Urals Energy Public Company Limited. ('Urals Energy' or the 'Company') Interim Results

Transcription

1 Urals Energy Public Company Limited ('Urals Energy' or the 'Company') 30 th September, 2008 Interim Results Urals Energy, a leading independent exploration and production company with operations in Russia, today announces its interim results for the six months ended 30 June Highlights Operations Average daily production for the period was 7,800 bopd (including production to April 22, 2008 from the divested KOMI assets.) Commencement of successful drilling campaign in Dulisma with 2 drilling rigs o o Tested appraisal well 105 at rate of 1,280 bopd Two additional horizontal production wells spudded and scheduled for completion in Q4 08 o Contract for another two drilling rigs awarded to begin drilling in Q Substantial progress in development of Dulisma field infrastructure o o o 24 kilometres of export pipeline constructed Major equipment installed at Central Processing Facility (CPF) Subsequent to period end awarded tender for Central Transfer Facility (CTF) construction Continued development of Taas Yuriakh o Drilled additional horizontal side track wells for production (a total of 12 will be completed by end September ) o Acquisition and processing of 250 km² of 2D (Kurungsky license) and 200 km² of 3D (Central block) seismic o Tenders issued for drilling and services (a contract was placed with a drilling contractor for a BU 3000 rig which was mobilised after the reporting period, with a second rig under negotiation) o Procurement of the license for the overlying gas reserves and usage thereof for fuel requirements, thus avoiding the need for diesel or crude oil for this purpose, while correspondingly reducing lifting cost

2 Reserves 107% increase in 2P reserves to 1,202 MMBOE ( H1 07: 579 MMBOE) o o Taas Yuriakh acquisition contributing 253 MMBBLS Upward revision of Dulisma reserves resulting in 81% increase to 842 MMBBOE 117% increase in C1 and C2 oil reserves (Russian classification) for Taas Yuriakh to 900 MMBBLS (317 MMBBLS net to Urals) Confirmed licence rights to overlying gas in Taas Yuriakh o Reserves estimated at 6.3tcf C1 + C2 (2.2 TCF net to Urals) by the Russian State Reserve Committee. o Auditors DeGolyer and MacNaughton yet to assess gas reserves on Taas Yuriakh Financial 94.6% increase in gross revenues to US$110.7 million due to higher crude oil prices and increased sales volumes Operating loss decreased to US$3.1 million from US$22.2 million due to higher crude oil prices and resumed production and sales of crude oil from Dulisma, combined with a decrease in Selling, General and Administrative (SG&A) expenses Financing of capital program of US$59.5 million with the majority spent on the development of Dulisma Ongoing negotiations with Sberbank regarding the $140 million Dulisma development loan, and the extension of the initial 1-year maturity of the $500 million Taas Acquisition loan and the $130 million Dulisma development loan by 2 and 5 years respectively. The company is targeting a mutually satisfactory result before November Corporate Gross proceeds from sale of Komi properties of US$93.5 million Continuing to proceed with divestiture of all remaining non-core assets with a view to finalizing these transactions by end Q1, 2009 Outlook Near term priority to reach mutually satisfactory conclusion in negotiations with Sberbank regarding loan facilites On track to meet revised production targets of 56,000 bopd in 2012 and 67,000 bopd in 2015 Operational programme in Dulisma contemplates ESPO connection in September 2009

3 Leonid Y. Dyachenko, Chief Executive, commented: During the first half of 2008 the Company continued to make good progress with the development of its key strategic operations in East Siberia. With an ongoing active programme set to continue for the remainder of the year and beyond, the Company remains firmly on track and focused on realising its operational targets and full potential. Enquiries: Pelham PR Mark Antelme Evgeniy Chuikov +44(0) / +44(0) (0) / +44(0) Chief Executive s Statement During the first half of 2008 the Company continued to make good progress with the development of its key strategic assets in East Siberia. Following the Taas Yuriakh acquisition in 2007 and further reserve upgrades at Dulisma, compared to the equivalent period last year the Company s 2P reserves rose by 107% to 1,202 MMBOE (H1 07: 579 MMBOE). This is also reflected in a 137% increase in the PV10 of the Company s 2P reserves to $3.2 billion. Average daily production for the period was 7,800 bopd, (including production until April 22 from the now divested KOMI assets). A successful drilling campaign commenced at Dulisma with two drilling rigs. Appraisal well 105 is now producing, having tested at 1,280 bopd and two additional production wells spudded and scheduled for completion by the year end. The development of the Dulisma field infrastructure has progressed substantially. Key developments include the construction of 24km of export pipeline and the installation of equipment at the Central Processing Facility. Since the period end, the Company has awarded the tender for the construction

