OREANDA-NEWS. June 27, 2007. 
 
Highlights
 
•     Maiden dividend of 7 pence per share
•     Group production increased one and a half-fold to 9.9 million barrels
•     Daily production up over three-fold to 38,901 barrels of oil per day by year end
•     EBITDA up seven-fold to £87.2 million
•     Record Net Profit after tax of £46.8 million
•     Net Profit in the second half of the year exceeded that in the first half by 39%
•     Earnings per share 16.77 pence
•     £305.8 million cash raised from successful equity placement
•     £328 million of borrowings repaid making the company effectively debt free at year end
•     Completion of acquisition of 25% of BP branded retail network of 47 gasoline stations in Moscow
•     54 million barrels of reserves at Orekhovskoye added following decision to develop this field
 
Report of Chairman and Chief Executive
 
Last September we reported that Sibir was a Company transformed from an enterprise of promise into an enterprise of profit. The full year results for 2006 show that transformation is in full swing with record levels of earnings and production, a strong balance sheet and additional assets that will contribute to future growth.
 
Year-on-year Operating Profit (including the Salym joint venture) was up eight-fold to £71.1 million, driven by contributions from all three core businesses: Salym Petroleum Development (SPD) contributed approximately £24.7 million; Sales of oil products contributed £45.6 million, and Magma’s upstream operations contributed £16.5 million. These three contributions total £86.8 million and after deduction of general and administrative expenses of £15.7 million the resultant Operating Profit is £71.1 million. As a result, EBITDA increased seven-fold to £87.2 million and Net Profit After Tax grew to £46.8 million versus a loss of £21.9 million in 2005, a turnaround in our performance of £68.7 million.
 
Production from our upstream ventures reached a record high of 9.9 million barrels, of which 7.5 million barrels came from Salym and 2.4 million barrels from Magma’s production unit, in total a one and a half fold increase on 2005 production of 4.0 million barrels. We finished the year with a daily production rate of 38,901 barrels of oil per day (bopd) versus 12,107 bopd at the end of 2005. In the first half of 2007 production has continued its upward trajectory with current daily production in excess of 47,000 bopd as we go to print and a projected year end production rate of over 60,000 bopd.
 
General and Administrative Costs of £15.7 million were reduced 12.6% on last year’s figure despite the fact that for the first time the company paid bonuses to key employees.
 
Earnings per share showed dramatic improvement from a loss of 10.57 pence per share in 2005 to a profit of 16.77 pence per share in 2006.
 
Our balance sheet was likewise transformed with the placement of 78,813,008 shares in the first quarter of 2006, raising a total of £305.8 million net of placement costs. This transaction allowed the company to pay off debt accumulated in the financing of its Salym project, leaving the company with a net cash position at the end of 2006. Up until now we have assumed that we would enjoy early repayment of our loans to SPD but we have decided that it will be in our best interests in respect of our dealings with the Russian tax authorities to capitalise a large element of these loans. We also believe that any residual loans will be better employed in re-investing into the expansion of SPD. Surplus cash will now flow to us through dividends as opposed to loan repayments.
 
The company’s transformation to profitability and your board’s confidence in the future prospects of the company are such that we announce an interim dividend of 7 pence per share in respect of 2006. The Board is particularly pleased to have achieved this long standing ambition to reward shareholders and has every intention of maintaining a robust dividend policy in the future.
 
Comparison between first and second halves of the year
 
The net profit performance in the second half of the year exceeded that in the first half by 39%. The improved profitability was due to a 67% increase in production at Salym to 4.7 million barrels in the second half up from 2.8 million barrels in the first half of 2006. However, financial performance during the second half was hampered by a combination of events. First, oil prices dropped materially before starting to recover towards the end of the year. This was reflected in lower revenues and disproportionately higher mineral extraction taxes and export duties which are based on the previous months’ oil prices as described in greater detail in the Financial Review section of our report. Second, operating costs at Salym were higher than expected and, third, our operating joint venture SPD was assessed in respect of an un-anticipated tax liability which meant that SPD has had to provide for the liability at this stage. Together these events adversely impacted financial results in the second half of 2006.
 
