PetroChina Company Limited Annual Report 2010

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Producing
Results

PetroNeft Resources plc
Annual Report and Accounts 2010
Годовой Отчет 2010

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PetroNeft Resources plc

Dublin Office
20 Holles Street,
Dublin 2,
Ireland.

Houston Office
Suite 518, 10333 Harwin Drive,
Houston, TX 77036,
USA.

www.petroneft.com

Producing six years
of strategic progress

Since incorporation, the primary
strategy of PetroNeft has been
to bring its existing oil fields to
production, thereby generating
sufficient cash flows to enable the
exploration of the many remaining
prospects. This was achieved in 2010.

Licence
commitments met
With the drilling of three
additional wells leading
to the discovery of the
Kondrashevskoye oil field
the initial five-year licence
commitments were met two
years ahead of schedule.
September 2008

Oil transport agreement
Crude Oil Transportation and
Custody Transfer agreement
signed with Imperial Energy.
This 25-year deal allows
PetroNeft to use Imperial’s
pipeline to transport our oil
to market.
August 2009

Further
reserve growth
Discovery of the Arbuzovskoye
oil field at Licence 61 and the
addition of reserves at Licence
67 saw proved and probable
reserves grow by 37% from
71 to 97 mmbbls.
November 2010

Debt and equity fundings
US$30 million debt facility
agreed with Macquarie Bank
and US$43 million equity raised
leaving the Group fully funded
for 2011 expansion programme.
May and October 2010

2011 and
beyond

Drilling commences
Three wells drilled to delineate
the Lineynoye and Tungolskoye
oil fields and discover the West
Lineynoye oil field.
March 2007

3,100 bopd

production reached
in March 2011

Stock market listing
Admission to AIM and
ESM Markets completed.
September 2006

US$23.5m

raised in private
placings and at IPO.

February 2006 to September 2006

Field work commences
Commencement of the
acquisition over 1,000 km of new
2D seismic data at Licence 61
following the reprocessing and
re-interpretation of over 2,500
km of vintage 2D seismic data.
February 2006

Looking to the future
Preliminary Development
Feasibility Study, which included
planned pipeline development
and funding requirements on
the Lineynoye and Tungolskoye
Oil Fields, was completed.
February 2007

Pilot production
First pilot production from
Lineynoye and West Lineynoye
oil fields.
February 2008

Funded for production
Placing of new ordinary
shares to raise US$27 million
– enough to build the 60km
pipeline, the oil processing
facilities and commence drilling
production wells in 2010.
September 2009

Year-round
production achieved
To achieve this we
constructed a 60km pipeline
from our Lineynoye oil field
to Imperial Energy’s facilities
at Kiev-Eganskoye and oil
processing and storage
facilities at the Lineynoye oil
field. We also drilled nine
new production wells to
supplement the two existing
wells at Lineynoye.
August 2010

Five new
exploration
wells
2011 will see a five well
exploration programme
target additional reserves
of approximately 120 mmbbls
net to PetroNeft.

17 new
production
wells
At Licence 61, 2011 will see
17 additional production wells
drilled at the Lineynoye oil
field and three exploration
wells also drilled in the
Licence area.

Expansion
of processing
facilities
The current design capacity
of the process facilities
is 7,400 bfpd which will be
expanded to 14,800 bfpd
in 2011.

2005

2006

2007

2008

2009

2010

2011

A positive start.
We acquired Licence 61 in the Tomsk
Oblast, Russia and began establishing
a local team. Licence 61 believed
to contain two existing oil fields at
Lineynoye and Tungolskoye and
numerous prospects.

Learning the potential of our assets.
The reprocessing of old well logs and
seismic data from Licence 61 enhances
our confidence as to the quality of
Licence 61 and determines the future
drilling priorities.

Steady progress on all fronts.
2P reserves were increased by 81%
from 33.5 mmbbls to 60.6 mmbbls
following the discovery of the West
Lineynoye oil field and delineation of
the Lineynoye and Tungolskoye oil
fields. Work on development plan for
Lineynoye oil field also commenced.

Firm foundations laid
but a frustrating year.
2P reserves were increased to
70 mmbbls with the discovery of the
Kondrashevskoye oil field and the
Board sanctioned the development
of the Lineynoye oil fields. However
the financial crisis delayed our plans.

Preparing to produce.
The Company prepared the facilities,
equipment and staff necessary to
achieve year-round production in 2010.

A transformational year.
The Group went from being just an exploration company to an exploration and
production company. 2P reserves also grew by a further 37% to 97 mmbbls.

Group Information

Nominated and
ESM Adviser
Davy
49 Dawson Street
Dublin 2
Ireland

Joint Brokers
Davy
49 Dawson Street
Dublin 2
Ireland

Canaccord Genuity
Cardinal Place
80 Victoria Street
London
SW1E 5JL
United Kingdom

Principal Bankers
Macquarie Bank Limited
Citypoint
1 Ropemaker Street
London
EC2Y 9HD
United Kingdom

AIB Bank
1 Lower Baggot Street
Dublin 2
Ireland

KBC Bank Ireland
Sandwith Street
Dublin 2
Ireland

Directors*
David Golder (U.S. citizen)
(Non-Executive Chairman)

Dennis Francis (U.S. citizen)
(Chief Executive Officer)

Paul Dowling
(Chief Financial Officer)

David Sanders (U.S. citizen)
(General Legal Counsel)

Gerard Fagan
(Appointed 8 September 2010)
(Non-Executive Director)

Thomas Hickey
(Non-Executive Director)

Vakha Sobraliev (Russian citizen)
(Non-Executive Director)

Registered Office
and Business Address
20 Holles Street
Dublin 2
Ireland

Secretary
David Sanders

Auditor
Ernst & Young
Chartered Accountants
Harcourt Centre
Harcourt Street
Dublin 2
Ireland

*Irish citizens unless otherwise stated.

Solicitors
Eversheds O’Donnell Sweeney
One Earlsfort Centre
Earlsfort Terrace
Dublin 2
Ireland

White & Case
5 Old Broad Street
London
EC2N 1DW
United Kingdom

White & Case
4 Romanov Pereulok
125009
Moscow
Russia

Registered Number
408101

Registrar
Computershare
Heron House
Corrig Road
Sandyford Industrial Estate
Dublin 18
Ireland

Producing six years
of strategic progress

Debt and equity fundings
US$30 million debt facility
agreed with Macquarie Bank
and US$43 million equity raised
leaving the Group fully funded
for 2011 expansion programme.
May and October 2010

2011 and
beyond

Drilling commences
Three wells drilled to delineate
the Lineynoye and Tungolskoye
oil fields and discover the West
Lineynoye oil field.
March 2007

3,100 bopd

production reached
in March 2011

Stock market listing
Admission to AIM and
ESM Markets completed.
September 2006

US$23.5m

raised in private
placings and at IPO.

February 2006 to September 2006

Pilot production
First pilot production from
Lineynoye and West Lineynoye
oil fields.
February 2008

Five new
exploration
wells
2011 will see a five well
exploration programme
target additional reserves
of approximately 120 mmbbls
net to PetroNeft.

17 new
production
wells
At Licence 61, 2011 will see
17 additional production wells
drilled at the Lineynoye oil
field and three exploration
wells also drilled in the
Licence area.

Expansion
of processing
facilities
The current design capacity
of the process facilities
is 7,400 bfpd which will be
expanded to 14,800 bfpd
in 2011.

2005

2006

2007

2008

2009

2010

2011

Preparing to produce.
The Company prepared the facilities,
equipment and staff necessary to
achieve year-round production in 2010.

A transformational year.
The Group went from being just an exploration company to an exploration and
production company. 2P reserves also grew by a further 37% to 97 mmbbls.

Group Information

Nominated and
ESM Adviser
Davy
49 Dawson Street
Dublin 2
Ireland

Joint Brokers
Davy
49 Dawson Street
Dublin 2
Ireland

Canaccord Genuity
Cardinal Place
80 Victoria Street
London
SW1E 5JL
United Kingdom

Principal Bankers
Macquarie Bank Limited
Citypoint
1 Ropemaker Street
London
EC2Y 9HD
United Kingdom

AIB Bank
1 Lower Baggot Street
Dublin 2
Ireland

KBC Bank Ireland
Sandwith Street
Dublin 2
Ireland

Directors*
David Golder (U.S. citizen)
(Non-Executive Chairman)

Dennis Francis (U.S. citizen)
(Chief Executive Officer)

Paul Dowling
(Chief Financial Officer)

David Sanders (U.S. citizen)
(General Legal Counsel)

Gerard Fagan
(Appointed 8 September 2010)
(Non-Executive Director)

Thomas Hickey
(Non-Executive Director)

Vakha Sobraliev (Russian citizen)
(Non-Executive Director)

Registered Office
and Business Address
20 Holles Street
Dublin 2
Ireland

Secretary
David Sanders

Auditor
Ernst & Young
Chartered Accountants
Harcourt Centre
Harcourt Street
Dublin 2
Ireland

*Irish citizens unless otherwise stated.

Solicitors
Eversheds O’Donnell Sweeney
One Earlsfort Centre
Earlsfort Terrace
Dublin 2
Ireland

White & Case
5 Old Broad Street
London
EC2N 1DW
United Kingdom

White & Case
4 Romanov Pereulok
125009
Moscow
Russia

Registered Number
408101

Registrar
Computershare
Heron House
Corrig Road
Sandyford Industrial Estate
Dublin 18
Ireland

PetroNeft Resources plc

Dublin Office
20 Holles Street,
Dublin 2,
Ireland.

Houston Office
Suite 518, 10333 Harwin Drive,
Houston, TX 77036,
USA.

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PetroNeft Resources plc
is an international oil
and gas exploration and
production company
focused on Russia.

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Producing
Results

PetroNeft Resources plc
Annual Report and Accounts 2010
ГГГГГГГ ГГГГГ 2010

www.petroneft.com

find out more at www.petroneft.com

What is our key objective or goal?
PetroNeft’s aim is to deliver shareholder value by developing oil
and gas assets in Russia.
≥ more info on p2

How will we achieve these objectives?
Using the combined skills, experience and resources of the Group’s
Directors and employees to maximise the value of these assets by
seeking to bring our existing discoveries into production as rapidly
as possible and by exploiting additional opportunities.
≥ more info on p2

What assets does the business currently hold?
The main assets of the Company are a 100% interest in a 4,991km2 oil
and gas licence (Licence 61) and a 50% operating interest in a 2,447km2
oil and gas licence (Licence 67). Both licences are located in the Tomsk
Oblast in Russia’s prolific Western Siberian Oil and Gas Basin.
≥ more info on p2-5

What are the values which guide
our corporate behaviour?
Our core values are based in honesty, hard work, professionalism,
respect for others and teamwork throughout the Group.
≥ more info on p9

What is our ambition for the future?
We are confident that we will continue to grow our production and have
additional significant reserve bookings in 2011, based on the quality of
our five well exploration/delineation well programme.
≥ more info on p12-15

Why should you invest in PetroNeft?
With production now established and set to grow each year in the
coming years PetroNeft has a solid foundation from which to explore
the many remaining exploration prospects within our current portfolio.
≥ more info on p9

Producing
progress

Operational Highlights
≥ Year-round production commenced on schedule in Q3 2010.
≥ Group 2P reserves increase 37% to 96.9 mmbbls.
≥ Production reached 3,100 bopd from nine wells.
≥ Drilling of 17 additional production wells planned for 2011 underway.
≥ Commenced five well exploration programme targeting 120 million

barrels of reserves in 2011.

Financial Highlights
≥ Commencement of oil sales in Q4 2010.
≥ Capital expenditure of US$42 million in 2010; a fully-funded

US$53 million spend planned for 2011.

≥ Successful oversubscribed US$43 million equity placing in October 2010.
≥ Macquarie US$30 million Loan facility signed in May 2010, improved

terms agreed in April 2011.

