Interim Results

15th Sep 2008 07:00



Monday 15 September 2008

Volga Gas plc

('Volga Gas' or 'the Company' or 'the Group')

Interim results for the six months ending 30 June 2008 

Volga Gas, the oil and gas exploration and production company which holds four subsoil licences in the Volga Region of European Russia, announces it interim results for the 6 months ending 30 June 2008.

key developments

Vostochny-makarovskoye

Karpenskiy Licence Area

Sub-Salt

Supra-Salt (Uzenskaya block)

Pre-Caspian Licence Area

Urozhainoye licence area

Financial

Mikhail Ivanov, Chief Executive Officer of Volga Gas, said:

"I am delighted with our operational achievements during the first half of the year of which the success of well Vostochny-Makarovskoye #1 was the highlight. After careful consideration, we continue to invest in Vostochny-Makarovskoye. The lawsuit seeking to unwind our acquisition of Gaznefteservis is an unwelcome distraction. We strongly believe that the Interest Purchase Agreement is valid and enforceable and are actively defending our position both in Russia and the United Kingdom. This will lead to production of condensate by the year end. We also intend to increase oil production on the newly-discovered southern Karpenskiy field and start drilling operations on the first of our sub-salt wells, Grafovskaya #1. The Company remains well capitalised and the team is working to deliver each of these events successfully and on time. The remainder of 2008 is both challenging and exciting."

For further information, please contact:

Financial Dynamics	+44 (0)20 7831 3113
Billy Clegg Alex Beagley
KBC Peel Hunt (Nominated Adviser and Joint Broker)	+44 (0)20 7418 8900
Jonathan Marren Matt Goode

There will be a conference call for analysts at 0830 GMT on Monday 15 September 2008, the details of which can be obtained from Financial Dynamics.

  

Chairman's Statement

Volga Gas (the "Company") and its subsidiaries (together, the "Group") is involved in the production, exploration and evaluation of oil and gas in four licences in the Volga Region of European Russia.

Key Events

Gaznefteservis Law Suit - The news of the court case in Russia seeking to unwind our acquisition of Gaznefteservis, the holder of the Vostochnye-Makarovskoye licence ("VM"), is unwelcome news (See Note 20 - Subsequent Events). The management team and board have considerable experience in dealing with issues of this kind in Russia. That experience is being used to resolve the case both in Russia and the United Kingdom. We believe the case to be without merit, and that the Interest Purchase Agreement to be valid and enforceable.

The essence of the case, ostensibly brought by a shareholder of Trans Nafta, is to seek to unwind the purchase of Gaznefteservis as a result of a purported failure by Trans Nafta to seek shareholder approval, despite representations and warranties to the contrary. After our drill bit success with well VM#1, and with first revenue expected by the end of the year we doubt that the ostensible reason for the case is the real one.

The board, after careful consideration of the merits of the case and of the Group's financial position, has decided to continue to invest in VM to bring it in to early production during 4Q 2008. Initially this will be condensate only. Limited amounts of gas will also be sold during 2009. After the initial three well drilling programme is complete we will release the current rig and not recommence drilling operations until mid-2009. In the unlikely event that we lose the case and the transaction is unwound, this will have a significantly detrimental impact on our cash flows and our future cash position.

With cash flow forecast from VM and the new find on the southern block of Karpenskiy we are confident that the Group's cash position is strong enough to invest in VM and the deep Karpenskiy well, as well as funding other exploration and evaluation activities to maintain compliance with its licence requirements.

Vostochny-Makarovskoye - The first half of 2008 has been operationally successful. The gross pay zone on VM was increased almost four times by well VM#1. Well VM#2 has been completed and will be hooked in to the early production facilities soon. The process of building the gas processing facility is progressing well and we expect to be in a position to commence early production in late 4Q 2008.

Karpenskiy Sub-Salt - Schlumberger completed the processing and interpretation of the Yuzhny-Ershovsky block, the location for the first well has been identified and the drilling passport issued. Russian category C3 reserves of 42bcm of gas (247mm BOE) and 48 million bbls of condensate and 14bcm of gas (81.2mm BOE) and 15.6 million bbls of condensate have been identified in two separate structures. Drilling operations are currently scheduled to commence in late November / early December.

