Interim Results

16th Sep 2009 07:00



16 September 2009

Volga Gas plc

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

HALF YEARLY RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2009

Volga Gas, the oil and gas exploration and production group operating in the Volga Region of European Russia, announces its half yearly results for the six months ended 30 June 2009.

KEY DEVELOPMENTS

KARPENSKIY LICENCE AREA

Supra-Salt (Uzenskoye oil field)

Uzenskoye has been in continuous production for the full six month period.

Average production of 1,050 b/d in the six months to 30 June 2009. Production in July and August averaged 1,600 b/d from three wells.

Three further wells have been completed, tied-in to field facilities and are being put on production. Oil production is expected to rise to a sustainable rate of over 2,000 b/d.

Sub-Salt

A rig was assembled on location to drill the first deep sub-salt well, Grafovskaya # 1 on the Yuzhny Ershovskoye prospect.

Drilling commenced on 28 August 2009. The well has been cased at 670 metres, has reached a depth of 1,180 metres and continues drilling through the thick salt section.

VOSTOCHNY-MAKAROVSKOYE

VM # 1 and VM # 2 wells, were successfully completed and tested in 2008, and pipelines laid to the Dobrinskoye Gas Processing Unit ("GPU") in preparation for first production.

Construction of the GPU is advanced and commissioning is continuing.

Application has been made for authority to commence production of gas and condensate.

FINANCIAL

First period of positive EBITDA and positive operating cash flow.

Revenues of $3.4 million in H1 2009 (H1 2008: $0.1 million).

$14.6 million in cash as at 30 June 2009 and no debt.

Equity Placing raised a further US$27m ($26.6m net of expenses) and completed on 7 July 2009.

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

"I am very pleased with our operational achievements during the first half of the year which included the start of sustained and growing production from the Uzenskoye field, the connection of the initial two Vostochny-Makarovskoye wells to the gas processing unit and the groundwork that enabled us to start drilling operations on the first of our sub-salt wells, Grafovskaya #1. The results of our production have enabled us to report a first period of positive EBITDA and positive operating cash flow - an important milestone for our company. Thanks to the support of our shareholders, the Company remains well capitalized and able to progress towards testing the potentially value transforming sub-salt potential of our licenses. The remainder of 2009 will be the most exciting period to date in the Company's history. We look forward to updating shareholders as and when appropriate."

The Company is hosting a meeting for analysts at 9:30am this morning, 16th September, at the offices of Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London, WC2A 1PB.

For further information, please contact:

Volga Gas plc
Mikhail Ivanov, Chief Executive Officer Tony Alves, Chief Financial Officer	+7 495 721 1233 +44 20 8622 4454
Financial Dynamics
Billy Clegg Edward Westropp Alex Beagley	+44 (0)20 7831 3113
Oriel Securities (Nominated Adviser and Joint Broker)
Richard Crawley Daniel Conti	+44 (0)20 7710 7600

  

Interim Management report

Operational Overview

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

Volga Gas's principal objectives for 2009 are to continue the development of the shallow oil production in the Uzenskoye field, to commence gas and condensate production from Vostochny Makarovskoye and to start drilling the first deep well, Grafovskaya # 1, on the sub-salt Yuzhny Ershovskoye prospect. As was made clear in the 2008 Annual Report, the deep drilling required the Company to raise additional funds. This was accomplished thanks to the support of the Company's shareholders on 7 July 2009 through a US$ 27 million placing of new shares in the Company.

During the first six months of 2009, the Group has made significant progress towards meeting its objectives for the year. Volga Gas is able to report that the current phase of development drilling on Uzenskoye is complete, giving the Group sustained and growing oil production. Construction continued on the Dobrinskoye gas processing unit which is expected to be the principal facility for processing the gas and condensate from Vostochny Makarovskoye. Finally and most excitingly, the mobilization of drilling crews and service contractors enabled the Group to start drilling the deep sub-salt exploration well, Grafovskaya # 1, on 28 August 2009.

