Urals Energy Makes Major Siberian Acquisition

Urals Energy has signed a definitive sale and purchase agreement to acquire the entire issued share capital of OOO Dulisma and OOO Lenskaya Transportnaya Kompaniya for an aggregate purchase price of $148 million payable in cash.

Pursuant to the Agreement, Urals Energy will acquire the significant Dulisminskoye oil, condensate and gas field together with the LTK transportation and treating facilities, all situated in the Irkutsk region of Eastern Siberia. The Irkutsk region is located in southern East Siberia approximately 1,100 km from the border between Russia and China. The region holds significant discovered oil and gas deposits, including the giant Kovykta and Verkhnechoskoye fields, and the East Siberia Pacific Ocean pipeline ("ESPO") planned by Transneft is expected to pass through the region.

Urals Energy will pay a total of $148 million for the acquisition, with an initial $50 million payment. Of the $148 million payable, $133 million is a cash payment to acquire the equity and $15m payable to acquire outstanding promissory notes. The balance of the consideration is payable on closing and is subject to approval by the Russian Federal Antimonopoly Service and other customary conditions precedent. Urals Energy has assumed operational and financial control of Dulisma and LTK with immediate effect. Closing of the transaction is expected in June 2006.

Dulisma owns the license for a large oil, condensate and gas field in the early stages of development located in the Irkutsk region of the Russian Federation. The Field is delineated by 47 exploration and appraisal wells drilled during the late 1980's. The Russian State Committee on Reserves has attributed recoverable reserves (categories ABC1-2) of approximately 180 million barrels of oil and condensate and 2.2 trillion cubic ft of gas to the field.

According to a preliminary April 12, 2006 estimate by the Company's independent engineering consultants, DeGolyer and MacNaughton, the Field contains approximately 109 million barrels of proved and probable oil reserves, approximately 87 million barrels of possible oil and condensate reserves and 1.9 trillion cubic feet of possible gas reserves as at March 31, 2006. These are preliminary estimates and subject to confirmation prior to publication of D&M's definitive reserve report expected in early May.

On completion of the acquisition and following confirmation by D&M of its preliminary reserve estimate for the Field, the Group will have increased its proved and probable reserves to 225 million barrels and proved, possible and probable reserves to 369 million barrels with an additional 2 trillion cubic feet of gas.

The Field is currently producing 1,000 bopd from five wells and transported through a third party pipeline system. On completion of the acquisition, Urals Energy intends to increase production as quickly and efficiently as possible through infield development drilling and construction of additional processing and transportation facilities. This will include the construction by LTK of an early phase 12,000 bopd capacity pipeline from the Field to the centralised oil depot at Ust-Kut. LTK owns the pipeline right of way and has received the necessary regulatory permits to build and operate the early phase pipeline which is expected to be operational by early 2007. Based on the Group's work to date, Urals Energy anticipates that production from the Field will increase to approximately 12,000 bopd by the end of 2008.

The Group also currently anticipates that the Field has the potential to increase its production to approximately 30,000 bopd by the end of 2011. This second phase of the development program will include the construction of a permanent pipeline to either the river port and railway terminal at Ust-Kut or to a planned pump station on the ESPO pipeline.

The Field is strategically located North West of Lake Baikal, along the planned route of the ESPO oil pipeline which is expected to connect East Siberian oilfields to the Pacific Coast in order to supply demand for oil in Asian markets. Transneft has announced it expects to commission the first phase of the ESPO in 2008. The Field, together with the Verkhnechonskoye Field operated by TNK-BP and the Talakan Field operated by Surgutneftegas, will potentially be key suppliers of crude oil to the ESPO. With estimated possible reserves of approximately 1.9 trillion cubic feet of gas, the Field also has the potential to supply Gazprom for its proposed gas pipeline to Asian markets.

Financing of the Acquisition

The Group intends to finance the acquisition through a combination of debt and equity capital, with new equity expected to be the principal funding source. Such funding will cover the acquisition, additional capital investment required to develop the acquired assets and the Company's other working capital needs.

The Company has entered into an agreement with Morgan Stanley & Co. International Limited covering the provision of US$50 million for the initial payment relating to the acquisition. The advance by Morgan Stanley to the Company is structured as a pre-payment for shares to be allotted to Morgan Stanley (or as it may direct). The number of shares to be allotted to Morgan Stanley are to be sufficient to discharge the Advance and certain associated costs and fees.

In the event that the Advance and associated costs and fees have not been recouped by 30 September 2006, the Group will be required to allot at least sufficient shares to Morgan Stanley, at a discount to the then prevailing market price, in order to allow it to recover the amount of the Advance (plus payment in kind accruals, costs and fees that accrue after 30 June 2006), with any proceeds realised by Morgan Stanley over and above such recovery to be returned to the Company.

The Group intends to convene an EGM in the near term to obtain shareholder approvals for the allotment of shares on a non-pre-emptive basis for purposes noted above and to approve the issue of shares to Morgan Stanley in respect of the Advance. In this regard, the Group and Morgan Stanley have received irrevocable undertakings to vote in favour of the necessary resolutions to support the Morgan Stanley arrangement from existing shareholders holding a majority of the Company's issued share capital. The requisite shareholder resolutions require a simple majority to be passed.

Rationale and Strategy

The Acquisition fits Urals Energy's acquisition criteria of acquiring producing and non-producing assets in complementary areas of Russia and the CIS with development and exploration potential. The Acquisition gives Urals Energy an attractive entry into Eastern Siberia, one of the most important undeveloped petroleum provinces in Russia. This acquisition is expected to significantly increase Urals Energy's proved and probable reserves and provide important future increases in production and cash flow. The Group believes the transaction represents a compelling opportunity to acquire producing and non-producing assets on attractive terms per 2P and 3P barrel in a new region. Recent proposals by Russian government working groups have focused on Eastern Siberia as a priority for tax relief to boost development of the region's oil industry.

The acquisition of Dulisma and LTK will be Urals Energy's fourth acquisition transaction within the last twelve months. The successful integration and development of the ZAO Arcticneft, OOO Dinyu and OOO Urals Nord acquisitions has enabled Urals Energy to meet its production target for 2007 twelve months earlier than anticipated at the time of the Group's IPO. Production is currently 9,000 bopd and prior to the announcement of this acquisition was forecast to rise to at least 14,000 bopd by the end of 2007. The Group will provide a revised production target following completion of the D&M report for the Field.

Background to Urals Energy

Urals Energy is an independent exploration and production (E&P) company with its principal assets and operations in Sakhalin Island, Timan Pechora (including areas in the Nenets Autonomous Okrug and Komi Republic) and the Republic of Udmurtia, Russia. The Company was admitted to trading on AIM in August 2005.

The Group is focused on the integration of its five recently acquired subsidiaries and the exploitation of their assets. In addition, it is actively seeking to continue to grow and diversify its reserve and production portfolio through exploration activities and the acquisition of additional E&P companies or assets by taking advantage of the ongoing rationalization of E&P assets in Russia.

The Group's six E&P subsidiaries have Proved and Probable reserves of 116 million barrels of oil equivalent (MMBOE) and produced approximately 6,237 barrels of oil per day (BOPD) during the second six months of 2005.

The Group's two largest subsidiaries by reserves and production, Petrosakh and Arcticneft, own and operate refining assets with a total refining capacity of 5,300 BOPD, which provide the Group with the ability to maximise the value of the oil produced by choosing between the sale of oil or of refined products depending on market conditions, tax considerations and other factors.