 | 5,966 |
| Additions | 24,862 | 207 | 296 | 542 | 25,907 |
| Disposals | ( 294) | - | - | - | ( 294) |
| Transfers | ( 4,039) | - | 4,039 | - | - |
| At 31 December 2008 | 24,205 | 735 | 5,993 | 646 | 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) | ( 119) | ( 925) | ( 95) | ( 4,902) |
| At 31 December 2008 | 20,442 | 616 | 4,974 | 518 | 26,550 |
|
| Development assets | Land & Buildings | Producing assets | Other | Total |
| Cost |
|
|
|
|
|
| At 1 January 2009 | 20,442 | 616 | 5,054 | 546 | 26,658 |
| Additions | 13,298 | 157 | 81 | 28 | 13,564 |
| Disposals | ( 1,445) | - | ( 8) | - | ( 1,453) |
| Transfers | ( 6,177) | - | 6,177 | - | - |
| At 31 December 2009 | 26,118 | 773 | 11,304 | 574 | 38,769 |
|
|
|
|
|
|
|
| Accumulated depreciation |
|
|
|
| |
| At 1 January 2009 | - | - | ( 80) | ( 28) | ( 108) |
| Depreciation | - | - | ( 822) | ( 13) | ( 835) |
| At 31 December 2009 | - | - | ( 902) | ( 41) | ( 943) |
| Exchange adjustments | ( 297) | ( 10) | 125 | ( 16) | ( 198) |
| At 31 December 2009 | 25,821 | 763 | 10,527 | 517 | 37,628 |
8. Other non-current assets - Group
| As at 31 December | 2009 US$ 000 | 2008 US$ 000 |
| VAT recoverable | 6,189 | 7,209 |
| Other non-current assets | 40 | 36 |
| Total other non-current assets | 6,229 | 7,245 |
Management believes that it may not be able to recover all VAT specific to license and e&e contractors' payments within the 12 months of the balance sheet date. Therefore this VAT is classified as a non-current asset.
The security deposit on acquisition of fixed assets of $19.8 million (2008: $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 foreign exchange difference.
In October 2008, the Group 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. The Group made an advance to Trans Nafta of RUR600 million (approximately US$20.4 million).
In March 2010, a final agreement was signed between the Group and Trans Nafta to complete the acquisition by the Group of a direct interest in the GPU assets. Under the terms of the agreement a sum of RUR 187 million (approximately US$6.2 million) has been paid to Trans Nafta. The GPU is to be managed and operated by ZAO Gamma, a company owned 75% by the Group and 25% by Trans Nafta.
9. Term deposits, cash and cash equivalents - Group
| At 31 December |
| 2009 | 2008 |
|
|
| US$ 000 | US$ 000 |
| Cash at bank and on hand |
| 14,171 | 22,753 |
| Short term bank deposits |
| 18,472 | 340 |
| Total cash and cash equivalents |
| 32,643 | 23,093 |
|
|
|
|
|
| Term bank deposit |
| 1,000 | - |
An analysis of Group deposits, cash and cash equivalents by bank and currency is presented in the table below:
| At 31 December |
| 2009 | 2008 |
|
|
|
|
|
| Bank | Currency | USD$ 000 | USD$ 000 |
|
|
|
|
|
| Cyprus |
|
|
|
| Bank of Cyprus | RUR | - | 3 |
|
| USD | - | 8 |
| United Kingdom |
|
|
|
| The Royal Bank of Scotland | USD | 12,160 | 19,196 |
| The Royal Bank of Scotland | GBP | 392 | 20 |
| Russian Federation |
|
|
|
| Unicreditbank | RUR | 3,697 | 432 |
| Other banks and cash on hand | RUR | 339 | 409 |
| Unicreditbank | USD | 16,055 | 3,025 |
|
|
|
|
|
| Total cash at bank and short term deposits |
| 32,643 | 23,093 |
|
|
|
|
|
| Republic of Ireland |
|
|
|
| EBS Building Society | USD | 1,000 | - |
| Total term deposit |
| 1,000 | - |
10. Inventories - Group
| At 31 December | 2009 | 2008 |
|
| US$ 000 | US$ 000 |
| Production & other spares | 3,533 | 1,462 |
| Crude oil inventory | 81 | 23 |
| Total inventories | 3,614 | 1,485 |
11. Other receivables - Group
| At 31 December | 2009 | 2008 |
|
| US$ 000 | US$ 000 |
| VAT receivable | 1,355 | - |
| Prepayments | 1,338 | 8,314 |
| Other accounts receivable | 259 | 135 |
| Total other receivables | 2,952 | 8,449 |
12. Trade and other payables - Group
| At 31 December | 2009 | 2008 |
|
| US$ 000 | US$ 000 |
| Trade payables | 2,688 | 2,416 |
| Taxes other than profit tax | 316 | - |
| Customer advances | 158 | - |
| Total | 3, 162 | 2,416 |
13. Contingencies and Commitments
13.1 Capital commitments
(a) Pre-Caspian Gas Company ("PGK")
(i) Karpenskiy Licence Area
In accordance with the amended Karpenskiy Licence Agreement ("Amended KLA") PGK was required to acquire 400 km2 of 3D seismic studies and to drill 14 wells. At the balance sheet date the Company had fulfilled all of its licence commitments.
(ii) Pre-Caspian Licence Area
In accordance with the license agreement for the Pre-Caspian license area, PGK was required to acquire an additional 500 km of 2D seismic in 2009. At balance sheet date the Company had completed its seismic commitments on the Pre-Caspian licence area. In order to maintain its licence interest, the Company will be required to commence drilling a well before 31 December 2011. This expenditure is not at present committed.
(iii) Urozhainoye-2 Licence Area
The Company is required to commence drilling a well in the Urozhainoye-2 Licence Area during 2010. Management estimates the cost of such a well to be US$ 4.0 million.
(b) Gaznefteservice ("GNS") - Vostochny-Makarovskoye Licence Area
In accordance with the Vostochny Makarovskoye licence agreement, GNS was required to drill at least one well by July 2008. As of the balance sheet date the licence commitments have been met.
14. Post-Balance Sheet Events
Acquisition of 75% interest in a Gas Processing Unit
On 4 March 2010 the Group announced that an agreement has been signed with Trans Nafta ("TN") to purchase a 75% direct interest in gas processing facilities which will be used for the Group's Vostochny Makarovskoye ("VM") gas and condensate field.
As a result of this agreement, Gaznefteservice ("GNS"), a company which is wholly owned by the Group, will have a direct 75% interest in a Gas Processing Unit ("GPU") constructed on a site approximately 7km from the VM field. The plant is to be operated by a company which is 75% owned by GNS. Under the terms of the agreement a sum of RUR 187 million (approximately US$6.2 million) has been paid. In November 2008, a sum of RUR 600 million (approximately US$20 million) was paid as an advance on the purchase of the interest in the GPU. As disclosed in Note 12, the initial payment remains recorded at the balance sheet date as a security deposit on acquisition of fixed assets.