We are pleased to say that our production is back on line, reductions in costs at SPD have been made or are ongoing, the tax assessment is under appeal and oil prices have been much stronger in 2007. We expect continued improvement in 2007 especially in the second half of the year provided oil prices remain at present levels.
 
Orekhovskoye Field
 
In December of 2006 we announced plans to commence development at the Orekhovskoye oil field. This added 54 million barrels of C1 and C2 reserves (Russian classification) and is expected to deliver an additional 5,000 bopd of production when development is complete. The development is being operated by Sibir’s subsidiary, Magma, and will take advantage of existing infrastructure at the company’s nearby Yuzhnoye field just 22 kilometres away. Development permits for the project have been secured and infrastructure development is well advanced, clearing the way for spudding the first well in July of this year.
 
Completion of acquisition of our interest in the BP branded network in Moscow
 
Approved by shareholders in December 2004 this transaction was completed in late December 2006. The results of this investment will not be included in our results until 2007. When originally approved this acquisition was part of a larger transaction and the consideration was not shown separately, but the consideration was in the region of $95 million based on an independent valuation. Based on the current profitability of this business we bought on a multiplier of under five times net profit. Dividends have been declared and we are about to receive the first dividend of approximately $15 million. The sales volumes and financial performance of this business are truly extraordinary and will contribute materially to 2007 profits and cash flow.
 
First major step in exploration
 
In 2006 our acquisition team sourced a large exploration play known as Koltagorsky near our Magma operations base in western Siberia. Negotiations with the incumbent licensees extended into 2007 when in March we announced the completion of the acquisition for a consideration of $50 million. Covering 2,100 square kilometres this prospect has an officially estimated 970 million barrels of resources (Russian classification). We will drill eight wells over the course of the next 18 months with the first results of the drilling programme to be announced before the end of this year. In addition we continue our plans to expand SPD and are looking with Shell at prospects where we can use the operational skills of SPD to good effect.
 
These are very exciting developments for your company and sends clear signals of our commitment to grow the business through the drill bit.
 
Moscow Oil and Gas Company
 
In our report to you last September we expressed an expectation “that we would acquire a larger stake in Moscow Oil and Gas Company (MOGC)”. This remains our expectation and we are in the final stages of completing the complicated processes and valuations which will lead to an expansion in our interest. We expect to announce the results of our negotiations during this summer.
 
Sibneft Yugra
 
Our efforts to seek restitution of our impaired value in this company continue unabated. Originally a well publicised case of seeking justice and restitution in respect of corporate fraud this matter has been complicated by the acquisition by Gazprom of Sibneft (now known as Gazprom Neft). You will appreciate that with the involvement of the Russian Federation through Gazprom Neft this is a delicate and sensitive issue and we must tread with great care and respect as we seek to find a solution to this long standing litigious matter. We are encouraged by recent developments when a number of attractive options for all concerned have been openly and constructively discussed.
 
Russian Risk and Political situation
 
The volatility in our share price reflects the degree of Russian risk perceived by the market. We have sought to insulate ourselves against this risk by complying with all our obligations, by having ultimate control of Sibir in the hands of influential and patriotic Russians and partnering as much as possible with State enterprises as evidenced by our mature relationship with the City of Moscow as co-shareholders in MOGC. While our dealings with Gazprom Neft involve from time to time robust exchanges, our relations with Gazprom Neft may now evolve in such a way as to significantly reduce the effect of Russian risk on Sibir and thus the volatility in our share price.
 
Looking Forward
 
With prodigious operational achievements at Salym and Magma, record production and profitability in all of our core businesses and the declaration of the first dividend in our company’s history 2006 was truly a watershed year for Sibir. Our financial position has never been stronger and this new financial strength gives us the energy and resources to take on projects that will fuel the company’s growth many years into the future. It is with this in mind that we look forward with great confidence to reporting ever stronger performance and more exciting developments in the months and years ahead.
 
