Full Year Results

29 March 2011

VOLGA GAS PLC

Full year results for the year ended 31 December 2010

Volga Gas Plc ("Volga Gas", the "Group" or the "Company"), the oil and gas exploration and production group operating in the Volga Region of European Russia, is pleased to announce its annual results for the year ended 31 December 2010.

Operational Highlights

·; Group production averaged 1,115 barrels of oil per day ("bopd") (2009: 1,267 bopd) with 2H 2010 production rising to 1,289 bopd.

·; Average sale price of US$32.06 per barrel (2009: $25.76), with prices rising above $35.00 towards the year end.

·; The sub-salt Grafovskaya #1 ("G#1") exploration well was completed and tested within budget and on time but without commercial success.

·; Successful extended test production of the two initial wells on the Vostochny Makarovskoye ("VM") gas/condensate field.

·; Final court judgement clarifies the legal position relating to Trans Nafta. Final resolution for access to gas plant under negotiation, intended to enable progress to first production from the VM field.

·; Combined Russian classification C1/C2 recoverable reserves of 67.3 million barrels of oil equivalent ("mmboe") on the Uzenskoye and VM fields, plus disclosed C3 prospective resources of 153 mmboe.

Financial Highlights

·; Revenues increased to US$13.1 million (2009: $11.6 million); gross profit of $6.2 million (2009: US$5.8 million).

·; Positive EBITDA of US$2.6 million (2009: US$3.0 million).

·; Exploration expense of US$23.9 million (2009: US$1.5 million) reflecting impairment on G#1 well result.

·; Net cash inflow from operations in 2010 was US$7.3 million (2009: $4.0 million).

·; Capital expenditure on exploration and development was US$14.1 million (2009: $23.7 million).

·; Year end cash of US$26.6 million (2009: US$33.6 million) and no debt.

Current trading and outlook

·; Oil production since 1 January 2011 has averaged approximately 1,300 bopd while the sales price has continued to rise in line with global oil prices.

·; The Court of Cassation in Moscow upheld an earlier judgement in favour of Volga Gas in the case against Trans Nafta. Negotiations on a settlement continue.

·; We aim to bring the VM field into production during 2011.

·; An exploration well in the Urozhainoye-2 licence area is about to commence drilling.

Mikhail Ivanov, Chief Executive of Volga Gas commented:

"2010 was a year of transition for Volga Gas. The major operational event of the year was the Grafovskaya#1 well, which although completed and tested within budget and on time, was disappointing. However, we are pleased with the continued steady oil production from Uzenskoye which has enabled the Group to remain a net cash flow generator. In addition, based on positive results from the court processes, we hope to reach a final resolution with Trans Nafta and move to start full time production from VM.

"We remain positive about the potential for growth, both in reserves and production from our four current licences. We continue to seek value accretive opportunities beyond our existing licence areas, as we continue to build a focused exploration and production business."

For additional information please contact:

Editors' notes:

Volga Gas is an independent oil and gas exploration and production company operating in the Volga region of European Russia. The company has 100% interests in its four licence areas.

The information contained in this announcement has been reviewed and verified by Mr. Mikhail Ivanov, Director and Chief Executive Officer of Volga Gas plc, for the purposes of the Guidance Note for Mining, Oil and Gas companies issued by the London Stock Exchange in March 2006. Mr. Mikhail Ivanov holds a M.S. Degree in Geophysics from Novosibirsk State University. He also has an MBA degree from Kellogg School of Management (Northwestern University). He is a member of the Society of Petroleum Engineers and has 18 years of experience in the sector.

Availability of report and accounts

The Group's full report and accounts will be dispatched to shareholders as soon as is practicable. Copies will also be available on the Company's website www.volgagas.com and on request from the Company at, Ground Floor, 17-19 Rochester Row, London SW1P 1QT.

Annual General Meeting

The annual general meeting is to be held on 13 June 2011 at 09:00 at the office of Akin Gump, Ten Bishop's Square, London E1 6EG. Notice of the AGM will be sent to shareholders with the Group's report and accounts.

