RNS Number:6464I
Urals Energy Public Company Limited
28 November 2007
Urals Energy Public Company Limited
("Urals Energy" or the "Company")
Acquisition of a Major Asset in East Siberia (the "Acquisition")
Urals Energy (LSE: UEN), a leading independent exploration and production
company with operations in Russia, announces that it has agreed to acquire a
35.3% interest in OOO Taas-Yuriakh Neftegazodobycha ("Taas") and has been
granted an option to increase such interest to 39.5% in January 2009.
Taas is a privately-held Russian exploration and production company with oil
development operations in East Siberia with licences to develop two adjacent
blocks of the Srednebotuobinskoye oil, gas and condensate field in the region
(the "SRB field"). The SRB field is essentially undeveloped. Taas holds (1) an
oil production licence for the central block of the SRB field (the "Central
Block"); and (2) a licence for geological prospecting, exploration and
production of hydrocarbons in the adjacent Kurungsky allotment in East Siberia
(the "Southern Block"). As part of the Acquisition, OOO Urals Energy, the
Company's operating subsidiary in Russia, will become the operator for the
development of the SRB field.
Urals Energy also announces that it has secured a committed, non-recourse US$500
million facility for the Acquisition (the "Acquisition Loan") and has secured,
on behalf of Taas, an additional committed, non-recourse US$600 million facility
for the development of the SRB field (the "Development Loan"), both from the
Savings Bank of the Russian Federation ("Sberbank"), one of the largest banks in
Central and Eastern Europe.
Unless otherwise explicitly stated, the financial and operating information,
reserves estimates and production forecasts of the Company contained in this
press release assume the exercise of the option to increase the Company's
interest in Taas to 39.5%.
Acquisition Highlights
* The Company has agreed to acquire a 35.3% interest in Taas and has been
granted an option by Finfund Limited (the "Seller") to acquire a further
4.2% interest in Taas in January 2009.
* This Acquisition more than doubles the Company's net proved-plus-probable
(2P) oil reserves by adding up to net 272 mmbbl, of which 94 mmbbl are
classified as proved (1P), based on a reserves study of the SRB field by
Degolyer & MacNaughton ("D&M").
* The acquisition price comprises US$440 million in cash and US$100 million
in new shares of the Company, payable on closing, and US$50 million, plus
interest, in cash or new shares of the Company, at the Seller's election,
payable within five months of closing.
* The exercise price for the option to acquire a further 4.2% interest in
Taas will be US$70 million, plus interest, in cash or shares of the
Company, at the Seller's election.
* OOO Urals Energy will become the operator for the development of the SRB
field under an operating agreement, and a shareholder agreement will be
entered into to formalise the relationship between the new and existing
shareholders of Taas (together, the "Taas Shareholders").
* The Development Loan will largely fund the development of the SRB field
until tie-in to the East Siberia Pacific Ocean pipeline (the "ESPO
pipeline"), currently expected to be operational in late 2009.
* With this Acquisition, the Company's net production from East Siberia is
expected to be 75,000 bopd by 2013, comprising 45,000 bopd from the SRB
field and 30,000 bopd from the Dulisminskoye field (the "Dulisma
field").
* Concurrently with the Acquisition, certain funds managed by Ashmore
Investment Management Limited ("Ashmore"), a third party unrelated to
the Company, have agreed to purchase a 10.5% interest in Taas from the
Seller for US$175 million, which is equivalent to the price per share in
Taas paid by the Company.
* Following the Acquisition, the purchase by Ashmore and assuming the
exercise of the Company's option to acquire a further 4.2% of Taas,
the current Taas Shareholders will retain a 50.1% interest in Taas.
Rationale for the Acquisition
* The Acquisition enhances the Company's portfolio through the addition of
substantial, attractively priced, 2P oil reserves (34.6% of which are 1P).
* The Company will benefit from economies of scale by adding to its existing
presence in East Siberia and achieving a critical mass in the region.
* The SRB field is well-positioned to access the ESPO pipeline, which opens
East Siberia to markets in the Asia-Pacific region. A tie-in to the ESPO
pipeline has been approved by Transneft and is expected to be operational
by late 2009.
