Fund Raising Puts PetroNeft on 'Firm Footing' to Reach Production Goal

PetroNeft has reported its results for the 6 months ended June 30, 2009.

Highlights, including post balance sheet events

  • Successful Equity placing raising US $27.5 million
  • Crude Oil Transportation and Custody Transfer agreement signed with Imperial Energy
  • Phase 1 project costs to first oil reduced by 58% to $25 million (previously $60 million)
  • Company now fully funded to reach year-round oil production in Q3 2010
  • Oil production expected to reach approximately 4,000 bopd by the end of 2010

Dennis Francis, Chief Executive Officer of PetroNeft Resources plc commented, "The recent successes of the fund raising and the pipeline agreement have put PetroNeft on a firm footing to reach year-round production in 2010 which will enable the Company to generate its own revenues and ultimately expand its reserve base both within License 61 and through the numerous business development opportunities we are seeing in the current climate."

Major progress achieved

To date, 2009 has seen major progress for PetroNeft. In late 2008 the move to year-round production was put on hold. Since then we have achieved significant cost savings and completed a new, improved agreement for the transportation of our oil to market. Most recently we have raised the necessary funds to bring the Company to first oil in 2010. Year-round production is expected to commence in the third quarter of 2010 with rates expected to reach 4,000 barrels of oil per day ("bopd") by the end of 2010, and reach 12,000 bopd in 2012.

Significant cost savings achieved

In 2008 the total funding requirement for the Phase 1 project to develop the Lineynoye and West Lineynoye oil fields was estimated to be over US $60 million. Since the project was put on hold in October 2008 we have been working to reduce this funding requirement which led to the reduction of the funding requirement by almost 60% to approximately US $25 million through the following key savings and efficiencies:

  • Weakening of the Russian Rouble against the US Dollar
  • Use of only one drilling rig in the first year instead of two
  • Revised pipeline route including utilisation of existing facilities at the pipeline tie-in point
  • Reduction and modification of field facilities

Transportation Agreement with Imperial Energy

On August 26, 2009 PetroNeft entered into a Crude Oil Transportation and Custody Transfer agreement with Imperial Energy. Under the terms of the agreement, Imperial will accept PetroNeft's crude oil using existing tank facilities at the Kiev-Eganskoye field and transport the crude to its custody transfer point at Zavyalovo for transfer into the Transneft system. The agreement is effective for 25 years and the tariff is subject to adjustments based on the Russian Consumer Price Index.

The overall tariff and associated capital cost structure has material cost and operational advantages for PetroNeft compared to the previous export option to the north. The fact that the new pipeline route is entirely within the Tomsk Oblast, whereas the northern route also entered the Khanty-Mansiysk District, will significantly reduce the various permits and approvals associated with the pipeline. In addition, the new pipeline route from Lineynoye to Kiev-Eganskoye runs adjacent to the Tungolskoye and newly discovered Kondrashevskoye oil fields, creating useful synergies for future phases of development.

The Company will construct the approximately 70km pipeline segment from Lineynoye to Kiev-Eganskoye this coming winter. The Company has already acquired over 90% of the pipe required and this has been in storage at a river port to the north of License 61.

Successful financing

PetroNeft successfully raised US $27.5 million in September 2009 through a placing of new shares with international institutional and private investors. This funding enables the Company to fully execute the Phase 1 project to develop the Lineynoye and West Lineynoye oil fields and become self financing from oil production revenues. As detailed in note 5 below an EGM to approve the placing will be held on October 15, 2009.

It remains the Board's intention to fund the Company with a mixture of debt and equity. Discussions are ongoing with Banks regarding debt finance which could be utilised for business development purposes or to accelerate the appraisal and development programme on License 61.


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