Chairman's Statement

2010 has been a year of transition for Volga Gas. The production side of the business performed well and enabled the Group to continue generating positive net operating cash flow and to maintain a strong financial position with US$26.6 million of net cash and no debt. In addition, the Group has significant proven reserves in its two principal fields, which form the basis of a rising profile of future production. Our fields are advantageously located and our costs are sufficiently low for us to achieve good returns at oil and gas prices significantly lower than those we currently enjoy. Most importantly, we have fulfilled our licence commitments on the Karpenskiy and Vostochny Makarovskoye licences and have sufficient funds to meet the commitments due in other licence areas.

During 2010 drilling of the Group's first deep sub-salt exploration well was completed and the well was subjected to a series of flow tests. Unfortunately, although there were five zones in the well with indications of hydrocarbons, no commercial flow rates were achieved.

Whilst this result is clearly a disappointment, it had no impact on our existing reserves or on our other exploration targets. The Group has identified material exploration prospects within existing acreage that can be tested at low cost. These will form the short term focus of activity. In addition, the deeper sub-salt potential of the area remains untested in other parts of the licence areas, on which based on the knowledge gained from our first well we may consider further sub-salt drilling in the future.

On the Vostochny Makarovskoye ("VM") field, we continued to deal with the legal and commercial matters that have so far delayed the development. Much of the physical infrastructure for VM is in place and the initial wells are ready for production. In fact, the wells have been placed successfully on long term test production.

As stated in previous Annual Reports, Volga Gas had planned to acquire a 75% interest in a gas processing unit ("GPU") built by Trans Nafta 5km from the VM licence area. After a lengthy but successful legal process over the last two years, we now appear to be reaching a conclusion which will result in Volga Gas acquiring the gas processing unit and other assets from Trans Nafta. We hope for a timely resolution of this matter and to move on to start production from the VM field..

Outlook and strategy

During 2011, the strategic priority of the Group will be to make significant progress towards full commercial operation of the VM field. The Board is also evaluating opportunities to extend the Group's activities into new areas, where we have identified the potential to add significant value and incremental production volumes.

The Board believes that Volga Gas has a strong asset base and the financial and operational capability to develop and extend these assets to provide long term value growth for our shareholders.

Alexey Kalinin

Chairman

Chief Executive's Review

During 2010, Volga Gas benefited from the successful development of the Yuzhny Uzenskoye field which has provided and continues to provide valuable and profitable oil production, enabling the Group to report increased revenues and gross profits. We also made good advances on the development of the Vostochny Makarovskoye ("VM") gas-condensate field, with a successful extended production test on the two initial wells. In the course of the year, we also identified a new material and relatively low cost exploration target within the Karpenskiy Licence Area which could materially add to the Group's oil and gas reserves.

The major event of 2010 was, however, the testing of the Grafovskaya #1 sub-salt exploration well. As I explain in the Operational Report below, this was, regrettably, unsuccessful. Our disappointment is partly offset by the fact that the operations were conducted without incident and within budgeted cost and provided useful geological data which we can use across our other sub-salt licence areas. Nevertheless, this well was the culmination of significant investment over the past three years and, based on the results of the well, we feel it is prudent to recognise substantially all of this investment as impaired. As detailed in the Financial Report below, this has led to an exploration expense of US$23.9 million in the 2010 Income Statement.

Following this result, we have decided for the time being to focus the Group's efforts and investment on the development of our proven reserves and on exploration activity in shallow horizons where we have already had some success.

One of our key objectives now is to bring the VM field into production. Much of the development work has been accomplished. We completed two production wells and installed intra-field pipelines in 2009, and during the second half of 2010 we successfully conducted extended production tests on these two wells.

Following the conclusion of the legal processes and subject to the settlement under negotiation as mentioned above in the Chairman's Statement, we anticipate being able to move in a timely manner towards first production from the VM field. In 2007 and early 2008 construction was commenced of a suitably scaled processing facility for the VM field but was put on hold in November 2008. Certain parts of this facility (including an H2S processing unit) will need to be relocated to the Dobrinskoye gas processing unit ("GPU") site and further upgrades undertaken to the GPU to enable production to commence from the VM Field. Our aim is to achieve this before the end of 2011.