The selling price of the Group's oil production has risen steadily in the course of H1 2009. With rising production volumes and rigorous cost control this has enabled the Group to achieve positive operating cash flow in the first six months of 2009 and to aspire to deliver a growing cash flow profile over the coming years. This is a significant turning point for a company that hitherto had little or no revenues and significant negative operating cash flow.

Karpenskiy Licence Area ("KLA")

Supra-Salt

During the first half of 2009, production from the Uzenskoye area averaged 1,051 barrels of oil per day and, during July and August, production averaged 1,600 barrels of oil per day. With rising sales prices, net revenues from oil sales have risen to a level that enables the Group to more than cover all operating costs and overheads and to begin generating positive operating cash flow.

Full time production commenced in November 2008 from the Uzenskoye field area in the southern portion of the KLA, initially with the Uz#3 well followed by the Uz#4 and Uz#5 wells, both of which were tested and completed during the first half of 2009.

Two further supra-salt wells were drilled during the period: Uz#6 and V-Uz#7.

Uz#6 was an appraisal well located at the edge of the Yu-Uzenskoye field. The initial vertical well did not encounter the oil reservoir although a deviated sidetrack drilled from the initial well - Uz#6bis - was successful in intersecting net pay of 8 metres in the principal Cretaceous Aptian reservoir. The well has been completed with a slotted liner run in the deviated open hole producing section. In-field flow lines have been installed and production commenced on early in September 2009. 

V-Uz#7 was an exploration well drilled on the Vostochny Uzenskaya prospect approximately 7km east of the Uzenskaya field facilities. The principal cretaceous sandstone target was found to be water bearing, however a secondary, deeper Jurassic interval was found to be oil bearing. 3-D seismic and electromagnetic surveys are being conducted over this potential new oil discovery and the data will be analysed before appraisal drilling, most likely before the end of 2009.

Since the period end development drilling has continued successfully. The Yu-Uz#8 and Yu-Uz#9 development wells on the producing field have been drilled, tested and completed as new production wells. With the new wells in production, current output has already increased and with sustained build up we expect average field output to exceed 2,000 barrels per day during Q4 2009.

Sub-Salt

The main activity during the period was the processing and interpretation of the 3-D data acquired over the Yuzhny-Mokrousovskoye structure, the second significant sub-salt prospect in the KLA. This has validated the initial interpretation of the historic 2-D seismic data in terms of the deep sub-salt prospectivity.  In addition, a further structure at an intermediate depth has also been mapped in the same area. This is a potentially oil bearing prospect at a depth of approximately 2,000 metres which could form part of the Group's future exploration drilling activities.

Most importantly for the Group is that having secured the necessary funds, it is in a position to drill the first sub-salt well, Grafovskaya #1, on the Yuzhny-Ershovskoye prospect. In order to obtain the well passport the Group booked Russian category C3 resources. These have been allocated in two structures; Grafovskaya and Yuzhny-Zapadnaya with recoverable C3 resources of 42.3 BCM (1.48 TCF) of gas and 48.4 million barrels of condensate and with 13.8 BCM (0.48 TCF) of gas and 15.6 million barrels of condensate respectively. The drilling site was prepared during 2008 and a high specification western drilling rig, LEWCO 450ton operated by Eurasia Drilling, was constructed on location. Having secured the required service contractors, such as Baker Hughes, Schlumberger and local Russian service providers, equipment and supplies, drilling commenced on 28 August 2009. The drilling operation is budgeted to take a total of 250 days to reach the target depth of 5,200 metres and to complete the well although the Company will make interim announcements as and when appropriate. The well has been drilled to and casing set at approximately 670 metres. It has now reached a depth of 1,180 metres and continues drilling through the thick salt section. The first potential reservoir target is estimated to be at a vertical depth of approximately 3,700 metres.

Vostochny-Makarovskoye Licence Area ("VM")

The VM # 1 and VM # 2 wells were drilled and tested during 2008. These two wells have now been connected by inter-field pipeline to the plant gate at the Dobrinskoye Gas Processing Unit ("GPU").