* Under Russian tax legislation, the Central Block of the SRB field benefits
from a mineral extraction tax exemption through 2016 and the Southern
Block of the SRB field benefits from a mineral extraction tax exemption
through 2021 or up to a cumulative total of 25 million tonnes of oil
(183 mmbls) in respect of each Block.
* The Company estimates that the present value of the tax exemption will
produce savings to Taas of approximately US$1,078 million (or US$1.56 per
2P barrel), assuming the D&M production profile, the price of the Urals
blend crude of US$50 per barrel and a 10% discount rate.
* The Acquisition provides the Company with the opportunity to benefit from
the upside of significant additional possible oil and gas reserves and
resources in place at the SRB field and in the East Siberia region.
Company Strategy
* The Company plans to leverage its unique position in East Siberia by
capitalising on potential licence opportunities and acquisitions of
complementary assets.
* The Company will focus on project management of greenfield developments
using the economies of scale and critical mass in East Siberia that
result from the Acquisition.
* The Company will continue exploration activities in offshore and island
properties while concurrently maximising the value from the adjacent
developed fields in those areas.
* The Company plans to streamline its portfolio by divesting non-core assets
and has scaled back certain work programmes and budgets in non-core areas
to focus on the aforementioned projects.
Corporate and Outlook
* The Company intends to raise additional financing of around US$130 million
in the near term. It is intended that this will include an equity
capital raising by way of a private placement, the proceeds of which the
Company will use for potential capital expenditure requirements, including
participation in future complementary licence auctions, repayment of
short-term loans and for general corporate and working capital purposes.
* The Company will shortly post to its shareholders a circular convening a
shareholders meeting (the "EGM") to seek approval for various resolutions
necessary to undertake the intended equity capital raising. These will
include a resolution to approve a limited waiver of pre-emption rights. In
connection with the EGM, certain existing shareholders of the Company,
together accounting for approximately 37.2% of the Company's issued
shares, have indicated to the Company that they intend to vote in favour of
the resolutions to be put to the EGM.
* The Company has continued to develop its existing portfolio with a
particular emphasis on operations in East Siberia.
* A solid foundation for future growth will be laid in 2008 with significant
production increases planned for 2009 as core assets come on-stream and
link into the ESPO pipeline.
* The Company intends to seek a listing on the Official List of the London
Stock Exchange in 2008.
Leonid Y. Dyachenko, Chief Executive of the Company, commented:
"Today's acquisition further illustrates the importance of East Siberia as a
major area of focus for Urals Energy. This acquisition of a substantial and high
quality asset with proven high productivity and potential upside increases our
already strong reserves base and has the potential to more than double our
existing mid-term production target of 30,000 bopd.
Overall, Urals Energy is in a strong position for future growth. With our new
and strengthened management team, our strategic priority will be the effective
and efficient development of our substantial resource base in Eastern Russia.
With our Dulisma field and this acquisition, we have access to some of the most
attractive barrels in Russia due to the associated tax exemptions, high quality
crude and access to the ESPO pipeline."
A copy of the D&M report on the oil and gas reserves of Taas (the "D&M Report")
can be found on the website of the Company (www.uralsenergy.com).
An analyst conference call will be held at 9:30 am GMT at which time management
will provide background to the announcement and answer questions. Dial in
details will be circulated to analysts during the course of the morning.
28 November 2007
Enquiries:
Pelham PR
Gavin Davis +44 (0) 20 7743 6677 / +44 (0) 7910 104 660
Evgeniy Chuikov +44 (0) 20 3008 5506 / +44 (0) 7894 608 606
Morgan Stanley
Alastair Maxwell +44 (0) 20 7425 8000
Jon Bathard-Smith +44 (0) 20 7425 8000
1. Taas Acquisition Overview
The Company today announces that it has agreed to acquire from the Seller a
35.3% interest in Taas and has been granted an option to acquire a further 4.2%
interest in Taas in January 2009.
As part of the acquisition, OOO Urals Energy, the Company's operating subsidiary
in Russia, will become the operator for the development of the SRB field under
an operating agreement with Taas (the "Operating Agreement").