Current trading

Since the beginning of 2011, oil production from the Uzenskoye field has been steady at approximately 1,300 bopd. We have not experienced any more of the significant weather-related disruptions which impacted our oil production early in 2010. With oil sale prices having increased further since the start of the year and costs remaining relatively low, Volga Gas continues to enjoy positive net operating cash flow.

Outlook

Key activities for 2011 will include ongoing management and development of existing production. The Group's priority is to bring the VM field into production as soon as possible after the commercial and legal matters with Trans Nafta have been resolved. Drilling activity in 2011 includes an exploration well on the Urozhainoy-2 Licence Area, and a development well on the Uzenskoye oil field. The budgeted cost of these two wells is US$5.5 million.

Certain fiscal changes have been included in draft legislation in Russia. These include proposals that could substantially reduce the tax burden on small oil fields. Based on current draft legislation, we anticipate the Uzenskoye field will benefit from these anticipated changes.

We look forward to delivering a successful new stream of production and to pursuing the other growth opportunities that we see for the business.

Mikhail Ivanov

Chief Executive Officer

Operational Review

Operations overview

The Group's principal activities in 2010 were: completion of the drilling of the Grafovskaya #1 sub-salt exploration well and subsequent testing operations and the commencement of extended test production on the Vostochny Makarovskoye gas-condensate field. On the Uzenskoye supra-salt oil field the Group continued to manage production from the wells drilled in 2008 and 2009 leading to steady production that provides the Group with a valuable source of cash generation which has enabled Volga Gas to remain cash flow positive.

The Group's Russian category C1 and C2 recoverable oil, gas and condensate reserves, as approved by the State Committee for Reserves, total 67.3 million barrels of oil equivalent (2009: 67.7 mmboe) taking into account production of 0.4 mmbbl during 2010. The reserves are presented in detail in the table below. The changes from the previous year reflect volumes of oil produced and a reclassification of certain C2 category reserves into C1 category.

Karpenskiy licence area

Early in 2008 we amended the terms of the Karpenskiy licence area ("KLA"), thereby resolving certain licence breaches the Group inherited when it acquired the licence from a LUKOIL subsidiary. The amended licence agreement required the Group to finalise the acquisition of 400km2 of 3-D seismic and drill a further ten exploration or production wells over the following two years. The drilling of the Grafovskaya #1 sub-salt well completed the exploration commitments on the KLA.

Sub-salt exploration

In April 2010 the Grafovskaya #1 sub-salt exploration well reached a total depth of 5,379 metres and a full string of casing was set. The drilling rig was demobilised and a lower cost workover rig mobilised to the well site to undertake a series of tests on the well. The testing programme involved perforation, acid treatment and flow testing in a sequence of five horizons starting from the deepest and working up to the shallowest. While strong shows of hydrocarbons were found in three of the tested intervals and some flow to surface was recorded, the rates were deemed to be sub-commercial.

The test results were clearly a disappointment. However, we were pleased with the operational management of the well which was drilled and tested safely, on time and within budgeted cost.

The data gathered from the well will be used to help refine our understanding of the sub-salt potential of other areas of our licences. While we continue to believe in the potential for significant oil and gas reserves in the sub-salt horizons of our licences, for the time being, our exploration activity will concentrate on lower cost shallow targets with which we have had some success already.

Supra-salt exploration

In April 2010 we disclosed that following analysis of 3-D seismic data, C3 prospective resources had been calculated on a supra-salt and intra-salt structure on the Yuzhny Mokrousovskoye area in the northern portion of the KLA. The C3 resources associated with this total 153 million barrels of oil representing a potentially material increment to Volga Gas' reserves should a discovery of this size be made.

Supra-salt production

Having completed the first phase of development drilling in 2009, during 2010, the main focus was on managing production from the five active wells on the Yuzhny Uzenskoye oil field.

During the months of March and April 2010, heavy snow falls followed by the subsequent thaw led to significant disruptions to transportation by the purchasers of our oil which is collected directly from the field site. Consequently, there were periods during which the wells were temporarily shut-in. When the wells were re-opened, it was discovered that the reservoir pressure had significantly increased. This indicates that there is an active water drive in the Yuzhny Uzenskoye field and that for the time being water injection into the field will not be required.