Introduction
01 Highlights
02 About PetroNeft
04 Our Assets in Detail
06 Our Reserves
08 Questions and Answers

Review of the year
10 Chairman’s Statement
12 Chief Executive Officer’s Report
16

Health, Safety and
Environmental Report

17 Principal Risks and Uncertainties
18 Financial Review

Governance
20 Board of Directors
22 Directors’ Report
26 Independent Auditor’s Report

Financial Statements
27 Consolidated Income Statement
27 Consolidated Statement

Forward Looking Statements
This report contains forward-looking statements. These statements relate to the Group’s future prospects,
developments and business strategies. Forward-looking statements are identified by their use of terms and
phrases such as ‘believe’, ‘could’, ‘envisage’, ‘potential’, ‘estimate’, ‘expect’, ‘may’, ‘will’ or the negative of those,
variations or comparable expressions, including references to assumptions.

The forward-looking statements in this report are based on current expectations and are subject to risks and
uncertainties that could cause actual results to differ materially from those expressed or implied by those
statements. These forward-looking statements speak only as at the date of this announcement. Pages 1 to 7
were approved by the Board on 20 May 2011.

of Comprehensive Income
28 Consolidated Balance Sheet
29 Consolidated Statement of Changes in Equity
30 Consolidated Cash Flow Statement
31 Company Balance Sheet
32 Company Statement of Changes in Equity
33 Company Cash Flow Statement
34 Notes to the Financial Statements
61 Notice of Annual General Meeting
64 Glossary
IBC Group Information

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 1

Introduction

About
PetroNeft

Producing oil
from an expanding
asset base

Tomsk Oblast

The Tomsk Oblast lies in the
south-eastern West Siberian
plain. The West Siberian oil and
gas basin is the largest oil and
gas basin in the world in terms
of area and second largest to the
Middle East in terms of reserves.
The Tomsk Oblast has large
reserves of natural resources
and raw materials.

With production of approximately
210,000 bopd, oil accounts for
62% of exports from the region.
Oil production is carried out mainly
in the north-west and in the north
of the Oblast. There have been
recent discoveries to the east
of the Ob River including those
by PetroNeft.

Our Assets

The main assets of the Company
are a 100% interest in a 4,991km2
oil and gas licence (Licence 61)
in the Tomsk Oblast in Russia
and a 50% operating interest in
a 2,447km2 oil and gas licence
(Licence 67) also located in the
Tomsk Oblast. Both licences are
located in the prolific Western
Siberian Oil and Gas Basin.

Scale
0

1,000km

62%

percentage of exports from
the region that oil accounts for

210,000

bopd produced
(approximately)

Moscow

Tomsk

History
The Group has its origins in PetroNeft LLC, a Texas-based company,
which was established in 2003 as an oil and gas investment and
consultancy company focused principally on the Russian market.
In May 2005, PetroNeft LLC acquired a Russian company, Stimul-T,
which had acquired a 100% interest in Licence 61 following a
competitive auction process in the November 2004 Tomsk Licence
Auction. PetroNeft Resources plc was incorporated on 15 September
2005 and was admitted to the London AIM and Dublin ESM Markets
in September 2006.

Strategy
The Group’s strategy is to develop an oil exploration, development and
production business in Russia, using the combined skills, experience
and resources of the Group’s Directors and employees. In the short
term this is to be achieved through the growth of production at Licence
61 and a rigorous appraisal and exploration programme on Licences
61 and 67, by seeking to bring the existing discoveries into production
as rapidly as possible and by exploiting the additional opportunities
already identified and summarised in the Ryder Scott Report.

In addition to operations on Licences 61 and 67, the company continues
to evaluate new projects for acquisition. The objective is to acquire new
Core Exploration and Production Areas that satisfy the Group’s strict
technical and legal evaluation criteria. While the main focus for new
acquisitions will be the West Siberian Basin, the company will also
consider projects in other areas within the Russian Federation.

2 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Scale
0

100km

Strezhevoy

Kargasok

Parabel

Kolpashevo

PetroNeft
Rosneft
Gazprom
Gazpromneft
ONGC (Imperial Energy)
TNK BP
Other
Oil Pipeline
Gas Pipeline

Scale
0

20km

Pictures (from left to right):
– Production drilling rig on Pad #1 at the Lineynoye oil field.
– Workover rig operations at the Lineynoye oil field.

Tomsk

Licence 67
Licence 67 contains the
Ledovoye oil field and
numerous prospects
and leads including the
Cheremshanskaya prospect.

Licence 61
Licence 61 contains five
known oil fields: Lineynoye,
Tungolskoye, West Lineynoye,
Kondrashevskoye and
Arbuzovskoye, and over 25
Prospects and Leads that
are currently being explored.

The objective is to acquire new
Core Exploration and Production
Areas that satisfy the Group’s
strict technical and legal
evaluation criteria.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 3

Introduction

Our Assets in Detail

As well as five discovered oil fields
in Licence 61 there are 25 additional
prospects to be explored. Licence 67
has one oil field and a number of
prospects including some structures
with wells that have tested oil. Total
proved and probable reserves for the
two licences is 97 mmbbls net to
PetroNeft.

Licence 61
Licence 61 development plan
The development of Licence 61 commenced in 2010 with the drilling
of nine new production wells at Pad #1 at the Lineynoye oil field. This
is continuing in 2011 with the drilling of 17 new production wells at Pads
2 and 3 also at Lineynoye using two drilling rigs. In 2012 it is planned
to introduce a third rig and commence bringing the other fields into
production. Exactly which fields are brought into production in 2012
is dependent on the results of the 2011 exploration programme.

Exploration of Licence 61 2011
Following the success discovering the Arbuzovskoye oil field, three
exploration/delineation wells will be drilled at Licence 61 in 2011
commencing in April 2011 at the following locations:

≥ Kondrashevskoye (No. 5 on below map).
≥ Sibkrayevskaya (No. 20 on below map).
≥ North Varyakhskaya (No. 8 on below map).

The first well will be a delineation well at the Kondrashevskoye oil
field which is seeking to prove additional reserves above the current
8 mmbbls of proved and probable reserves booked by Ryder Scott.

The second well will be a high impact exploration well at the
Sibkrayevskaya prospect targeting over 40 mmbbls of reserves. This
prospect is following up on potential by-passed oil pay identified from
a re-interpretation of the electric logs from a well drilled here in 1972.

The third well drilled at Licence 61 in 2011 will be at the North
Varyakhskaya prospect. This well is targeting reserves of between 5 and
10 mmbbls. The prospect is less than 10km from the central processing
facilities at the Lineynoye oil field and if successful could be brought into
production in 2012.

Further exploration of Licence 61
After the above 2011 exploration programme there still remains
a considerable suite of exploration prospects at Licence 61. The southern
half of the Licence area in particular contains many prospects with
multiple pay objectives.

New field discovered in 2010
In November 2010 we discovered the Arbuzovskoye oil field about 10km
east of the Lineynoye oil field. Ryder Scott attribute 13 mmbbls of proved
and probable reserves to this field.

Future exploration programmes at Licence 61 could include using
the all weather road in the southern end of Licence 61 to gain access
to potential drill locations on the Tuganskaya, Traverskaya, Kirillovskaya
and Balkinskaya prospects. This could include the use of a mobile rig
to conduct a five to seven well exploration programme in 2012/13.

Licence 61

5 Oil Fields

1 Lineynoye oil field
2
Tungolskoye oil field
3 West Lineynoye oil field
5 Kondrashevskoye oil field
7 Arbuzovskoye oil field

25 Prospects

Tungolskoye West Lobe
and North (2)
4 Lineynoye Lower
6

West Korchegskaya
(Lower Jurassic)

8 Arbuzovskaya

North and Upper (2)

9 Emtorskaya East
10 Emtorskaya Crown
11 Sigayevskaya
12 Sigayevskaya East
13 Kulikovskaya Group (2)
14 Kusinskiy Group (2)
15 Tuganskaya Group (3)
16 Kirillovskaya (4)
17 North Balkinskaya
18 Traverskaya
19 Tungolskoye East
20 Sibkrayevskaya

4 Potential Prospects

21 Emtorskaya North
22 Sibkrayevskaya East
23 Sobachya
24 West Balkinskaya

Scale

25km

Oil field
Prospect ready for drilling
Prospect identified
Potential prospects

Lineynoye Field Development

Oil field
Area most favourable
for fracture stimulation

4 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

L-6L-6 CampCentralProcessingFacilityL-1Pad 2Pad 3Pad 1

Licence 67
Licence Summary
≥ 25 year exploration and production licence.
≥ To be developed 50:50 with Arawak Energy.
≥ PetroNeft is the operator.
≥ Auction price US$1.42 million.
≥ 55 million barrels of C3 Russian Registered Reserves.
≥ 2P reserves of 14 mmbbls confirmed at Ledovoye oil field.

2010 work programme
The first stage in the appraisal of Licence 67 was the reprocessing
of vintage well and seismic data. Well log data from 21 wells within
and around Licence 67 was digitised and reprocessed. 4,300km of 2D
seismic acquired in over 15 different surveys in the 1980s and 1990s
was reprocessed using common parameters and reanalysed using
modern software.

This work was completed in the fourth quarter of 2010 and used to
determine the work programme for 2011.

Ryder Scott reported on the Licence for the first time at the end of 2010
and have estimated proved and probable reserves of 14 mmbbls net
to PetroNeft at the Ledovoye oil field. They have also identified reserve
potential of 92.5 mmbbls at eight other prospects and leads.

Exploration of Licence 67 2011
In 2011 two exploration wells will be drilled at Licence 67 targeting
over 60 mmbbls of reserves at the following locations:

≥ Cheremshanskaya
≥ Ledovoye

The first well drilled will be at Cheremshanskaya. This well is following up
on two old wells drilled in the 1960s and 1970s where we have identified
potential by-passed pay. Ryder Scott estimate that there could be over
60 mmbbls of reserves net to PetroNeft at this prospect.

The second well will delineate the Ledovoye oil field but also follow
up on potential by-passed pay at the Lower Cretaceous horizon where
the Company estimates there could be up to 15 mmbbls of reserves
net to PetroNeft.

Licence 67

Drilled Structures

1 Cheremshanskaya
2 Ledovoye oil field
3 Sklonovaya
4 North Pionerskaya
5 Bolotninskaya

Identified Prospects
and Leads

Grushevaya Stratigraphic trap

6 Levo-Ilyakskaya
7 Syglynigaiskaya
8 Grushevaya
9
10 Malostolbovaya
11 Nizhenolomovaya Terrasa Gp.
12 Baikalskaya
13 Malocheremshanskaya
14 East Chermshanskaya
15 East Ledovoye

Drilled Structure with oil show or test
Drilled Structure with no oil shows reported
Undrilled Structure or Stratigraphic Trap
Excluded area with producing oil fields

Scale

25km

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 5

Introduction

Our Reserves

Producing
reserves

Year-round production
commenced in 2010.

Since acquiring Licence 61 in 2005, Group proved and probable
reserves have grown by 247% to 97 mmbbls. This has been achieved
through a systematic programme of reprocessing and interpreting
old seismic data and well logs, acquiring new 2D seismic data,
drilling seven exploration/delineation wells and acquiring a new
Licence – Licence 67. The Group now has six oil fields and numerous
prospects and leads adding upside potential.

2010 saw the commencement of production from just one of these
six oil fields, Lineynoye at Licence 61. Nine new production wells
were drilled using one production drilling rig. We also built a 60km
pipeline at Licence 61 which enables year-round production and
is capable of handling future production from the other four oil
fields at Licence 61 and any future discoveries from the range
of prospects there. The central processing facility built at the
Lineynoye oil field will also act as a hub for other oil fields within
the Licence area and its capacity is being expanded in 2011
to handle the production growth expected in the coming years.
The pipeline and processing facility are designed to allow
relatively straightforward and low cost capacity expansion.

Central oil processing facilities at the
Lineynoye oil field – September 2010.

2P Reserve Growth

million barrels

Licences 61 & 67¹

Million barrels

120

100

96.93

14.02

13.24

8.12

23.32

70.84
8.12

23.32

23.88

22.74

15.51

15.48

2008/09

2010

60.62

28.82

16.32

15.49

2007

27.89
9.34

18.55

2005

33.54
15.61

17.92

2006

Tungolskoye

Lineynoye

West Lineynoye

Arbuzovskoye

Kondrashevskoye

Ledovoye (L-67)

≥ 2P reserves are as estimated by Ryder Scott, Petroleum
Consultants, each year and conform to the definitions
approved by the Society of Petroleum Engineers (‘SPE’)
Petroleum Resources Management System (‘PRMS’) rules.

