Volga Gas, the oil and gas exploration and production group operating in the Volga Region of European Russia, has provided an operation review for the six months ended June 30, 2009.
KARPENSKIY LICENSE AREA
Supra-Salt (Uzenskoye oil field)
Mikhail Ivanov, Chief Executive Officer of Volga Gas, said, "I am very pleased with our operational achievements during the first half of the year which included the start of sustained and growing production from the Uzenskoye field, the connection of the initial two Vostochny-Makarovskoye wells to the gas processing unit and the groundwork that enabled us to start drilling operations on the first of our sub-salt wells, Grafovskaya #1. The results of our production have enabled us to report a first period of positive EBITDA and positive operating cash flow - an important milestone for our company. Thanks to the support of our shareholders, the Company remains well capitalized and able to progress towards testing the potentially value transforming sub-salt potential of our licenses. The remainder of 2009 will be the most exciting period to date in the Company's history. We look forward to updating shareholders as and when appropriate."
Volga Gas and its subsidiaries (together, the "Group") are involved in the exploration, evaluation and production of, oil and gas in four licenses in the Volga Region of European Russia.
During the first six months of 2009, the Group has made significant progress towards meeting its objectives for the year. Volga Gas is able to report that the current phase of development drilling on Uzenskoye is complete, giving the Group sustained and growing oil production. Construction continued on the Dobrinskoye gas processing unit which is expected to be the principal facility for processing the gas and condensate from Vostochny Makarovskoye. Finally and most excitingly, the mobilization of drilling crews and service contractors enabled the Group to start drilling the deep sub-salt exploration well, Grafovskaya # 1, on August 28, 2009.
The selling price of the Group's oil production has risen steadily in the course of H1 2009. With rising production volumes and rigorous cost control this has enabled the Group to achieve positive operating cash flow in the first six months of 2009 and to aspire to deliver a growing cash flow profile over the coming years. This is a significant turning point for a company that hitherto had little or no revenues and significant negative operating cash flow.
Karpenskiy License Area ("KLA")
During the first half of 2009, production from the Uzenskoye area averaged 1,051 barrels of oil per day and, during July and August, production averaged 1,600 barrels of oil per day. With rising sales prices, net revenues from oil sales have risen to a level that enables the Group to more than cover all operating costs and overheads and to begin generating positive operating cash flow.
Full time production commenced in November 2008 from the Uzenskoye field area in the southern portion of the KLA, initially with the Uz#3 well followed by the Uz#4 and Uz#5 wells, both of which were tested and completed during the first half of 2009.
Two further supra-salt wells were drilled during the period: Uz#6 and V-Uz#7.
Since the period end development drilling has continued successfully. The Yu-Uz#8 and Yu-Uz#9 development wells on the producing field have been drilled, tested and completed as new production wells. With the new wells in production, current output has already increased and with sustained build up we expect average field output to exceed 2,000 barrels per day during Q4 2009.
The main activity during the period was the processing and interpretation of the 3-D data acquired over the Yuzhny-Mokrousovskoye structure, the second significant sub-salt prospect in the KLA. This has validated the initial interpretation of the historic 2-D seismic data in terms of the deep sub-salt prospectivity. In addition, a further structure at an intermediate depth has also been mapped in the same area. This is a potentially oil bearing prospect at a depth of approximately 2,000 metres which could form part of the Group's future exploration drilling activities.
Vostochny-Makarovskoye Licence Area ("VM")
The VM # 1 and VM # 2 wells were drilled and tested during 2008. These two wells have now been connected by inter-field pipeline to the plant gate at the Dobrinskoye Gas Processing Unit ("GPU").
In February 2009 drilling on the VM # 4 well was completed. As reported at the time, the well found only a limited eight meters of effective pay. The VM#4 well has been temporarily suspended and may be re-drilled as a sidetrack to locate more of the productive reservoir.
As construction of the GPU has progressed, commissioning procedures have commenced and the plant is being tested with production from the Dobrinskoye field, which is owned by Trans Nafta. It is envisaged under an agreement with Trans Nafta that the GPU will be transferred into a joint venture, 75% owned by Volga Gas. Negotiations in relation to this are in progress. The Group has applied to the government authorities to commence production from the VM#1 and VM#2 wells and hopes to be able to announce start up of the field early in 2010.
Pre-Caspian License Area
Processing and interpretation of 1,000 km of 2-D seismic, acquired during 2008, has identified a potentially large sub-salt prospect within this license area. The Group applied successfully to the licensing authorities to exchange our remaining 2-D seismic commitment for a more concentrated 78 km2 3-D seismic program to enable more detailed mapping of the prospect. The new 3-D seismic has been acquired and the interpretation of the new data is underway. At the same time the licencing authorities agreed to a one year extension of the period before exploration drilling has to start.
This license area contains a partially appraised oil discovery. A well drilled on the Sobolevskoye prospect in 1990 flowed at 1,200 barrels per day of oil and 1.9 mmcf/d of gas. We have now completed an initial 350 km of 2-D seismic survey and commenced interpretation. We expect to formulate plans for further exploration and appraisal activity during 2010.
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