The Yuzhny Uzenskoye field, whilst of modest scale, is very profitable to the Group. It was developed at a cost of US$1.91 per barrel of C1 reserves and benefits from very low production costs, averaging US$1.07 per barrel (2009: US$0.71 per barrel). In addition as the oil is sold directly at the field facilities, the field bears no oil transportation costs. Details of the financial performance are in the Financial Review below.

Average production for the full year 2010 was 1,115 bopd with production during the second half of the year averaging 1,289 bopd. Since the start of 2011, production has remained steady at a rate of approximately 1,300 bopd. Development plans for 2011 include an additional well intended to access an undeveloped pocket of the reservoir and upgrades to the in-field roads.

Vostochny Makarovskoye licence area

The Group completed its first phase three well drilling programme on the VM field early in 2009. As previously reported, there are two completed and tested wells on the field with intra field pipelines laid between the well locations to the boundary of the Dobrinskoye gas facility in preparation for production.

During 2010, the Group conducted an extended pilot production programme on the VM#1 and VM#2 wells. The wells were individually flowed through a test separator installed at the field site. Condensate was gathered in storage tanks on location for sale while gas produced from the wells was flared. Although this activity was primarily a technical test programme, it provided a small profit contribution. All costs, including installation of test equipment, were expensed in 2010.

While the test programme has yet to be completed, the data gathered so far has enabled the Group to develop a production plan for the field. Initial production from the field will be managed to enable higher recovery of condensate from the reservoir in the early years while in the later years an increasing proportion of gas is planned to be produced from the wells.

Commencement of full time production has been delayed pending completion of the previously planned acquisition by the Group of a 75% interest in the gas processing unit ("GPU") located approximately 5km from the VM licence area. With the anticipated settlement of the legal and commercial disputes with Trans Nafta moving to a conclusion, we hope shortly to commence the final work required to bring the VM field into production. Included in the required work is an upgrade to the GPU so it can become fully operational, including transfer of a sulphur treatment unit from the VM licence area to the GPU.

Oil, gas and condensate reserves

Financial Review

Results for the year

During 2010 our operations were primarily in an exploration and development phase although we also benefited from sustained production from the shallow oil reserves in the KLA.

In 2010, the Group generated US$13.1 million in revenue (2009: US$11.6 million) from the sale of 407,050 barrels of crude oil and condensate (2009: 458,900 barrels). Oil and condensate sales were made into the domestic market during the period. The average price realised was the equivalent of US$32.06 per barrel (2009: US$25.76 per barrel). With sales made exclusively into the regional market in the Volga Region at the wellhead, our sales prices closely reflect international prices, adjusted for export taxes and transportation costs. The oil production activities generated a gross profit of US$6.2 million in 2010 (2009: profit of US$5.8 million).

As indicated in the Operational Review, the average cost of production from the Uzenskoye oil field was US$1.07 per barrel (2009: US$0.71 per barrel). Production based taxes increased to US$12.91 per barrel (2009: US$9.65), reflecting the increase in the Urals oil price which determines the rate of Mineral Extraction Tax. Gross profit per barrel of oil sold in 2010 was US$15.26 per barrel (2009: US$13.27 per barrel).

Operating and administrative expenses in 2010 were US$4.7 million (2009: US$3.7 million) as a result of higher legal expenses.

During 2H 2010, the Group undertook extended production testing on the Vostochny Makarovskoye gas-condensate field. The full costs incurred, including installation of test equipment and operating costs, were expensed during the year. These costs, offset by condensate sales from test production, were included in exploration and evaluation expenses.

The Group experienced positive EBITDA (defined as operating profit before non-cash charges, exploration expense, depletion and depreciation) of US$2.6 million (2009: US$3.0 million).

After recording an exploration and evaluation expense of US$23.9 million (2009: US$1.5 million), comprising primarily an impairment charge relating to the unsuccessful Grafovskaya #1 well in the KLA, the Group recorded an operating loss for the year of US$22.5 million (2009: operating profit of US$ 0.6 million).