≥ Oil water contact is not defined at Kondrashevskoye –

reserves could approach 20 million bbls if the oil water
contact is at the spill point of structure, which is common
for fields in the region.

≥ Russian C1 + C2 Reserves equal 95.06 million bbls as
approved by the Russian State Reserves Committee in
January 2009. The reserves for Arbuzovskoye and Ledovoye
will be registered in 2011.

1 Source: Ryder Scott – Petroleum Consultants reports for Licence 61 and Licence 67 as at 1 January 2011

6 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Introduction
Introduction

3P & P4 Reserve Growth

Annual Production Forecast

641

million barrels

Licences 61 & 671

Million barrels

Average Net Oil Production Rate (bopd)

640.69

156.17

100.41

384.11

531.3

156.17

63.06

312.07

35,000

28,000

21,000

14,000

7,000

324.21

350.00

183.62

700

600

500

400

300

200

100

Cumulative
mmbbls

100

2005

2006

2007

2008/09

2010

2011

‘12

‘13

‘14

‘15

‘16

‘17

‘18

‘19

‘20

‘21

‘22

‘23

‘24

‘25

Upper Jurassic

Middle/Lower Jurassic

Cretaceous

Cum. production L-61 & L-67

Arbuzovskoye

Kondrashevskoye

Lineynoye/West Lineynoye

Tungolskoye

Ledovoye (L-67)

≥ 3P reserves are as estimated by Ryder Scott, Petroleum
Consultants, each year and conform to the definitions
approved by the Society of Petroleum Engineers (‘SPE’)
Petroleum Resources Management System (‘PRMS’) rules.

≥ All prospect possible reserves are based on structures with
unequivocal four-way dip closure at the reservoir horizon
as identified by 2D seismic data.

≥ The forecast is based on the Company’s 2P reserves

of 96.9 million bbls – six existing oil fields only.

≥ 2P reserves remaining after 2025 are 5.2 million bbls.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 7

Introduction

Questions and Answers

Dennis Francis, Chief Executive
Officer, and Paul Dowling, Chief
Financial Officer, answer some key
questions about our business.

Strategy:
To date, PetroNeft has confined its activities to the
Tomsk region of Russia. Is the Company considering
acquiring assets outside of Tomsk or even outside
of Russia?

The Company has built up an excellent team of professionals to support
our operations in Tomsk and therefore will seek to further develop
and add to existing assets in Tomsk to leverage our knowledge and
experience in the area. However, as well as looking at new opportunities
in Tomsk, we have been and will continue to look at potential acquisitions
in Western Siberia in general and further afield within the Russian
Federation. We look at auctions of licences by the state as well as the
potential acquisition of existing licences from their current owners.
Our focus is on field sizes of between 10 and 50 million barrels and
it remains our intention to build a portfolio of assets of this size that
have near-term production potential and longer term exploration upside.
The Company’s expertise is within the Russian Federation where we
see ample opportunity, so there are no plans to look at assets outside
Russia at the present time.

Production:
The Company frequently mentions that it has to use
hydraulic fracturing to enhance the flow rates from
its oil wells. What is hydraulic fracturing and why
is it necessary?

Our oil fields are similar to many oil fields in Western Siberia where
the permeability and porosity of the reservoir sandstones that contain
the oil reserves are moderate to poor in quality. This means that the
natural flow rates will tend to be low because the rock is tight and
there are not sufficient conduits for the oil to flow through. Hydraulic
fracturing is a method used around the world to improve the permeability
of tight reservoirs. The economics of a field can be improved substantially
by the use of hydraulic fracturing as it typically boosts production
significantly thereby accelerating the recovery of oil from the reservoir.

The process involves the injection of a special fluid, primarily water,
at very high pressure into the sandstone oil reservoir. The high pressure
causes fractures to be created in the rocks. Then a proppant of synthetic
or ceramic sand is injected into the new artificially created fractures to
ensure the fractures stay open once the pressure is released. Oil should
then flow at higher flow rates because of the enhanced permeability
created by the hydraulic fracturing process. Once the process is
complete the frac tubing is removed and an electric submersible pump
is installed in the well. Typically it will then take about ten days for all of
the fluids injected during the hydraulic fracturing process to clear out of
the well and a stabilised oil production rate to be achieved.

8 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Are there any lessons from the 2010 production
drilling programme and how will the 2011 and future
drilling programmes be influenced by these lessons?

Yes, there are a number of lessons learned from the 2010 drilling
programme. The principal lesson is that it is very difficult to predict
the level of near bore damage which can occur during the drilling and
completion processes and therefore the resulting flow rates before
fracture stimulation. We have implemented some changes to the drilling
and completion practices for 2011 that may alleviate the issue, but it is
unlikely that all damage can be eliminated. Given that we plan to fracture
stimulate most of our production wells this is not necessarily a long-term
problem for each well as fracture stimulation will substantially cure
the effects of near bore damage.

We have also learned from the first batch of fracture stimulation wells.
We achieved varying results based on the size of the frac and corresponding
quantity of proppant used during the hydraulic fracturing process.
These lessons will influence our future programmes.

What are the Company’s 2011
and 2012 production targets?

Because of the lessons learned during the 2010 drilling campaign
we have decided to move the target production date to the end of the
first quarter in each calendar year. This will ensure that all of the wells
drilled in the previous calendar year will have been fracture stimulated
and returned to stable production and therefore the rates are more
easily predicted at that stage.

The target production by the end of the first quarter of 2012 is between
7,000 and 8,000 bopd and the target by the end of the first quarter of 2013
is between 10,000 and 12,000 bopd.

Tax Incentives:
Have there been any recent changes
to the tax regime in Russia?

In November 2010 the Russian Duma passed a change to increase
the rate of Mineral Extraction Tax (“MET”) by about 5% with effect from
1 January 2012 and by a similar amount from 1 January 2013. While this
has been passed by the Duma there is ongoing lobbying by the industry
to reverse the change particularly in the context of the Government’s
stated objective to reduce the tax burden on the upstream oil industry.

Two other tax changes that would see the overall tax burden that
PetroNeft will pay decrease are also being discussed. The first is
the introduction of a reduced rate of MET for oil fields where the initial
recoverable reserves are below five million tonnes (about 35 million
barrels). It is likely that PetroNeft’s Arbuzovskoye, Kondrashevskoye
and Tungolskoye oil fields would qualify for a reduction of between 30%
and 45% in the MET liability for production at these oil fields. This draft
law passed the first stage vote in the Russian Duma in early April 2011,
however there are several further stages before it could get signed into
law by the President.

The second proposed change is to reduce the top rate of export duty
on crude oil exports from 65% to 60%. This would not only reduce the
tax burden on export sales but would likely lead to better pricing of oil
sold on the domestic market in Russia.

Funding:
What funding needs does PetroNeft have over the
short and medium-term and how will these be met?

In October 2010 the Company raised US$43 million through a placement
of new ordinary shares. Also, in April 2011 the Company agreed terms
to re-finance the US$30 million loan from Macquarie Bank on improved
terms. As at the date of the re-financing only US$11.2 million of the
Macquarie loan remained outstanding. The funds provided by the placing
of new shares and the Macquarie debt facility are sufficient to fund the
2011 programme to drill five exploration wells, 17 production wells and
to double the capacity of the oil processing facilities at Lineynoye from
7,400 bopd to 14,800 bopd. It is expected that the cash flows from the
increased production that will result from the additional 17 production
wells together with the increased debt capacity of the business will
enable us to fund the continuing development of the Group’s existing
assets in the coming years.

The Group is actively looking to add to its portfolio of assets and
depending on the size and nature of such opportunities additional
equity funding may be an important element of the funding mix for
such acquisitions.

Culture:
How would you describe the culture of
PetroNeft and what are your core values?

Our culture and core values are based on the past experiences and
common beliefs of the Board and our Russian management team.
We take pride in the experience and make-up of our Board and
management team and the corporate governance policies that we
have put in place. Our core values are based in honesty, hard work,
professionalism, respect for others and teamwork throughout the
Group. We seek to treat our employees well in terms of rewards
and work environment. We also strive to be considered as a
“well intentioned”, fully compliant organisation by authorities
in the areas where we operate and a good corporate citizen by
stakeholders generally.

Investment Case for Petroneft:
Why should I invest in PetroNeft?

PetroNeft has a superb asset base with its interest in two licences
in Tomsk. With production now established and set to grow each
year in the coming years the Group has a solid foundation from
which to explore the many remaining exploration prospects within
our current portfolio. The Group is also funded for production
growth in the coming years through internally generated cash
flows and the debt capacity that such cash flows generate.
The production growth and exploration upside provide many
opportunities for investors to generate excellent returns.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 9

Business Review

Chairman’s
Statement

PetroNeft is fortunate to have
a highly experienced and dedicated
team and this knowledge and
experience have enabled us to meet
the array of challenges facing the
Group in recent years.

A Transformational Year
2010 was an important year. PetroNeft achieved its primary goal
of bringing its existing oil fields into production, having completed
the construction of a 60km pipeline and oil processing facilities
at the Lineynoye oil field as well as drilling nine new production wells.
2011 will see further development and production growth with the
planned addition of 17 new production wells at the Lineynoye oil field.

2010 also saw further exploration success with the discovery of the
Arbuzovskoye oil field at Licence 61 and the addition of reserves at
Licence 67 which had been acquired following an auction in December
2009. In 2010 proved and probable reserves grew by 37% from 71 million
barrels of oil (“mmbbls”) to 97 mmbbls. 2011 will see a five well
exploration programme target additional reserves approximately
120 mmbbls net to PetroNeft.

Production
Following the successful completion of a 25 year Crude Oil
Transportation and Custody Transfer agreement with Imperial Energy
(“Imperial”) in August 2009, PetroNeft completed the construction
of a 60km pipeline from the Lineynoye oil field to Imperial’s facility
at Kiev-Eganskoye in the first half of 2010. Oil storage and processing
facilities were also constructed at the Lineynoye oil field in 2010 with
an initial capacity of 7,400 barrels of fluid per day (“bfpd”) which will
be added to in 2011 to bring capacity to 14,800 bfpd. These two major
construction projects were completed on schedule and largely
within budget.

Nine new production wells were also drilled at the Lineynoye oil field
and put into production. A programme of hydraulic fracturing was
carried out on the nine new wells and production reached 3,100 bopd
once this programme was completed and the wells had cleaned up.
The Group plans to drill 17 new development wells in 2011. The Group
is targeting production in a range of between 7,000 and 8,000 bopd by the
end of Q1 2012 when all of these 17 new wells, together with the existing
wells, will have been fracture stimulated and returned to production.

Reserves Growth
In March 2010 the Board took the decision to drill an exploration well
at the Arbuzovskaya prospect in Licence 61. This well was drilled in
October and November 2010 and led to the discovery of the Arbuzovskoye
oil field. Ryder Scott has assessed that there are 13 mmbbls of proved
and probable reserves at Arbuzovskoye. Ryder Scott undertook its
first review of Licence 67 which was acquired in January 2010 following
a December 2009 state auction. Proved and probable reserves at the
Ledovoye field were assessed at 28 mmbbls (14 mmbbls net to PetroNeft).

10 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Pictures (from left to right):
– Alexander Tarasenko, Shift Manager

Stimul-T.

– Fire water tanks under construction at

Lineynoye Central Processing Facilities.

– Gas powered piston generators at the
Lineynoye oil field use associated gas
for power generation.

I would like to welcome all new employees to the Group and thank all
of our employees, old and new, for their hard work in 2010 to achieve
our goal of getting into production.

Summary
2010 was a transformational year for the Group. The commencement
of production means that the Group will generate significant cash
in the coming years to enable it to expand its reserve base both through
exploration and delineation in current Licence areas and through business
development opportunities in Tomsk and further afield in Russia.

PetroNeft is fortunate to have a highly experienced and dedicated team
and this knowledge and experience have enabled us to meet the array
of challenges facing the Group in recent years. I am confident that this
team will enable PetroNeft to continue to add shareholder value.

Finally, I know that I speak for all the Directors, management and staff
of the Group in giving sincere thanks to our shareholders, both old and
new, for your confidence and continued support through the past year.