The Acquisition focuses the Company's activities on East Siberia and transforms
the Company in terms of scale and regional critical mass. It will serve to
further anchor the Company's operations in the region and is complementary to
the Dulisma field, enabling synergies in the operation of these assets,
including sharing of key specialists.
The SRB field was discovered in 1970 and over 60 appraisal wells have been
drilled, which prove significant reserves and provide important information with
respect to drilling costs and well productivity. These appraisal wells provide
Taas and the Company with a thorough understanding of the underlying reservoir
and substantially reduce the geological and reserves risk that is typically
associated with greenfield development.
According to D&M, as of 31 March 2007, the SRB field had proved-plus-probable
(2P) gross oil reserves of 690 mmbbl and 286 mmbbl of possible reserves and a
best estimate of gross contingent resources of 47 mmbbl. The Company has already
identified several potential additional upsides associated with the SRB field,
including substantial gas reserves (licences to which Taas may obtain at
licensing auctions or amending existing licences to obtain gas rights), further
development of the previously untapped Osinsky reservoir within the Taas licence
area and adjacent licence blocks, which are expected to become available at
auctions in the future.
The Company aims to connect to the ESPO pipeline in late 2009 and achieve peak
production by 2013. Taas has already received Transneft approval to tie-in to
the ESPO pipeline near Lensk, located approximately 170 kilometres away from the
SRB field.
The Company and Taas will progress ongoing design work based on earlier
conceptual plans to finalise a development plan for the SRB field. Ongoing
reservoir modelling and simulation will be used to produce a development plan,
which would seek to maximise oil recovery with the minimum number of wells. The
Company's internal estimated well count and peak rate is currently lower than
the D&M Report. As a result, the capital expenditures and operating costs
currently forecast by the Company are lower. The exact number of wells is
contingent on final well designs and reservoir studies.
As described in further detail below, the Company has obtained committed
non-recourse financing from Sberbank for the implementation of the development
of the SRB field.
2. Company Operations Update
The Company has continued to develop its existing portfolio throughout the year,
with a particular emphasis on Sakhalin Island and the Dulisma field located in
Eastern Russia.
Dulisma Field
The Company has prepared infield roads, cleared the land for facilities,
drilling pads, and rights-of-way on the Dulisma field. The tendering phase for
the central processing facility and oil export pipeline is also nearing
completion. The work for the power generation station is approaching completion
and drilling operations will resume using the Company's first drilling rig by
December 2007. A second drilling rig is scheduled for delivery in late March to
early April 2008. The Company restored production from three of its eight wells
to approximately 250 bopd and three more are to be restored to production by the
end of December, resulting in year end production of about 500 - 750 bopd.
Sakhalin Island
ZAO Petrosakh is on track to complete its full 2007 drilling campaign in
relation to the onshore licence with the sixth well now being drilled. Since
mid-year, the Company has drilled two wells, one of which is producing as
expected while the second is in the completion phase. A third well is being
drilled currently and a fourth well is undergoing a work-over. Once 2007 work
plans are completed, production should be between 2,600 and 2,800 bopd by the
end of this year. The Company plans to drill four oil producing wells in 2008
and two sidetracks will be used as water injectors for enhanced oil recovery.
Komi Region and Udmurtia
The Company has oil production operations on seven fields in the Komi region and
three in Udmurtia. The production from the Company's assets in Komi and Udmurtia
has remained steady at approximately 5,700 bopd. Given the Company's decision to
re-focus its strategy on East Siberia, some works planned for the second half of
2007 were scaled back and, as a result, the expected uplift from this programme
was not achieved.
Kolguyev Island
The Company has two production licences on Kolguyev Island in the Barents Sea.
Production is stable at 850 bopd as there is water injection for pressure
support in the Charkaborsky reservoir. The Company is now examining options with
regard to additional exploratory and/or development drilling on the island.
Exploration activity is briefly discussed below.