Operations Review
 
In 2006 Sibir began to see the fruits of its investment at Salym. This came in the form of rapidly growing production, from just over 10,000 bopd at the beginning of the year to over 60,000 bopd by year end, as the project moved from construction to the production phase. This was achieved in spite of unseasonably cold weather in the early part of the year and difficulties with water injection in the second half. At the Yuzhnoye field infrastructure investments made throughout 2004 and 2005 were commissioned in early 2006 thus increasing the effective capacity of the Yuzhnoye Central Processing Facility (CPF) almost twofold, thus setting the stage for development of the nearby Orekhovskoye satellite field. Both at Salym and Magma our operational colleagues in Moscow and in the field were able to deliver impressive operational results as you will see from the following detailed report.
 
Salym Petroleum Development N.V. (SPD)
 
SPD is Sibir’s 50/50 joint venture between its 100% owned subsidiary Evikhon and Shell Salym Development B.V., a member of the Royal Dutch Shell Group. SPD operates the Salym Group of fields (West Salym, Vadelyp and Upper Salym) in the Khanty-Mansiysk District in West Siberia.
 
Salym Fields
 
Having launched commercial production in late November of 2005, SPD delivered first oil in January 2006 to the Transneft national pipeline system from SPD’s CPF at West Salym, via SPD’s 88 kilometre export pipe line and SPD’s Custody Transfer Facilities (CTF) at the Transneft tie-in point. Extreme cold in the first quarter and technical difficulties with water injection facilities in the second half of the year resulted in a slower than internally forecast ramp up of production, but this was compensated by intense activity to bring production rates back in line with projections and the year end target of 60,000 bopd was ultimately surpassed.
 
Production
 
Total Salym production grew from 10,341 bopd at the beginning of the year to nearly 63,000 bopd by year end, an increase of some 500% and a total production of 14.9 million barrels was recorded for the year. Crude sales for the period totalled 14.7 million barrels of which exports comprised 6.15 million barrels and domestic sales 8.55 million barrels.
 
Capital Expenditure
 
Sibir’s share of capital expenditure for the year totalled $167 million including $104 million for construction of facilities and infield infrastructure and $63 million for drilling and completion of the wells.
 
Construction Highlights
 
Salym operational highlights for 2006:
 
•        The second train of the CPF at West Salym was completed and commissioned;
•        Performance test on both trains of the CPF demonstrated operational capacity of over 65,000 bopd per train or 130,000 bopd in total;
•        An operations base was completed with a fire station, repair and operations workshop, mechanical repair workshop, vehicle wash-down bays, chemical storage, administration building, boiler house, gate house and security system, warehouses, fuel tanks, two fire water tanks (each 300 cubic metres), fire pumps, fuel gas treatment, sewage treatment plant and accommodation for 160 men;
•        Construction of a water injection pump station on West Salym and water intake facilities was completed in July. The station included two imported mega pumps and due to design defects those pumps failed within less than a month of commissioning and water injection was performed for the next several months by replacement high pressure triplexes. These were not sufficient to compensate the resultant unscheduled voidage in the developed part of the reservoir, slowing production ramp-up until October when two Russian modular pumps were installed. In the spring of 2007 two more modular pumps were installed to ensure sufficient injection capacity for production ramp-up. By April of 2007 the imported mega pumps had been re-engineered and put back into service, enabling SPD to fill the voidage left from the initial pump failure;
•        The CTF including oil transfer pumps, meters, fire protection, and administration buildings were completed;
•        A 13 km trunk pipe line from Upper Salym to CPF at West Salym was completed with a tie-in to Vadelyp;
•        Development of six new well pads was completed at West Salym, two on Vadelyp, and one on Upper Salym, with related infield roads, oil and water pipe lines and power lines (with related pad sub-stations). Four more pads were nearly completed before the year end;
•        Temporary water injection facilities were installed at Upper Salym.
 