David Golder
Non-Executive Chairman

Successful Debt and Equity Financing
PetroNeft successfully raised US$43 million in October 2010 through
a placing of new shares which enabled the Group to commence the
Phase 1 project to develop the Lineynoye and West Lineynoye oil fields
and become self-financing.

During 2010 we entered into a US$30 million debt facility with Macquarie
Bank Limited. This facility gave the Group the ability to complete the nine
well production drilling programme in 2010 and to drill the Arbuzovskoye
exploration well that led to the discovery of a new oil field.

It remains the Board’s intention to fund the Company with a mixture
of debt and equity for business development purposes and to accelerate
the appraisal and development programme on Licences 61 and 67.

Business Development
The principal near-term objective of the Group remains the development
of the northern oil fields on Licence 61. However, we have not lost sight
of our longer-term objective of securing assets outside of Licence 61
to provide growth for the future.

The acquisition of Licence 67 (Ledovy) was a first step in this growth.
This new acreage materially enhances the Company’s footprint
in the Tomsk Oblast and is in line with our stated growth strategy.
PetroNeft was able to win this auction because of its highly experienced
management team and ability to be flexible and responsive to the
opportunity. In January 2010, Arawak Energy (“Arawak”) exercised their
option under the August 2008 Area of Mutual Interest Agreement to
acquire 50% of Licence 67 and we look forward to working with Arawak
to develop this asset. PetroNeft will be the Operator for Licence 67.

We continue to actively examine a number of acquisition opportunities
in the Tomsk region and elsewhere in Russia and hope to update
shareholders in more detail in the coming months.

Corporate Development
We have added a number of senior management positions to the Group
this past year as we moved from an exploration to an exploration and
production company. These positions were carefully considered and we
selected candidates who met both the immediate and long-term needs
of the Group. The headcount has increased from 63 to 144 during 2010
principally due to the increased number of professionals and operatives
required to run a producing oil field and the associated facilities.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 11

Business Review

Chief Executive
Officer’s Report

The development project is now well
underway and 2010 is set to be a
transformational year for the Group.

General
2010 saw PetroNeft enter year-round production for the first time.
This was a culmination of our efforts in recent years and the result
of the valued support of our shareholders and employees. To get to
production we had to construct a 60km pipeline from our Lineynoye
oil field to Imperial Energy’s facilities at Kiev-Eganskoye and construct
oil processing and storage facilities at the Lineynoye oil field. We also
drilled nine new production wells which will be supplemented by two
existing wells at Lineynoye.

Also in 2010 PetroNeft drilled one exploration at Licence 61 well which
resulted in the discovery of the Arbuzovskoye oil field.

At Licence 61, 2011 will see 17 additional production wells drilled at
the Lineynoye oil field and three exploration wells also drilled in the
Licence area.

Having won the rights to Licence 67 at a state auction in late 2009 we
spent 2010 completing the acquisition as well as gathering, digitising,
reprocessing and analysing all the old well and seismic data associated
with the Licence which has led to the booking of additional proved and
probable reserves and an exciting two well exploration programme
planned for 2011.

Licence 61 – Oil Field Development
In 2009 the focus had been on optimising the development plan in order
to reduce the funding requirement to get to year-round production. A key
part of this was the signature in August 2009 of the 25 year agreement
with Imperial Energy whereby Imperial would accept PetroNeft’s crude
oil using existing tank facilities at the Kiev-Eganskoye field and transport
the crude oil to its Custody Transfer Point at Zavyalovo for transfer
into the Transneft system. Shortly afterwards PetroNeft raised the
necessary funds to build the pipeline and oil processing facilities and
commence the drilling of production wells.

In 2010 we constructed the 60km pipeline and oil processing facilities
and drilled nine new oil production wells and one water source well
at Lineynoye oil field. The current design capacity of the process
facilities is 7,400 bfpd which will be expanded to 14,800 bfpd in 2011.
Water injection facilities to handle excess produced water and future
water injection will also be installed in 2011. The initial facilities design
emphasised the installation of gas piston power generators to utilise
associated gas from the oil production to generate electricity for the
camp, facilities and field needs and thereby minimise the flaring of
associated gas.

12 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Drilling from Pad 1 commenced in April 2010 utilising one production
drilling rig. The drilling programme has been designed around the
Russian BU 3000 EUK production drilling rig which is cost efficient and
technically proven in the area. The drilling of the nine production wells
and one water source well for future water flood operations was
completed in October 2010. The initial well took about 30 days to drill;
however, at the end of the programme the wells were taking just 15
days to drill. The subsequent completion operation which involved a
workover rig took about ten days per well. First production commenced
on schedule in August 2010. The geology of the drilling programme was
in line with expectations and we were pleased that some of the thickest
net pay wells (up to 17.9 m) were the northernmost drilled and close to
the Pad 2 location.

Initial production rates from the wells have been quite variable, from
50 to 450 bopd, even though many wells appear to have very similar
characteristics on the well-logs. We attribute much of this variation to
near bore reservoir damage caused during the drilling and completion
processes. In the main, the post fracture stimulation rates have been
from 350 to 700 bopd except for two wells (110 and 117) where, because
of nearby water sands, we did not carry out a large sized fracture
stimulation. Based on the well performance after fracture stimulation,
we feel we can improve on the design of the fracture stimulation for
each well in the future. Some of the key lessons learned and actions
undertaken to improve production and guidance in the future are as
follows:

≥ We plan to carry out a fracture stimulation programme on up to

eight of the new wells being drilled at Pad 2 and Pad 3 in the third
quarter. While such a programme was previously believed to be
uneconomic because of the high cost of transporting the necessary
equipment and materials by helicopter we have found that it can be
very economic provided the heavy materials are moved to the field
in advance by winter roads. Therefore we have, in the first quarter
of 2011, purchased over 600 tonnes of proppant for this programme
together with some of the basic equipment used in the fracture
stimulation process such as the high strength tubing used and the
special proppant bins used for feeding the proppant into the system
during the process and transported it to the field by winter road.
This basic equipment can be reused in future fracture stimulation
programmes. The remaining wells at Pad 2 and Pad 3 will be fracture
stimulated next winter and should be competed and returned
to production by the end of March 2012.

≥ Based on the well performance after fracture stimulation we have

learned that in the future we should err on the side of larger volume
hydraulic fracturing in order to gain the optimum rate of production
and delay and minimise the decline in production rate.

≥ We have purchased our own workover rig so that in the future we
can have better control over the quality of the equipment and well
completion processes and thereby help to reduce formation damage
and the time required to return wells to production after the hydraulic
fracturing process. We will also directly employ our own workover
rig crew in order to establish consistent quality of operations.

≥ We find that the formation damage from the drilling and completion
processes can be quite variable from well to well so it is hard to
predict the initial production rates. Hence in the future we will move
our year-end production guidance to the end of the first quarter and
thereby allow all of the new wells to be fracture stimulated and
returned to production.

≥ Production drilling rigs are now required to have brand new 4-stage
mud cleaning systems which should help to reduce some of the
formation damage caused during the drilling process.

While we have learned some lessons along the way, we are very pleased
with the results of the first production wells and the production achieved
to date. In early 2011 the production drilling rig has been moved from
Pad 1 to Pad 2 and a second production drilling rig has been mobilised
to drill from Pad 3. Drilling from Pad 2 has now commenced and the first
well contained 18.2 m of net oil pay, which is the most to date in the field
development. Drilling from Pad 3 will commence shortly.

Schematic of Oil Processing Facilities

Current capacity:
370,000 tons/year
7,400 bfpd; expanding
to 14,800 bfpd in 2011.

Pad 1
Well

Diesel
Backup
Generator
1,000 KW

Fuel Gas
Filter

Gas
Separator

Future Expansion
2x 1,000 KW

Gas Piston
Power
Generators
3 x 450 KW

Boiler (Heater)

Secondary
Separator

Vaporiser

High and Low
Pressure Flares

Key:

Oil
Gas
Water

Dotted lines indicate
expansion in 2011.

Notes:
1 No gas dehydration
2 Gas stabilisation
3 Oil storage 2 days
4 Pumping 2 x 50%
5 No gas compression
6 Power – gas piston
engine generators

Primary
Separator

16 atm

Heater

40ºC

Well
Test
Separator

Slug
Catcher

Future
Expansion

10 atm

Oil Storage Tanks

2,000 m3

1,000 m3

Future
Expansion

Settling
Tanks 50m3

60m3/hr
9,000 bpd

Meter

To Water Injection Stations

Filter

Water Storage
Tank 700m3

Pipeline

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 13

Business Review

Chief Executive
Officer’s Report
continued

Licence 61 – Exploration, Delineation
and Reserve Expansion
The financial crisis slowed the progress of exploration and delineation
of Licence 61. However, exploration drilling recommenced in the fourth
quarter of 2010 with the drilling of the Arbuzovskoye No. 1 well and
the discovery of a new field containing about 13 million barrels of 2P
reserves at Arbuzovskoye. In 2011 three further exploration/delineation
wells will be drilled at Licence 61. The wells are a delineation well at
Kondrashevskoye, followed by exploration wells at Sibkrayevskaya and
North Varyakhskaya. This programme targets about 60 million barrels
in potential reserves.

While the current focus is the exploration and quick tie-in of new fields
in the vicinity of the Lineynoye Central Processing Facilities, we have
a significant portfolio of prospects in the southern portion of the
Licence, of which many have potential in multiple horizons including
the Cretaceous. An all weather road is available through a significant
portion of this part of the Licence and crosses over some prospects.
We have initiated a feasibility study to ascertain what prospects we
could access via the all weather road, with the intention of undertaking
a five to seven well exploration programme using a mobile rig.
However we do not envision drilling in this area until 2012-2013.

Business Development
The Group actively pursues opportunities in the Tomsk Region and
Russia in general. These include potential corporate acquisitions
and participating in State Auctions. The Group has developed a high
technical and economic standard with regard to acquisitions and many
opportunities do not meet this test. However, our experience shows that
there are quality opportunities available and we just need to be patient
and deliberate in our search.

This work came to fruition in December 2009 with the acquisition
of Licence 67 at a State Auction in the Tomsk region. The gross bid
consideration was 42 million Roubles (US$1.42 million).

Licence 67 (Ledovy)
Licence 67 was registered in January 2010. This new acreage materially
enhances the Group’s footprint in the Tomsk Oblast and is an important
step forward in our growth strategy. While there was a very short time
frame and minimal amount of data available before the auction, the
Group was able to quickly make a comprehensive evaluation of the block
and win the auction due to the past knowledge and relationships of its
Tomsk staff. Highlights of Licence 67 activities in 2010 are as follows:

≥ Approximately 4,415km of vintage 2D seismic and 21 wells in

the area have been digitised and reprocessed with modern software.

≥ The reprocessed data was the basis for a comprehensive

reinterpretation of the structure, stratigraphy and petroleum
potential of the area.

≥ Ryder Scott estimates the 2P reserves at the Ledovoye oil field

to be 14.0 million barrels net to PetroNeft.

≥ Ryder Scott estimates the 3P reserves and exploration resources

to be 110 million barrels net to PetroNeft.

≥ Two exploration/delineation wells are planned for 2011 targeting

an additional 60 million barrels plus in reserves.

Pictures (from left to right):
– Oil storage tank at Central Processing

Facilities.

– Boiler at Central Processing Facilities.
– Rig floor on production drilling rig.

14 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

In December 2010, Yuriy Chimur was appointed Head of Field
Production. Yuriy has 17 years experience in oil and gas field production
and was most recently Chief Engineer for LLC Aliansneftegaz and LLC
Nord Imperial. He has degrees from Tomsk Polytechnic University in
reservoir engineering and oil and gas field operation.

Conclusion
2010 has been a transformational year for PetroNeft. We have gone
from being just an exploration company to an exploration and production
company. This is not an easy transition and we are very proud of our
staff in Tomsk for their efforts in accomplishing this difficult goal both
on schedule and within budget. Now that the Lineynoye Central
Processing Facilities are in place our near-term efforts will be focused
on monetising the nearby fields which will be tied-in to the Lineynoye
Central Processing Facility in the coming years.

We are also very excited with the results of our comprehensive
re-evaluation of all of the vintage seismic and well data on Licence 67.
This new acreage materially enhances our footprint in the Tomsk Oblast
and is an important step forward in PetroNeft’s stated growth strategy.