Karpenskiy Supra-Salt - Well Uzenskaya #3, an exploration well, was successful. It produced over 2,000bbl/day of light oil in drillstem test, with production rates expected at not less than 350bbl/day. The well targeted a Jurassic carbonate zone and discovered a new field. The well is being hooked in to the existing Uzenskaya facilities and we will start production in early 4Q 2008. Uzenskaya #4 has been spudded and will seek to determine the extent of the field. Once the result of Well#4 is known we will determine the balance of the 2008 supra-salt drilling programme.

Financial Review

Operations - The Group recorded an operating loss of US$ 6.3 million (31 December 2007 - US$ 8.4 million, 30 June 2007 - US$ 1.7 million.) The loss after tax for the 6 months ending 30 June 2008 was US$ 5.1 million (31 December 2007 US$ 2.6 million, 30 June 2007 US$ 1.2 million).

Cash Position - Financially, the Group's cash position remains strong with US$ 80.0 million at 30 June 2008 (31 December 2007 of US$ 97.5 million, 30 June 2007 of US$ 111.5 million).

The decrease in cash is primarily due to investment in oil and gas tangible and intangible assets, the expensing of certain oil and gas exploration and evaluation activities and working capital requirements.

Principle Risks and Uncertainties

The risks described on pages 13-15 of the Annual Report and in Note 3 - Financial Risk Management, a copy of which can be obtained from www.volgagas.com, remain extant. In addition the Company faces the following risks:

Gaznefteservis law suit - As discussed above and in Note 20 - Subsequent Events, this law suit in Russia places our ownership of Gaznefteservis, in doubt.

Capital risk management - The Company believes that it has sufficient resources to fund its ongoing operations. In the event that the Company loses its suit over Gaznefteservis, it's ability to fund its other operations may be brought in to doubt. The board is closely monitoring the Group's cash position and will act in the event that the Group's capital is deemed to be insufficient to fund operations.

The discussion below expands upon risks described in the Annual Report as a result of recent market events:

Credit crunch - The Company is currently debt free and as such the credit crunch has not affected us. The Company is however, in negotiations to secure a reserve-based lending facility. The Company has been advised that the current environment will not have a material impact on its ability to borrow. However, there can be no guarantee that a funding facility will be available if circumstances continue to worsen.

Volatility of prices for oil and gas - The Company is currently producing limited amounts of oil. During the 2H 2008 it expects to commence production of condensate and materially increase its production of oil.

Oil mineral extraction tax ("MET") in Russia effectively means that the Company is hedged against significant moves in the price of oil down to approximately US$ 35/bbl. Thus we expect to maintain our netback to the wellhead margin. 

Condensate pricing is more directly exposed to world prices as the application of MET is different from that of oil. If the world oil price continues to slide we would expect to see a contraction in the margin we are able to achieve on condensate sales, albeit from a higher starting point than oil.

We expect to sell substantially all our immediate production in to domestic markets. Forecast domestic Russian economic growth should limit the reduction in demand witnessed in more developed markets. As such, we believe that there will continue to be markets in which to sell our production.

Related parties

Related party disclosures are given in Note 19

Forward-Looking Statements

Certain statements in this interim report are forward-looking. Although the group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

Outlook

We are confident of our legal position both in Russia and the UK regarding the Gaznefteservis case, and expect that we will be able to resolve this matter satisfactorily.

Your board looks forward to the remainder of the year with confidence. Meaningful production will commence on both Vostochny-Makarovskoye and the newly discovered southern Karpenskiy field. Importantly, drilling operations are due to commence on the first of the deep sub-salt structures, Grafovskaya #1.

Alexey V. Kalinin

Chairman

12 September 2008  

Operational Update

Vostochny-Makarovskoye Licence Area ("VM")

Well VM #1 was completed in March. The gross pay zone in the Evlano-Livenskiy horizon was increased from 47m to over 160m. The Bobrikovsky horizon was confirmed. Well VM #2 was spudded immediately thereafter. VM #2 has been cased and perforated and is being hooked in to the early production facilities. Well VM#3 will be spudded once the rig has been released from VM #2.

The gas processing facilities are currently being installed and will be capable of producing first revenue during 4Q of this year. Initially this will be condensate only.

