"I am pleased to report that the Company increased its oil and gas production in 2006 resulting in a substantial rise in both revenues and profitability. Average daily production rose by some 20% to 11,146 boepd in the period, and this rate of increase has continued into the current year with average production to date exceeding 13,000 boepd. Your Board remains focused on driving forward the development of our production licenses in Ukraine whilst seeking to broaden the asset and reserve base.
"The Company successfully completed 9 new production wells and 5 well interventions/workovers on the Poltava production licenses during 2006, as well as initiating exploration activities in Ukraine, with the drilling of the first exploration well on the Zaplavskoye license.
"The pace of development activity is continuing during this current period with drilling planned on all of the Poltava licenses. The second new Well R102 in the deep Rudenkovskoye Field has been drilled and brought on-stream this month and the results of the first fracture stimulation of Well R101 on the field are anticipated shortly. Our ability to enhance productivity of both existing and planned Rudenkovskoye wells will undoubtedly influence the rate of development of this challenging field.
"I am particularly enthused by the success of the Well M160 which was also announced this month and believe it to be a milestone in the development of our Poltava licenses. This step-out well was drilled and completed in 200m of productive Tournasian Carbonates in an area north of the Molchanovskoye Field. The first of the follow-up wells to firm-up the extent of this exciting new carbonate play is in progress and I am cautiously optimistic that this will result in an upward revision of our reserves.
"Irrespective of ongoing drilling success, we will continue to be constrained to the delivery of between 40 and 42 MMcfd of gas from our Poltava licenses for most of this year. However, the 2007 tie-in to the 56 inch Soyuz pipeline is on schedule with the hot tap into the trunkline and the 5km spur line to the PPC facilities already completed. Commissioning of the Soyuz tie-in by the year end will not only release our shut-in gas to production but also remove any capacity constraint for gas delivery going forward.
"Significant effort is being expended on broadening our exploration portfolio in eastern and central Europe. Notably, the Company spudded its first exploration well on the B Golitza license in Bulgaria in April and is on schedule to complete the 4,900m well in 120 days. Further seismic reprocessing and acquisition work is also scheduled over our Bulgarian, Turkish and Ukrainian licenses during the year.
"Acquisition of development projects in Ukraine and Russia underpins our growth strategy and, coupled with confirmation of additional reservoirs within our existing licenses, is targeted to achieve a significant increase in our reserve base. I remain hopeful that I will be able to announce progress on these fronts in the coming months.
"Your Board is committed to delivering increasing returns to its shareholders. We are again recommending a doubling of the dividend for the period and I can confirm that the Board will continue to review the absolute dividend level going forward."
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