In February 2009 drilling on the VM # 4 well was completed. As reported at the time, the well found only a limited eight metres of effective pay. The VM#4 well has been temporarily suspended and may be re-drilled as a sidetrack to locate more of the productive reservoir.

As construction of the GPU has progressed, commissioning procedures have commenced and the plant is being tested with production from the Dobrinskoye field, which is owned by Trans Nafta. It is envisaged under an agreement with Trans Nafta that the GPU will be transferred into a joint venture, 75% owned by Volga Gas. Negotiations in relation to this are in progress. The Group has applied to the government authorities to commence production from the VM#1 and VM#2 wells and hopes to be able to announce start up of the field early in 2010.

Pre-Caspian Licence Area

Processing and interpretation of 1,000 km of 2-D seismic, acquired during 2008, has identified a potentially large sub-salt prospect within this licence area. The Group applied successfully to the licencing authorities to exchange our remaining 2-D seismic commitment for a more concentrated 78 km2 3-D seismic programme to enable more detailed mapping of the prospect. The new 3-D seismic has been acquired and the interpretation of the new data is underway. At the same time the licencing authorities agreed to a one year extension of the period before exploration drilling has to start.

Urozhainoye-2

This licence area contains a partially appraised oil discovery. A well drilled on the Sobolevskoye prospect in 1990 flowed at 1,200 barrels per day of oil and 1.9 mmcf/d of gas. We have now completed an initial 350 km of 2-D seismic survey and commenced interpretation. We expect to formulate plans for further exploration and appraisal activity during 2010.

Financial Review

Results of Operations - For the six months ended 30 June 2009 the Group recorded turnover of US$ 3.4 million (H1 2008: US$ 0.1 million) and an operating loss of US$ 0.66 million (H1 2008: loss of US$ 6.27 million). Included in the operating loss for H1 2009 were exploration expenses of US$ 0.48 million (H1 2008: US$ 3.92 million) and depletion and depreciation of US$ 0.35 million (H1 2008: $0.02 million). EBITDA, calculated as operating income before exploration expense, depletion and depreciation was positive US$0.17 million (H1 2008: negative $ 2.33 million)  The loss after tax for the six months ending 30 June 2009 was US$ 0.63 million (1H 2008: US$ 5.05 million).

All oil sales are made at the field facilities and are sold to domestic customers. Net oil sales prices achieved during the six months to 30 June 2009 increased steadily through the period from US$10.16 per barrel in January 2009 to US$26.43 per barrel in June 2009, while the average realization for the six months to 30 June 2009 was US$18.15 per barrel. For the six months to 30 June 2009, the average rate of Mineral Extraction Tax was US$7.74 per barrel while the production costs were US$0.98 per barrel and the unit Depletion and Depreciation charge was $1.84 per barrel. Comparative figures for 1H 2008 are not meaningful given the immaterial level of production during 1H 2008.

Sales are recorded net of VAT, however VAT receipts on sales are being retained while the Group recovers accumulated VAT on past capital expenditure. The remaining balance of unrecovered VAT is recorded on the Group Balance Sheet as Other non-current assets and as at 30 June 2009 amounted to US$ 7.1 million (31 December 2008 US$ 7.2 million).

Capital Expenditure - For the six months ended 30 June 2009, the Group incurred capital expenditures of US$ 9.5 million (H1 2008: US$ 7.9 million). The majority of capital expenditure in 2009 was incurred in supra-salt development and exploration drilling in the KLA and on the VM development with the remainder on 3-D seismic in the Pre-Caspian Licence area.

 

Cash Position - The Group's net cash balances at 30 June 2009 were US$ 14.6 million (31 December 2008: US$ 23.1 million), with no debt. 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 partly offset by net income from oil production and positive working capital movements. On 7 July 2009, the Company completed a Placing of new Ordinary Shares to raise additional net funds of US$ 26.6 million.