Karpenskiy Licence Area

Sub-Salt

Schlumberger has now completed the processing and interpretation of the 3-D data acquired over the Yuzhny-Ershovskoye structure. This has allowed us to identify the location of the first well which we will drill on the strructure. We have prepared the drilling passport for the first sub-salt well, Grafovskaya #1. In order to obtain the passport we have booked Russian category reserves. These have been allocated in two structures; Grafovskaya and Yuzhny-Zapadnoye with recoverable C3 reserves of 42.3bcm of gas and 48.4 million bbls of condensate and with 13.8bcm of gas and 15.6 million bbls of condensate respectively. Russian C3 reserves are broadly comparable with SPE category Prospective Resources (see page 60 of the 2007 Annual Report for definitions.)

The preparation of the drilling site has commenced and drilling operations are forecast to commence in late November, early December.

Schlumberger are close to completing the processing and interpretation of the Yuzhny-Mokrousovsky block.

Supra-Salt

Well Uzenskaya #3 was an exploration well targeting a Jurassic structure in the south of the Karpenskiy licence area. The well flowed over 2,000bbl/day in open hole test. We expect that it will flow at approximately 350bbl/day once brought in to production. It is being tied in to the existing Uzenskaya facilities and will be brought in to production shortly thereafter.

Well Uzenskaya #4 has been spudded and is seeking to confirm the quantum of the discovered reserves in the structure discovered by Uzenskaya #3..

Pre-Caspian Licence Area

Saratovneftegeophysika completed the acquisition of 1,000km of 2-D seismic, processing and interpretation has now been completed and will be used to determine the acquisition of a further 500km of 2-D during the 2008/09 winter.

Urozhainoye-2

To date the Company has acquired 295km of 2-D seismic over the licence area. Acquisition is due to continue through the second half of the year.

Mikhail Yu. Ivanov

Chief Executive Officer

12 September 2008  

Directors' responsibility statement

The directors' confirm that this consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information pursuant to DTR 4.2.7 and DTR 4.2.8, namely:

an indication of important events that have occurred during the first six months and their impact on the set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The directors of Volga Gas plc are listed in the Volga Gas plc Annual Report for 31 December 2007.

By order of the Board

Alistair Stobie

12 September 2008

  

Consolidated Interim Balance Sheet (Unaudited)

(presented in US$ 000)

	Notes	30 June 2008	31 December 2007
ASSETS
Non-current assets
Intangible assets	3	36,359	34,114
Property, plant and equipment	4	13,449	5,940
Other non-current assets	5	11,698	2,612
Deferred tax assets	16	2,443	645
Total non-current assets		63,949	43,311
Current assets
Cash and cash equivalents	6	79,518	97,539
Derivative financial instruments	7	-	2,756
Inventories	8	875	145
Other receivables	9	7,229	2,661
Total current assets		87,622	103,101
Total assets		151,571	146,412
EQUITY AND LIABILITIES
Equity
Share capital	10	1,040	1,037
Share premium (net of issue costs)	10	144,134	143,552
Other reserves	11	9,364	4,061
Accumulated loss		(8,896)	(3,844)
Total equity		145,642	144,806
Current liabilities
Trade and other payables	12	5,929	1,606
Total equity and liabilities		151,571	146,412

  

Consolidated Interim Statement of Income (Unaudited)

(presented in US$ 000, except for loss per ordinary share and number of shares)

		Six months ended 30 June
	Notes	2008		2007
CONTINUING OPERATIONS
Revenue		112	-
Cost of sales	13	(197)	-
Gross loss		(85)	-
Operating and administrative expenses	13	(6,187)	(1,651)
Operating loss		(6,272)	(1,651)
Interest income		524	473
Interest expense		-		(373)
Other gains and losses - net	14	718		274
Loss for the period before tax		(5,030)		(1,277)
Current income tax	15	(1,757)		-
Net deferred income tax	16	1,735		44
Loss for the period attributable to equity holders		(5,052)		(1,233)
Basic and diluted loss per ordinary share (in US dollars)		0.09		0.03
Weighted average number of shares outstanding		53,751,954		42,582,168

  

Consolidated Interim Statement of Cash Flows (Unaudited)

(presented in US$ 000)