4 of the Central Transfer Facility, which will tie in with the new ESPO trunk system. The target remains to produce 27,000 bopd in Further development progress has also been made at the Taas field, including the drilling of additional horizontal side-track production wells and the acquisition and processing of 2D and 3D seismic at the Kurungsky license and Central block respectively. This data will allow for further depletion planning. Tenders have now been issued for drilling and services and the license for the use of the overlying gas reserves as a fuel supply has been procured. At Petrosakh s Okruzhnoye Field, Sakhalin Island, an excellent flowing oil well (#52) was drilled and completed. Well # 52 further demonstrated the value of Ural s wider asset base and the Company s commitment to maximising existing value. In keeping with our stated strategy of disposing of non strategic assets, the Company successfully sold its KOMI project for a consideration of $93.5 million. Urals will continue to actively pursue further disposal opportunities for non-core assets. The Company continues to negotiate with Sberbank regarding the $140 million Dulisma development loan, and the extension of the initial 1-year maturity of the $500 million Taas Acquisition loan and the $130 million Dulisma development loan by 2 and 5 years respectively. Dulisma Operational Update The Dulisma field development is comprised of multi-well drilling pads with flow lines to the CPF where oil will flow into the 73km export pipeline to the CTF, providing oil metering at the Transneft ESPO trunk system. The Russian Company, OAO SibKompletkMontageNaladka, was selected for constructing the CTF which is the last facility required for start up to ESPO. In addition, the Company awarded a drilling rig contract to ZAO L- Burenie for two-315 ton drilling rigs to begin drilling by March The Company s Dulisma subsidiary owns three drilling rigs, two of which are currently drilling and the third is being mobilised to the field to begin operations in December This will bring to five the number of rigs to be used for drilling operations in Dulisma.

5 Meanwhile, the Company is gathering reservoir data by conducting production flow rate and shut-in pressure tests in various wells for reservoir management planning. The Company is working with the international consulting firm, DeGolyer and MacNaughton on geological and reservoir modeling and simulations to refine the reservoir management plan. During the testing phase, the production rate from the Dulisma field is 1,500 to 1,800 bopd and is currently sold through a temporary pipeline operated by a neighboring production company. Before connection to ESPO, production will be in the range of 4,000 to 7,000 bopd transported through the temporary pipeline and trucking. Upon connection to ESPO, the Company plans to produce 8000 bopd increasing production to 12,000 bopd in the end of 2009 and to 27,000 bopd in Additionally, the Company is assessing the value of limited gas off-take and gas processing to extract natural gas liquids while producing the main oil rim. Financial Results The six months ended 30 June 2008 were characterised by high crude oil market prices, resulting in an increase in gross revenues to $110.7 million, compared to $56.9 million for the same period in Revenues were also positively impacted by higher crude oil sales volumes, which increased to thousand tons from during the six months ended 30 June 2008 and 2007, respectively. Included within gross revenues during the first six months of 2008 were crude oil, purchases totalling 48.4 thousand tonnes made from Dinyu, NizhneomrinskayaNeft and Michayuneft, and which were further resold to the third parties after these subsidiaries were divested in April There were no deliveries of crude oil exported from Arcticneft during the reporting period, resulting in 25.7 thousand tons of crude oil that remained in stock until July 2008, when it was shipped. Arcticneft is highly dependent on weather conditions as it can only ship crude oil during the summer and fall period from July to December.

6 Gross profit In thousand US dollars Period ended 30 June Gross revenues (excluding crude oil for resale) 56,922 81,518 Less Export duties and excise tax 12,515 20,107 Less cost of sales (excluding cost of purchased crude oil) 36,694 41,552 Gross profit 7,713 19,859 Gross profit margin 17% 32% Gross profit (net revenues less cost of sales) from operating activity increased from $7.7 million to $19.9 million as a result of increased volumes of production due to both the resumption of production and sales at Dulisma, where the Company doesn t pay Mineral Extraction Tax, and the increase in crude oil prices. Elsewhere the increase in prices was off-set by higher Mineral Extraction Tax, which rose in line with crude oil market prices. Resale of purchased oil Resale of crude oil (in thousand US dollars) Period ended 30 June Crude oil Export sales 0 18,174 Domestic sales (Russian Federation) 0 11,057 Total revenues from resale of purchased oil 0 29,231 Cost of purchased oil 0 28,649 Net margin % Following the divestiture of subsidiaries in the Komi Republic, the Group continued to re-sell crude oil produced by these subsidiaries on the export and domestic markets. The total cost of this purchased crude amounted to $28.7 million during the six months ended 30 June Also the Company charged a commission on these operations, which was included in gross revenues in these financial statements. The profit margin on these operations is substantially lower than for the self-produced oil, as the price of purchased crude oil also includes a seller s mark-up. There were no such operations with the Komi subsidiaries in Selling, General and Administrative expenses decreased during the six months ended 30 June 2008 by $6.4 million. This was primarily due to an absence of non-recurring expenses related to separation