Outlook

The Group anticipates oil production to increase to over 2,000 barrels per day during 4Q 2009. Since the start of the second half of 2009, the oil sales prices have remained at higher levels than achieved during 1H 2009, with the average sales prices in July and August at US$29.05 per barrel (net of VAT). Mineral Extraction Tax rates will rise or fall in line with oil prices with approximately a one month lag but unit production costs and DD&A are expected to remain approximately unchanged.

For the second half of 2009, the Group's capital expenditure is expected to total US$ 16 million, including US$ 8 million on the Grafovskaya #1 exploration well and development expenditure of US$ 5 million.

Following the successful placing, completed in July 2009, the Group is well placed to meet the key objectives for 2009 as set out in the Annual Report, namely: increasing oil production from the supra-salt Uzenskaya field area; commencement of production from the initial first two wells on Vostochny-Makarovskoye; and commencement of drilling operations on the first of the deep sub-salt structures, Grafovskaya #1. The Board looks forward to updating the market as the Group progresses through the work programme.

Principal Risks and Uncertainties

The risks described on pages 14-15 of the 2008 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:

Capital risk management - The Group believes that it has sufficient resources to fund its ongoing operations. Furthermore, with the Placing completed on 7 July 2009, the Group has the funds necessary to drill its first major sub-salt exploration well.

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

Volatility of prices for oil and gas - The Group is currently producing at a rate of approximately  2,000 barrels per day of oil and expects to increase production to over 2,500 barrels per day during 4Q 2009. Sales are made to domestic purchasers in Russia and are at the field gate. Sales prices reflect international oil prices, less Russian export taxes (which vary with international oil prices though with a short time lag) and transportation costs.

Oil mineral extraction tax ("MET"), which is also directly related to international oil prices, represents a substantial proportion of the cost of sales. Thus the exposure to oil price volatility is in effect partially hedged. 

Domestic unregulated gas prices in Russia have declined in 2009 while both demand and production as reported by Gazprom have also dropped materially. This does not have an immediate impact on operations while the Group awaits commencement of gas production. Nevertheless, with the fields located close to energy consuming markets, the Group expects to be able to sell all of its anticipated gas production at acceptable prices.

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.

  

VOLGA GAS plc

IFRS CONSOLIDATED INTERIM FINANCIAL INFORMATION (UNAUDITED)

AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2009

Interim Financial Information: Group Income Statement (Unaudited)

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

		Six months ended 30 June
Continuing operations	Notes	2009	2008
Revenue		3,368	112
Cost of sales	3	(1,996)	(197)
Gross profit/(loss)		1,372	(85)
Exploration and evaluation expense		(479)	(3,920)
General and administrative expenses	4	(1,553)	(2,267)
Operating loss		(660)	(6,272)
Interest and other income		16	524
Other income, net	5	429	718
Loss for the period before tax		(215)	(5,030)
Taxation		(418)	(22)
Loss for the period attributable to equity holders		(633)	(5,052)
Basic and diluted loss per ordinary share (in US dollars)		0.01	0.09
Weighted average number of shares outstanding		54,017,800	53,751,954

Interim Financial Information: Group Statement of Comprehensive Income (Unaudited)

		Six months ended 30 June
		2009	2008
Profit for the Period		(633)	(5,052)
Currency translation differences		(5,928)	5,303
Total comprehensive income for the period		(6,561)	251
attributable to owners of the company		(6,561)	251

The accompanying notes are an integral part of this condensed consolidated interim financial information.

  Interim Financial Information: Group Balance Sheet (Unaudited)

(presented in US$ 000)

	Notes	As at 30 June 2009	As at 31 December 2008
ASSETS
Non-current assets
Intangible assets	6	30,139	30,596
Property, plant and equipment	6	32,869	26,550
Other non-current assets		6,326	7,245
Security deposit on acquisition of fixed assets	7	19,175	20,422
Deferred tax assets		1,468	2,003
Total non-current assets		89,977	86,816
Current assets
Cash and cash equivalents		14,555	23,093
Inventories		4,186	1,485
Other receivables		4,837	8,449
Total current assets		23,578	33,027
Total assets		113,555	119,843
EQUITY AND LIABILITIES
Equity
Share capital		1,045	1,045
Share premium (net of issue costs)		144,682	144,682
Other reserves		(21,955)	(16,027)
Accumulated loss		(14,775)	(14,142)
Total equity		108,997	115,558
Current liabilities
Trade and other payables		2,532	2,416
Current income tax liability		2,025	1,869
Total current liabilities		4,557	4,285
Total equity and liabilities		113,555	119,843

The accompanying notes are an integral part of this condensed consolidated interim financial information.