Drilling
 
SPD’s aggressive drilling program continued with four rigs at work in 2006 and five hoists at work on completions and workovers. The SPD drilling team continued to set records for drilling time, completing one well in as little as 7 days. Well completion efficiency has been improved to 4.1 days per well and well hook-up times reached technical limits. In total 106 wells were drilled in 2006, including the first wells at Vadelyp which were put into production in October 2006.
 
West Salym
 
With over 70% of total Salym reserves West Salym continues to be an important element of SPD’s activity. In 2006 five well pads including oil and injection water pipe lines, roads and power lines were completed and production launched. Water injection facilities were also put into operation. 96 wells including 18 high-angle 80 degree wells for a total of 254 linear kilometres were drilled. 107 wells were hooked up, 91 wells completed (including 7 water source/supply wells) and 98 new wells put on stream. 67 well workovers, 23 well service jobs, 7 hydraulic fracturing stimulation jobs and 16 well conversions were also done. Construction continued on phase two of CTF where the Salym export pipe line ties into Transneft national pipeline.
 
Upper Salym
 
At Upper Salym a 325 millimetre diameter trunk pipeline to the CPF at West Salym, was built, commissioned and put into operation. Four well conversions, 25 well workovers, 10 well service jobs and 3 hydraulic fracturing stimulation jobs were completed and 2 wells, including one water source well, were completed and 2 producing wells hooked up and put on stream.
 
Vadelyp profile
 
SPD completed the first well pad at Vadelyp in May 2006, spudded the first well in June and delivered first oil in October. 13 wells of 43.9 linear kilometres were drilled, 12 wells hooked up, 8 wells completed and 8 wells put on stream. Construction of a second well pad commenced with related infrastructure such as road, power lines, water and oil pipe lines.
 
Salym 2007 Preview        
 
In 2007 SPD plans continued accelerated development of the Salym fields to bring year end production to over 100,000 bopd.
 
At West Salym five well pads and related infrastructure will be completed in 2007 and three rigs will continue development drilling. At the CPF an additional 10,000 cubic meter storage tank and integrated security system will be constructed and CPF de-bottlenecking activities will continue. Completion of five dedicated appraisal wells to the Achimov reservoir, a tight Lower Cretaceous reservoir with significant resources, is expected during 2007 as per license requirements. If successful, this pilot project offers the potential to increase reserves at the field.
 
In Upper Salym SPD plans to build another well pad with related infrastructure and multi-phase metering facilities. A newly added 200 tonne mobile rig will drill one exploration well and two high angle producers on a bonus structure prospect followed by seven development wells on the pad completed in 2006.
 
In Vadelyp one pad is slated for completion and 29 development wells will be drilled. SPD will drill one exploration well on the Zhuravl prospect and one appraisal well on Vadelyp South. Planned infrastructure development at Vadelyp includes construction of a water injection line from the CPF at West Salym to Vadelyp North and multi-phase metering facilities to allow selective metering of hydrocarbons produced from Vadelyp.
 
At the CTF tie in point to the Transneft pipeline two 20,000 cubic meter tanks will be completed along with transfer pumps, a fire station and a laboratory to fully comply with Transneft requirements.
 
A 45 MW Power Generation Plant (PGP) fueled by associated gas from Salym is slated for construction and commissioning in 2007. When completed the PGP will utilise most of associated gas from production and will significantly reduce SPD’s dependence on the local electric monopoly for power. The first gas turbine is scheduled to be operational by year end with two additional turbines commissioned in 2008.
 
Magma Oil Company
 
Magma Oil Company (95% Sibir owned) holds the licenses for the Yuzhnoye and Orekhovskoe oilfields in Khanty-Mansiysk District of West Siberia.
 