		Six months ended 30 June
	Notes	2008	2007
Net cash used in operating activities	17	(13,240)	(1,100)
Cash flows from investing activities
Purchases of property, plant and equipment	4	(7,249)	-
Purchases of intangible assets	3	(680)	(1,949)
Net cash used in investing activities		(7,929)	(1,949)
Cash flows from financing activities
Proceeds from issue of shares (net of issue costs)	10	-	125,190
Repayment of long-term borrowings		-	(14,015)
Net cash provided by financing activities		-	111,175
Effect of exchange rate changes on cash and cash equivalents		3,148	-
Net increase (decrease) in cash and cash equivalents		(18,021)	108,126
Cash and cash equivalents at beginning of the period	6	97,539	3,328
Cash and cash equivalents at end of the period	6	79,518	111,454

  Consolidated Interim Statement of Changes in Equity (Unaudited)

(presented in US$ 000)

	Notes	Share Capital	Share premium	Other  reserves	Currency translation reserve	Accumulated  loss	Total Equity
For the six months ended 30 June 2007
As at 1 January 2007		579	15,251	588	460	(1,271)	15,607
Loss for the period		-	-	-	-	(1,233)	(1,233)
Share capital issued	10	450	134,550	-	-	-	135,000
Share issue cost	10	-	(9,810)	-	-	-	(9,810)
Discount on long-term debt		-	-	(588)	-	-	(588)
Share based payments	10	5	524	-	-	-	529
Adjustment on translation of non-Dollar subsidiaries		-	-	-	532	-	532
As at 30 June 2007		1,034	140,515	-	992	(2,504)	140,037
For the six months ended 30 June 2008
As at 1 January 2008		1,037	143,552	-	4,061	(3,844)	144,806
Loss for the period		-	-	-	-	(5,052)	(5,052)
Share based payments	10	3	582	-	-	-	585
Adjustment on translation of non-Dollar subsidiaries		-	-	-	5,303	-	5,303
As at 30 June 2008		1,040	144,134	-	9,364	(8,896)	145,642

  

Notes to the IFRS Consolidated Interim Financial Information (Unaudited)

(presented in US$ 000 unless otherwise stated)

1. ORGANISATION AND PRINCIPAL ACTIVITIES

Volga Gas plc (hereinafter referred to as "Company" or "Volga") is a public liability company registered in England and Wales with registered number 5886534. The principal activities of the Company and its subsidiaries (hereinafter jointly referred to as the "Group") are the acquisition, exploration and development of hydrocarbon assets and production of hydrocarbons in the Volga Region of the Russian Federation. Its registered office is at 7th floor, Phoenix House 18 King William Street, London, EC4N 7HE.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation. The consolidated interim financial information for the six months ended 30 June 2008 has been prepared in accordance with International Accounting Standard No. 34, Interim Financial Reporting. The comparative figures for the year ended 31 December 2007 do not constitute statutory financial statements for the purpose of Section 240 of the Companies Act 1985. They have been extracted from the Company's published accounts, a copy of which has been delivered to the Register of Companies. The report of the auditors on those accounts was unqualified and did not contain a statement under either Section 237(2) or (3) of the Companies Act 1985. This consolidated interim financial information should be read in conjunction with the Group's consolidated financial statements for the year ended 31 December 2007. 

Exchange rates. The official rate of exchange of the Russian rouble to the US dollar ("USD") at 30 June 2008 and 31 December 2007 was 23.46 and 24.55 Russian roubles to USD 1.00, respectively. The official rate of exchange of the Russian rouble to the Euro at 30 June 2008 and 31 December 2007 was 36.91 and 35.93 Russian roubles to 1.00 Euro, respectively. Any re-measurement of Russian rouble amounts to US dollars or any other currency should not be construed as a representation that such Russian rouble amounts have been, could be, or will in the future be converted into other currencies at these exchange rates. 

Accounting policies. The principal accounting policies and methods of computation followed by the Group are consistent with those disclosed in the consolidated financial statements for the year ended 31 December 2007. New standards, amendments to standards and interpretations, which are applicable for the financial year ending 31 December 2008, have had no impact on the accounting policies.

Segment reporting. A reportable segment is a business segment or a geographical segment identified based on the foregoing definitions for which segment information is required to be disclosed. The operations of the Group comprise one class of business, being oil and gas exploration, development and production and in only one geographic area: the Russian Federation. 