  Interim Financial Information: Group Cash Flow Statement (Unaudited)

(presented in US$ 000)

		Six months ended 30 June
Notes		2009	2008
Profit/(loss) for the period before tax		(215)	(5,030)
Less adjustments for:
Share grant expense		-	585
Depreciation		349	20
Foreign exchange differences		(82)	-
Total effect of adjustments		267	605
Increase in long-term assets		(320)	(8,930)
Working capital changes
Decrease/(increase) in trade and other receivables		538	(1,729)
Increase in payables		421	2,567
Decrease/(increase) in inventory		761	(723)
Net cash from/(used in) operating activities		1,452	(13,240)
Cash flows from investing activities
Purchase of intangible assets		(1,140)	(680)
Purchase of property, plant and equipment		(8,336)	(7,249)
Net cash used in investing activities		(9,476)	(7,929)
Net cash provided by financing activities		(233)	-
Effect of exchange rate changes on cash and cash equivalents		(281)	3,148
Net decrease in cash and cash equivalents		(8,538)	(18,021)
Cash and cash equivalents at beginning of the period		23,093	97,539
Cash and cash equivalents at end of the period		14,555	79,518

The accompanying notes are an integral part of this condensed consolidated interim financial information.  Interim Financial Information: Group Statement of Changes in Equity (Unaudited)

(presented in US$ 000)

	Share Capital	Share Premium	Currency Translation Reserve	Accumulated Loss	Total  Equity
Opening equity 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	3	582	-	-	585
Adjustments on translation of non-Dollar subsidiaries	-	-	5,303	-	5,303
Closing equity at  30 June 2008	1,040	144,134	9,364	(8,896)	145,642
Opening equity at  1 January 2009	1,045	144,682	(16,027)	(14,142)	115,558
Loss for the period	-	-	-	(633)	(633)
Adjustments on translation of non-Dollar subsidiaries	-	-	(5,928)	-	(5,928)
Closing equity at  30 June 2009	1,045	144,682	(21,955)	(14,775)	108,997

The accompanying notes are an integral part of this condensed consolidated interim financial information.

  Notes to the IFRS Consolidated Financial Statements  (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 and quoted on the Alternative Investment Market. 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. The Company's registered office is at Ground Floor, 17-19 Rochester Row, London SW1P 1QT.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

General information. This condensed consolidated interim financial information has not been audited and does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2008 were approved by the Board of directors on 17 April 2009 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 237 of the Companies Act 1985.

Basis of preparation. This condensed consolidated interim financial information for the six months ended 30 June 2009 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. IAS 34 has been revised to be consistent with IAS 1 (revised/refer below). The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2008, which have been prepared in accordance with IFRSs as adopted by the European Union.

At 30 June 2009, the Group had $14.6 million of cash and cash equivalents. At 30 June 2009 the Group has committed capital expenditure of $5.0 million as explained in Note 8 to the interim financial statements. The committed capital expenditure primarily relates to licence obligations on the Karpenskiy Licence Area. In addition, as disclosed in Note 9, the Company raised $26.6m (net of expenses) by way of a Placing of new Ordinary Shares in July 2009. These funds are intended to cover the costs of drilling expenditures in respect of a deep exploration well in the Karpenskiy Licence Area and to provide additional working capital for the Group.

Through its ordinary course activities, the Group is exposed to fluctuations in oil and gas prices as well as operational and development risks, each of which could impact cash generation from operations or may require additional capital investment that could place an increased burden on the Group's available cash resources.

