2. Polar Lights Company review

2.1. General review

Polar Lights Company (PLC) was started in January, 1992, when the American company Conoco Inc and Russian partner OAO Arkhangelskgeoldobycha (AGD), formed one of the first Russian-Western oilfield development joint ventures in Russia. Rosneft, another notable Russian company soon after joined the joint venture. The present interest in the project is ConocoPhillips 50%, Rosneft 50%.

Since first commercial oil production in August, 1994, Polar Lights Company has produced 16MM tons which is both exported and supplied to the Russian domestic market.

The license area where Polar Lights Company operates lies in the northern part of the Timan-Pechora oil/gas province in the Nenets Autonomous Okrug, within the Arkangelsk Oblast. Here the company holds exploration and development licenses for Ardalin field and an adjoining area with three satellite fields. The Law of the Russian Federation No. 2395-1, “On Subsurface Resources”, regulates relations arising in connection with the geological study, use and protection of subsurface resources within the territory of the Russian Federation. Pursuant to the Law, subsurface resources may be developed only on the basis of a license. The license is issued by the regional governmental body and contains information on the site to be developed, the period of activity, financial conditions. The Company holds several licenses issued by Nenets Regional Authority. The licenses expire in 2017.

Investment in the project now totals nearly $500 million since the start-up of operations. It is notable that capital financing was originally obtained from well known western financial institutions, EBRD, IFC and OPIC and that PLC has an outstanding reputation with the institutions.

Polar Lights Company closely cooperates with the regions where it carries out its operations. It accounts for over 40% of tax revenue to the Nenets Autonomous Okrug's budget and is a major taxpayer in Arkangelsk. It has directly generated over 250 new jobs for Russian specialists and indirectly provides several hundred jobs for contract personnel.

Polar Lights Company does not confine its activities to Ardalin operations alone. The company takes on-going measures to maintain a long-term resource base to support its operations. Along with production at Ardalin, Polar Lights Company is exploring adjoining fields discovered earlier by Arkhangelskgeoldobycha – Dyusushevskoye, Oshkotynskoye, and Vostochno-Kolvinskoye, where the company plans to drill several new wells. PLC is in the process of investing approximately $100MM to develop these satellite fields.

The Company sells its crude oil under general rules of export quotation applicable for all Russian oil producers. Under the general rules the export quota is defined and approved by the Energy Commission of the Russian Government based on the planned crude oil production. In 2004 and 2003 the Company’s export sales have approximated 38 percent and 35 percent of production, respectively. The remaining production was sold on the Russian domestic and “near-abroad” oil markets. Generally, export sales result in a higher net realized price than Russian domestic sales after considering related transportation and export duties and other charges.

The Company transports its products through specific pipelines owned and operated by Transneft (a regulated monopoly). It is therefore dependent on available pipeline capacity for transportation from its oil fields.

The Company’s principal sources of funds have been from operating activities as well as long-term borrowings. In the near term the Company’s primary use of cash or needs for cash will be predicated on the level of capital expenditures necessary to maintain production from existing producing fields and develop further commercial reserves if identified in accordance with license requirements and shareholder expectations.