Exploration Programme
Sakhalin Island: Pogranichnoye Block
Reprocessing and interpretation of 2D and 3D seismic for both the onshore
Okruzhnoye field and the Pogranichnoye block were conducted independently by two
seismic processing and analysis firms, Largeo and PetroAlliance. The
Pogranichnoye block measures a total of 1,700 square kilometres in area, and
exploration prospects have been identified in horizons such as the Pileng, which
is productive in the onshore Okruzhnoye field, as well as secondary prospects in
the Daginsky sandstones that are productive in the Sakhalin I and Sakhalin II
projects located further north along the coastline.
The unrisked contingent recoverable resources estimated by the two firms are
approximately 236 mmbbl. The Company is conducting studies for the next phase of
exploration and appraisal. Average distances from the shoreline to the
Vitnitskoye and Aprelskoye structures are between 3.5 and 5 kilometres. Plans
are also underway to investigate options for exploratory drilling in 2008 and
2009.
Nenets Nadezhda Well
In October 2007, the Company completed its exploration efforts in this block
after drilling a 3,700 metres exploratory well in the Nenets Autonomous Region
of Russia in the north of the Timan-Pechora basin. The well was drilled to test
the Permian and lower Devonian sections that constitute the primary oil bearing
horizons in a number of offsetting fields. The well was drilled, cored, logged
and tested, and subsequently abandoned after failing to produce oil in
commercial quantities. The Company does not intend to pursue any other
exploration opportunities in the area and this licence will expire in January
2008.
Arcticneft Paleozoic Exploration Prospects
The Company is currently drilling the first of the two exploration wells to test
seismic anomalies in the Permian/Carboniferous interval underlying the
Peschanoozeroskoye field. The first well is a sidetrack of the initial well,
which encountered oil on testing. The Paleozoic section on Kolguyev Island is an
extension of the prolific Timan-Pechora basin which extends into the offshore
north of the Russian coastline.
Group Production
Although the Company scaled back portions of its work programmes as it
contemplated divestitures and its refocused strategy, the total production has
remained stable near 9,000 bopd with an adjusted 2007 exit rate of 10,000 bopd
matching the actual work performed and the wells to be put on line by the end of
the year.
Management Changes
As part of the Company's strategy of streamlining its portfolio, focusing on
greenfield developments in East Siberia and its enhancement of operational
expertise in critical areas, certain key management changes have been made in
2007. Mr. Vladimir Sidorovich, an experienced specialist in banking, investment,
power utilities and oil and gas sectors in Russia, replaced Mr. Stephen Buscher
as Chief Financial Officer in August. Also in August, the Company appointed Mr.
Kerry Kendrick, a registered petroleum engineer with extensive experience as
manager of large international exploration and production projects, as Chief
Operating Officer of the Company. In addition, Mr. Mervyn Goddings has replaced
Mr. Henri Wolski as Senior Vice President of Operations. Mr. Goddings is a
civil engineer with 30 years of oil and gas infrastructure and project
management experience and most recently was a senior project manager with
TNK-BP.
Other
A claim has been filed by a former shareholder of CNPSEI, against the Company
and CNPSEI (a subsidiary of the Company with operations in Komi) challenging the
validity of the holding by the Company of its participation interest in CNPSEI.
The Company believes that the claim is unlikely to succeed on the merits. The
Company is contesting the claim vigorously.
28 November 2007
Appendix 1 - Further Information on the Acquisition Structure and Financing
Acquisition Structure
The Company will initially acquire a 32.3% interest in Taas for a price of
US$440 million in cash and US$100 million in shares of the Company (the "First
Tranche"), due to close ("Initial Closing") no more than fifteen business days
from today. The Company's shares to be issued will be valued at the volume
weighted average price of shares in the Company for the five trading days
following this announcement (including today) (the "VWAP").
The Company will also acquire a further 3.0% interest in Taas within 150 days
following the Initial Closing for a price of US$50 million, plus interest at the
rate of 11.95% p.a. (the "Second Tranche\"), payable in either cash or, at the
Seller's election, equivalent shares in the Company calculated at the time of
issue on the same VWAP basis as described in relation to the First Tranche
above. The Company has agreed to accelerate the purchase of the Second Tranche
from a portion of the proceeds of any asset sales and/or equity placings made
after the Initial Closing.