Based on management's projections the Directors believe the Group has sufficient cash to fund its remaining licence commitments related to exploration activity on the Karpenskiy and Pre-Caspian licence areas, to complete the development of the Vostochny-Makarovskoye licence area and to satisfy all expenditure related to administrative and operating expenses for the foreseeable future.

Accordingly, the condensed consolidated interim financial statements have been prepared on the going concern basis on the assumption that the Group will continue to have access to sufficient funds in order to meet its obligations as they fall due for the foreseeable future.

Exchange rates. The official rate of exchange of the Russian ruble to the US dollar ("USD") at 30 June 2009 and 31 December 2008 was 31.29 and 29.38 Russian rubles to USD 1.00, respectively. Any re-measurement of Russian ruble amounts to US dollars or any other currency should not be construed as a representation that such Russian ruble amounts have been, could be, or will in the future be converted into other currencies at these exchange rates. 

Taxation. Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31 December 2008, as described in those annual financial statements. Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

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 2008. New standards, amendments to standards and interpretations, which are applicable for the financial year ending 31 December 2009, are described below and have had no material impact on the Group's financial statements.

The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2009:

IAS 1 (revised), 'Presentation of financial statements'. The revised standard prohibits the presentation of items of income and expenses (that is 'non-owner changes in equity') in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owner changes in equity. All 'non-owner changes in equity' are required to be shown in a performance statement. Entities can choose whether to present one performance statement (the consolidated statement of comprehensive income) or two statements (the income statement and a consolidated statement of comprehensive income). The Group has elected to present two statements: an income statement and a statement of comprehensive income. The interim financial statements have been prepared under the revised disclosure requirements.

IFRS 8, 'Operating segments'. IFRS 8 replaces IAS 14, 'Segment reporting'. It requires a 'management approach' under which segment information is presented on the same basis as that used for internal reporting purposes. Segmental reporting follows the Group's internal reporting structure. In the opinion of the Directors the operations of the Group comprise one class of business, being oil and gas exploration, development and production and the Group operates in only one geographic area: the Russian Federation.

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 January 2009, but are not currently relevant for the Group:

IFRIC 13, 'Customer loyalty programmes'.

IFRIC 15, 'Agreements for the construction of real estate'.

IFRIC 16, 'Hedges of a net investment in a foreign operation'.

IAS 39 (amendment), 'Financial instruments: Recognition and measurement'.

The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 January 2009 and have not been early adopted:

IFRS 3 (revised), 'Business combinations' and consequential amendments to IAS 27, 'Consolidated and separate financial statements', IAS 28, 'Investments in associates' and IAS 31, 'Interests in joint ventures', effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. Management is assessing the impact of the new requirements regarding acquisition accounting, consolidation and associates and joint ventures on the group. The group will apply IFRS 3 (revised) to all business combinations from 1 January 2010,subject to endorsement by the EU.

IFRIC 17, 'Distributions of non-cash assets to owners', effective for annual periods beginning on or after 1 July 2009. This is not currently applicable to the group, as it has not made any non-cash distributions.

IFRIC 18, 'Transfers of assets from customers', effective for transfers of assets received on or after 1 July 2009. This is not relevant to the group, as it has not received any assets from customers.

  

3. COST OF SALES

Cost of sales is analysed as follows:

	Six months ended 30 June
	2009	2008
	US$ 000	US$ 000
Production expenses	185	107
Mineral extraction taxes ("MET")	1,464	72
Depletion, depreciation and amortisation	347	17
	1,996	197

 

4. GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses are analysed as follows:

	Six months ended 30 June
	2009	2008
	US$ 000	US$ 000
Share based payments	-	585
Salaries	749	950
Taxes, other than payroll and MET	52	49
Audit fees	95	153
Consultancy	280	207
Other	377	322
Total general and administrative expenses	1,553	2,267

5. OTHER INCOME/(EXPENSES), NET

	Six months ended 30 June
	2009	2008
	US$ 000	US$ 000
Gain on forward currency contracts	-	2,936
Foreign exchange gain/(loss)	422	(2,218)
Other Income	7	-
Total other income /(expenses), net	429	718