7 expenses paid to certain top managers of the Group, who left the Group during the six months ended 30 June In the current period the Company reported an operating loss of $3.1 million as compared to the loss of $22.2 million reported at 30 June Gain from the change in fair value of financial derivatives increased from $1.1 million to $18.0 million during The increase is primarily due to the change in fair value of the put option liability, which decreased from $118.7 at 31 December 2007 to $96.2 million at 30 June 2008, resulting in a gain which was partly off-set by the impairment of the call option, which was reduced to nil. The fair values of the call and put options as at the valuation date of 31 December 2007 were estimated at $5.1 million and $118.7 million, respectively, based on the equity value derived from the long-term discounted cash flows model by applying cost of capital and some other parameters attributable to analogous to Taas Yuriakh traded companies, since the shares of Taas are not traded on the market. For the purposes of these financial statements the Group has reviewed the long-term model of discounted cash flows to asses the change in Taas Yuriakh equity value, and re-value the financial instruments as required by IFRS. As a result of changes in macroeconomic parameters, primarily the long-term oil price forecast, the equity value of Taas Yuriakh has increased. This change resulted in a decrease of the put option value, classified as a financial instrument in this interim condensed consolidated financial from $118.7 million to $96.2 million as of 31 December 2007 and 30 June 2008, respectively. With respect to the call option, management has not assigned any value to this financial derivative, as the Group is not planning to exercise this option but rather plans to use funds available to the Group for value creation through the ongoing development of the Dulisma oil field. Furthermore, given current market conditions, the Group s ability to sell this option to a third party prior to its expiration in January 2009 is uncertain. Therefore, for the purposes of this interim condensed consolidated financial report, management have discounted the value of the call option to nil, from $5.1 million as of 31 December 2007, and recognised a loss on the revaluation of the financial derivative in the Statement of Income. The write down does not result in any loss of cash-flow for the Group Interest expenses increased primarily because of total interest accrued for the $500 million and $130 million Sberbank loans in the amount of $43.7 million, and the accretion of the issuance costs under the Sberbank loans in the amount of $10.6 million. Interest income increased during the six months of 2008 as compared to six months of 2007 primarily due to the interest income received from the loans

8 issued to Taas Yuriakh, and also interest on the promissory notes deposited with Sberbank, which were used to secure interest payments under the $500 million loan agreement. Operating cash flows before changes in working capital increased because of an increase in net revenues and a decrease in selling, and general and administrative expenses. However, the total cash generated from operations decreased as compared to the first six months in This was primarily due to the increase in volumes of crude oil held in stock as of 30 June 2008 compared to 30 June For the first six months of 2008 the Group generated $41.4 million from investing activity. This was driven by the receipt of proceeds from the divestiture of certain subsidiaries located in the Komi Republic of Russian Federation. The total proceeds net of transaction costs amounted to $93.1 million. Also the Group recognised income of $3.6 million with respect to the sale of the Komi subsidiaries. Cash used for the purchases of property, plant and equipment increased by $25.7 million. This increase primarily relates to the development of the Dulisma field and was used for the construction of the pipe-line from the field to the tie-in to ESPO, construction of Central Processing Facility, as well as drilling and construction of other infrastructure in the field. Loans issued during the six month period amount to $26.6 million. The majority of this amount represents loans issued to the equity investee Taas Yuriakh, which was acquired at the end of The loans were given for the development of the Srednebotuobinskoye field, repayment of old outstanding loans to third parties and to finance the acquisition of promissory notes to secure interest payments to Sberbank in accordance with the $600 million loan agreement for the development of Taas Yuriakh. During the six months ended 30 June 2008 the Group classified certain subsidiaries as assets held for sale. Such classification is governed by the IFRS if the Company is expecting to realise the benefits from the assets not through ongoing operations, but through the sale of those assets. At 30 June 2008 following the decision of Group to sell Chepetskoye NGDU during 2008 and an announced sale of CNPSEI, which is connected to the transaction with the other Komi subsidiaries, these subsidiaries were classified as assets held for sale and recorded as current assets and current liabilities in the attached financial statements.