Yuzhnoye Oilfield
 
In 2006 Magma continued to focus its activities on increasing production capacity at the Yuzhnoye Oilfield, located 60 kilometres from the City of Nizhnevartovsk. Throughout the year Magma’s ongoing drilling and hydraulic fracturing campaign continued and the CPF upgrade launched in 2005 was finally completed, commissioned and put into operation.
 
Production
 
Production at Yuzhnoye for 2006 totalled 2,410,342 barrels for an average production rate of 6,603 bopd from 43 wells.
 
Capital Spending
 
Capital spending for the year totalled $21 million and was focused on drilling new development wells, completion of Operations base camp and the upgrading and subsequent commissioning of the CPF.
 
Yuzhnoye Operational Highlights
 
•        A $5 million CPF and water injection system at Yuzhnoye was completed and commissioned;
•        4,584,781 barrels of water were injected for reservoir pressure maintenance through 17 water injection wells;
•        12 wells totalling 35,296 linear meters were drilled at an average cost of $755,000 per well including completion;
•        16 wells were completed or recompleted, 82 well workovers were done and 111 well service jobs performed including 17 hydraulic fracturing treatments and 8 acid treatment jobs.
 
Orekhovskoye Oilfield
 
The Orekhovskoye field is an undeveloped property which lies 22 kilometres to the northeast of the Yuzhnoye oilfield. Sibir acquired the license for Orekhovskoye as part of its purchase of Magma, but development was delayed because the economics of the project were thought to be unattractive. Taking into consideration the long term outlook for crude prices, Magma re-engineered its development scenario based on four well pads and highly deviated wells. The resulting proposal was submitted to the authorities who approved it in August of 2006. The approved development scenario delivers positive economics at oil prices above $30 a barrel and increases Magma’s C1+C2 Russian classification reserves by as much as 54 million barrels.
 
In April of 2007 Magma secured approval for the Technological Schema, the field development plan required by the Central Commission for Oil and Gas Development (TsKR) to launch development. All other permits and approvals for the project have been acquired including those for tree cutting and land take. Key contracts have been tendered and a drilling rig moved to pad 2 where 12 wells are planned. A permanent 13.4 kilometre road is under construction, a power substation has been upgraded and power line construction to the first well pad is underway. Magma had originally planned to spud its first well in May, however changes in the approvals and permits process and flooding due to unseasonably warm weather in the spring pushed back the launch of drilling to July 2007.
 
Magma 2007 Preview
 
Magma’s oil production plan for 2007 is 2.5 million barrels or over 6,700 bopd.
 
Magma’s capital budget for 2007 is targeted on facilities and drilling at the Yuzhnoye field and development work at Orekhovskoye. Projects for 2007 include:
 
•        Further upgrades to the Yuzhnoye CPF to handle additional production from Orekhovskoye;
•        Completion of a land survey and permitting for construction of a 25 kilometre wet gas pipe line for associated gas as per license requirements;
•        Construction of a multi phase pipe line from the Orekhovskoye pumping station to the CPF at Yuzhnoye, 2 well pads each with 12 producing and injector wells, an infield pipe line, power lines and an electrical substation.
 
Group Reserves Summary
 
The Group’s interests in commercial reserves of oil as of 31 December 2006 are included in the unaudited table below:
 
Russian reserves classification (1)
 
Million barrels A+B+C1 C2 Total
Magma’s Yuzhnoye and Orekhovskoe Oilfields 127 11 138
Salym Group of Fields (50%) (2) 391 156 547
Total 518 167 685

 
1. Russian reserves are classified as follows:
A = reserves proved and developed in accordance with the development plan approved by the Russian authorities.
B = reserves proved and developed in accordance with early development plan.
C1= reserves tested and mostly proved but not developed.
C2= reserves contiguous to C1 and substantiated by geological data and lie within probable, possible and contingent.
 