In addition, the Company has an option (the "Option") to acquire an additional
4.2% interest in Taas in January 2009 for a price of US$70 million, plus
interest at the rate of 11.95% p.a. from the Initial Closing, payable in either
cash or, at the Seller's election, equivalent shares in the Company calculated
at the time of issue on the same VWAP basis as described in relation to the
First Tranche above.
The price to be paid by the Company (for each of the First Tranche, Second
Tranche and Option) is fixed as at signing and is not subject to adjustment
after signing or any closing in respect of indebtedness, working capital or
otherwise.
Ashmore has agreed to purchase a 10.5% interest in Taas at the same time as the
Initial Closing (the "Ashmore Purchase"). The price to be paid by Ashmore,
US$175 million in cash, represents the same price per share in Taas as that paid
by the Company. In the event of certain contingencies, Ashmore has been granted
the right to put its shares in Taas to the Company no earlier than one year from
the Initial Closing for an amount equal to the price paid for them plus interest
at the rate of 14% p.a. to be satisfied in cash or, at Ashmore's option, 50% in
cash and 50% in shares in the Company valued at a price determined by the
average closing price of the Company's shares in the two-week period following
the Initial Closing.
The existing shareholders of Taas will retain a 50.1% interest in Taas following
completion of the First Tranche, Second Tranche and Ashmore Purchase and the
exercise of the Option.
Financing of the Acquisition
The Company is financing substantially all of the cash element of the First
Tranche with the Acquisition Loan (the remainder of the cash element is being
financed from the Company's existing resources), which has an initial term of
one year, extendable by a further two years, and an interest rate of 14% p.a.
(the interest due for each year is to be prepaid at the beginning of each year).
The Acquisition Loan is secured by a pledge to Sberbank of the shares in Taas to
be acquired by the Company and by Ashmore; in addition, certain of the Company's
largest shareholders, who are also members of the Company's management, are
pledging their shares in the Company to Sberbank.
The borrower under the Acquisition Loan will be OOO Urals Energy (which will
then on-lend the proceeds to the Company). There is no direct recourse to the
Company in respect of the Acquisition Loan (other than in respect of the pledges
described above).
Taas Debt Financing
Development Loan
In order to provide for the development of the oilfields covered by Taas's
licences, the Company and the Seller have secured financing for Taas in the form
of the Development Loan.
The Development Loan has an initial term of one year, extendable by a further
six years, and an interest rate of 12% p.a. (the interest due for the first two
years is to be prepaid at the beginning of the term). The Development Loan is
secured by a secondary pledge to Sberbank of the shares in Taas to be acquired
by the Company and Ashmore and by a pledge to Sberbank of the interests in Taas
held by the other Taas Shareholders.
The Taas Shareholders other than Ashmore (which has the right but no obligation)
have agreed to lend to Taas, pro rata to their respective interests in Taas,
such amounts of the Development Loan that are not provided by Sberbank. Such
amounts are to be provided in two tranches of up to US$300 million each.
The borrower under the Development Loan will be Taas. Other than as described in
the paragraph above and pursuant to the obligation to fund Taas' interest
payment obligations as described below, there is no direct recourse to the
Company in respect of the Development Loan.
Shareholder debt financing
In order to provide for working capital for Taas, the Seller and the Company
have agreed to lend to Taas RUR885 million within one month of the Initial
Closing (as to 50.1% and 49.9% of the loan respectively).
In order to support the development, working capital and other needs of Taas, if
required, all of the Taas Shareholders have agreed to lend to Taas, pro rata to
their respective holdings in Taas, amounts representing the interest that is due
on all loans (from whatever sources and including the Development Loan) to Taas
at any time such interest is payable.
Shareholder capital contributions
The Seller has agreed to make a capital contribution of US$90 million to Taas
immediately prior to the Initial Closing to repay certain bank debt of Taas. In
order to assist the Seller's cash flow in funding this contribution, the Company
has agreed to grant the Seller a two-year unsecured loan in the amount of US$90
million at an interest rate of 10.50% p.a., US$70 million of which will be made
available within 150 days of the Initial Closing and the remainder of which will
be made available within 450 days of the Initial Closing (the "US$90 million
Loan").