The Group is confident that we will continue to grow our production and
have additional significant reserve bookings in 2011, based on the quality
of our five well exploration/delineation well programme. PetroNeft looks
forward to further building its business and asset base in the region in
2011 and beyond.

Dennis Francis
Chief Executive Officer

Needless to say we are very excited about the results of the
comprehensive reinterpretation of the hydrocarbon potential of
Licence 67. We have been able to book reserves at Ledovoye oil field
and feel we have a quality prospect to drill at Cheremshanskaya. The
Cheremshanskaya No. 1 well was drilled in 1962 and while oil shows
were reported while drilling, the well was not properly tested due to
drilling problems. The recent log re-evaluation shows by-passed pay
in three separate intervals in the well. Ryder Scott estimates the
potential reserves in the structure to be in excess of 60 million
barrels net to PetroNeft.

In the second half of 2011, PetroNeft plans to drill additional exploration/
delineation wells on the Ledovoye oil field and the Cheremshanskaya
prospect. Both wells will be drilled parallel to existing wells in order to
optimise the coring and testing of potential by-passed pay zones in the
vintage wells drilled in 1973 and 1962 respectively.

Arawak Area of Mutual Interest
Licence 67 is within Western Siberia and thus falls within the 2008
Area of Mutual Interest agreement between PetroNeft and Arawak.
Under this agreement, Arawak have exercised their option to take a
50% interest in the Licence and finance 50% of all costs including the
acquisition cost. PetroNeft will be the Operator of the Licence. While
we have been working together during 2010 on Licence 67, the formal
legal agreement governing our relationship with Arawak was signed
in February 2011 and the various conditions precedent under the
agreement are expected to be completed in June 2011.

Health, Safety and Environmental
The Group is fully committed to high standards of Health, Safety and
Environmental (HSE) management. More details of our HSE activities
are included in the HSE report on page 16.

Personnel
The Company made two important senior management appointments
in 2011.

In April 2010, Michail Dronov was appointed to the Group as Chief
Development Geologist. Michail has over 25 years experience in the
development of oil and gas fields in the Tomsk region. He most recently
worked as Chief Geologist for LLC STS-Service. He has an advanced
degree from Tomsk Polytechnic University in the development of oil
and gas fields.

Chief Development Geologist, Mikhail
Dronov, was appointed in April 2010.

Ryder Scott Estimated Reserves in Oil Fields
(net to PetroNeft*)

Oil Field Name

Licence 61
Lineynoye
Tungolskoye
West Lineynoye
Kondrashevskoye
Arbuzovskaya

Licence 67*
Ledovoye

Proved
Proved & Probable

Proved,
Probable,
& Possible

1P mmbo

2P mmbo

3P mmbo

5.2
1.4
2.7
0.6
1.9

22.8
15.5
23.3
8.1
13.2

28.5
19.6
29.2
26.1
16.6

11.8

82.9

120.0

1.5

14.0

17.4

13.3

96.9

137.4

• All oil in discovered fields is in the Upper Jurassic section.

Reserves were determined in accordance with the Society of Petroleum Engineers (“SPE”) Petroleum
Resources Management System (“PRMS”) rules.

* Licence 67 will be co-developed with Arawak Energy and the reserves above reflect PetroNeft’s 50%

share.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 15

Business Review

Health, Safety and
Environmental Report

The Group is fully committed to high standards of Health, Safety and
Environmental (HSE) management and being socially responsible within
the communities we work in. There are inherent risks in the oil and gas
industry and these are managed through policies and practices, which
stress the need for individual and collective responsibility within our
staff structure and with contractors that operate for the Group.

Alexey Balyasnikov, the General Director of Stimul-T, has primary
responsibility for all aspects of HSE management. As well as reporting
directly to Group CEO, Dennis Francis, he attends all Board meetings
to report to the full Board on HSE issues.

There were no lost time incidents in the year and no events which
breached the stringent environmental regulations that exist in Russia.

Health and Safety Management
The Group has a Labour Safety and Industrial Security Department
headed up by Elena Morgunova. The role of the Department is to
minimise the risks to employees and contractors from the day-to-day
operation of our business, to train all staff in safety awareness, and
to prepare contingency plans to minimise the potential impact of any
unplanned incidents or events. For that purpose we:

≥ Control compliance of all employee operations with labour safety

requirements and ensure employees of the Group and employees of
contractors are adequately trained in the use of relevant equipment.

≥ Monitor all contracts the Group enters into in order to ensure

contractors are informed of the labour safety policies of the Group.

≥ Carry out regular site inspections to ensure full compliance.
≥ Develop and deliver labour safety and industrial security training

to Group employees.

≥ Maintain an Emergency Response Plan for explosion and fire hazard

facilities of the Group.

≥ Develop and get approved by state authorities:

≥ Regulation for control of industrial safety compliance at

hazardous facilities.

≥ Regulation for order of accident investigation at hazardous

industrial facilities of the Group.

≥ Maintain a vaccination and insurance programme for tick-borne

encephalitis, a disease common in the West Siberian environment.

Environmental Impact Management
The Board recognises that the Group’s activities can have a significant
impact on the environment. As part of its responsibilities under Russian
law, an environmental assessment of Licence 61 was carried out before
any drilling work commenced in 2007. This was to establish the state
of the environment within Licence 61 in advance of any major works.
A similar assessment commenced at Licence 67 in 2010 and will be
completed in the first half of 2011.

Since early 2007 there has been a dedicated full-time Environmental
Engineer, Elena Nepriyateleva, on staff in our Tomsk office.
Her responsibilities include:

≥ Monitoring of exploration and production activities.
≥ Monitoring activities of sub-contractors.
≥ Maintaining compliance with various environmental laws

and regulations.

In 2010 the main activities from an environmental perspective were:

≥ Environmental monitoring system has been introduced

at Lineynoye field.

≥ Planning and approvals for 2011 production drilling and field
development and exploration/delineation programmes.

≥ The first stage of Environmental Baseline Study for Licence 67.
≥ Preparation of programme for environmental and subsoil

monitoring in Licence 67.

This included the use of an independent company to supervise the work
of both our own staff and the staff of contractors working at our sites.

Compliance and Inspections
The Group reports on its HSE activities to various statutory authorities
in Russia on a quarterly and annual basis and is also subject to regular
inspections by various bodies. Inspections relating to compliance with
Natural Resource Management Law (Rosprirodnadzor) in relation to
the newly constructed facilities at Lineynoye took place in 2010 and 2011
and no significant issues arose from these inspections.

Community
One of PetroNeft’s key philosophies is to operate as a compliant,
well-intentioned Group within the communities where we work. This
entails ensuring compliance with laws and regulations and returning
and paying our taxes on time.

During 2010 we also made contributions to orphanages in the Tomsk
Oblast and contributed to social programs run in the Alexandrovskoye
region of Tomsk where Licence 61 is located.

There were no lost time incidents
in the year and no events which
breached the stringent environmental
regulations that exist in Russia.

16 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

At work in the Laboratory at
Lineynoye Central Processing Facility:
Ilgiza Aslyamova – Head of Chemical
Analysis Laboratory.

Business Review

Principal Risks
and Uncertainties

The principal risks and uncertainties affecting the Group and the actions taken by the Group to mitigate these risks and uncertainties are:

Risk Category

Country Risks

Risk Issue

Mitigation

Political – federal risks

Fields/acquisitions below 500 million boe are not considered strategic
to the Russian state.

State is encouraging small operators.

Political – local risks

Tomsk Oblast administration is very supportive of development.

Local management are well respected in region.

Ownership of assets

Licences were acquired at government auctions. Work programme for
Licence 61 is complete. Work programme for Licence 67 is not onerous.

Changes in tax structure

25 year Licence term can be extended based on approved
production plan.

Fiscal system is stable – recent and proposed changes largely benefit
upstream oil and gas companies.

Proactive lobbying effort made in area of tax legislation.

Technical Risks

Exploration risk

Proven oil and gas basin with multiple plays.

Drilling risk

Relatively shallow wells with proven technology.

Good quality 2D seismic.

Knowledgeable exploration team with proven track record in region.

Production/Completion risk

Routine completion practices including fracture stimulation.

Good rig availability.

Experienced operations team.

Financial Risks

Reserve risk

Availability of finance

Oil price

Industry cost inflation

Uninsured events

HSE incidents

Export quota

Other Risks

Reserves high-graded; extensive reservoir simulation and reservoir
management will be undertaken.

Performance of similar fields in region.

SPE and Russian reserves updated and in substantive alignment.

US$43 million equity raised October 2010 in significantly over
subscribed placing, US$30 million bank facility agreed in May 2010
and refinanced on improved terms in April 2011.

Robust project sanction economics – conservative base case
assumptions. Board will consider use of appropriate hedging
instruments.

Rigorous contracting procedures with competitive tendering. Also the
relationship of the Dollar/Rouble exchange rate to the oil price provides
a natural balance between costs and income.

Comprehensive insurance programme in place.

HSE standards set and monitored regularly across the Group.

Equal access to export quotas available for all oil producers
using Transneft.

Conservative assumption in economics – domestic net back price
now largely in alignment with export net back.

Third-party pipeline access

25 year transportation agreement in place.

Transneft pipeline access

Available capacity and access confirmed.

East Siberia-Pacific Ocean (ESPO) pipeline allows export of oil
to Pacific market.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 17

Business Review

Financial Review

As a result of the equity funding and
the Macquarie loan facility the Group’s
2011 capital investment programme
is fully funded.

2010 saw the culmination of our efforts in recent years to optimise the
economics of the development of our oil fields in order to be able to fund
the commencement of production thereby achieving our stated aim of
monetising our existing oil fields. Year-round production commenced
on schedule in late August 2010 following the construction of the 60km
pipeline and the oil processing facilities.

During the year we entered into a debt facility with Macquarie Bank
Limited and raised additional finance from the equity markets. We also
re-commenced exploration at Licence 61.

In 2011 we will continue to grow our production through the drilling
of 17 additional production wells at the Lineynoye oil field. We will also
drill five exploration wells across our two Licence areas in 2011.

Key Financial Metrics

Revenue
Cost of sales
Gross profit
Gross margin

Administrative expenses
Overheads
Share-based payment expense
Foreign exchange loss on intra-group loans
Other foreign exchange gain/(loss)

Finance revenue

Finance expense

Income tax expense

Loss for the year attributable
to equity holders of the Parent

Capital expenditure in the year

2010
US$

2009
US$

5,155,646
(4,284,181)
871,465
17%

509,710
(420,566)
89,144
17%

(5,601,591)
(460,500)
(137,054)
285,038

(3,430,687)
(464,100)
(537,683)
(410,056)

(5,914,107)

(4,842,526)

126,595

(1,356,918)

173,296

(20,644)

(852,429)

(318,472)

(7,125,394)

(6,471,552)

41,646,953

6,153,603

Net proceeds of equity share issues

40,793,563

25,863,882

Bank and cash balance at
year-end (including restricted cash)

25,281,881

15,726,479

Net Loss
The net loss for the year increased to US$7,125,394 from US$6,471,552
in 2009. The main reason for the increase in losses relates to an increase
of US$2,170,904 in overheads partly due to the addition of new staff
at our Tomsk operations during the year and the depreciation charge
for non-current assets, constructed during the year.

2010 Capital expenditure
of US$42 million

Production Wells
$20m
Equipment and facilities $13m
$3m
Pipeline
$5m
Exploration

18 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Revenue, Cost of Sales and Gross Margin
Revenue from oil sales was US$5,155,646 for the year. A gross margin
of 17% was achieved. Cost of sales includes depreciation of US$530,235.
We would expect this margin to improve in future periods as many of
the costs will not rise proportionally as production grows. We produced
189,508 barrels of oil in the period and sold 158,295 barrels of oil achieving
an average oil price of US$33 per barrel. All of our oil was sold on the
domestic market in Russia.

In October 2010 PetroNeft raised US$43 million through a private
placing of new ordinary shares. The placing was significantly over-
subscribed. The placing was co-ordinated by the Group’s joint-brokers,
Davy and Canaccord Genuity who were assisted by Renaissance Capital.
The shares were placed with both new and existing shareholders and the
proceeds used to finance the Group’s exploration and development
programme.

