Fred Callaway, President, said "This agreement marks the beginning of a new phase in the Company. The principals in the operating partner have many years of technical experience with major companies in western Canada and, in the past few years, with private start-up companies. This new strategy will provide additional activity and value to the Company while helping to balance its portfolio of short and long term opportunities."
With respect to its Ukrainian operation, Kroes views its 45% ownership of Kashtan Petroleum Ltd. as a major underpinning of its asset value and expects that production will continue to improve with new drilling. The latest well, No. 303, is at total depth after drilling through the K1 formation at a deviation angle of 75 degrees and encountering 19 meters of pay. Construction of production facilities has been delayed due to inclement winter weather in the region. Completion and testing should be completed in the next few weeks.
The political situation in Ukraine remains unsettled after the parliamentary elections held on March 26. The impact of the results still are not clear, as it will be necessary for alliances to be made among parties in order to determine who will be appointed Prime Minister and what political direction the new government will take.
The economic impact of the production tax imposed on liquids production by the Ukrainian government early last year has become more onerous in 2006 when the rate was increased to effectively take 41% of the price received by producers. This will have a significant impact on Kashtan's netback, as prior to the introduction of the new production tax early in 2005, there was no royalty on production from the Lelyaki field. With oil prices in the $60 range, the economics of drilling are still positive; however, Kroes and many other industry operators have petitioned the government to eliminate or at least reduce the tax. In the meantime, the partners in Kashtan are assessing the impact on cash flow before establishing the work program for 2006, but it is expected that drilling of development wells will continue.
Kroes also advises that it has engaged Dr. Rudolph Berends to seek new natural gas projects in Ukraine and to assist with its existing interests while Executive Vice President Edward Southern is on medical leave. Dr. Berends has a Doctoral degree in Geophysics and a MBA from Stanford University. He has worked in a number of countries with major international petroleum operators, as well as with private investors, and in recent years has had excellent success in the exploitation and re-development of mature oil fields.
Kroes Energy is a junior oil and gas producer and explorer participating in the Lelyaki Oilfield redevelopment project in Ukraine, one of Eastern Europe's fastest growing economies. Kroes has a strong management team with extensive international experience.
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