9 Sberbank and liquidity All of the Company s bank debt at 30 June and at 30 September 2008 was comprised of two Sberbank loans: 1. $500 million Taas acquisition loan bearing interest of 14% per annum with initial 1-year maturity expiring in November 2008 with the possibility of a 2-year extension if certain conditions precedent are met. Annual interest payments should be prepaid in the form of the purchase of Sberbank promissory notes for the amount of $70 million in November 2007, 2008 and The purchase of promissory notes in November 2008 to prepay interest under this loan for 2009 is one of the two outstanding conditions for the extension of the maturity of the loan. The second condition is signing of a loan agreement for a $140 million loan for continued development of Dulisma. The Company believes it has met all Conditions Precedent to availability of such $140 million loan. The borrower of this loan is Urals Energy LLC, Russia, and UEPCL s % of interest in Tass is pledged under this loan. In addition to that certain founding shareholders of Urals Energy have pledged to Sberbank shares of UEPCL, worth $ 22 million at the time of the pledge. Also, Ashmore s % interest in Taas is pledged under this loan. 2. $130 million Dulisma field development loan bearing interest of 14% per annum with initial 1-year maturity expiring in November 2008 with the possibility of a 5-year extension if certain conditions precedent are met. The conditions precedent are the same as for the maturity extension of the $500 million Taas acquisition loan. The borrower of this loan is ZAO Dulisma, and UEPCL s 100% of interest in Dulisma is pledged under this loan. In addition to that, certain founding shareholders of Urals Energy have pledged to Sberbank shares of UEPCL, worth $28 million at the time of the pledge. The Company believes it is capable of maintaining its liquidity at an adequate level and meeting its financial obligations if it receives the incremental $140 million loan and obtains the extension for the other Sberbank loans maturing in November The Company is targeting mutually satisfactory result of the negotiations with Sberbank before November Investors should refer to Note 4 in the notes to the interim results for further information on the liquidity position of the Company.

10 Ongoing seasonal deliveries of oil to the export markets from Kolguev (Arcticneft) and Sakhalin (Petrosakh) islands contribute to the Company s liquidity. Next shipment of 27,500 tonnes from Petrosakh is scheduled for the first week of October. Management and Personnel Effective from 1 May 2008 Bob Maguire resigned as a non-executive director in order to devote more time to his other business interests which have increased since he joined Urals Board. Outlook Urals Energy is well placed to further build upon its unique position in East Siberia, with its attractive fiscal regime and easy access to the fast growing Asia-Pacific markets. Finalising financing arrangements with Sberbank is the near term priority and should ensure that Company liquidity is sound and sources of financing for the Company s projects are available. The Company is continuing with its aggressive development programme at its core assets and is on track for combined Taas and Dulisma revised production targets of 56,000 bopd in 2012 and 67,000 bopd in 2015.

11 Urals Energy Public Company Limited Interim Condensed Consolidated Balance Sheets (unaudited) (presented in US$ thousands) 30 June December 2007 Note Assets Current assets Cash and cash equivalents 22,504 28,400 Accounts receivable and prepayments 38,879 38,771 Promissory notes receivable 14 30,238 64,581 Current income tax prepayments Inventories 40,839 21,464 Non-current assets held-for-sale 6 35, ,363 Total current assets 168, ,484 Non-current assets Property, plant and equipment 584, ,745 Financial derivatives 11-5,103 Intangible assets 1,405 1,816 Other non-current assets 35,219 19,649 Investment in joint venture 907, ,433 Loan receivable from joint venture 12, 15 29,869 2,264 Deferred tax assets 2,875 1,925 Total non-current assets 1,562,040 1,482,935 Total assets 1,730,461 1,770,419 Liabilities and equity Current liabilities Accounts payable and accrued expenses 29,429 23,397 Income tax payable 3,615 2,079 Other taxes payable 2,300 2,900 Other taxes provision Financial instruments 11 96, ,657 Short-term borrowings and current portion of long-term borrowings , ,031 Advances from customers 13 54,381 55,179 Liabilities associated with non-current assets held-forsale 6 5,952 27,477 Current liabilities before warrants classified as liabilities 816, ,249 Warrants classified as liabilities ,326 Total current liabilities 817, ,575 Long-term liabilities Long-term borrowings - 29 Long term finance lease obligations 1,067 1,164 Dismantlement provision 1,265 1,448 Deferred tax liability 97,200 93,835 Total long-term liabilities 99,532 96,476 Total liabilities 917, ,051 Equity Share capital 7 1, Share premium 7 635, ,111 Difference from conversion of share capital into USD 7 (113) - Translation difference 55,601 49,919 Retained earnings 119, ,744 Equity attributable to shareholders of Urals Energy Public Company Limited 811, ,764 Minority interest 1,767 1,604