  

3. INTANGIBLE ASSETS

Intangible assets represent exploration and evaluation assets such as licenses, studies and exploratory drilling.

For the six months ended 30 June 2007	Work in progress - exploration and evaluation	Exploration and evaluation	Development	Total
As at 1 January 2007	570	24,725	-	25,295
Additions	1,879	-	70	1,949
Transfers	-	(21,215)	21,215	-
Exchange adjustment	30	46	423	499
As at 30 June 2007	2,479	3,556	21,708	27,743
For the six months ended 30 June 2008	Work in progress - exploration and evaluation	Exploration and evaluation	Development	Total
As at 1 January 2008	3,972	8,407	21,735	34,114
Additions	376	151	136	663
Exchange adjustment	178	393	1,011	1,582
As at 30 June 2008	4,526	8,951	22,882	36,359

  

4. PROPERTY, PLANT AND EQUIPMENT

Movements in property, plant and equipment, for the six months ended 30 June 2008 and 2007 are as follows:

For the six months ended 30 June 2007	Development assets	Land and buildings	Producing assets	Other	Total
Cost
As at 1 January 2007	-	-	-	38	38
As at 30 June 2007	-	-	-	38	38
Depreciation
As at 1 January 2007	-	-	-	-	-
Depreciation	-	-	-	(7)	(7)
As at 30 June 2007	-	-	-	(7)	(7)
Net book value
As at 30 June 2007	-	-	-	31	31
For the six months ended 30 June 2008	Development assets	Land and buildings	Producing assets	Other	Total
Cost
As at 1 January 2008	3,676	528	1,658	105	5,967
Additions	7,083	-	27	-	7,110
Transfers	(181)	-	181	-	-
As at 30 June 2008	10,578	528	1,866	105	13,077
Depreciation
As at 1 January 2008	-	-	(8)	(19)	(27)
Depreciation	-	-	(13)	(7)	(20)
As at 30 June 2008	-	-	(21)	(26)	(47)
Net book value
Exchange adjustment	307	24	81	7	419
As at 30 June 2008	10,885	552	1,926	86	13,449

5. OTHER NON-CURRENT ASSETS

	30 June 2008	31 December 2007
Advances for development assets	6,798	2,480
VAT recoverable	4,868	105
Other non-current assets	32	76
Total other non-current assets	11,698	2,661

Other non-current assets represent advances for development assets including VAT and VAT recoverable related to payments for licenses and under E&E agreements. Management believes that VAT recoverable will not be able to recover it until the Company is revenue producing. Therefore this VAT was classified as a non-current asset.  

6. CASH AND CASH EQUIVALENTS

Cash and cash equivalents include the following items:

	30 June 2008	31 December 2007
Cash at bank and on hand	73,591	91,507
Short-term bank deposits	5,927	6,032
Total cash and cash equivalents	79,518	97,539

An analysis of the Group cash and cash equivalents by bank and currency is presented in the table below:

Bank	Currency	30 June 2008 US$ 000	31 December 2007 US$ 000
Cyprus
Bank of Cyprus	RR	4	55,100
Bank of Cyprus	USD	14	1
United Kingdom
The Royal Bank of Scotland	USD	32,031	26,570
The Royal Bank of Scotland	GBP	39	268
The Royal Bank of Scotland	RR	29,867	-
Russian Federation
Unicreditbank	RR	16,929	14,712
Unicreditbank	USD	12	12
Other banks	RR	622	876
Total cash and cash equivalents		79,518	97,539

7. DERIVATIVE FINANCIAL INSTRUMENTS

As at 31 December 2007 the Company had two open forward currency contracts to sell USD for Russian Rubles with the Royal Bank of Scotland. The fair value of the financial instruments at 31 December 2007 were:

Terms of contract	Settlement date	Unrealized gain/(loss) as at  31 December 2007, US$ 000
Forward sale of 50 mln USD for RR	4 February 2008	2,767
Forward sale of 15 mln USD for RR	17 March 2008	(11)
Total derivative financial instruments		2,756

These two forward contracts were settled on due dates with a gain of US$ 2,828,000 and US$ 488,000 respectively US$ 2,756,000 of this gain was recognized in 2007.