The Company believes that the Development Loan, together with projected
available cash flow, will be sufficient to finance the currently projected
development needs of Taas. However, in case such funding is insufficient, all of
the Taas Shareholders have agreed to make a capital contribution of US$100
million to Taas, pro rata to their respective holdings in Taas, on the
Development Loan being fully drawn (and this undertaking is a condition to the
Development Loan).
Sale and Purchase Agreement
The sale and purchase agreement for the Acquisition (the "SPA") is between the
Company (as a purchaser), Ashmore (as a purchaser) and the Seller.
The Company has conducted an extensive due diligence review of Taas and has
received from the Seller certain warranties in the SPA. These warranties are
limited in their scope and application (in particular in relation to Taas'
licences and the financial position of Taas). Most warranties are qualified by
the awareness of the Seller.
Any claims under the SPA must be brought within nine months of the relevant
closing. The overall limit for such claims is US$25 million (subject to the
warranties relating to the title to the Taas shares and Taas' licences, for
which the overall limit is the consideration payable) and the Company will not
be able to bring a claim under the SPA where the Company already has actual or
constructive knowledge of the matter forming the basis of the claim. There is no
tax indemnity. The Company has a very limited right to terminate the Acquisition
prior to the Initial Closing (even if, for example, a defect in the
participation interests or the business of Taas is discovered after signing).
Shareholders' Agreement
From the Initial Closing, the Taas Shareholders' relationship will be regulated
by a joint venture agreement governed by English law (the "SHA"). The SHA
provides for, amongst other matters, management and board appointments, decision
making (including measures designed to protect the position of the Company),
equity contributions in addition to the debt financing obligations described
above (including an obligation to maintain Taas' net assets position at the
level required by the Development Loan), financial reporting, contracting and
share transfer restrictions.
In particular, the Taas Shareholders have agreed to establish a
Cyprus-incorporated holding company and transfer their interests in Taas to the
holding company in consideration for shares in the holding company. This
transfer will be subject to the approval of the Russian Federal Anti-monopoly
Service, which will not be sought until after the Initial Closing.
Under the SHA, the Seller has the right to buy back the Company's interest in
Taas for the then outstanding amount of the Acquisition Loan if the Company is
in default thereunder or the Acquisition Loan cannot be repaid in full at
maturity.
The Taas Shareholders (including the Company) have granted each other customary
pre-emption rights on share transfers in the form of a right of first offer. In
addition, the Taas Shareholders have a right to exit from Taas by tagging all
their shares in Taas to a sale by another Taas Shareholder to any third party.
The SHA continues in force in relation to the Company for two years or until the
existing shareholders of Taas effect an exit (whichever is later). In addition,
if at any time Ashmore's interest in Taas reduces below 2%, the measures
designed to protect the position of the Company (so called "reserved matters")
will no longer apply.
The enforceability of agreements such as the SHA may present challenges insofar
as their provisions conflict with provisions of Russian law. The parties to the
SHA have therefore agreed to modify the charter of Taas to incorporate the
protective provisions of the SHA that are consistent with the mandatory
provisions of Russian law. Specific provisions and how they are to be
incorporated are subject to further negotiations.
Operating Agreement
OOO Urals Energy will become the operator for the SRB field under the Operating
Agreement. As part of this, OOO Urals Energy will have the right to implement
the development plan (once agreed).
The ultimate decision-making and the agreement of the development plan and the
business plan will remain with the Taas Shareholders (including the Company).
If the Development Loan is called in for early repayment (whether or not that
obligation is met), the Operating Agreement will terminate (and another operator
will need to be appointed); there are also other circumstances, some of which
are beyond the Company's control, as a result of which the Operating Agreement
will terminate.
Guarantee
The performance of the financial obligations of the operator under the Operating
Agreement is guaranteed by the Company to Taas. The scope of the guarantee
includes OOO Urals Energy's liability for losses suffered by Taas as a result of
the improper performance of work by OOO Urals Energy's sub-contractors in
circumstances where OOO Urals Energy has recommended that Taas accept such work.