12 Total equity 813, ,368 Total liabilities and equity 1,730,461 1,770,419 Approved on behalf of the Board of Directors on 29 September 2008 L.Y. Dyachenko Chief Executive Officer V.G. Sidorovich Chief Financial Officer

13 Urals Energy Public Company Limited Interim Condensed Consolidated Statement of Income (unaudited) (presented in US$ thousands) Six months ended 30 June: Note Gross revenues 8 110,749 56,922 Less: excise taxes (195) (539) Less: export duties (19,912) (11,976) Revenues 90,642 44,407 Operating costs Cost of production 9 (70,201) (36,694) Selling, general and administrative expenses 10 (23,505) (29,910) Total operating costs (93,706) (66,604) Operating (loss) profit (3,064) (22,197) Finance income (expense) Interest income 14 3,169 1,450 Interest expense 14 (55,414) (12,531) Foreign currency gains 9,571 2,846 Gain from disposal of assets held for sale 6 3,629 - Loss from joint venture operations (3,535) - Change in fair value of financial derivatives 11 18,036 1,112 Total finance expense (24,544) (7,123) Loss before tax (27,608) (29,320) Income tax benefit (charge) (3,418) 265 Loss for the period (31,026) (29,055) (Loss) profit for the period attributable to: - Minority interest 86 (12) - Shareholders of Urals Energy Public Company Limited (31,112) (29,043) Loss per share of profit attributable to shareholders of Urals Energy Public Company Limited: - Basic loss per share (in US dollar per share) 7 (0.1750) (0.2450) - Diluted loss per share (in US dollar per share) 7 (0.1750) (0.2450) Weighted average shares outstanding attributable to: - Basic shares 177,824, ,546,479 - Diluted shares 177,824, ,546,479

14 Urals Energy Public Company Limited Interim Condensed Consolidated Statements of Cash Flows (unaudited) (presented in US$ thousands) Six months ended 30 June: Cash flows from operating activities Loss before income tax (27,608) (29,320) Adjustments for: Depreciation and depletion 11,144 10,601 Share-based payments 4,297 6,695 Interest income (3,169) (1,450) Interest expense 55,414 12,531 Foreign currency gains (9,571) (2,846) Gain from disposal of assets held for sale (3,629) - Loss from joint venture operations 3,535 - Change in fair value of financial derivatives (18,036) (1,112) Other 64 (124) Operating cash flows before changes in working capital 12,441 (5,025) (Increase) in inventories (25,197) (13,823) (Increase)/decrease in accounts receivables and prepayments 25 (1,944) Increase in accounts payable and accrued expenses 17,669 7,079 Increase/(decrease) in advances from customers (854) 15,606 Increase/(decrease) in other taxes payable (1,098) 2,465 Cash generated from operations 2,986 4,358 Interest received Interest paid (44,566) (3,208) Income tax paid (1,995) (876) Net cash (used in)/generated from operating activities (42,696) 853 Cash flows from investing activities Proceeds from sale of subsidiaries 93,125 - Purchase of property, plant and equipment (59,487) (33,780) Repayment of promissory notes 35,002 - Loans issued (26,617) - Acquisition of joint venture (578) - Purchase of intangible assets (43) (822) Net cash (used in)/generated from investing activities 41,402 (34,602) Cash flows from financing activities Proceeds from borrowings, net of borrowing costs 18, ,289 Repayment of borrowings (18,000) (65,054) Repayment of loan organization fees (10,000) - Cash proceeds from issuance of ordinary shares, net of 5,892 - associated costs Purchase of financial derivative - (20,457) Finance lease principal payments (222) (211) Cash proceeds from exercise of options Net cash (used in)/generated from financing (4,205) 56,567

15 activities Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash (5,477) 22,848 equivalents Cash and cash equivalents at the beginning of the 28,779 33,082 period Сash and cash equivalents at the end of the period 23,302 55,930 Cash and cash equivalents at the end of the period of 22,504 - the Group, excluding those classified as held for sale Cash and cash equivalents at the end of the period of the assets classified as held for sale 798 -

