Urals Energy Gets Transneft Approval for Access to ESPO Pipeline

Urals Energy

Urals Energy has received approval from Transneft to accept the oil produced by Urals Energy's Dulisma field at Pump Station #8 located near the town of Kirensk and approximately 80 kilometers from the Dulisma field, for its ESPO pipeline. This approval by Transneft provides the Dulisma field future permanent export pipeline access for its crude oil production and reduces the distance of constructing a permanent pipeline from the Dulisma field by approximately 270 kilometers. Approval by Transneft allows Urals Energy to optimize its development plan and forego further construction of a temporary pipeline to Ust-Kut. The Group will now concentrate on constructing a permanent connection with the ESPO pipeline. Urals Energy will begin project design shortly for its Dulisma-ESPO inter-connect, commencing procurement of pipe and other facilities by April 2007. Based on Urals Energy's original field development plan, the reduced distance is estimated to result in planned pipeline construction cost savings of approximately $70 million.

The Dulisma field is located in the Irkutsk Oblast, 350 kilometers northeast of the town of Ust-Kut. Earlier this year, Transneft announced an important change in the route of the ESPO pipeline away from Lake Baikal and further to the northeast where several important oilfields await development, including Dulisma. According to Transneft, construction of the ESPO began in April 2006 and first phase completion from Taishet to Skovorodino is planned by the end of 2008.

The Dulisma field will be one of the early entrants to the ESPO as development is starting in 2007 and first oil is expected to enter the pipeline in mid-2008. By late 2011, the Dulisma field is forecast to produce approximately 30,000 BOPD. Interim field production prior to connecting Dulisma to the ESPO will continue to be transported to Ust-Kut via a temporary pipeline operated by an adjoining producer.

Urals Energy acquired the Dulisma field in June 2006 for $148 million cash. Dulisma has proven and probable oil reserves of 109 million barrels and possible reserves of 1.7 trillion cubic feet of gas and 87 million barrels of oil and condensate. The Dulisma field will be developed using horizontal drilling technology and the first development well is expected to spud in the spring of 2007. To drill these wells, Urals Energy has purchased a new-built, 160 ton, heavy duty mobile drilling rig and associated equipment for use by Dulisma. As announced earlier, development plans are already underway at Dulisma with important equipment and facilities currently being procured and readied for transport to the field site this winter.

According to Transneft, in April 2006, construction of the ESPO pipeline began from Taishet towards Ust-Kut in a west-to-east direction. In October, construction began at Tinda near the planned Skovorodino station that will connect with China. The first operational segment of the ESPO pipeline is expected to connect the Talakan field at Pump Station #10 with Pump Station #1 at Taishet. Transneft has announced that when the Taishet to Talakan segment is completed, it may reverse the flow of oil, east to west, as a means of early production. Timing of this "early-oil" transportation plan has not been announced, but Transneft has indicated that the route from Taishet to Skovorodino will be completed in late 2008.

The 160-ton drilling rig purchased for Dulisma was manufactured in China in compliance with API specifications and recently passed load-testing and inspection by Urals Energy and its contractor to supply a custom-made top-drive unit, Canrig Drilling Technology Limited. In addition, Urals Energy has contracted with various Russian manufacturers to provide a two 2.5 MW gas-electric turbine generator, a first stage central oil-processing facility, oil storage tanks, a 100-man work camp, power lines and transformers, in-field pipelines and pumps, and construction equipment and transport vehicles.

William R. Thomas, Chief Executive Officer, commented:

"The approval by Transneft for access by Dulisma to the ESPO pipeline is an important milestone in the successful development of the Dulisma field. Urals Energy appreciates the quick response to our application by Transneft and looks forward to working closely with Transneft during the construction of the ESPO pipeline and the development of the Dulisma field. This is a key development for Urals Energy giving the Group an estimated $70m of cost savings and a permanent export pipeline two years earlier than originally anticipated. "