Volga Gas provided an update on current activities and to preview the planned work program and capital budget for 2011.
Uzenskoye field (supra-salt Karpenskiy)
Oil production from the Uzenskoye field during Q3 2010, averaged 1,376 bopd, reflecting a sustainable and steady rate of production from four wells. Production in Q2 2010 (832 bopd on average) was impacted by abnormal weather-related disruptions - heavy snow followed by a rapid thaw made the roads unusable preventing regular oil transportation from the wellsite. In Q3 2009, the production (1,693 bopd on average) was from 5 wells; one of these wells has been taken off production for future workover and conversion into a water injector.
The Uzenskoye field continues to produce under natural flow and with negligible water cut. The production rates seen in Q3 2010 have been maintained throughout October.
The short term development plans for the field include one new development well, Uzen #11, which is planned to be drilled into a currently non-producing portion of the reservoir. It is expected to be drilled and completed during H1 2011. In addition there will be further investment in upgrading in-field roads.
Volga Gas continued to benefit from increasing oil sales realizations. The sales price reported of US $32.19 per barrel (net of VAT) is a netback price at the field facilities. Since the end of Q3 2010, prices have continued to increase modestly.
Extended test production has been carried out on the two completed wells, VM#1 and VM#2, at the Vostochny Makarovskoye field. The wells were flowed with varying chokes to gather well pressure data and to enable an optimal production management plan for the field when it commences full time production. The response of the field under the testing program is in line with our expectations.
During the testing, condensate was separated and collected for sale while the gas produced was flared. The cash flow from condensate sales offset the costs of the testing program and provides a modest surplus.
On August 24, 2010, Volga Gas announced that a court order had been awarded against Trans Nafta for the payment of a sum of RUR 640 million (US$21 million). The sum relates to the down payment made by Volga Gas in 2008 for a proposed acquisition of a 75% interest in a gas plant being constructed by Trans Nafta. The legal processes relating to this case continue and will be the subject of further announcements. Meanwhile, Volga Gas anticipates undertaking work on an existing sulfur processing unit for the Vostochny Makarovskoye field. This unit has been partially constructed on the field site and is required for the processing of gas produced from the field.
Grafovskaya#1 (sub-salt Karpenskiy)
Further to the announcement on 21 September 2010, operations on the Grafovskaya#1 well have now been concluded, with no commercial hydrocarbon flow rates. As disclosed with the Interim Results 2010, an impairment charge of approximately US$26 million is anticipated for this well.
Work program and budget
The 2011-2012 work program comprises one new development well on Uzenskoye, as mentioned above, and three exploration wells:
The first is a firm well that completes current work commitment on the Urozhainoye-2 license. It is expected to be drilled during H1 2011. The other two wells are currently considered as a contingent work program.
The cost of the firm exploration drilling outlined above has been budgeted at US $3.5 million. In the event of success, we would anticipate further drilling on the same prospects during 2011-2012. The development expenditure on Uzenskoye during 2011 is planned to be US $2.0 million. In addition, the anticipated work on the existing sulfur processing unit for the Vostochny Makarovskoye field investment is expected to require investment of less than US$ 3 million. This is expected to be largely funded by cash generated from operations.
Mikhail Ivanov, Chief Executive of Volga Gas commented, "After the disappointing test results on Grafovskaya #1, Volga Gas is in the short term concentrating on bringing existing discoveries into production and on exploration activities in supra-salt horizons where we have a clear track record of success.
"The program we have developed is focused on increasing both our production and reserves with exploration drilling that includes some low risk prospects as well as material high impact/high risk (but low cost) drilling. Meanwhile, we are also continuing to work towards delivering production from the Vostochny Makarovskoye gas/condensate field and are examining further opportunities to expand our business."
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