8. INVENTORIES

	30 June 2008	31 December 2007
Production and other inventory	867	114
Crude oil	8	31
Total inventories	875	145

  9. OTHER RECEIVABLES

	30 June 2008	31 December 2007
Prepayments	7,206	2,480
Other financial accounts receivable	-	105
Other accounts receivable	23	76
Total other receivables	7,229	2,661

10. SHARE CAPITAL AND SHARE PREMIUM

The following table summarizes the movement in the share capital and share premium of the Company for the six months ended 30 June 2007 and 30 June 2008.

For the six months ended 30 June 2007	Number of shares	Share capital US$ 000	Share premium US$ 000
As at 1 January 2007	307,201	579	15,251
Number of shares before subdivision	307,201	-	-
Subdivision of shares	30,720,100	-	-
Issue of shares:
- public placement (net of issue cost)	22,500,000	450	124,740
- shares issued to directors (a)	272,564	5	524
As at 30 June 2007	53,492,664	1,034	140,515
For the six months ended 30 June 2008	Number of shares	Share capital US$'000	Share premium US$'000
As at 1 January 2008	53,623,948	1,037	143,552
Issue of shares:
- shares issued to directors (a)	131,284	3	582
As at 30 June 2008	53,755,232	1,040	144,134

(a) Share based compensation

The following tables summarize information on the shares issued to Directors of the Company in exchange for services provided for the six months ended 30 June 2007 and 30 June 2008:

For six months ended 30 June 2007	Number of shares allotted as  at 1 January 2007	Number of shares allotted  for the period	Number of shares allotted as  at 30 June 2007
Executive directors
Mikhail Ivanov	-	175,032	175,032
Alistair Stobie	-	87,532	87,532
Non-executive directors
Ronald Freeman	-	5,000	5,000
Stephen Ogden	-	5,000	5,000
Total	-	272,564	272,564
For six months ended 30 June 2008	Number of shares allotted as  at 1 January 2008	Number of shares allotted  for the period	Number of shares allotted as  at 30 June 2008
Executive directors
Mikhail Ivanov	262,549	87,517	350,066
Alistair Stobie	131,299	43,767	175,066
Non-executive directors
Ronald Freeman	5,000	-	5,000
Stephen Ogden	5,000	-	5,000
Total	403,848	131,284	535,132

As at 30 June 2008 the outstanding restricted share agreements covering 262,668 shares had an exercise price of 0.01 GBP and a weighted average remaining contractual life of 11 months.

11. OTHER RESERVES

Other reserves represent adjustment on translation of share capital of non-US$ subsidiaries into US$. All related exchange gains and losses are charged directly to equity. 

12. TRADE AND OTHER PAYABLES

	30 June 2008	31 December 2007
Trade and other payables	3,608	1,079
Taxes payable	2,294	507
Other payables	27	20
Total trade and other payables	5,929	1,606

  

13. COST OF SALES, OPERATING AND ADMINISTRATIVE EXPENSES

	For six months ended 30 June 2008	For six months ended 30 June 2007
Cost of sales	197	-
Operating and administrative expenses	6,187	1,651
Total costs and expenses	6,384	1,651

Total costs and expenses were analyzed as follows:

	For six months ended 30 June 2008	For six months ended 30 June 2007
Exploration & evaluation	3,920	-
Directors' emoluments and other benefits	1,140	796
Salaries	441	110
Consultancy	207	511
Audit fees	153	39
Taxes other than income tax (excluding payroll taxes)	121	34
Travel and transport	109	38
Rent & Communication	64	44
Legal	26	18
Insurance	22	-
Depreciation	20	7
Other	161	54
Total costs and expenses	6,384	1,651

Analysis of directors' emoluments and other benefits for the six months ended 30 June 2007 and 30 June 2008 is as follows:

For the six months ended 30 June 2007	Salary	Share based compensation (a)	Other benefits (b)
Executive directors
Mikhail Ivanov	157	313	-
Alistair Stobie	80	156	50
Non-executive directors
Ronald Freeman	15	30	-
Stephen Ogden	15	30	-
Total	267	529	50
For the six months ended 30 June 2008	Salary	Share based compensation (a)	Other benefits (bonuses)
Executive directors
Mikhail Ivanov	188	390	125
Alistair Stobie	142	195	50
Non-executive directors
Ronald Freeman	25	-	-
Stephen Ogden	25	-	-
Total	380	585	175

(a) Share based compensation

Details of directors' interests in the share capital of the Company are provided in Note 10.