6. PROPERTY PLANT AND EQUIPMENT AND INTANGIBLE ASSETS 

	Property, plant and equipment	Intangible assets
At 1 January 2008	5,940	34,114
Additions	7,110	663
Depletion, depreciation and amortization	(20)	-
Exchange adjustment	419	1,582
At 30 June 2008	13,449	36,359
	Property, plant and equipment	Intangible Assets
At 1 January 2009	26,550	30,596
Additions	7,820	1,326
Depletion, depreciation and amortization	(349)	-
Disposals	(3)	-
Exchange adjustment	(1,149)	(1,783)
At 30 June 2009	32,869	30,139

  7. SECURITY DEPOSIT ON ACQUISITION OF FIXED ASSETS

The security deposit of 600 million rubles (30 June 2009 - $19.2 million, 31 December 2008 -$20.4 million) relates to an advance paid by the company to Trans Nafta for the Group's share of costs associated with the construction of a Gas Processing Unit ("GPU") to be jointly owned by the Company and Trans Nafta. 

In October 2008, the Group a reached resolution in relation to a legal claim regarding its 2006 purchase of Gaznefteservice from Trans Nafta. As part of the resolution between the parties, the Group and Trans Nafta entered into a preliminary sale and purchase agreement under which the parties agreed to combine their GPUs, both of which were under construction at the time of the legal action. The combined GPU will be owned and operated on a 75/25 basis by the Group and Trans Nafta.

In accordance with this preliminary agreement, the Group made an advance to Trans Nafta of RUR600 million. On completion of the GPU, Trans Nafta will register the asset with the authorities. When the completed GPU is registered, a final sale and purchase agreement will be entered into and title to the 75% of the completed GPU will pass to the Group.

8. CONTINGINCIES AND COMMITMENTS

In accordance with the amended Karpenskiy Licence Agreement ("Amended KLA") PGK is required to acquire 400 km2 of 3D seismic studies and to drill 14 wells. By 31 December 2008 the Group had fulfilled the license requirements on 3D acquisition. As at 30 June 2009, eleven of the committed wells have been drilled. Management currently estimates that expenditure to drill the balance will be no more than approximately US$5,000,000.

Having raised additional funds as disclosed below, the Group will undertake the drilling of the deep sub-salt Grafovskaya #1 exploration well in the Karpenskiy Licence Area. Management currently estimates the cost of this well to be approximately $18,700,000.

9. SUBSEQUENT EVENTS

On 7 July 2009 the Company completed a Placing of 27,000,000 new Ordinary Shares raising US$27 million before expenses (US$26.6 million net of expenses). The net proceeds are to be used to fund forward costs of the Grafovskoye # 1 sub-salt well on the Yuzhny Ershovskoye field in the Karpenskiy licence area and also to provide contingency for any cost over-runs. Remaining funds to be applied to bring forward exploration and development projects within the Group's other existing licence areas.

10. RELATED PARTY TRANSACTIONS

The Group is controlled by Baring Vostok Private Equity Fund III and Baring Vostok Private Equity Fund IV, which own 58.66% of the Company's shares as at 7 July 2008. Baring Vostok Private Equity Funds III and IV perform their control through a number of nominee holding companies. The remaining 41.34% of the shares are widely held.

In order to support the recent share Placing, Baring Vostok Private Equity Fund IV undertook to subscribe for up to 27,000,000 Placing Shares (the "BVPEF IV Placing Commitment") on the basis that the BVPEF IV Placing Commitment reduced if and to the extent that the Joint Bookrunners and the Company find other subscribers for Placing Shares. There were no underwriting fees or any other consideration paid for the BVPEF IV Placing Commitment.

  STATEMENT OF DIRECTORS' RESPONSIBILITIES

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 required by 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 2008.

By order of the Board

Mikhail Ivanov		Tony Alves
Chief Executive Officer 15 September 2009		Chief Financial Officer 15 September 2009

ENDIR GUUGWBUPBGMA

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Related Shares:

VGAS.L