William R Thomas, Chief Executive of Urals Energy, commented:
"2007 will be an important year for Urals Energy and the progress we continue to make across all areas of the business is creating a solid platform for growth.
"We have made significant progress at Dulisma, which is a key asset. Financing for the project has been secured, a ten-year production tax holiday has been officially confirmed by the tax authorities, and our field development plan has been approved by the Russian Government. All this is further indication of the progress we are making."
Oil production has increased from a maximum productive rate of 10,100 BOPD in late September 2006 to 11,600 BOPD today. A combination of weather related delays in drilling, which are not unusual for this time of year, and a delay in launching our fracture stimulation program resulted in year-end production being slightly lower than initially anticipated. We are confident of achieving 15,000 BOPD by the third quarter and we continue to target group production of 19,000 BOPD by year end 2007.
Overall we completed a total of nine producing wells in the second half of 2006, lower than expected due to both timing delays and poor equipment. We have subsequently invested in new equipment, which is already producing positive results.
At Petrosakh, the frac fleet and associated equipment has now been delivered to the field site and is being readied to begin fracturing the first four wells of a planned eight well program. We should know the results of this initial four well program by the end of the first quarter. Once we fracture stimulate the remaining suitable wells at Petrosakh, we will move the equipment to Komi and begin fracture stimulating our fields at CNPSEI, Dinyu and Nizhne Omrinskaya Neft, of which all have excellent stimulation potential.
We had excellent results at the Potapovskoye field in Urdmurtia where we drilled 3 new producing wells with all producing above plan.
We drilled one exploration well at the Dinyu field in the Komi Republic in the third quarter of 2006. This well, DN-48, was drilled to test an extension of the Dinyu field to the Southeast. The well encountered a previously unidentified reef structure with over 60 meters of permeable limestone reservoir. After extensive testing, the well produced only small quantities of live oil perhaps indicating the oil has migrated up-structure.
As a result, we have recently completed the acquisition of approximately 300 kilometers of new 2D seismic over the Dinyu field area, and we will be looking to identify several new drilling locations with this new data. The potential includes the new reef trend we encountered while drilling DN-48, and a newly identified eastern lobe that has excellent potential.
We have signed contracts, purchased equipment and materials, and begun site preparation for the Nadezhdinsky No. 1 exploration well in Timan Pechora. Located approximately 60 kilometers southwest of the port of Varendey on the northern coastline of Russia, this prospect is our highest rated exploration target of the five licenses we hold there. With a target potential of 60 million barrels recoverable, the well is expected to spud in April 2007 and has an AFE dry hole cost of approximately $8 million for a target depth of 3,200 meters.
At Petrosakh, we continue to re-process and re-interpret our 3D seismic data base that covers the offshore license area, Pogranichny. We expect to complete this new analysis in the second quarter and will then be in position to refine our exploration drilling plans for this high-potential area.
At Arcticneft we are now re-entering well 29 to begin a deep sidetrack to explore the Permian horizon. If successful, this well test would have a significant impact on our development plans at Arcticneft.
We have today separately announced the completion of a new debt finance facility for the development of the Dulisminskoye field in Irkutsk Oblast, Eastern Siberia. Goldman Sachs International and Standard Bank are providing a total of US$130 million of subordinated debt that is expected to fund Urals Energy's commitment to develop the oil reserves at the Dulisminskoye field.
This loan will provide Urals Energy with the debt capital necessary to develop the Dulisminskoye field to its peak oil production level of 30,000 BOPD by 2011 while at the same time accelerating our development plan to meet Transneft's new pipeline construction timetable.
In addition, on 22 January 2007, we received written confirmation from the Irkutsk Tax Inspectorate verifying that the Dulisminskoye field qualifies for a ten year, zero production tax rate for the period beginning 1 January 2007 and ending 31 December 2016. Production taxes paid by Urals Energy's other Russian producing subsidiaries for the 11-month period ending 30 November 2006 averaged approximately $11.50 per barrel. Based on the Dulisminskoye field reserve report by DeGolyer & MacNaughton dated 31 March 2006, Urals Energy estimates that the gross tax savings provided by this ten year production tax holiday will approximate $308 million and result in an approximate $191 million increase in the project's present value discounted at ten percent.
Development activity at Dulisminskoye has already begun with the arrival of a workover rig, two gas-electric generators, drilling tubulars, bulldozers and excavating equipment. We have purchased a new 100-man field camp that will be delivered and constructed shortly, and ordered the manufacture of vessels for a central processing facility ("CPF"). The early manufacture and delivery of the CPF vessels this winter will allow us to complete construction of the CPF in time for delivery of pipeline quality oil when the ESPO is commissioned in 2008.
A Chinese-manufactured mobile drilling rig is now clearing customs and is expected in the field next month. We plan to spud the first Dulisminskoye development well in early April. We also expect to order pipe for the construction of our approximate 80 kilometer ESPO interconnect in the second quarter of this year.
Our capex budget for Dulisma in 2007 is expected to include $17 million for drilling and $25 million for pipelines, infrastructure and facilities.
Finally, development progress has been further solidified by the approval of the Russian Central Committee for Field Development of Urals Energy's field development plan for the Dulisminskoye field. The combined result of full field debt financing, official development plan approval, and continued progress by Transneft in constructing the ESPO, now provides Urals Energy with a clear path for the successful development of the Dusliminskoye field.
While the industry wide impact of increases in Russian export taxes and lower crude prices in the fourth quarter of 2006 will have a short term impact on our net realisations, we are confident that as a result of the current oil price environment there will be a reversal of this trend by mid year.
Overall, as a result of the Dulisma financing announcement and continued production growth, the Group expects to fund the development of the Dulisminskoye field and our overall 2007 activity from existing cash and internally generated cash flow.
The Group is making progress across all its areas of operation and has an intensive development, drilling and exploration program underway this year. We expect to drill 22 development wells and at least one high-impact exploration well. Our fraccing program has the potential to materially increase production across all the Group's fields. Total capital expenditures for 2007 are expected to total approximately $90 million.
With the approval of the Dulisminskoye development plan by the Russian Government, confirmation of a ten year production tax holiday, and the successful Dulisma project financing also announced today, Urals Energy is currently targeting Group production of 50,000 BOPD by 2011.
We continue to develop several excellent new acquisition opportunities in Russia and the FSU. The market continues to increase in terms of number of deals offered, but we remain careful about identifying and closing acquisitions that are accretive and will have a material impact. We hope to close one or more new and important deals in 2007.
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