Finance Costs
Finance costs of US$1,356,918 relate to interest on bank loans, discount
on deposit paid for pipeline usage, arrangement fees in relation to
the Macquarie Bank loan facilities and the unwinding of discount on
decommissioning provision. A more detailed analysis is given at Note 7
on page 44.

Finance Revenue
Finance revenue of US$126,595 (2009: US$173,296) arises from interest
earned on bank deposits.

Taxation
The current tax charge arises on interest earned from bank deposits.
The deferred tax charge arises on interest earned by PetroNeft on loans
to its wholly owned subsidiary Stimul-T.

As a result of the equity funding and the Macquarie loan facility the
Group’s 2011 capital investment programme is fully funded. It is also
expected that operating cash flows and debt capacity of the Group’s
producing assets will enable the Group to continue investment in 2012
and beyond in order to bring its other oil fields into production.

Financial Risk Management
The Board sets the treasury policies and objectives of the Group,
which include controls over the procedures used to manage financial
risk. The Group’s activities expose the Group to a variety of financial
risks including foreign currency, commodity price, credit, liquidity and
interest rate risks. These financial risks are managed by the Group
under policies approved by the Board. Details of the Group’s financial
risk management policies are set out in detail in Note 24 to the
consolidated financial statements.

Investor Relations
During 2010, the CEO and CFO held regular meetings with analysts
and institutional investors and the fund raising in October 2010 further
widened the base of institutional investors in the Company. In September
2010 PetroNeft hosted a group of analysts and shareholders in Tomsk
including a visit to the Lineynoye oil field. This visit helped to increase
the amount of analyst coverage of PetroNeft.

The target for 2011 is to continue our programme of meetings and
specifically to get more analyst coverage in order to further increase
our visibility within the investment community. In March 2011 the Group’s
website, www.petroneft.com, was upgraded and re-launched bringing
easier navigation and additional tools and information for users.

Significant Shareholders
So far as the Directors are aware, the names of the persons other
than the Directors who, directly or indirectly, are interested in 3%
or more of the Issued Share Capital at 4 May 2011 are as follows:

Name of Shareholder

Ordinary Shares

Percentage

JP Morgan Chase & Co
BlueGold Capital Management LLP
Macquarie Bank Limited
Ali Sobraliev
Pictet & Cie.
Arawak Energy
Wasatch Advisers Inc.

37,687,500
29,618,768
25,628,047
23,014,273
14,153,213
14,114,344
14,023,048

9.06%
7.12%
6.16%
5.53%
3.40%
3.39%
3.37%

Paul Dowling
Chief Financial Officer

Capital Investment
Several major capital projects were completed in 2010 and further
significant investment is planned in 2011. 2010 projects included:

≥ Construction of a 60km pipeline from Lineynoye oil field to Imperial

Energy’s facility at Kiev-Eganskoye.

≥ Construction of oil processing, oil storage and crew facilities

at the Lineynoye oil field.

≥ Drilled and completed nine new production wells and one water

source well at the Lineynoye oil field.

≥ Drilled one exploration well that led to the discovery of the

Arbuzovskoye oil field

In 2011 the Group intend to invest US$53 million, the largest amount
it has ever invested in a single year in the following projects:

≥ Drill, complete and carry out fracture stimulation on 17 new
production wells at Pads 2 and 3 in the Lineynoye oil field.
≥ Double the capacity of the oil processing facilities at Lineynoye

from 7,400 bfpd to 14,800 bfpd.

≥ Drill three exploration wells at Licence 61, namely, Kondrashevskoye

No. 2, Sibkrayevskaya No. 372 and North Varyakhskaya No. 1.

≥ Drill two exploration wells at Licence 67, namely, Cheremshanskaya

No. 3 and Ledovoye No. 2a. As Licence 67 is 50% owned by Arawak
Energy they will contribute 50% of these costs.

Current and Future Funding of PetroNeft
In May 2010 PetroNeft entered into a loan facility with Macquarie
Bank Limited for up to US$30 million. At peak the maximum drawn
on this loan was US$16 million, however this had been reduced to
US$14.2 million by year-end 2010. In April 2011 a revised facility was
agreed for up to US$75 million with immediate availability of US$30
million subject to the satisfaction of conditions precedent primarily
related to the perfection of security over certain physical assets of
the Group’s Russian subsidiaries.

2011 Planned capital expenditure
of US$53 million

Production Wells
$32m
Equipment and facilities $9m
$8m
Exploration – L61
$4m
Exploration – L67

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 19

Governance

Board of
Directors

David Golder1
Non-Executive Chairman (Age 63)
Mr. Golder has been Non-Executive Chairman of the Company since
2005. He is also Chairman of the Remuneration Committee and a
member of the Audit Committee. He has over 40 years experience in the
petroleum industry and was formerly Senior Vice President of Marathon
Oil Company (‘‘Marathon’’), retiring in 2003. From June 1996 to 1999,
Mr. Golder was seconded from Marathon to Sakhalin Energy Investment
Company where he was Executive Vice President – Upstream. Located
in Moscow, he managed all upstream activities which focused on the
oil development and company infrastructure aspects of the Sakhalin II
Project onshore and offshore Sakhalin Island. Mr. Golder is a member
of the Society of Petroleum Engineers. He has a BSc degree in
Petroleum & Natural Gas Engineering from Pennsylvania State
University and has completed the Program for Management
Development at Harvard University.

Dennis Francis 2
Chief Executive Officer and Executive Director (Age 62)
Mr. Francis has been Chief Executive Officer and an Executive
Director of the Company since its formation in 2005. He has over
39 years experience in the petroleum industry and was with Marathon
for 30 years. From 1990, Mr. Francis was the USSR/FSU task force
manager, responsible for developing new opportunities for Marathon
in Russia. Marathon and its partners ultimately won the first Russian
competitive tender, which was to develop the Sakhalin II Project offshore
Sakhalin Island. Mr. Francis was instrumental in the formation of Sakhalin
Energy Investment Company and was a director in that company. He is
a member of the American Association of Petroleum Geologists and
Society of Exploration Geophysicists. He has a BSc degree in geophysical
engineering and an MSc degree in geology, both from the Colorado
School of Mines. He has also completed the Program for Management
Development at Harvard University.

20 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Paul Dowling3
Chief Financial Officer and Executive Director (Age 39)
Mr. Dowling joined the Company in October 2007 and was appointed
to the Board of Directors in April 2008. He has 20 years experience in
the areas of accounting, auditing, taxation, financial reporting, AIM/IPO
reporting, corporate restructuring, corporate finance and acquisitions/
disposals. Most recently he was a Partner in the accounting firm,
LHM Casey McGrath, located in Dublin. Mr. Dowling is a fellow of the
Association of Chartered Certified Accountants (ACCA) and a member
of the Irish Taxation Institute. He currently represents the ACCA with
the Consultative Committee of Accountancy Bodies – Ireland (CCAB-I).
He is also a non-executive Director of Moesia Oil & Gas plc, an unlisted
company, focused on oil and gas exploration and development
in Central and Eastern Europe.

Dr. David Sanders4
General Legal Counsel, Executive Director
and Company Secretary (Age 62)
Dr. Sanders has been General Legal Counsel, Executive Director and
Company Secretary of the Company since its formation in 2005. He is
an attorney at law and has over 33 years experience in the petroleum
industry, including 20 years of doing business in Russia and three years
in the oil and gas litigation division of the law firm of Fulbright & Jaworski
LLP. In 1988, Dr. Sanders joined Marathon where he analysed and
reviewed joint venture agreements for worldwide production until his
assignment in 1991 to the negotiating team for the Sakhalin II Project
in Russia. Dr. Sanders has a degree in electronics from Pennsylvania
Institute of Technology, a liberal arts degree from the University of
Houston and a doctorate of jurisprudence from South Texas College
of Law. He is a member of the State Bar of Texas and of the American
Bar Association.

Gerard Fagan5
Non-Executive Director (age 62)
Mr. Fagan was appointed as a Non-Executive Director on 8 September
2010. He is a member of the Audit Committee and a member of the
Remuneration Committee. Mr. Fagan previously worked with Smurfit
Kappa Group plc (“Smurfit Kappa”) for 23 years before his retirement
as Group Financial Controller in September 2009. During this time he
had global responsibility for controlling financial operations of Smurfit
Kappa, a company with turnover of €7 billion and operations in over
30 countries worldwide. Mr. Fagan has vast experience in mergers and
acquisitions, corporate finance, accounting, taxation, insurance and
corporate governance. He is both a Chartered and Chartered Certified
Accountant and has previously served on the audit committee of the
Institute of Chartered Accountants in Ireland. Mr. Fagan is also
a Non-Executive Director of Liffey Reinsurance Company Limited,
The Baxendale Insurance Company Limited, Bramshott Management
Limited and Bramshott Europe Fund plc.

Thomas Hickey6
Independent Non-Executive Director (Age 42)
Mr. Hickey has been a Non-Executive Director of the Company since
2005. He is Chairman of the Audit Committee and a member of the
Remuneration Committee. He is Corporate Development Director of
Petroceltic International plc, an AIM listed oil and gas company focused
on the Middle East-North Africa and the Mediterranean basin. He was
Chief Financial Officer and a Director of Tullow Oil plc from 2000 to 2008.
During this time Tullow grew via a number of significant acquisitions and
exploration success. Prior to joining Tullow Oil plc, he was an Associate
Director of ABN AMRO Corporate Finance (Ireland) Limited. In this role,
he advised public and private companies in a wide range of industry
sectors in the areas of fundraising, stock exchange requirements,
mergers and acquisitions, flotation and related transactions. Mr. Hickey
is a Commerce graduate of University College Dublin and a Fellow of the
Irish Institute of Chartered Accountants. He is also a non-executive
Director of Ikon Science Limited, a UK geological software company.

Vakha Sobraliev7
Non-Executive Director (Age 56)
Mr. Sobraliev has been a Non-Executive Director of the Company since
2005. He is a member of both the Audit and Remuneration Committees.
He has over 30 years experience operating and managing energy service
companies and state operating units exploring for and exploiting oil
resources in the Western Siberian oil basin. Mr. Sobraliev is currently
a shareholder and General Director of Tomskburneftegaz LLC, an oil
and gas well drilling and services company operating in Western Siberia.
From 1975 to 2000, Mr. Sobraliev worked for Tomskneft and Strezhevoy
drilling boards in various drilling and economic capacities including chief
engineer and chief accountant. He has degrees in mining engineering and
economics from Tomsk Polytechnic Institute and the Tomsk State
University respectively. Mr. Sobraliev is a resident of Tomsk, Russia.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 21

Governance

Directors’ Report
For the year ended 31 December 2010

The Directors present herewith their Annual Report and the audited financial statements of PetroNeft Resources plc (the ‘Company’) and its
subsidiaries (collectively, the ‘Group’) for the year ended 31 December 2010.

Principal Activity
The principal activities of the Group are that of oil and gas exploration, development and production. The Group was established to acquire and
develop oil and gas exploration, development and production interests in Russia and other countries of the former Soviet Union. A detailed business
review is included in the Chairman’s Statement, Chief Executive Officer’s Report and in the Financial Review.

Results and Dividends
The loss for the year before tax amounted to US$6,272,965 (2009: US$6,153,080). After a tax charge of US$852,429 (2009: US$318,472) the loss
for the year amounted to US$7,125,394 (2009: US$6,471,552). The Directors do not recommend payment of a dividend. Accordingly, an amount
of US$7,125,394 has been debited to reserves.

Review of the Development and Performance of the Business
In compliance with the requirements of the Companies Acts, 1963 to 2009, a fair review of the performance and development of the Group’s
business during the year, its position at the year-end and its future prospects is contained in the Chief Executive Officer’s Report on pages 12 to 15
and the Financial Review on pages 18 to 19. The key financial metrics used by management are set out in the Financial Review on page 18.

Corporate Governance
The Company is not subject to the Combined Code on Corporate Governance applicable to companies with full listings on the Dublin and London
Stock Exchange. The Company does, however, intend, in so far as is practicable and desirable, given the size and nature of the business and the
constitution of the Board, to comply with the Corporate Governance Guidelines for AIM Companies (the ‘QCA Guidelines’) as published by the Quoted
Companies Alliance (the ‘QCA’).

