Volga Gas plc, the oil and gas exploration and production group operating in the Volga Region of Russia, provides the following update on the preliminary reserves estimates in its Vostochny Makarovskoye ("VM") and Dobrinskoye fields.

As previously announced, on 17 July 2019 following unsuccessful sidetrack wells on the VM#2 well,  subsequent logging on the VM#3 well showed that the gas:water contact was higher than previously expected.

The Company appointed Schlumberger Ltd to conduct a comprehensive technical evaluation and reservoir study on the VM and Dobrinskoye fields. The study was completed recently and a re-calculation of remaining reserves in the fields is being carried out. While the results are yet to be finalised, preliminary results have been presented to the Board of Company.

These results indicate total preliminary estimates of oil and gas Proved reserves for the Group as at 31 December 2019 are 9.1 mmboe, a downward revision of 8.3 mmboe, or 48%. This is made up of the preliminary estimates of Proved remaining reserves as at 31 December 2019 for the VM field of 2.9 million barrels of oil equivalent ("mmboe"), a downward revision of approximately 7.9 mmboe, or 73%. The preliminary Proved reserves for the Dobrinskoye field, as at 31 December 2019 are 0.4 mmboe, a downward revision of approximately 0.6 mmboe, or 60%. There are no material revisions to the oil reserves of the Group expected from the review.

By way of geological background, the VM field is a carbonate reservoir exhibiting both matrix porosity, with the hydrocarbons held in pores within the rock, and fracture porosity, with the hydrocarbons present in fractures. The majority of hydrocarbons in place are in matrix porosity. The rising gas:water contact is presumed to lead to a barrier to production of gas from matrix porosity and this is the cause of the significant revisions to estimates of recoverable gas and condensate. It is possible, though it cannot be assumed, that alternative production management procedures may enable a greater proportion of the hydrocarbons in place to be produced economically. This could in time lead to future upward revisions to reserves.  Management will be evaluating the technical and financial effectiveness of such alternative production management regimes, including any incremental capital investment required.

Production outlook and financial impact

As announced on 6 January 2020, production from the VM and Dobrinskoye fields totalled 4,062 boepd in December 2019. Management currently expects this production rate to be maintained through 2020.

The reserve revisions outlined above will lead to a material non-cash impairment charge on the carrying value of the VM and Dobrinskoye assets, as well as significantly increased unit non-cash depletion charges on production.

Offsetting the impact on the Groups' Income statement, the Group has operated in a cash flow positive basis during 2019 and expects to continue to do so in 2020. As at 31 December 2019, the Group's cash position totalled US$14.1 million with no debt. Management believes this provides the necessary financial resources to undertake a programme of rebuilding value.

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