(b) Other benefits

Alistair Stobie received a special bonus in respect of the Company's admission to AIM. This bonus was included within the costs associated with the issue of capital.

Shares issued to non-executive directors have no vesting conditions, they were valued at the placing price of US$ 6 each and were fully-expensed during the reporting period. The fair value of restricted shares issued to Mikhail Ivanov and Alistair Stobie was measured by use of the Black-Scholes pricing model with the following assumptions:

	As at 30 June 2008	As at 30 June 2007
Current share price	US$ 6	US$ 6
Exercise price	US$ 0.02	US$ 0.02
Expected volatility	3.36%	3.36%
Expected life	1.66 years	2.66 years
Risk free rate	5.6%	5.6%
Expected dividends	None	None

Accordingly US$ 469,000 and US$ 585,000 of the total fair value determined was charged to the income statement for the six months ended 30 June 2007 and 30 June 2008 respectively.

14. OTHER GAINS AND LOSSES

	For six months ended 30 June 2008	For six months ended 30 June 2007
Gain on forward currency contracts	-	271
Realized gain on forward currency contracts	2,936	-
Foreign exchange (loss)/gain	(2,218)	3
Total other gains and losses	718	274

Realized gain on forward currency contracts for the six months ended 30 June 2008 includes net gain of 560 US$ 000 from two open forward currency contracts recognized in 2007 on fair value and gain of 2,376 US$ 000 from new forward currency contracts settled during the reporting period.

15. CURRENT INCOME TAX EXPENSE

Effective income tax rate. The subsidiaries of the Group are located in Russian Federation, Cyprus and Great Britain with statutory income tax rates in 2008 and 2007 at 24%, 10% and 30% (28% starting 1 April 2008), respectively. For the six months ended 30 June 2008 and 30 June 2007, the consolidated Group's effective income tax rates were 0.4% and 3.4%, respectively.

16. DEFERRED INCOME TAX

The Group started production of oil from the Uzenskaya field during 2007. The Group expects to commence meaningful production from Vostochny-Makarovskoye field in 2009. Until that time the Group will be loss-making. The Group will be able to offset future profit against accumulated loss for tax purposes. Therefore, deferred tax assets represent tax loss carried forward.  

17. CASH FLOW USED IN OPERATING ACTIVITIES

	For six months ended 30 June 2008	For six months ended 30 June 2007
Loss for the period before tax	(5,030)	(1,277)
Adjustments to loss before tax
Depreciation	20	7
Gain on forward contract	-	(271)
Share grant expense	585	529
Total effect of adjustments	605	265
Increase in long-term assets	(8,930)	-
Working capital changes
Increase in trade and other receivables	(1,729)	(902)
Increase in payables	2,567	814
Increase in inventory	(723)	-
Net cash outflow from operating activities	(13,240)	(1,100)

18. CONTINGENCIES AND COMMITMENTS

Operating environment. The Russian Federation continues to display some characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is in practice not convertible in most countries outside of the Russian Federation, and relatively high inflation. The tax and customs legislation within the Russian Federation is subject to varying interpretations and changes that can occur frequently.

While there have been significant improvements in the macro-economic environment of the Russian Federation, the future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the government, together with tax, legal, regulatory, and political developments.

Capital commitments. The following are capital commitments as at 30 June 2008:

(a) Pre-Caspian Gas Company

(i) Karpenskiy Licence Area

In accordance with the amended Karpenskiy Licence Agreement ("Amended KLA") PGK is required to;

Complete 400km2 of 3D seismic by end-2008. This obligation has been fulfilled.

Drill 14 wells. As at 30 June 2008 five of these wells have been drilled. Management currently estimates that expenditure to drill the balance will be approximately US$15,000,000. 

(ii) Pre-Caspian Licence Area

In accordance with the licence agreement for the Pre-Caspian license area, PGK is required to acquire 400 km of 2D seismic in 2007/2008, 600 km in 2008/2009 and 500km in 2009/2010. As at 30 June 2008 the Company had acquired 1,000km. The cost of seismic acquisition between 2007 and 2009 is expected to be US $5,100,000. As at 30 June 2008 the Company had pre-payments of US $1,700,000. The Company is required to commence drilling in 2009 and to have completed two wells in 2010.

