VGAS.L Regulatory News (VGAS)

7 June 2018

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

· Year to 31 May 2018, Group production averaged 4,402 barrels of oil equivalent per day ("boepd").

· Year to 31 May 2018, realised prices for oil and condensate net of sales expenses averaged $45.1 per barrel.

· LPG production commenced in May 2018 and is expected to reach full operational capacity by the end of June 2018.

· The Group's cash position increased by US$4.6 million to US$12.0 million (as at 31 May 2018).

Production Summary

The reduced production compared to the equivalent period in 2017 was due primarily to lower capacity utilisation during implementation and optimisation of Redox gas sweetening and the presence of increased formation water during gas production from certain of the production wells on the Vostochny Makarovskoye ("VM") field. Optimisation of the Redox gas sweetening process continues together with management studies, as further detailed below, to optimize the production rate.

Realisations

The average netback sales price for oil and condensate for the period 1 January to 31 May 2018 was US$45.11 per barrel (1 Jan to 31 May 2017: US$34.80 per barrel). The domestic sales prices closely track international prices after adjusting for export taxes and transport costs.

The gas sales price in Ruble terms was RUR 4,025 per thousand cubic metres excluding VAT (1 Jan to 31 May 2017: RUR 3,856). As the Ruble weakened in March 2018, the average selling price for gas for January to May 2018 was the equivalent of US$1.97 per mcf (1 Jan to 31 May 2017: US$21.90/mcf).

Field development operations

During late 2017 and early 2018, the presence of formation water in certain of the production wells on VM was detected. This led to the Company to commissioning a new independent reserve report which resulted in a significant reduction in reserves, mainly in the VM field, although the estimate of original hydrocarbons in place was unchanged.

Management has commenced the process of developing technical and operational solutions to mitigate the impact of the reserves reductions. Having concluded a preliminary study, management is considering competing proposals from potential contractors for the remediation project which will seek to optimise the production rate and overall extraction of hydrocarbons from the VM reservoir.

In addition, preparations are under way for the drilling of sidetracks to two currently non-producing wells - VM#2 on the VM field and well #26 on the Dobrinskoye field - with the aim of restoring production from these wells by developing undepleted reservoir zones. The results are anticipated in August 2018.

On the Uzenskoye oil field, the new horizontal well #101 on the undeveloped Albian reservoir in the Uzen field was drilled by July 2017 and placed on full time production in December 2017. Since then, the well has been producing at an average rate of approximately 300 bopd, offsetting declines on the older wells and leading to an increase in oil production, as reported above. Further development of the Albian reservoir is anticipated, but not before the end of 2018.

Gas plant development

Since July 2017, the Dobrinskoye gas plant has been operating exclusively with the Redox-based gas sweetening process. During the implementation of this, the capacity utilisation of the gas plant was reduced as the process has been optimised. The optimization programme continues with further minor modifications to the process equipment at the plant. Nevertheless, the Redox process has enabled reductions in the cost of consumables and has eliminated the need to dispose of bulky spent chemicals.

The key recent development at the gas plant is the construction of cryogenic separation of liquid petroleum gases ("LPG"), which historically was either flared as part of the condensate stabilization process or included with the sales gas. Construction of the LPG project was completed in April 2018 and test production commenced in May. Testing is expected to continue during June 2018 and final commissioning is expected to be concluded towards the end of the month, after which full time LPG production is anticipated.

Finance

Revenues for the first five months to 31 May 2018 were US$16.3 million (1 Jan to 31 May 2017: US$19.4 million) with lower production partly offset by higher prices for oil and condensate. The estimated EBITDA for January to May 2018 was US$4.6 million (1 Jan to 31 May 2017: US$ 7.2 million).

The Group's cash position increased to US$12.0 million as at 31 May 2018 (US$8.7 million at 31 December 2017), after payment of approximately US$2.0 million on capital expenditure and US$0.9 million on interest and debt repayments. At the prevailing exchange rate, the bank loan outstanding as at 31 May 2018 was US$3.0 million (31 December 2017 US$4.0 million).

During May 2018, the Group received a sum of US$3.1 million as settlement of a court case against a former drilling contractor, pending one final stage in the legal process. This is included in the above cash balance.

Andrey Zozulya, Chief Executive of Volga Gas commented:

"I am pleased to report operational and financial performance that is in line with management's expectations and I am particularly pleased that our LPG project is in test production. This project provides an incremental stream of revenue which is expected to have a material positive impact on profitability, as it attracts no additional Mineral Extraction Tax.

"The Company is looking forward to delivering further improvements to the Group's financial performance and to resuming distributions to shareholders, which will be considered by the Board in September with the 2018 Interim Results."

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