2. As noted previously, the operator of the Salym fields, SPD, uses a reserve classification known as proven, expected and scope for recovery reserve estimate based on the field development plan which total 926 million barrels (or Sibir’s share - 463 million barrels). The difference between the SPD estimates and the Russian reserves numbers are due primarily to the exclusion of the lower reservoirs in the SPD numbers.
 
Financial Review
 
2006 financial results were the best in the Group’s history, driven by the rapid increase in production at Salym, high oil prices in the first half of the year combined with strong margins throughout the year and increased volumes in Sibir’s refining and products trading operations.
 
Operating Environment
 
Crude prices for 2006 were robust compared to historical averages, but showed significant fluctuations throughout the year. Brent prices moved up from a monthly average of $60/bbl in February to a high of $73/bbl in July and fell back below $60/bbl by late autumn before starting to recover towards the end of the year, resulting in significant volatility in Sibir’s earnings from month to month.
 
Russian Mineral Extraction Tax (MET) and export taxes are set every two months based on the previous two months average prices. In a rising market, those taxes therefore lag behind the rising crude price. In the first half of 2006 Sibir benefited from this lag effect as MET and export tax calculations trailed rising crude prices. For most of the second half of the year the lag effect worked in the opposite direction as higher taxes based on higher prices in previous months were levied against lower crude prices.
 
Crude Oil Production
 
Total production for the Sibir group increased two and a half fold in 2006 to 9.9 million barrels of which 7.5 million barrels came from Sibir’s share of production from SPD and 2.4 million barrels from the Magma production unit. Sibir’s share of Salym production in the second half of 2006 increased by 67% to 4.7 million barrels from 2.8 million barrels in the first half. Second half production from Magma’s upstream unit was 1.2 million barrels, a 5% increase on the first half of 2006. As described above approximately 60% of this production was sold domestically and 40% for export. Sibir’s share of Salym production sold domestically is purchased at arm’s length by our Magma trading unit for processing.
 
Analysis of Accounts
 
Sibir presents its accounts in accordance with UK GAAP under which the consolidation of results from Sibir’s interest in SPD are shown in “share in profit from joint venture” in the Operating Profit line item. Therefore, results reported under the four headings below represent the results of Sibir’s production unit, Magma, and its oil products trading operation, and exclude the results of SPD.
 
Turnover and Cost of Sales (excluding results of SPD)
 
Volumes of crude produced by Magma amounted to 2.4 million barrels of which 1.0 million barrels were sold for export. The remaining 1.4 million barrels of Magma production was processed and eventually sold as oil products. Additionally, Magma purchased 15.2 million barrels of crude on the open market for processing.  Sales of refined oil products totalled 17.3 million barrels for the period.
 
Group Turnover for 2006 (excluding the attributable SPD Turnover) increased to £604.6 million compared to £357.2 million in 2005. Part of this increase in Turnover relates to higher crude and product prices, but most of the increase relates to higher sales volumes in Magma’s lower margin product reselling business and increased crude oil sales volumes associated with the purchasing and selling of Sibir’s 50% share of exported crude production from Salym.
 
Gross Profit (excluding results of SPD)
 
The Group’s Gross Profit in 2006 increased by 29.7% to £62.1 million from £47.9 million in 2005 as a result of increased Gross Margins offset by an increase in production expense. Production expenses increased 17.2% from £16.0 million in 2005 to £18.8 million in 2006. This was due primarily to increases in the mineral extraction tax from an average of $9.02/barrel in 2005 to $11.44/barrel in 2006. In addition, there was a 10% percent increase in production expenses from an average of $2.81/barrel in 2005 to $3.10/barrel in 2006 resulting from inflation and the continued strength of the Russian rouble.
 
Administration Expenses (excluding results of SPD)
 
The Group’s administration and general expenses were £15.7 million in 2006 compared with £17.9 million in 2005. After excluding the effect of foreign exchange movements and other non-recurring items, the Group’s administration expenses in 2006 have decreased by 4% to £15.7 million in 2006 from £16.3 million in 2005. The most significant movements in these expenses lay in an increase resulting from bonuses paid to key employees amounting to £4.1 million offset by reduced legal expenses associated with the Sibneft-Yugra legal proceedings.
 
