Volga Gas Plc, the oil and gas exploration and production group operating in the Volga Region of Russia, provides an update on current activities.

Uzenskoye field (supra-salt Karpenskiy) Oil production from the Uzenskoye field from 1 January to 31 May 2011, which included periods of weather-related disruption, averaged 1,109 bopd (1H2010 920 bopd). Production in May 2011, which experienced normal conditions, averaged 1,329 bopd.

The short term development plans for the field include one new development well; Uzen #11, which is planned to be drilled into a currently non-producing portion of the reservoir, which is expected to be drilled and completed later in 2011 or early 2012.

Volga Gas continued to benefit from increasing oil sales prices, which have risen steadily from US$40.09 per barrel in January 2011 to $48.77 in May 2011. Mineral extraction taxes, which are the major cost of sales, have increased in line with the formula based on Urals oil prices. The field operating costs remain below $1.50 per barrel.

Dobrinskoye Gas Plant and Gas/Condensate Field The acquisition of Gazneftedobycha from Trans Nafta was completed on 28 April 2011, although contributions to Group revenues are included with effect of 1 April 2011.

The gas plant has been operating as expected, and was successfully subjected to various regulatory inspections shortly after the acquisition was completed.

The Dobrinskoye field is currently producing gas and condensate steadily. During May 2011, production averaged 7.7 mmcf/d of sales gas and 645 bpd of condensate.

Mineral Extraction Tax rates for gas and condensate are significantly lower than for oil. The operating and administrative costs associated with these assets are in line with expectations.

Vostochny Makarovskoye Extended test production has continued on the two completed wells, VM#1 and VM#2, using a test separator located at the Vostochny Makarovskoye field. The response of the field under the testing programme remains in line with management's expectations.

During the testing, condensate is separated and collected for sale while the gas produced is flared. The cash flow from condensate sales offset the costs of the testing programme and provides a modest surplus.

During July 2011, Volga Gas plans to complete the tie-in of the two wells into the Dobrinskoye gas plant. Once this operation has been completed, Volga Gas will continue test production through the gas plant facilities. Data from this will be used to determine the extent to which plant modifications and upgrades will be required to enable full scale production from the Vostochny Makarovskoye field.

Urozhainoye-2 licence area - exploration Drilling is continuing on the Yuzhny Romanovskaya-1 well in the Urozhainoye-2 licence area. To date, the well has reached a depth of 1,244 metres and is drilling on to a target depth of approximately 2,800 metres to test the Bobrikovsly horizon, which is productive in the nearby fields.

Pre Caspian licence area Technical work is being concluded on a number of shallow prospects in the Pre-Caspian licence area, which will enable us both to test promising exploratory targets and to retain the license block, which has significant sub-salt exploration potential. Drilling is expected to commence later in 2011.

Balance Sheet and Financial condition As at 31 May 2011, Volga Gas had cash of approximately US$14.4 million and outstanding debts of US$9.0 million. The inclusion of the Dobrinskoye field and the rising revenues from Uzenskoye oil sales has significantly increased the Group's net operating cash generation.

Mikhail Ivanov, Chief Executive of Volga Gas commented, "The acquisition of Gazneftedobyche in April was a turning point for Volga Gas; not only did it resolve a difficult commercial situation, but the additional assets have enabled the Group's financial performance to rise to a new level and enabled us to move towards bringing the Vostochny Makarovskoye field into full production.

"The increasing production levels, continuing development drilling and exploration activities provide us with a platform to significantly grow our business in terms of reserves, future production and cash flow. We also stay alert and focused on acquisition opportunities that may arise in the region."

Tags: Volga Gas Plc