16 Urals Energy Public Company Limited Interim Condensed Consolidated Statements of Changes in Shareholders Equity (unaudited) (presented in US$ thousands) Share capital Share premium Difference from conversion of share capital into USD Cumulative Translation Adjustment Retained earnings Equity attributable to Shareholders of Urals Energy Public Company Limited Minority interest Total equity Balance at 1 January ,448-22,445 37, ,548 1, ,976 Effect of currency translation ,849-7, ,877 Loss for the period (29,043) (29,043) (12) (29,055) Total recognized income (loss) ,849 (29,043) (21,194) 16 (21,178) Issuance of restricted stock 8 (8) Exercise of options Share-based payment - 6, ,675-6,675 Balance at 30 June ,135-30,294 7, ,049 1, ,493 Balance at 1 January ,111-49, , ,764 1, ,368 Effect of currency translation ,162-19, ,239 Accumulative translation (13,480) 13, adjustment relating to disposed subsidiaries Loss for the period (44,592) (44,592) 86 (44,506) Total recognized income (loss) ,682 (31,112) (25,430) 163 (25,267) Issuance of shares 19 5, ,017-6,017 Share-based payment - 4, ,297-4,297 Conversion of share capital into USD (113) Balance at 30 June , ,406 (113) 55, , ,648 1, ,415

17 Note 1: Activities Urals Energy Public Company Limited ( Urals Energy or the Company or UEPCL ) was incorporated as a limited liability company in Cyprus on 10 November Urals Energy and its subsidiaries (the Group ) are primarily engaged in oil and gas exploration and production in the Russian Federation and processing of crude oil for distribution on both the Russian and international markets. The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34, CY-1066, Nicosia, Cyprus. UEPCL s shares are traded on the AIM (Alternative Investment Market) Market operated by the London Stock Exchange. The Group comprises UEPCL and the following main subsidiaries and joint venture: 30 June December 2007 Exploration and production ZAO Petrosakh ( Petrosakh ) Sakhalin 97.2% 97.2% ZAO Arcticneft ( Arcticneft ) Nenetsky 100.0% 100.0% OOO CNPSEI ( CNPSEI ) Komi 100.0% 100.0% ZAO Chepetskoye NGDU ( Chepetskoye ) Udmurtia 100.0% 100.0% OOO Dinyu ( Dinyu ) Komi % OOO Oil Company Dulisma ( Dulisma ) Irkutsk 100.0% 100.0% OOO Nizhneomrinskaya Neft Komi % OOO Taas-Yuryakh Neftegazdobycha ( Taas ) Sakha-Yakutia 35.3% 35.3% Management company OOO Urals Energy Moscow 100.0% 100.0%

18 Note 2: Seasonality The Group s producing subsidiaries, ZAO Petrosakh and ZAO Arcticneft, operate on Sakhalin and Kolguev Islands, respectively, and are not connected to the State owned pipeline monopoly, Transneft. Accordingly, the majority of their production is exported by tanker. Due to severe weather conditions, shipping tankers can generally only load during the period of June through late December. Outside this period, oil is either stored or processed and sold on the local market. During the six months ended 30 June 2008, Petrosakh and Arcticneft produced 49.8 and 19.5 thousand tons of crude oil, respectively, and sold 46.4 and 0.3 thousand tons of crude oil and oil products, respectively. During the six months ended 30 June 2007, Petrosakh and Arcticneft produced 66.9 and 20.4 thousand tons of crude oil, respectively, and sold 51.9 and 0.6 thousand tons of crude oil and oil products, respectively. During 2008 crude oil export sales from ZAO Petrosakh commenced in June 2008 and crude oil export sales from ZAO Arcticneft commenced in July Crude oil and oil products in stock at 30 June 2008 were 14.6 thousand tons and 25.7 thousand tons in Petrosakh and Arcticneft, respectively, and 12.7 thousand tons and 8.8 thousand tons, respectively, at 31 December Note 3: Basis of Presentation The consolidated interim condensed financial information has been prepared in accordance with International Accounting Standard No. 34, Interim Financial Reporting ( IAS 34 ). This consolidated interim condensed financial information should be read in conjunction with the Company consolidated financial statements as of and for the year ended 31 December 2007 prepared in accordance with International Financial Reporting Standards ( IFRS ). The 31 December 2007 consolidated balance sheet data has been derived from the audited financial statements. Use of estimates. The preparation of consolidated interim condensed financial information in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities as of the reporting date and during the reporting period. Estimates have principally been made in respect to fair values of financial assets and financial liabilities, impairment provisions, asset retirement obligation and deferred income taxes. Actual results may differ from such estimates. Functional and presentation currency. The United States dollar ( US dollar or US$ or $ ) is the presentation currency for the Group s operations as management have used the US dollar accounts to manage the Group s financial risks and exposures, and to measure its performance. Financial statements of the Russian subsidiaries are measured in Russian Roubles, their functional currency. Translation to functional currency. Monetary balance sheet items denominated in foreign currencies have been remeasured using the exchange rate at the respective balance sheet date. Exchange gains and losses resulting from foreign currency translation are included in the determination of profit or loss. The US dollar to Russian Rouble exchange rates were and as of 30 June 2008 and 31 December 2007, respectively. Translation to presentation currency. The Group s financial statements are presented in US dollars in accordance with IAS 21 (revised 2003), The Effects of Changes in Foreign Exchange Rates. The results and financial position of each group entity having a functional currency different from the presentation currency (the functional currency of none of which is a currency of a hyperinflationary economy) are translated into the presentation currency as