The QCA Guidelines were devised, in consultation with a number of significant institutional small company investors, as an alternative corporate
governance code applicable to AIM companies. An alternative code was proposed because the QCA considered the Combined Code on Corporate
Governance to be inappropriate to many AIM companies.

The QCA Guidelines state that “the purpose of good corporate governance is to ensure that the Company is managed in an efficient, effective and
entrepreneurial manner for the benefit of all shareholders over the longer term.” The guidelines set out a code of best practice for AIM companies.
Those guidelines require, among other things, that:
a) certain matters be specifically reserved for the Board’s decision;
b) the Board should be supplied in a timely manner with information (including regular management financial information) in a form and of a quality

appropriate to enable it to discharge its duties;

c) the Board should, at least annually, conduct a review of the effectiveness of the Company’s system of internal controls and should report

to shareholders that they have done so;

d) the roles of Chairman and Chief Executive should not be exercised by the same individual or there should be a clear explanation of how other

Board procedures provide protection against the risks of concentration of power within the Company;

e) Company should have at least two independent Non-Executive Directors on the Board and should not be dominated by one person or group of people;
f) all Directors should be submitted for re-election at regular intervals subject to continued satisfactory performance;
g) the Board should establish audit, remuneration and nomination committees; and
h) there should be a dialogue with shareholders based on a mutual understanding of objectives.

PetroNeft satisfies all of these requirements. Major corporate decisions of the Group are subject to Board approval. The Board is supplied in
a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. These matters include approval of the
Group’s general commercial strategy, financial statements, Board membership, significant acquisitions and disposals, major capital expenditures,
overall corporate governance and risk management and treasury policies. The Company holds regular Board meetings throughout the year.

In accordance with the QCA Guidelines, the Board has established Audit and Remuneration Committees, as described below, and utilises other
committees as necessary in order to ensure effective governance.

Audit Committee
The members of the Audit Committee are Thomas Hickey, David Golder, Gerard Fagan and Vakha Sobraliev. It is chaired by Thomas Hickey.
The Audit Committee’s responsibilities include, among other things, reviewing interim and year-end financial statements and preliminary
announcement, accounting principles, policies and practices, internal controls and overseeing the relationship with the external auditor
and the results of their audit.

22 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Governance

Remuneration Committee
The members of the Remuneration Committee are David Golder, Gerard Fagan, Thomas Hickey and Vakha Sobraliev. It is chaired by David Golder.
The Remuneration Committee’s responsibilities include, among other things, determining the policy and elements of remuneration for Executive
Directors, provided however, that no Director shall be directly involved in any decisions as to their own remuneration.

Nomination Committee
Given the current size of the Group, a Nominations Committee is not considered necessary. The Board reserves to itself the process by which
a new Director is appointed.

The appointment of Gerard Fagan as a Non-Executive Director of the Board means that the percentage of Non-Executive Directors on the Board is
now above the recommended 50%. The Group has adopted a model code for Directors’ dealings that is appropriate for an AIM company. The Group
complies with Rule 21 of the AIM Rules relating to Directors’ dealings and will take all reasonable steps to ensure compliance by the Directors and
the Group’s applicable employees and their relative associates.

Shareholder Communication
Shareholder communication is given high priority by the Group and there are regular meetings between senior executives, institutional shareholders,
analysts and brokers. These meetings, which are governed by procedures designed to ensure that price sensitive information is not divulged, are
designed to facilitate a two-way dialogue based upon the mutual understanding of objectives. The Annual General Meeting (‘AGM’) affords individual
shareholders the opportunity to question the Chairman and the Board and their participation is welcomed. Shareholders are also welcome to
telephone or email the Company at any time.

The Chairmen of the Audit Committee and Remuneration Committee are available at the AGM to answer questions. In addition, major shareholders
can meet with the Chairman or Executive and Non-Executive Directors on request.

The Board is kept appraised of the views of shareholders, and the market in general, through feedback from the meetings programme. Analysts’
reports on the Company are also circulated to the Board on a regular basis. The Group’s website, www.petroneft.com, is also a key communication
tool with all shareholders. News releases are made available on the website immediately after release to the Stock Exchange, where presentations,
reserve reports and other materials are also available.

Internal Control
The Directors have overall responsibility for the Group’s system of internal control and have delegated responsibility for the implementation of this
system to executive management. This system is reviewed annually and includes financial controls that enable the Board to meet its responsibilities
for the integrity and accuracy of the Group’s accounting records.

The Group’s system of internal financial control provides reasonable, though not absolute, assurance that assets are safeguarded, transactions
authorised and recorded properly and that material errors or irregularities are either prevented or detected within a timely period.

Directors
The present Directors are listed on pages 20 to 21.

In accordance with Article 83 of the Articles of Association, David Golder and Paul Dowling retire by rotation and, being eligible, offer themselves
for re-election. Gerard Fagan, having been appointed to the Board on 8 September 2010, also retires in accordance with Article 86 of the Articles
of Association and being eligible offers himself for election.

Directors, Company Secretary and Their Interests
The Directors and Company Secretary who held office at 31 December 2010 had no interest, other than those shown below, in the Ordinary
Shares of the Company. All interests shown below are beneficial interests.

David Golder
Dennis Francis
Paul Dowling
David Sanders
Vakha Sobraliev
Gerard Fagan
Thomas Hickey

Ordinary Shares
As at

Ordinary Shares
As at
4 May 2011 31 December 2010

Ordinary Shares
As at
1 January 2010

3,165,458
22,570,416
206,583
2,213,235
–
200,000
1,726,283

3,165,458
22,570,416
192,531
2,213,235
–
–
1,587,614

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 23

Governance

Directors’ Report (continued)
For the year ended 31 December 2010

In addition to the above, the Directors hold the following share options:

Director

David Golder
Dennis Francis
Paul Dowling
David Sanders
Vakha Sobraliev
Gerard Fagan
Thomas Hickey

Options held
as at
1 January
2010

615,000
1,540,000
855,000
1,440,000
555,000
–
453,000

Granted
in Year

120,000
330,000
280,000
280,000
100,000
150,000
100,000

Options held
as at
31 December
2010

735,000
1,870,000
1,135,000
840,000
655,000
150,000
443,000

Exercise price

£0.19 – £0.66
£0.19 – £0.66
£0.19 – £0.66
£0.19 – £0.66
£0.19 – £0.36
£0.66
£0.19 – £0.66

Exercised
in Year

–
–
–
880,000
–
–
110,000

Details of the terms and conditions of the option scheme are included in Note 28 to the financial statements.

Principal Risks and Uncertainties
The Group has a risk management structure in place which is designed to identify, manage and mitigate business risks. Risk assessment and
evaluation is an essential part of the Group’s internal control system.

Details of the principal risks and uncertainties affecting the Group, as required to be disclosed in accordance with the Companies Acts, 1963 to 2009,
are detailed in the Financial Review.

Remuneration Committee Report
The Group’s policy on senior executive remuneration is designed to attract and retain people of the highest calibre who can bring their experience
and independent views to the policy, strategic decisions and governance of the Group.

In setting remuneration levels, the Remuneration Committee takes into consideration the remuneration practices of other companies of similar size
and scope. A key philosophy is that staff must be properly rewarded and motivated to perform in the best interests of the shareholders. Bonuses for
Executive Directors are based on performance targets which include elements relating to shareholder return and individual performance.

The share option scheme is designed to incentivise performance and loyalty of Directors and key employees. Options vest when certain operational
and total shareholder return targets are met. Share option holdings of the Directors are disclosed above.

The Board has also agreed to allow Directors elect to have their Directors’ fees paid in shares. Under this scheme, the number of shares issued
will be based on the closing price at each quarter end. Elections under this scheme must be for a minimum of one year. Certain Directors elected
to receive a portion of their remuneration for 2008, 2009 and 2010 in shares instead of cash.

In US Dollars

Director

Executive Directors
Dennis Francis
Paul Dowling
David Sanders
Former Executive Director
Des Burke

Non-Executive Directors
David Golder
Gerard Fagan
Thomas Hickey
Vakha Sobraliev

Total Directors remuneration

certain amounts were paid in shares instead of cash.

Basic
*
remuneration

*
Bonuses

Pension

Share-based
payment

Total
remuneration

2010

2009

246,712
216,838
219,787

127,805
103,277
71,639

–
10,615
–

–
–––––––––––
683,337
–––––––––––

33,474
8,316
26,494
13,247
–––––––––––
81,531
–––––––––––
764,868
–––––––––––

–
–––––––––––
302,721
–––––––––––

–
–
–
–
–––––––––––
–
–––––––––––
302,721
–––––––––––

–
–––––––––––
10,615
–––––––––––

–
–
–
–
–––––––––––
–
–––––––––––
10,615
–––––––––––

48,198
34,283
41,829

–
–––––––––––
124,310
–––––––––––

14,222
1,252
11,388
10,570
–––––––––––
37,432
–––––––––––
161,742
–––––––––––

422,715
365,013
333,255

–
–––––––––––
1,120,983
–––––––––––

47,696
9,568
37,882
23,817
–––––––––––
118,963
–––––––––––
1,239,946
–––––––––––

442,333
342,729
373,582

40,268
–––––––––––
1,198,912
–––––––––––

48,985
–
38,316
24,923
–––––––––––
112,224
–––––––––––
1,311,136
–––––––––––

24 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Governance

Statement of Directors’ Responsibilities in respect of the Financial Statements
Company law in the Republic of Ireland requires the Directors to prepare financial statements for each financial year which give a true and fair
view of the state of affairs of the Company and of the Group and of the profit or loss of the Group for that period.

In preparing these financial statements of the Group, the Directors are required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgments and estimates that are reasonable;
• Comply with applicable International Financial Reporting Standards as adopted by the European Union; and
• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue

in business.

The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that the financial statements comply with the Companies Acts, 1963 to 2009. They are also responsible for
safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Political Donations
The Company did not make any political donations during the year.

Books of Account
The measures taken by the Directors to ensure compliance with the requirements of Section 202, Companies Act 1990, regarding proper books
of account are the implementation of necessary policies and procedures for recording transactions, the employment of competent accounting
personnel with appropriate expertise and the provision of adequate resources to the financial function. The books of account of the Company are
maintained at 20 Holles Street, Dublin 2, Ireland.

Important Events after the Balance Sheet Date
In April 2011 PetroNeft signed a new loan facility agreement with Macquarie Bank Limited for up to US$75 million subject to the satisfaction
of conditions precedent primarily related to the perfection of security over certain physical assets of the Group’s Russian subsidiaries.

Auditors
Ernst & Young, Chartered Accountants, have indicated their willingness to continue in office in accordance with the provisions of Section 160(2)
of the Companies Act, 1963.

Annual General Meeting
Your attention is drawn to the Notice of Meeting set out on page 61.

Your Directors believe that the Resolutions to be proposed at the Meeting are in the best interests of the Company and its shareholders as a whole
and, therefore, recommend you to vote in favour of the Resolutions. Your Directors intend to vote in favour of the Resolutions in respect of their own
beneficial holdings of 30,081,975 Ordinary Shares.

Approved by the Board on 10 May 2011

Dennis Francis
Director

Paul Dowling
Director

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 25

Governance

Independent Auditor’s Report
to the members of PetroNeft Resources plc

We have audited the Group and Parent Company financial statements (the ‘financial statements’) of PetroNeft Resources plc for the year ended
31 December 2010, which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated
and Parent Company Balance Sheets, the Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company
Statement of Changes in Equity, and the related notes 1 to 30. These financial statements have been prepared under the accounting policies set
out therein.

This report is made solely to the Company’s members, as a body, in accordance with section 193 of the Companies Act, 1990. Our audit work has
been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and
for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective Responsibilities of Directors and Auditors
The Directors are responsible for the preparation of the financial statements in accordance with applicable Irish law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union, as set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards
on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and have been properly prepared in accordance with the
Companies Acts, 1963 to 2009. We also report to you our opinion as to: whether proper books of account have been kept by the Company; whether,
at the balance sheet date, there exists a financial situation which may require the convening of an extraordinary general meeting of the Company; and
whether the information given in the Directors’ Report is consistent with the financial statements. In addition, we state whether we have obtained all
the information and explanations necessary for the purposes of our audit and whether the Company Balance Sheet is in agreement with the books
of account.