Appendix 2 - Further Information on Taas
Organisation and History
Taas was incorporated in Russia as a limited liability company on 1 November
2000 to develop the SRB field. In April 2002, Taas obtained its first licence to
develop the SRB field from its parent company, OAO "Taas-Yuriakh Neft" ("TYN"),
which, in turn, received its oil production licence in 1991 as the winner of a
state tender organised by Russian federal and local authorities. In 2006, as a
result of TYN's decision to increase the charter capital of Taas, two Cypriot
companies, Yakut Energy Limited and the Seller, made contributions to the
charter capital of Taas and received 37.3% and 62.2% respectively.
Reserves, Resources and Production
On 9 July 2007, D&M delivered an independent evaluation of Taas' reserves and
contingent resources with respect to all of Taas' currently licensed fields and
areas. According to the D&M Report, as of 31 March 2007 Taas had proved,
probable and possible oil reserves in the SRB field and gross contingent
resources in the Osinsky reservoir as shown in the tables below. D&M has not
evaluated Taas' gas reserves.
The tables below represent extracts from the D&M Report for the oil reserves and
resources. In addition to the information on reserves of the SRB field contained
in the D&M Report, one of the tables below contain figures excerpted from the
report prepared by Miller & Lents, Ltd. for Taas on June 29, 2007 ("M&L
Reports"). In addition to oil reserves, the SRB field contains gas reserves,
including the gas cap, associated gas and free gas. Taas does not have a licence
to develop gas reserves in the Central Block as it does in the Southern Block.
However, obtaining such license would allow Taas to develop gas reserves in the
SRB field. In addition, it will allow Taas to take advantage of a potential gas
pipeline running parallel to the ESPO which has been recently announced by OAO
Gazprom, as and when such pipeline development occurs.
D&M Report Total Proved (106bbl) Probable* (106bbl) Possible* (106bbl)
___________________ ___________________ ___________________
SRB field 239.0 451.1 285.7
* Probable and possible reserves have not been adjusted for risk to make them
comparable to proved reserves.
M&L Reports Total Proved (106bbl) Probable* (106bbl) Possible* (106bbl)
___________________ ___________________ ___________________
SRB field 507.8 215.7 211.9
* Probable and possible reserves have not been adjusted for risk to make them
comparable to proved reserves.
D&M Report Resources Summary
____________________________________________________________________
Low Estimate Median Estimate Best Estimate High Estimate
(106bbl) (106bbl) (106bbl) (106bbl)
___________ ___________ ___________ ___________
Gross Contingent Oil 11.8 34.6 47.4 95.9
Resources
________________
Notes:
1. Pg and Pe have not been applied to the volumes in this table.
2. Recovery efficiency is applied to resources in this table.
3. Contingent resources are not comparable to reserves.
According to the D&M Report, the estimated future net revenue and net present
value attributable to the proved-plus-probable oil reserves in the SRB field are
as summarised in the table below. The amounts are expressed in US Dollars in
millions, using an exchange rate of RUR 26.0 per US$1.0:
D&M Report Future Net Revenue Net Present value at 10
percent
(million US$) (million US$)
___________ ___________
Proved Developed Producing 82.5 49.9
Proved Undeveloped 2,925.0 1,523.1
Total Proved 3,007.5 1,573.0
Proved-Plus-Probable* 7,272.7 2,680.1
* Values attributable to probable reserves have not been adjusted for risk to
make them comparable to values attributable to proved reserves.
The SRB Field
The SRB field represented a significant oil and gas discovery in 1970. The field
has remained essentially undeveloped until the recent construction of the ESPO
pipeline which will allow access to multiple markets. According to the D&M
Report, two reservoirs within the SRB field are known to be hydrocarbon-bearing:
the Vendian-Lower Cambrian Botuobinsky reservoir, which is the only reservoir
currently producing, and the Lower Cambrian Osinsky reservoir, which lies
approximately 500 metres above the Botuobinsky Reservoir.