The Group recognised a loss before tax of US$22.2 million (2009: profit before tax of US$0.9 million) and reported net loss after tax and minorities interests of US$16.9 million (2009: profit of US$0.2 million). These numbers include current and deferred income tax credits of US$ 5.3 million (2009: charges of US$0.7 million).

No dividends have been paid or proposed for the year (2009: none).

Cash flow

Group net cash flow from operating activities was US$7.3 million (2009: US$4.0 million), before expensed exploration costs. The net cash flow of the Group was enhanced by a net US$4.5 million (2009: US$2.5 million) from positive working capital movements and from the recovery of VAT on past capital expenditures. Having accrued net prepayments in earlier years, the cash outflow from investing in exploration and development assets in 2010 was US$14.0 million (2009: US$20.2 million), slightly less than the capital expenditure for the year.

Capital Expenditure

During 2010 a total of US$14.1 million was invested in capital expenditure on the Group's licence areas (2009: US$23.7 million) as detailed below:

The most significant individual components of the capital expenditure were US$12.5 million on oil and gas exploration assets, predominantly the Grafovskaya #1 exploration well. Expenditure on development and producing assets primarily relates to the VM field.

Balance sheet and financing

As at 31 December 2010, the Group held cash and bank deposits of US$26.6 million (2009: US$33.6 million) and remains debt free.

As at 31 December 2010, the Group's intangible assets were reduced to US$29.0 million (2009: US$40.1 million) following the impairment charge related to the Grafovskaya#1 well. The prepayment of RUR 600 million, made to Trans Nafta in November 2008 continued to be recorded as a security deposit on acquisition of fixed assets, pending final resolution on planned acquisition of the gas plant assets.

The Group intends to fund its development and exploration expenditures using a combination of cash flow from operations and cash-on-hand. The Group will consider raising additional financing, both of equity and debt as appropriate, to explore and develop its asset base.

The Group's financial statements are presented on a going concern basis.

Issue of share capital

There were no issues of shares during the year to 31 December 2010. During the year to 31 December 2009, the Company issued a total of 27,000,000 shares in a non-preemptive placement generating net proceeds of US$26.6 million.

Tony Alves

Chief Financial Officer

Financial and operational summary

Group Income Statement

(presented in US$ 000)

Group Statement of Comprehensive Income

(presented in US$ 000)

Group Balance Sheet

(presented in US$ 000)

Approved by the Board of Directors on 28 March 2011 and signed on its behalf by

Mikhail Ivanov Tony Alves

Chief Executive Officer Chief Financial Officer

Group Cash Flow Statement

(presented in US$ 000)

Group Statement of Changes in Shareholders' Equity

(presented in US$ 000)

1. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

1.1 Basis of preparation

The consolidated financial statements of Volga have been prepared in accordance with International Financial Reporting Standards, as adopted by the European Union (IFRSs as adopted by the EU), IFRIC interpretations, and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

No income statement is presented for Volga Gas plc as permitted by Section 408 of the Companies Act 2006.

The consolidated financial statements have been prepared on the going concern basis as the directors have concluded that the Group will continue to have access to sufficient funds in order to meet its obligations as they fall due for at least the foreseeable future.

1.2 Oil and gas exploration assets

The Company and its subsidiaries apply the successful efforts method of accounting for Exploration and Evaluation ("E&E") costs, in accordance with IFRS 6 "Exploration for and Evaluation of Mineral Resources". Costs are accumulated on a field-by-field basis. Costs directly associated with an exploration well, including certain geological and geophysical costs, and exploration and property leasehold acquisition costs, are capitalised until the determination of reserves is evaluated. If it is determined that a commercial discovery has not been achieved, these costs are charged to expense after the conclusion of appraisal activities. Exploration costs such as geological and geophysical that are not directly related to an exploration well are expensed as incurred.

Capital expenditure is recognised as property, plant and equipment or intangible assets in the financial statements according to the nature of the expenditure and the stage of development of the associated field, i.e. exploration, development, production.

Once commercial reserves are found, exploration and evaluation assets are tested for impairment and transferred to development tangible and intangible assets. No depreciation or amortisation is charged during the exploration and evaluation phase.