(iii) Urozhainoye Licence Area

There are no capital commitments in respect of the Urozhainoye Licence Agreement for 2008.  

(b) Gaznefteservice

(i) Vostochny-Makarovskoye Licence Area

In accordance with the Vostochny Makarovskoye licence agreement, GNS must drill at least one well by July 2008. This well has been completed. As at 30 June 2008 the Group had entered in to a number of contracts for the construction of gas processing and surface facilities for the Vostochny-Makarovskoye Licence Area. The balance of commitments under these contracts was approximately US $4,300,000. 

Taxation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activities of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in its interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years proceeding the year of review. Under certain circumstances reviews may cover longer periods.

Management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the Group's tax, currency and customs positions will be sustained. 

Mineral licenses. The Group is subject to periodic reviews of its activities by governmental authorities with respect to the requirements of its mineral licenses. Management cooperates with governmental authorities to agree on remedial actions necessary to resolve any findings resulting from these reviews. Failure to comply with the terms of a license could result in fines, penalties or license limitation, suspension or revocation. The Group's management believes any issues of non-compliance will be resolved through negotiations or corrective actions without any material adverse effect on the Group's financial position, statement of income or of cash flows.

The Group's oil and gas fields and license areas are situated on land located in Near Volga district. Licenses are issued by the Federal Agency for the Use of Natural Resources under the Ministry of Natural Resources and the Group will be obliged to pay unified natural resources production tax upon start of production. 

Environmental liabilities. The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group is going to periodically evaluate its obligations under environmental regulations and, as obligations are determined, they are recognized as an expense immediately if no future benefit is discernible. Potential liabilities which might arise as a result of a change in interpretation of existing regulations, civil litigation or changes in legislation cannot be estimated. Under existing legislation, management believes that there are no probable liabilities which will have a material adverse effect on the Group's financial position, statement of income or of cash flows.

Legal contingencies. In the opinion of management, there are no current legal proceedings or other claims outstanding, which could have a material effect on the result of operations or financial position of the Group and which have not been accrued or disclosed in the consolidated interim financial information, other than those disclosed in Note 20 to this financial statements.

19. RELATED PARTY TRANSACTIONS

The Group is controlled by Baring Vostok Private Equity Fund III, which owned 55.10% of the Company's shares as at 30 June 2008. Baring Vostok Private Equity Fund III performs its control through a number of nominee holding companies. The remaining 44.90% of the shares are widely held.

The following transactions concerning purchases of goods and services were carried out with related parties:

Related party	Relationship	Kind of transactions	For six months ended  30 June 2008	For six months ended  30 June 2007
Cavendish  Nominees	Controlling shareholder	Interest expense on loans received	-	373
Granite  Consulting	Affiliated with  controlling shareholder	Salaries, rent, services	-	194
Baring Vostok Cyprus Limited	Affiliated with controlling shareholder	Salaries, rent, services	15	-

Outstanding balances with above mentioned related parties as at 30 June 2008 and 31 December 2007 were as follows:

Baring Vostok Cyprus Limited		15	56

All transactions with related parties were made on a commercial basis.

20. SUBSEQUENT EVENTS

On 28 August 2008 the Company announced that Trans Nafta shareholder Kulyaev Alexander Alexandrovich has filed suit against its 100% wholly-owned subsidiary Woodhurst Holdings and Trans Nafta in the Basmanny Arbitration Court in Moscow to unwind the sale of Gaznefteservis ("GNS"), the holder of Vostochno-Makarovskoye licence, by Trans Nafta to Woodhurst holding ("Woodhurst") in September 2006 ("Interest Sale & Purchase Agreement"). The basis of the suit is that Trans Nafta had not obtained appropriate corporate approval to sell GNS to Woodhurst. 

The suit is on early stage and it is not possible to predict the ultimate outcome. Accordingly, the Group can not reasonably estimate the effect, if any, this matter will have on their financial position, results of operations or cash flows. In the event that the Basmanny Arbitration Court finds in favor of the plaintiff and unwinds the transaction, the Group may also not be able to fund their exploration and development activities. The Company believes, based on advice from legal counsel, the Interest Sale & Purchase Agreement is valid and plan on vigorously defending itself in this matter.

ENDIR GUUQPBUPRGBC

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