During the Soviet era, a significant number of wells were drilled within Taas'
licence boundaries of the SRB field, with penetrations of the Botuobinsky
reservoir approximately equivalent to 5 km spacing. As a result, the SRB field
has over 60 appraisal wells located in the Central Block of which 13 were kept
active to supply oil to local markets. The cumulative oil produced from those
wells is approximately 6 mmbbls. The sum of subsurface geological, reservoir and
production data from the appraisal and active wells removes large elements of
risk normally associated with greenfield development. Recently, Taas has been
employing modern western technology to re-enter wells to drill horizontally.
Those newly drilled wells will be tested in the near future.
The upside potential of the Acquisition is in the gas reserves in the SRB field
as mentioned above plus further development of the previously untapped Osinsky
reservoir and adjacent licence blocks that are expected to become available at
state auctions in the near future.
The SRB field lies approximately 130 kilometres southwest of Mirniy, the capital
of the Russian diamond industry, a town with a population of approximately
50,000 with a relatively developed infrastructure, including an airport with
daily flights to Moscow, and 140 kilometres northwest of the city of Lensk, a
town with a population of approximately 30,000 and an important regional
transport hub with a local airport for small planes and helicopters. The only
populated area in the vicinity of the SRB field is the Taas-Yuriakh settlement,
a community of less than 1,000 people.
Tax Exemption
Under recently introduced tax legislation, certain fields in East Siberia,
including the Republic of Sakha (Yakutia), the Irkutsk Oblast and the
Krasnoyarsk Territory, are entitled to up to a 10- or 15-year mineral extraction
tax exemption. Under the new law, if the volume of oil produced reaches 25
million tonnes before the end of such a tax exemption, tax payment obligations
of such a company are resumed. Since the SRB field is located in the Republic of
Sakha (Yakutia), it has qualified for a 10-year tax exemption in the Central
Block and a 15-year tax exemption in the Southern Block. The limit of a
25-million tonne oil production volume has been established separately for the
Central Block and the Southern Block. The Company estimates that the tax
exemption will produce savings to Taas of approximately US$1,078 million in net
present value terms, assuming a price of Urals blend crude oil of US$50 per
barrel, a discount rate of 10 percent, the income tax rate of 24 percent and the
production and cost estimates for proved-plus-probable (2P) reserves set forth
in the D&M Report.
Transportation and Oil Marketing
Taas has already received an approval from Transneft to tie-in to the ESPO
pipeline near Lensk, located approximately 170 kilometres away from the SRB
field. The end-point of the ESPO pipeline by the end of the first phase of the
ESPO construction is planned to be at Skovorodino, near the Russia-China border.
From there, the Company plans to transport oil by railway for sale in Northern
China or at the port of Nakhodka on the Pacific coast. To date, no official
transportation tariffs by the ESPO pipeline have been made available.
Development of the SRB field
In brief, the development of the SRB field includes three main components:
drilling, infield infrastructure and an oil export system. The Company will make
every effort to maximise the asset value, NPV, with an optimal number of wells
that maximise oil recovery.
Drilling
The conceptual project design includes horizontal drilling technology among
other technologies that will be appraised with the objective of enhancing oil
recovery and minimising drilling costs. The conceptual design also includes
injection wells for water and/or gas to maintain reservoir pressure and maximise
oil recovery.
Infield infrastructure and facilities
The infield infrastructure and facilities component of the development plan
includes a central process facility (the "CPF"), production gathering lines,
reinjection lines for water and gas, electric power lines, roads and drilling
pads.
The CPF will be installed to match the production capacity of the wells. The CPF
is used to separate clean oil for shipping via the oil export line. Some field
gas would be used as fuel for engines and boilers while the rest is to be
reinjected into the reservoir.
Oil Export System
The Company is planning to construct a 170 kilometre trunk oil pipeline that
will connect the CPF to the ESPO pipeline at the connection point near Lensk.
Further updates will be issued as material information on the development plan
for the SRB field becomes available.
This information is provided by RNS
The company news service from the London Stock Exchange
END
ACQFEFSMASWSELF
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