SPD Key Results
 
As mentioned above we are required to account for our 50% interest in SPD in the Share of Income from Joint Venture line item which means that SPD’ numbers are not included in Sales or Gross Profit figures listed above. The importance of SPD to your Company is such that we wish to provide you with more information.
 
According to SPD’s own audited accounts, adjusted to comply with Sibir’s accounting policies, sales for the year were up from £19.6 million in 2005 to £334.8 million in 2006, a sixteen-fold increase. Gross profit after depletion was up from a loss of £3.9 million in 2005 to a profit of £81.8 million in 2006 and Operating Profit after depletion increased to £60.2 million in 2006 from a loss of £39.2 million in 2005. Sibir’s 50% share of 2006 SPD’s Operating Profit was £30.1 million (50% of £60.2 million). To meet UK GAAP accounting standards this figure is reduced by £5.4 million in relation to an ongoing amortisation of the fair value uplift arising from the acquisition of Evikhon by Sibir. Thus, the share of SPD’s Operating Profit that contributed to Group Operating Profit for 2006 amounts to £24.7 million, representing an increase of £45.7 million over the 2005 figure which was a £21.0 million loss.
 
Operating Profit for the Year and EBITDA
 
The Group’s Operating Profit before its share of Operating Profit from the SPD joint venture was £46.4 million compared to a profit of £29.9 million in 2005. This substantial improvement from the prior year is due primarily to increased margins resulting from higher crude and refined product prices, as well as administration expenses held below 2005 levels.
 
Total Group Operating Profit was a record £71.1 million including its share of profit from the SPD joint venture of £24.7 million.
 
The increase in profitability reflects the ramp up of production at the joint venture supported by strong crude prices throughout 2006. While SPD’s per barrel gross margins on crude sales were in line with those for sales of Magma’s own crude production, Group share of profit from SPD fell below Sibir’s internal estimates due to lower than expected production due to technical difficulties and higher per barrel operations and administrative expenses.
 
The Group’s EBITDA, for the year increased seven-fold to £87.2 million compared to £11.9 million in 2005.
 
Interest Expense
 
Net interest expense for the Group in 2006 decreased to £12.7 million from £19.7 million in 2005. The decrease is mostly attributable to the recapitalisation of the company.
 
Taxation
 
2006 taxation of £9.4 million versus £9.6 million in 2005 represents profits tax payable by our Russian operating subsidiary Magma of £12.0 million offset by a net deferred tax credit in SPD of £2.7 million.
 
Net Profit
 
The profit to the Group for 2006 after interest, taxation and minority interest was £46.8 million in 2006 compared with a loss of £21.9 million in 2005, a turnaround in financial performance of £68.7 million.
 
Balance Sheet
 
The Group’s balance sheet has been transformed by a placing of 78,813,008 shares raising a total of £305.8 million (net of placement costs) in the first quarter of 2006, strengthening the Group’s financial flexibility over the short and long term. As at 31 December 2006, the Company had net current assets of £402.3 million compared with net current assets of £61 million as at 31 December 2005.
 
On 12 December 2006 the Group completed the acquisition of a 25% + 1 share investment in STBP Holdings Limited, a network of 47 BP branded retail fuels stations in the City of Moscow and Moscow region. The Group acquired this investment, which is shown as an Investment in an Associate, after receiving Shareholder approval in 2004, in exchange for 21,955,520 new ordinary shares of 10p each at an agreed value of £2.50 per share or £54.9 million. The market price of the shares on the date they were issued was £4.20 and the total acquisition cost shown in the financial statements is therefore £92.2million. For the avoidance of doubt, the operating results from the Group’s interest in this investment will not be accounted for until 2007 as the acquisition was only completed  in late 2006.
 
