VGAS.L Regulatory News (VGAS)

27 January 2020

Volga Gas plc

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

PRELIMINARY RESULTS OF THE RESERVOIR STUDY ON THE VOSTOCHNY MAKAROVSKOYE AND DOBRINSKOYE FIELDS

Volga Gas plc, the oil and gas exploration and production group operating in the Volga Region of Russia, is providing the following update on the preliminary reserves estimates in its Vostochny Makarovskoye ("VM") and Dobrinskoye fields.

As previously announced, on 17 July 2019 following unsuccessful sidetrack wells on the VM#2 well, subsequent logging on the VM#3 well showed that the gas:water contact was higher than previously expected.

The Company appointed Schlumberger Ltd to conduct a comprehensive technical evaluation and reservoir study on the VM and Dobrinskoye fields. The study was completed recently and a re-calculation of remaining reserves in the fields is being carried out. While the results are yet to be finalised, preliminary results have been presented to the Board of Company.

These results indicate total preliminary estimates of oil and gas Proved reserves for the Group as at 31 December 2019 are 9.1 mmboe, a downward revision of 8.3 mmboe, or 48%. This is made up of the preliminary estimates of Proved remaining reserves as at 31 December 2019 for the VM field of 2.9 million barrels of oil equivalent ("mmboe"), a downward revision of approximately 7.9 mmboe, or 73%. The preliminary Proved reserves for the Dobrinskoye field, as at 31 December 2019 are 0.4 mmboe, a downward revision of approximately 0.6 mmboe, or 60%.  There are no material revisions to the oil reserves of the Group expected from the review.

By way of geological background, the VM field is a carbonate reservoir exhibiting both matrix porosity, with the hydrocarbons held in pores within the rock, and fracture porosity, with the hydrocarbons present in fractures. The majority of hydrocarbons in place are in matrix porosity. The rising gas:water contact is presumed to lead to a barrier to production of gas from matrix porosity and this is the cause of the significant revisions to estimates of recoverable gas and condensate. It is possible, though it cannot be assumed, that alternative production management procedures may enable a greater proportion of the hydrocarbons in place to be produced economically. This could in time lead to future upward revisions to reserves. Management will be evaluating the technical and financial effectiveness of such alternative production management regimes, including any incremental capital investment required.

Production outlook and financial impact

As announced on 6 January 2020, production from the VM and Dobrinskoye fields totalled 4,062 boepd in December 2019. Management currently expects this production rate to be maintained through 2020.

The reserve revisions outlined above will lead to a material non-cash impairment charge on the carrying value of the VM and Dobrinskoye assets, as well as significantly increased unit non-cash depletion charges on production.

Offsetting the impact on the Groups' Income statement, the Group has operated in a cash flow positive basis during 2019 and expects to continue to do so in 2020. As at 31 December 2019, the Group's cash position totalled US$14.1 million with no debt. Management believes this provides the necessary financial resources to undertake a programme of rebuilding value.

Strategy update

As announced on 3 December 2019, the Company has commenced a search process to strengthen the board by appointing up to two new independent non-executive directors, one of which would replace Ronald Freeman, who retired on 31 December 2019. Further announcements on this will be made at the appropriate time.

Separately, and in addition to management initiatives to rebuild the value of the Group's assets, which will include exploration drilling on identified potentially oil bearing prospects in the Karpenskiy licence area with slim hole drilling, the strengthened Board will look at other areas to enhance shareholder value.

Andrey Zozulya, Chief Executive of Volga Gas commented:

"While the reserve downgrades at the VM field are disappointing, the Group's total production from the VM and Dobrinskoye fields is expected to be maintained through 2020 at the current level of approximately 4,000 boepd. In addition, the Group has the necessary financial resources at its disposal with the Group's cash position at year end of US$14.1 million with no debt at year end and we will continue to operate in a cash flow positive basis in 2020. Management is focused on optimising the recovery of gas and condensate from the VM field and is also actively seeking opportunities to build sources of additional alternative production. Among these additional sources is the unexploited exploration potential for new oil reserves in the Group's Karpenskiy licence area. To that end, the Company plans to intensify its slim hole drilling activities. This technique enables oil and gas production wells to be drilled at a fraction of the cost of a conventional well. The Company has seen generally promising results from the first nine slim hole wells drilled during 2019. More details on this will be provided with the full year 2019 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.

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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 five 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