19 follows: (i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet. Goodwill and fair value adjustments arising on the acquisitions are treated as assets and liabilities of the acquired entity. (ii) Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions). (iii) All resulting exchange differences are recognised as a separate component of equity. When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the exchange differences deferred in equity are reclassified to statement of income.

20 Note 3: Basis of Presentation (Continued) Reclassifications. Certain reclassifications have been reflected in the six months ended 30 June 2007 amounts to conform to this interim condensed consolidated financial information. The table below discloses the amounts before and after reclassification. Management believes that the current presentation is preferable to that presented in prior years. As originally reported Following reclassification or adjustment Cost of purchased crude oil Unified production tax 14,203 17,268 Depreciation and depletion 7,900 10,601 Wages and salaries including payroll taxes 6,614 10,962 Materials 3,165 3,697 Other taxes 1,075 1,350 Energy services Other 3,217 4,923 Change in finished goods - (13,484) Total cost of production 36,694 36,694 At 31 December 2007, $22,422 thousand of materials and suppliers intended for construction of fixed assets were reclassified from inventories to property, plant and equipment. The reclassifications were made to conform to current year presentation. As originally reported Following reclassification or adjustment Inventories 43,886 21,464 Property, plant and equipment 518, ,745 Note 4: Going concern A substantial portion of the Group's consolidated net assets of $813.4 million comprise undeveloped mineral deposits requiring significant additional investment. The Group is dependent upon external debt to fully develop the deposits and realize the value attributed to such assets. During 2007, the Group attracted $630 million in financing from Sberbank in the form of current borrowings (Note 14). As a result, at 30 June 2008 the Group s current liabilities exceeded current assets by $649.1 million. According to the Group's borrowing agreements with Sberbank, after the Group meets several technical condition precedents, Sberbank is obliged to extend the maturity of borrowings of $500.0 million by two years from the original maturity and the remaining $130 million loan by 5 years from the original maturity. At the date of this interim condensed consolidated financial information there are two conditions precedent that remain outstanding; the most significant is the need for the Group to sign a loan agreement for an additional $140 million loan from Sberbank for the development of Dulisma. Management is currently negotiating the terms of this agreement with Sberbank. As of the date of preparation of this interim condensed consolidated financial information, Sberbank has not committed to providing this loan.

21 In addition to obtaining the additional $140 million loan and extending the maturity of the Sberbank borrowings, management intends to meet its investing cash flow needs through cash generated from its producing properties and from proceeds from divestiture of certain non-core assets. As at the balance sheet date and the date of signing this interim condensed consolidated financial information, there is uncertainty as to whether the $140 million loan will be granted and thus whether the terms of the $130 million and $500 million loans will be extended. Further, due to the deterioration in conditions in the credit markets (see note 16) access to immediate alternative sources of long term funding is problematic. Consequently, there exists a material uncertainty whether the Group can continue as a going concern. Management is currently discussing the receipt and extension of the aforementioned loans. Based on discussions to date, management considers that the application of the going concern assumption is appropriate.

22 Note 5: New accounting pronouncements and interpretations Except as discussed below, the principal accounting policies followed by the Group are consistent with those disclosed in the financial statements for the year ended 31 December Certain new standards and interpretations have been published that are mandatory for the Group s accounting periods beginning on or after 1 January 2008 or later periods and which the Group has not early adopted. Beginning 1 January 2008, the Group has adopted the following interpretations: IFRIC 11, IFRS 2 Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). IFRIC 11 addresses accounting for certain transactions an entity may enter into to satisfy rights to equity instruments previously granted to employees. Additionally it provides guidance on accounting for rights to equity instruments of a parent company granted for employees of a subsidiary in the subsidiary s separate financial statements; IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). IFRIC 12 gives guidance on the accounting by operators for publicto-private service concession arrangements; IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). IFRIC 14 addresses the measurement of defined benefit plan assets and accounting for an obligation under a minimum funding requirement. The adoption of these interpretations, if applicable, had an insignificant effect on the Group s consolidated interim condensed financial information. Recently, the International Accounting Standards Board published the following new standards and interpretations which have not been early adopted by the Group: IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances; IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 requires an entity to report financial and descriptive information about its operating segments and specifies how an entity should report such information. The Group is currently assessing what impact the new standard will have on its consolidated financial statements; IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and