Total assets less current liabilities as at 31 December 2006 were £718 million compared with £272.4 million as of 31 December 2005.
 
Called up share capital has decreased in the period due to the cancellation of the 191,847,421 issued Deferred shares of 90p each which was approved by the High Court of Justice, Chancery Division on 18 January 2006. The effect of this is to create a reserve of £172.7 million which has been used first to eliminate the accumulated deficit on the Company’s profit and loss account and secondly to create a pool of realised profit to retain within the Company until the Company pays dividends to its shareholders.
 
Total shareholder’s equity as at 31 December 2006 was £668.4 million compared to £259.7 million as at 31 December 2005.
 
The Group’s net debt as at 31 December 2005 of £204.4 million has been transformed to a net cash position of £6.5 million as at 31 December 2006. Group cash balances have increased from £5.4 million as at 31 December 2005 to £110.7 million as at 31 December 2006.
 
Cash Flow
 
In 2006, the Group recorded a net cash inflow from operating activities of £0.1 million resulting from the repayment of creditor balances that had built up during 2005 as well as increasing its trade debtors during the period.
 
During the year, the Group financed £8.9 million of Magma’s capital expenditure, and made loans totalling £68.8 million to SPD.
 
Proceeds from the placings referred to in the Balance Sheet section above together with cash on hand were used to repay £328 million of borrowings. These borrowings were incurred in satisfying the financing obligations of the Group in respect of the SPD expenditures, as well as short-term facilities required to finance the Group’s crude and oil products trading activities.
 
Financial Instruments
 
The Group’s financial instruments comprise borrowings, cash and liquid resources, and various items, such as trade debtors, and trade creditors which arise directly from its operations. The main purpose of these financial instruments is to finance the Group’s operations. It is, and has been throughout the period under review, the Group’s policy that there is no trading in financial instruments. The main risks arising from the Group’s financial instruments are foreign currency risk, oil price risk, interest rate and liquidity risk.
 
The Board reviews and agrees policies for managing each of these risks and they are summarised as follows under the following four headings:
 
Foreign Currency Policy
 
Approximately 59% of Sibir’s revenue in 2006 was received in United States dollars (compared to 50% in 2005), the balance being received in Russian roubles. As the vast majority of development, production and taxation expenditures are in roubles, and some interest servicing and loan repayments are in roubles, the risk from variations in the value of the rouble is not significant.
 
Sibir continues to transfer funds to and from Russia without incident or impediment. The foreign currency reservation requirements in respect of loans from the Group’s Russian subsidiaries to the Group’s non-Russian companies (e.g. head office) which were imposed by the Central Bank of the Russian Federation since in 2005, and which resulted in additional, though insignificant, interest expense to the Group. These requirements were cancelled in May 2006.
 
Oil Price Policy
 
Oil and product prices are inherently volatile and could be affected by various worldwide economic and political developments. The Group’s policy is to continuously monitor oil and product prices.
 
The Group did not enter into any hedging arrangements during 2006.
 
Interest Rate and Liquidity Policy
 
The Group finances its operations though its own cash on hand, project finance and trade finance. Cash forecasts identifying the liquidity requirements of the Group are produced regularly. These are reviewed by management and the Board to ensure that sufficient working capital is available to the Group for the foreseeable future.
 
Environmental Risk
 
The Group aims to meet its environmental responsibilities by procuring environmental impact assessments on all major developments at any of its projects and by ensuring compliance with the local laws and regulations of the regulatory agencies.
 
Forward Looking Statements
 
This report contains certain forward looking statements that involve substantial known and unknown risks and uncertainties, some of which are beyond Sibir’s control, including the impact of general economic conditions where Sibir operates, industry conditions, changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Sibir’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward looking statements will transpire or occur, or if any of them do so, what benefits, including the amount of proceeds, that Sibir will derive therefrom.
 
Going Concern
 
The directors have a reasonable expectation that the Group has adequate resources to continue its operations for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.