(a) Development tangible and intangible assets

Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells into commercially proven reserves, is capitalised within property, plant and equipment and intangible assets according to nature. When development is completed on a specific field, it is transferred to producing assets as part of property , plant and equipment or intangible assets. No depreciation or amortisation is charged during the development phase.

(b) Oil and gas production assets

Development and production assets are accumulated generally on a field by field basis and represent the cost of developing the commercial reserves discovered and bringing them into production together with E&E expenditures incurred in finding commercial reserves and transferred from the intangible E&E assets as described above.

The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads, finance costs capitalised and the cost of recognising provisions for future restoration and decommissioning.

Where major and identifiable parts of the production assets have different useful lives, they are accounted for as separate items of property, plant and equipment. Costs of minor repairs and maintenance are expensed as incurred.

(c) Depreciation/amortisation

Oil and gas properties intangible assets are depreciated or amortised using the unit-of-production method. Unit-of-production rates are based on proved and probable reserves, which are oil, gas and other mineral reserves estimated to be recovered from existing facilities using current operating methods. Oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the field storage tank.

(d) Impairment - exploration and evaluation assets

Exploration and evaluation assets are tested for impairment prior to reclassification to development tangible or intangible assets, or whenever facts and circumstances indicate that an impairment condition may exist. An impairment loss is recognised for the amount by which the exploration and evaluation assets' carrying amount exceeds their recoverable amount. The recoverable amount is the higher of the exploration and evaluation assets' fair value less costs to sell and their value in use. For the purposes of assessing impairment, the exploration and evaluation assets subject to testing are grouped with existing cash-generating units of production fields that are located in the same geographical region.

(e) Impairment - proved oil and gas production properties and intangible assets

Proven oil and gas properties and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped together where the cash flows of each field are interdependent, for instance where surface infrastructure is used by one or more field in order to process production for sale.

(e) Decommissioning

Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision represents the estimated discounted liability (the discount rate used currently being at 10% per annum) for costs which are expected to be incurred in removing production facilities and site restoration at the end of the producing life of each field. A corresponding item of property, plant and equipment is also created at an amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or the current estimate of the discount rate used are reflected as an adjustment to the provision and the property, plant and equipment. The unwinding of the discount is recognised as a finance cost.

1.3 Inventories

Crude oil inventories are stated at the lower of cost of production and net realisable value. Materials and supplies inventories are recorded at average cost and are carried at amounts which do not exceed the expected recoverable amount from use in the normal course of business.

1.4 Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

1.5 Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of oil and gas in the ordinary course of the Group's activities. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Group.

(a) Sales of oil and gas

Revenue from the sale of oil or gas is recognised when the oil/gas is delivered to customers and title has transferred. Revenue is stated net of value-added tax. For oil sales, this is at the physical point of delivery, i.e. the loading of a customer's truck. For gas sales, this is typically the point of entry to the gas distribution system. In 2010 and 2009 all of the Group's revenue related to oil sales collected directly by customers.

(b) Interest income

Interest income is recognised on a time-proportion basis using the effective interest method.

1.6 Provisions

Provisions for environmental restoration, restructuring costs and legal claims are recognised when: the group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.

2. Cost of sales and administrative expenses - Group

Cost of sales and administrative expenses are as follows:

Total operating and administrative expenses are analysed as follows:

(a) Exploration and evaluation

The principal component of the 2010 exploration and evaluation expense is the impairment charge on the carrying value of intangible assets relating to the Grafovskaya #1 well. This includes the cost of seismic studies as well as costs of drilling and testing operations on the well. In 2009 expenditure on seismic studies certain drilling expenditures relating to supra-salt exploration on the Karpenskiy Licence were expensed as management considered that the expenditure was not related closely enough to specific oil and gas reserves to allow its capitalization in accordance with IFRS 6 'Exploration for and evaluation of mineral resources'.

3. Current and deferred income tax - Group

4. Intangible assets - Group

Intangible assets represent exploration and evaluation assets such as licenses, studies and exploratory drilling, which are stated at historical cost.