23 liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, goodwill will be measured as the difference at acquisition date between the fair value of any investment in the business held before the acquisition, the consideration transferred and the net assets acquired. Acquisition-related costs will be accounted for separately from the business combination and therefore recognized as expenses rather than included in goodwill. An acquirer will have to recognize at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognized in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. The Group is currently assessing what impact the new standard will have on its consolidated financial statements; Amendment to IAS 32 and IAS 1, Puttable financial instruments and obligations arising on liquidation (effective from 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. The Group is currently assessing what impact the new standard will have on its consolidated financial statements; IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the noncontrolling interests (previously minority interests ) even if this results in the noncontrolling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group is currently assessing what impact the new standard will have on its consolidated financial statements; Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group is currently assessing what impact the new standard will have on its consolidated financial statements; IAS 23 (Revised), Recognition of Borrowing Costs. The revision removed the option of immediately recognizing as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after 1 January The Group is currently assessing what impact the new standard will have on its consolidated financial statements; Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as noncurrent under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest

24 method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Group is currently assessing what impact the new standard will have on its consolidated financial statements; Amendment to IFRS 1 and IAS 27, Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (revised May 2008; effective for annual periods beginning on or after 1 January 2009). The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognized in profit or loss rather than as a recovery of the investment. The Group is currently assessing what impact the new standard will have on its consolidated financial statements; Amendment to IAS 39, Financial Instruments: Recognition and Measurement. Entities are required to apply the amendment retrospectively for annual periods beginning on or after 1 July 2009, with earlier application permitted. The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The Group is currently assessing what impact the new standard will have on its consolidated financial statements; IFRIC 13, Customer loyalty programmers, effective for annual periods beginning on or after 1 July The Group is currently assessing what impact the new interpretation will have on its consolidated financial statements; IFRIC 15, Agreements for the construction of real estate, effective for annual periods beginning on or after 1 January The Group is currently assessing what impact the new interpretation will have on its consolidated financial statements; IFRIC 16, Hedges of a net investment in a foreign operation, effective for annual periods beginning on or after 1 October The Group is currently assessing what impact the new interpretation will have on its consolidated financial statements. Note 6: Non-current assets held for sale As of 31 December 2007, the assets and liabilities related to Dinyu, Michayuneft, Nizhneomrinskaya Neft and CNPSEI have been presented as held for sale following the approval of the Group s Board of Directors in December 2007 to sell these subsidiaries. In April 2008, the Group completed the sale of Dinyu, Michayuneft and Nizhneomrinskaya Neft for $93.1 million subject to a possible working capital adjustment that management believes will be insignificant. As a result of the sale of Dinyu, Michayuneft and Nizhneomrinsakya Neft the Group recognized a gain of $3.6 million. As part of the sale and purchase agreement, CNPSEI was also included in the list of assets to be disposed; however, this transaction is not complete at the date of this interim condensed consolidated financial information as it is subject to an unfulfilled condition precedent. Management believes that this transaction will be completed during 2008 and therefore, CNPSEI is classified with assets held for sale as of 30 June In January 2008 the Group implemented a plan to divest ZAO Chepetskoye NGDU, which is expected to be sold during Therefore, the Group has also classified Chepetskoye as non-current assets held for sale in this interim condensed consolidated financial information.

25 Below is a breakdown of assets and liabilities of non-current assets classified as held for sale. 30 June December 2007 Cash and cash equivalents Accounts receivable and prepayments 932 2,166 Current income tax prepayments Inventories 1,313 3,313 Property, plant and equipment 31, ,052 Intangible assets Deferred tax assets Other non-current assets Total non-current assets held for sale 35, ,363 Accounts payable and accrued expenses 739 2,515 Income tax payable - 1 Other taxes payable 1,790 3,099 Advances from customers - 57 Long-term borrowings - 41 Dismantlement provision 494 2,638 Deferred tax liability 2,929 19,126 Total liabilities directly associated with non-current assets classified as held for sale 5,952 27,477