VGAS.L Regulatory News (VGAS)

10 June 2016

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 31 May 2016, Group production averaged 5,932 barrels of oil equivalent per day ("boepd") and during May 2016 total production was at 6,229 boepd

· Realised prices after adjusting for export taxes and transport costs, rose from below $16 per barrel in January 2016 to approximately $27 per barrel in May 2016

· Successful well workover operations on the Uzenskoye field raised production above management expectations to over 780 bpd.

· Group's cash position increased from $6.7 million on 31 December 2015 to $8.8 million on 31 May 2016.

Production Update

Between 1 January and 31 May 2016, Group production averaged 5,932 boepd, comprising 23.9 million cubic feet per day ("mmcf/d") of gas, 1,609 barrels per day ("bpd") of condensate and 348 bpd of oil. During the equivalent period in 2015, which was impacted by extended shut-ins caused by market disruptions, production averaged 2,669 boepd.

The Russian domestic oil market in early 2016 exhibited similar disruptions to those seen in 2015 which have impacted domestic regional demand. However, as a result of management's initiatives undertaken towards the end of 2015 to develop export channels for condensate, 55% by volume of the condensate sales were to export markets during this period and as a consequence production of gas and condensate was in line with management's plans.

On the other hand, as a result of the 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. Given the minor proportion of the Group's production this represents, the impact on total production was not significant.

During May total production was at 6,229 boepd.

Realisations

International oil prices were weak at the start of 2016 but have rallied materially since reaching a 13-year low in January 2016 when Brent oil hit $27 per barrel to recover to approximately $50 per barrel. Our realised prices, which track international prices after adjusting for export taxes and transport costs, tracked this development rising from below $16 per barrel in January to approximately $27 per barrel in May. The average netback sales price for our oil and condensate during the first five months of 2016 was approximately $22 per barrel.

Gas sales prices continue to be stable in Ruble terms at approximately RUR 3,560 per thousand cubic metres excluding VAT. Consequently the devaluation of the Ruble has led to a significant fall in the US dollar equivalent value. However, the Ruble has recovered from over 86 to the US dollar early in 2016 to approximately 67 at present. At the current exchange rate the selling price equates to US$ 1.50/mcf.

Field development operations

Drilling operations on our main gas/condensate field, Vostochny Makarovskoye ("VM") were concluded during 2015. The remaining development activity on the VM field is the construction of the flow line from the VM#3 well to the gas processing plant. On completion of these operations 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 750,000 m3 per day, equivalent to 26.5 mmcf/d.

On our oil producing field, Uzenskoye, workover operations have been conducted on the existing wells to block off water inflow into the well bores and to install electrical submersible pumps to provide artificial lift on the wells. As a result of these activities, the ongoing oil production rate is expected to increase from approximately 450 bpd to over 650 bpd.

Technical studies for the optimal development of the currently undeveloped shallow Albian reservoir in the Uzenskoye field are being completed and a proposal for this development is being prepared by management.

Gas plant development

The Dobrinskoye Gas Plant has been running consistently at the planned processing rate of 750,000 m3 per day of gas since the VM#4 well was brought on line in December 2015. While the physical capacity is estimated at up to one million m3 per day, the need to dispose of bulky spent chemicals used in the gas sweetening process acts as an effective constraint.

In order to preserve the capital of the Group, plans for investment in a redevelopment of the Dobrinskoye Gas Plant comprising amine based desulphurisation and cryogenic separation of LPG have been deferred. Management has plans for low capital cost means of achieving reductions in processing expenses and increasing the effective operational capacity of the plant. The Board will shortly be considering the options in relation to this project.

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 five months of 2016 are ahead of those experienced in the equivalent period in 2015. In addition, as the committed capital expenditures have declined on completion of the drilling operations, the Group's cash position has strengthened since the end of 2015, increasing from $6.7 million on 31 December 2015 to $8.8 million on 31 May 2016. The Group remains debt free, although management is currently negotiating a new debt facility to provide additional flexibility for funding future development expenditures.

Board and Management Changes

As announced on 13 April 2016, Tony Alves has stepped down as Group CFO and on conclusion of today's AGM is also resigning as a director of Volga Gas, but will continue to advise the company on a consultancy basis. As of 16 May 2016, Mr. Vadim Son has been appointed Group CFO, which is a non-board position.

Andrey Zozulya, Chief Executive of Volga Gas commented:

"I am pleased to report that the assets of the Group are continuing to perform as planned and that the changes to commercial arrangements have enabled the Group to continue to remain net cash generative in an economic environment which, especially in the early part of 2016, has been very challenging in Russia. 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's priority is to build on this base within the constraints of the existing environment, to maximise the potential of the Group's assets and to seek further opportunities to add value."

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