The impairment in 2010 relates to the write off of the Grafovskaya exploration well on the Karpenskiy licence and associated costs. The Grafovskaya well was the first exploration well on the Grafovskaya field and did not encounter commercial quantities of hydrocarbons and, as a result, the well and associated costs have been written off. Approximately $1,995,000 of seismic costs related to the unexplored portion of the Karpenskiy licence continue to be included within exploration and evaluation assets.

5. Property, plant and equipment - Group

Movements in property, plant and equipment, for the years ended 31 December 2010 and 2009 are as follows:

6. Non-current assets - Group

(a) Other non-current assets

Management believes that it may not be able to recover all VAT specific to license and e&e contractors' payments within the 12 months of the balance sheet date. Therefore this VAT is classified as a non-current asset.

(b) Security deposit on acquisition of fixed assets - US$19.7 million (2009: US$19.8 million)

The security deposit on acquisition of fixed assets of US$19.7 million (2009: US$19.8 million) relates to an advance of RR 600 million that was paid by the Group to Trans Nafta in 2008. The payment was for the Group's share of costs associated with the construction of a Gas Processing Unit ("GPU") to be jointly owned by the Group and Trans Nafta.

Since the initial payment to Trans Nafta, this item has been subject to an ongoing legal process. The background is as follows:

·; In October 2008, the Group reached a legal settlement with Trans Nafta relating to the original purchase by the Group of GNS. As part of that settlement the Group and Trans Nafta entered into a sale and purchase agreement ("SPA") relating to the GPU and the Group made an advance payment to Trans Nafta in accordance with the SPA.

·; During 2009 and 2010, negotiations continued between the Group and Trans Nafta on the purchase and joint operation of the GPU. However, it became clear that the resolution of the key legal, operational and commercial matters was unlikely to be achieved within a reasonable timeframe.

·; On 2 May 2010, legal proceedings commenced by the Group's wholly-owned subsidiary GNS, against OOO Gazneftedobycha ("GND"), a subsidiary of Trans Nafta, for the recovery from GND of the security deposit plus interest accrued since November 2008.

·; On 24 August 2010, the Moscow Arbitration Court ordered GND to pay RUR 640 million (approximately US$ 22 million) to Volga Gas, representing the original prepayment plus an uplift for interest. This judgement was then revised in the Court of Appellation on 22 November 2010.

·; A subsequent hearing in the Court of Cassation on 28 February 2011 fully upheld the original judgement given in August 2010.

Having a final judgement on the legal status of the security deposit, the Group is currently negotiating a final settlement with Trans Nafta which is expected to include, inter alia, purchase of the Group's share in the GPU. The interest element of the August judgement (RR 40 million) has not yet been accrued by the Group as it is deemed to be a contingent asset as at 31 December 2010.

7. Term deposits, cash and cash equivalents - Group

In November 2009, the Company placed US$1.0 million on a six month term deposit with EBS Building Society in the Republic of Ireland. This was repaid in full on maturity.

8. Inventories - Group

9. Other receivables - Group

Prepayments to contractors relate to initial advances made in respect of drilling, construction and other projects.

10. Trade and other payables - Group

11. Capital commitments

  (i)  Pre-Caspian Licence Area

In accordance with the license agreement for the Pre-Caspian license area, PGK was required to acquire an additional 500 km of 2D seismic in 2009. At the end of the reporting period PGK had completed its seismic commitments on the Pre-Caspian licence area. In order to maintain its licence interest, PGK will be required to commence drilling a well before 31 December 2011. This expenditure is not at present committed.

(ii)  Urozhainoye-2 Licence Area

PGK was required to commence drilling a well in the Urozhainoye-2 Licence Area during 2010. As a result of operational delays, this was deferred to early 2011. Management estimates the cost of such a well to be US$ 3.5 million.

As of the balance sheet date all other licence commitments have been met.

12. Post-Balance Sheet Events

Trans Nafta case: In February 2011 the Moscow Court of cassation upheld the initial verdict in the case with Trans Nafta ordering Trans Nafta to pay RUR 640 million (approximately $22 million) representing the advance previously made to Trans Nafta in respect of the acquisition of a 75% interest in a gas processing unit.