VGAS.L Regulatory News (VGAS)

19 May 2017

Volga Gas plc

("Volga Gas", the "Company" or the "Group")

OPERATIONAL UPDATE

Volga Gas plc, the oil and gas exploration and production group operating in the Volga Region of Russia, is holding its Annual General Meeting today and is pleased to provide the following update on its activities and operations:

Highlights

· Between 1 January and 30 April 2017, Group production averaged 7,341 barrels of oil equivalent per day ("boepd") and during April 2017 total production was at 7,553 boepd. Production is on average 23% above the equivalent levels in 2016.

· Realised prices after adjusting for export taxes and transport costs, increased to $34 per barrel during the first four months of 2017, compared to approximately US$22 per barrel in the same period of 2016.

· Commenced drilling of the Uzen #101 horizontal well.

· Industrial testing of the Redox gas sweetening process is under way.

· Construction of the LPG project is to commence shortly 

· Group's cash position increased from $19.7 million on 31 December 2016 to $20.2 million on 30 April 2017.

· Proposed dividend payment of US$5.0 million to be made on 26 May.

Production Update

Between 1 January and 30 April 2016, Group production averaged 7,341 boepd (2016: 5,932 boepd), comprising 30.5 million cubic feet per day ("mmcf/d") of gas (2016: 23.9 mmcfd), 1,730 barrels per day ("bpd") of condensate (2016: 1,609 bpd) and 522 bpd of oil (2016: 348 bpd). Production increases over the equivalent period reflect the benefits of higher utilisation of processing capacity at the Dobrinskoye gas plant and workovers on the Uzen oil field which took effect during 2H 2016 and have subsequently been sustained.

The Russian domestic oil market in early 2017 exhibited less disruption than seen in the previous two years. However, as a result of management's initiatives undertaken towards the end of 2015 to develop export channels for condensate production of gas and condensate continued in line with management's plans. Although more than 50% of condensate was exported in January, more favourable domestic market conditions led to lower exports and for the four months, exports were approximately 27% of total condensate sales.

During the period January to April 2017, as a result of another abnormally mild winter, ground conditions close to the Group's oil field resulted in the routes used by our customers' oil tanker trucks being unpassable, leading to significant periods in which the oil production was shut in and actual output was below management's expectations. Given the minor proportion of the Group's production this represents, the impact on total production was not significant.

Realisations

International oil prices in early 2017 have been generally stable, with the Brent oil price trading between $50 and $55 per barrel. Our realised prices, which track international prices after adjusting for export taxes and transport costs, were similarly stable at approximately $34 per barrel. For the equivalent period in 2016, the average was approximately $22 per barrel.

The change in our gas sales arrangements in 2017, with sales being made directly to Gazprom's distribution system, led to improved sales prices in Ruble terms to approximately RUR 3,856 per thousand cubic metres excluding VAT (2016: RUR 3,559). Combined with the recovery of the Ruble, the average selling price for gas for January to April 2017 was the equivalent of US$2.10 per mcf (2016: US$1.39/mcf).

Field development operations

Drilling operations on our main gas/condensate field, Vostochny Makarovskoye ("VM") were concluded during 2015. The current activity on the VM field comprises minor improvements to production management systems and a planned workover on the VM#2 production well. There will be a total of five productive wells on the VM field, although the current output from just three of these, VM#1, VM#2 and VM#4, is sufficient to supply the gas plant with its current effective gas processing capacity of 1 million m3 per day, equivalent to 35.3 mmcf/d.

More material development activity is under way on the producing oil field, Uzenskoye. A rig to drill the new horizontal well #101 on the undeveloped Albian reservoir in the Uzen field was mobilised during April and drilling commenced as planned on 27 April 2017. Drilling operations are expected to continue for between six and eight weeks. The results of this operation are expected to be available during July 2017.

As a result of these activities, the oil production capacity is expected to increase from approximately 800 bpd to over 1,500 bpd, depending on the actual results of the horizontal well #101.

Gas plant development

The Dobrinskoye Gas Plant has been running consistently at close to the maximum processing rate of 1 million m3 per day of gas since July 2016.

The key potential change for the gas plant operations will be a change to a Redox-based gas sweetening process which would significantly reduce the cost of consumables and effectively eliminate the need to dispose of bulky spent chemicals. The tests conducted to date have been encouraging. However, management's decision to switch fully to Redox will be based on a full scale industrial trial currently under way. The decision is expected to be reached by the end of June 2017.

Another key development at the gas plant is the construction of cryogenic separation of liquid petroleum gases ("LPG"), which is currently either flared as part of the condensate stabilization process or included with the sales gas. Deliveries of the long lead items of equipment have commenced and construction is expected to start shortly and the LPG project is expected to be commissioned before the end of 2017. The LPG project will provide an additional product stream which is expected to increase total sales volumes by approximately 10% and to enhance profitability. The project is expected to be completed within the budgeted capital cost of US$5.0 million.

Finance

Mainly as a result of higher production rates and development of condensate exports which have enabled continuous production through periods of disrupted domestic markets, the Group's revenue and EBITDA numbers in the first four months of 2017 are materially ahead of those experienced in the equivalent period in 2016.

In addition, net of cash outflows on capital expenditure of approximately US$3.6 million during the first four months of 2017, the cash position increased slightly to US$20.3 million compared to US$19.7 million as at 31 December 2016. Total debt is unchanged in RUR terms but with the revaluation of the Ruble currently stands at US$4.2 million.

A dividend payment of US$0.062 per share is proposed at the Company's AGM today. Conditional on shareholder approval, this dividend, totaling US$5.0 million, will be paid to shareholders on the register on 5 May 2017 on 26 May 2017.

Andrey Zozulya, Chief Executive of Volga Gas commented:

"I am pleased to report that the assets of the Group are continuing to perform strongly and that the Group has been able to deliver significant increases in revenue and cash generation during the first four months of 2017. Volga Gas has a competitive business and a robust balance sheet which will provide a strong base for the current operations and for further growth in the future.

"Management is looking forward to delivering further increases to the Group's production and profitability through the successful completion of ongoing projects, to maximising the potential of the Group's assets and to seek further opportunities to add value."

Market Abuse Regulation (MAR) Disclosure

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

For further information, please contact:

Editors' notes:

Volga Gas is an independent oil and gas exploration and production company operating in the Volga region of Russia. The company has 100% interests in its four licence areas.

The information contained in this announcement has been reviewed and verified by Mr. Andrey Zozulya, 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 June 2009. Mr. Andrey Zozulya holds a degree in Geophysics and Engineering from the Groznensky Oil & Gas Institute and is a member of the Society of Petroleum Engineers.

Glossary

bbl Barrel

bopd Barrels of oil per day

bpd Barrels per day

boepd Barrels of oil equivalent per day, in which 6,000 cubic feet of natural gas is equated to one barrel of oil

mcf thousand cubic feet

mmcfd Millions of standard cubic feet per day