OREANDA-NEWS. January 17, 2012. Alliance Oil Company's total upstream volumes for 2011 increased by 12% to 17.9 mbbl (49,100 bopd) from 16.0 mbbl (43,800 bopd) in 2010. The full year development and exploration program resulted in 56 new wells. The preliminary refining volumes in 2011 increased by 13% to 26.9 mbbl (73,700 bopd) from 23.7 mbbl (64,900 bopd). Preliminary oil product sales amounted to 27.4 mbbl (24.4 mbbl).

The total oil production for the fourth quarter of 2011 increased by 38% to 5.8 mbbl (62,700 bopd) compared to 4.2 mbbl (45,600 bopd) in the third quarter of 2011. Preliminary refining volumes at the Khabarovsk refinery amounted to 6.7 mbbl (72,800 bopd) in the fourth quarter of 2011 compared to 7.1 mbbl (77,100 bopd) in the third quarter of 2011. Preliminary fourth quarter oil product sales amounted to 7.1 mbbl compared to 7.1 mbbl in the third quarter of 2011.

Supported by macroeconomic factors and improved financial performance, the Company plans to increase its drilling activities in 2012 and budgets capital expenditures of 380-450 MUSD for the upstream segment, primarily in the Tomsk and Timano-Pechora regions. In the downstream segment, capital expenditures of 490-540 MUSD are planned to complete the modernisation of the Khabarovsk refinery and support further expansion in the Russian Far East oil products market.

The upstream production guidance for 2012 is an average daily production of 63,000-69,000 barrels (2011: 49,100 bopd) and the average daily refining guidance for the downstream segment volume is at 68,000-73,000 barrels (2011: 73,700 bopd).

Operational update Oil production in the Timano-Pechora region increased by 107% to 3.1 mbbl in the fourth quarter of 2011 compared to 1.5 mbbl in the third quarter of 2011. Oil production in the Volga-Urals region and Kazakhstan was flat at 2.0 mbbl in the fourth quarter of 2011 compared to 2.0 mbbl in the third quarter of 2011. Oil production in the Tomsk region was flat at 0.7 mbbl in the fourth quarter of 2011 compared to 0.7 mbbl in the third quarter of 2011.

In 2011, 52 production and 4 exploration wells were drilled. All production wells were completed and put into operation. Exploratory tests in the Volga-Urals region and Kazakhstan resulted in confirmation and addition of reserves. An exploratory well at Kolvinskoye was drilled in the fourth quarter of 2011 and currently is being evaluated.

The Kolvinskoye field in Timano-Pechora was launched in the third quarter of 2011, following completion of the pipeline and other infrastructure facilities. This field currently produces around 24,000 bopd. In the fourth quarter of 2011 oil production from the Kolvinskoye oil field amounted to 2.1 mbbl.

In December 2011, the Company and Repsol Exploracion S.A. reached an agreement to form a joint venture for exploration and production growth in Russia with a total asset base of approximately 840 MUSD. Alliance will own 51% of the joint venture and will contribute Volga-Urals assets with proven and probable oil reserves of 171.5 million barrels as of December 31, 2010 and current production of around 20,000 bopd. Repsol will carry out a capital increase in the joint venture and also pay cash to Alliance to obtain a 49% participation. As part of Repsol's commitment, Repsol in December acquired and will in 2012 contribute Eurotek to the JV. Eurotek's main assets are two licences, encompassing the Syskonsyninskoye gas Field (SK), which is at an advanced development stage, starting production in 2012 and the Yuzhno-Khadyryakhinskoye gas field (YK) which is under the final stage of appraisal and planned to come on-stream by 2016. Proven and probable reserves at the SK and YK field are estimated at 115 mboe with additional resource potential.

Preliminary Khabarovsk refinery throughput totalled 6.7 mbbl in the fourth quarter of 2011 and 26.9 mbbl in 2011. Capacity utilisation remained high and was driven by continued high demand for oil products in the Russian Far East. In the first quarter of 2011, the Company expanded its downstream presence in the Russian Far East by acquiring Gavanbunker, a sea terminal to further strengthen its growing bunkering operations.

Outlook for 2012

Upstream The strategic objectives for the upstream segment in 2012 are to gradually increase oil production and further grow the reserve base through development of the existing assets and the joint venture with Repsol.

The upstream capital expenditures are planned at 380-450 MUSD and primarily targets further development of the Kolvinskoye field in the Timano-Pechora region and the Puglalymskoye field in the Tomsk region. At Kolvinskoye, the plan is to optimize reserve recovery and benefit from the Mineral Extraction Tax exemption through continuous production growth in coming years. Planned activities for the field are aimed at an active drilling programme, maintaining formation pressure and adding infrastructure. At the Puglalymskoye field, an intensive drilling program is planned to further develop the field and grow production in this region.

The upstream production guidance for 2012 is an average daily production of 63,000-69,000 barrels. The previously stated target of 90,000 bopd at the end of 2012 will no longer apply as a target and will be replaced by guidance on average daily volumes. Following the formation of the joint venture with Repsol and the incorporation of the Eurotek assets in 2012, the total asset base will provide the basis for significantly higher production levels in coming years.

The current upstream capital expenditures plan and production guidance reflect continued consolidation of the Volga-Urals assets which are to be contributed to the joint venture and excludes the Eurotek assets.

Downstream The upgrade of the Khabarovsk refinery and the strengthening of the marketing arm remain the key downstream projects. The refinery modernisation which will lead to an increase of light product yield and higher capacity is scheduled for completion in 2012 and expected to be fully operational in 2013. The Company plans to establish a connection from Khabarovsk to the ESPO pipeline to enable crude oil deliveries to the refinery by pipeline gradually replacing railway deliveries starting from 2013.

Downstream capital expenditures are planned at 490-540 MUSD. Planned 2012 capital expenditures are primarily related to the modernisation of the Khabarovsk refinery, the connection to ESPO, construction/reconstruction of retail stations and oil depots and other projects to support Far East expansion and improve efficiency.

The average daily refining guidance for the downstream segment is at 68,000-73,000 barrels in 2012. Following the modernisation of the Khabarovsk refinery, the refining capacity will amount to approximately 90,000 bopd.

"In 2011, the Company's performance was supported by macroeconomic factors, primarily high crude prices and strong demand for oil products, and operational performance, primarily the launch of the Kolvinskoye oil field. This will be reflected in improved financial results for 2011 and for the fourth quarter in particular. For 2012, we plan a capital program aimed at long-term reserve and production growth in the upstream segment and increased capacity and efficiency in the downstream segment. Current operational performance and the new joint venture should support our growth oriented investment plans with higher levels of cash flow from operations in coming years", says Arsen Idrisov, Managing Director of Alliance Oil Company.