We also report to you if, in our opinion, any information specified by law regarding directors’ remuneration and other transactions is not disclosed
and, where practicable, include such information in our report.

We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. The other
information comprises only the Chairman’s Statement, the Chief Executive Officer’s Report, Health, Safety and Environmental Report, the Financial
Review and the Directors’ Report. We consider the implications for our report if we become aware of any apparent misstatements or material
inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment
of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting
policies are appropriate to the Group’s and Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion
In our opinion the financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of affairs
of the Group and of the Company as at 31 December 2010, and of the loss of the Group for the year then ended and have been properly prepared
in accordance with the Companies Acts, 1963 to 2009.

We have obtained all the information and explanations we consider necessary for the purposes of our audit. In our opinion proper books of account
have been kept by the Company. The Company Balance Sheet is in agreement with the books of account.

In our opinion the information given in the Directors’ Report is consistent with the financial statements.

In our opinion, the Company balance sheet does not disclose a financial situation which under section 40(1) of the Companies (Amendment) Act,
1983 would require the convening of an extraordinary general meeting of the Company.

Ernst & Young
Chartered Accountants and Registered Auditors
Dublin
10 May 2011

26 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

Consolidated Income Statement
For the year ended 31 December 2010

Continuing operations
Revenue
Cost of sales

Gross profit
Administrative expenses
Loss on oil and gas properties
Exchange loss on intra-Group loans

Operating loss

Finance revenue
Finance costs

Loss for the year for continuing operations before taxation

Income tax expense

Loss for the year attributable to equity holders of the Parent

Loss per share attributable to ordinary equity holders of the Parent
Basic and diluted – US Dollar cent

Consolidated Statement of Comprehensive Income
For the year ended 31 December 2010

Loss for the year attributable to equity holders of the Parent

Currency translation adjustments

Total comprehensive loss for the year attributable to equity holders of the Parent

Approved by the Board on 10 May 2011

Dennis Francis
Director

Paul Dowling
Director

Note

2010
US$

2009
US$

5
5

6
7

5,155,646
(4,284,181)
–––––––––––––
871,465
(5,777,053)
–
(137,054)
–––––––––––––
(5,042,642)

509,710
(420,566)
–––––––––––––
89,144
(4,304,843)
(1,552,350)
(537,683)
–––––––––––––
(6,305,732)

126,595
(1,356,918)
–––––––––––––
(6,272,965)

173,296
(20,644)
–––––––––––––
(6,153,080)

(852,429)
–––––––––––––

(318,472)
–––––––––––––

(7,125,394)
–––––––––––––

(6,471,552)
–––––––––––––

(1.97)
–––––––––––––

(2.53)
–––––––––––––

2010
US$

2009
US$

(7,125,394)

(6,471,552)

(33,696)
–––––––––––––

(770,566)
–––––––––––––

(7,159,090)
–––––––––––––

(7,242,118)
–––––––––––––

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 27

Financial Statements

Consolidated Balance Sheet
As at 31 December 2010

Assets
Non-current Assets
Oil and gas properties
Property, plant and equipment
Exploration and evaluation assets
Leasehold land payments

Current Assets
Inventories
Trade and other receivables
Cash and cash equivalents
Restricted cash

Assets held for sale

Total Assets

Equity and Liabilities
Capital and Reserves
Called up share capital
Share premium account
Share-based payment reserve
Retained loss
Currency translation reserve
Other reserves

Equity attributable to equity holders of the Parent

Non-current Liabilities
Provisions
Deferred tax liability

Current Liabilities
Trade and other payables
Interest bearing loans and borrowings

Total Liabilities

Total Equity and Liabilities

Approved by the Board on 10 May 2011

Dennis Francis
Director

Paul Dowling
Director

28 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Note

2010
US$

2009
US$

12
13
14
16

17
18
19
19

22
9

20
21

62,143,801
1,674,216
21,391,491
–
–––––––––––––
85,209,508
–––––––––––––

907,947
8,064,978
22,781,881
2,500,000
–––––––––––––
34,254,806
2,020,678
–––––––––––––
36,275,484
–––––––––––––
121,484,992
–––––––––––––

27,165,261
1,776,108
18,217,242
176,825
–––––––––––––
47,335,436
–––––––––––––

–
4,909,915
15,726,479
–
–––––––––––––
20,636,394
–
–––––––––––––
20,636,394
–––––––––––––
67,971,830
–––––––––––––

5,624,840
122,082,388
3,641,064
(25,877,797)
(5,828,332)
336,000
–––––––––––––
99,978,163
–––––––––––––

4,724,013
81,328,170
2,368,929
(18,752,403)
(5,794,636)
336,000
–––––––––––––
64,210,073
–––––––––––––

743,670
1,636,475
–––––––––––––
2,380,145
–––––––––––––

269,654
826,129
–––––––––––––
1,095,783
–––––––––––––

5,401,479
13,725,205
–––––––––––––
19,126,684
–––––––––––––
21,506,829
–––––––––––––
121,484,992
–––––––––––––

2,665,974
–
–––––––––––––
2,665,974
–––––––––––––
3,761,757
–––––––––––––
67,971,830
–––––––––––––

Financial Statements

Consolidated Statement of Changes in Equity
For the year ended 31 December 2010

At 1 January 2009

Loss for the year
Currency translation adjustments

Total comprehensive loss for the year
New share capital subscribed
Transaction costs on issue of share capital
Remuneration and other emoluments
paid in shares
Share-based payment expense

At 31 December 2009

At 1 January 2010

Loss for the year
Currency translation adjustments

Total comprehensive loss for the year
New share capital subscribed
Transaction costs on issue of share capital
Share options exercised
Remuneration and other emoluments
paid in shares
Share-based payment expense
Share-based payment expense – Macquarie
warrants (note 21)

At 31 December 2010

Share
capital
US$

Share
premium
US$

Share-based
payment and
other reserves
US$

Currency
translation
reserve
US$

Retained
loss
US$

Total
US$

2,919,041
–––––––––––––
–
–
–––––––––––––

57,193,950
–––––––––––––
–
–
–––––––––––––

2,240,829
–––––––––––––
–
–
–––––––––––––

(5,024,070)
–––––––––––––
–
(770,566)
–––––––––––––

(12,280,851)
–––––––––––––
(6,471,552)
–
–––––––––––––

45,048,899
–––––––––––––
(6,471,552)
(770,566)
–––––––––––––

–
1,797,899
–

–
25,560,368
(1,494,385)

–
–
–

(770,566)
–
–

(6,471,552)
–
–

(7,242,118)
27,358,267
(1,494,385)

7,073
–
–––––––––––––
4,724,013
–––––––––––––

68,237
–
–––––––––––––
81,328,170
–––––––––––––

–
464,100
–––––––––––––
2,704,929
–––––––––––––

–
–
–––––––––––––
(5,794,636)
–––––––––––––

–
–
–––––––––––––
(18,752,403)
–––––––––––––

75,310
464,100
–––––––––––––
64,210,073
–––––––––––––

4,724,013
–––––––––––––
–
–
–––––––––––––
–
872,841
–
27,406

81,328,170
–––––––––––––
–
–
–––––––––––––
–
42,307,945
(2,387,223)
813,714

2,704,929
–––––––––––––
–
–
–––––––––––––
–
–
–
–

(5,794,636)
–––––––––––––
–
(33,696)
–––––––––––––
(33,696)
–
–
–

(18,752,403)
–––––––––––––
(7,125,394)
–
–––––––––––––
(7,125,394)
–
–
–

64,210,073
–––––––––––––
(7,125,394)
(33,696)
–––––––––––––
(7,159,090)
43,180,786
(2,387,223)
841,120

580
–

19,782
–

–
460,500

–
–

20,362
460,500

–
–––––––––––––
5,624,840
–––––––––––––

–
–––––––––––––
122,082,388
–––––––––––––

811,635
–––––––––––––
3,977,064
–––––––––––––

–
–––––––––––––
(5,828,332)
–––––––––––––

–
–––––––––––––
(25,877,797)
–––––––––––––

811,635
–––––––––––––
99,978,163
–––––––––––––

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 29

Financial Statements

Consolidated Cash Flow Statement
For the year ended 31 December 2010

Cash flows from operating activities
Loss before taxation

Adjustment to reconcile loss before tax to net cash flows
Non-cash
Depreciation and amortisation
Share-based payment expense
Unwinding of discount on decommissioning provision
Discount on deposit paid for pipeline usage
Write off of leasehold land payments
Loss on disposal of oil and gas properties
Remuneration and other emoluments paid in shares
Finance revenue
Other finance costs

Working capital adjustments
(Increase)/decrease in trade and other receivables
Increase in inventories
Increase/(decrease) in trade and other payables
Income tax received

Net cash flows used in operating activities

Investing activities
Purchase of oil and gas properties
Advance payments to contractors
Advance payment to purchase License 67
Purchase of property, plant and equipment
Disposals of property, plant and equipment
Exploration and evaluation payments
Increase in restricted cash
Interest received

Net cash used in investing activities

Financing activities
Proceeds from issue of share capital
Transaction costs of issue of shares
Proceeds from exercise of share options
Proceeds from loans and borrowings
Transaction costs on loans and borrowings
Payments of loans and borrowings
Interest paid

Net cash received from financing activities

Net increase in cash and cash equivalents
Translation adjustment
Cash and cash equivalents at the beginning of the year

Note

2010
US$

2009
US$

(6,272,965)

(6,153,080)

811,949
460,500
20,787
342,053
176,825
–
20,362
(126,595)
994,078

215,693
464,100
20,644
–
–
1,552,350
75,310
(173,296)
–

(3,444,866)
(808,561)
2,944,919
–
–––––––––––––
(4,881,514)
–––––––––––––

1,988,854
–
(408,533)
23,163
–––––––––––––
(2,394,795)
–––––––––––––

(32,006,996)
(3,883,284)
–
(217,524)
1,154
(3,736,142)
(2,500,000)
161,961
–––––––––––––
(42,180,831)
–––––––––––––

(5,402,567)
(2,635,111)
(1,160,556)
(291,838)
–
(812,550)
–
137,930
–––––––––––––
(10,164,692)
–––––––––––––

43,180,786
(2,387,223)
841,120
16,000,000
(584,467)
(1,788,000)
(835,467)
–––––––––––––
54,426,749
–––––––––––––

27,358,267
(1,494,385)
–
–
–
–
–
–––––––––––––
25,863,882
–––––––––––––

7,364,404
(309,002)
15,726,479
–––––––––––––

13,304,395
253,887
2,168,197
–––––––––––––

Cash and cash equivalents at the end of the year

22,781,881
–––––––––––––

15,726,479
–––––––––––––

30 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

Company Balance Sheet
As at 31 December 2010

Non-current Assets
Property, plant and equipment
Financial assets

Current Assets
Trade and other receivables
Cash and cash equivalents
Restricted cash

Total Assets

Equity and Liabilities

Capital and Reserves
Called up share capital
Share premium account
Share-based payment reserve
Retained loss
Other reserves

Equity attributable to equity holders of the parent

Non-current Liabilities
Deferred tax liability

Current Liabilities
Trade and other payables
Interest bearing loans and borrowings

Total Liabilities

Total Equity and Liabilities

Approved by the Board on 10 May 2011

Dennis Francis
Director

Paul Dowling
Director

Note

13
15

18
19
19

20
21

2010
US$

2009
US$

9,136
40,368,922
–––––––––––––
40,378,058
–––––––––––––

7,844
40,280,658
–––––––––––––
40,288,502
–––––––––––––

75,051,933
21,001,248
2,500,000
–––––––––––––
98,553,181
–––––––––––––
138,931,239
–––––––––––––

29,457,794
13,944,861
–
–––––––––––––
43,402,655
–––––––––––––
83,691,157
–––––––––––––

5,624,840
122,082,388
3,641,064
(8,854,833)
336,000
–––––––––––––
122,829,459
–––––––––––––

4,724,013
81,328,170
2,368,929
(6,569,543)
336,000
–––––––––––––
82,187,569
–––––––––––––

1,636,475
–––––––––––––
1,636,475
–––––––––––––

826,129
–––––––––––––
826,129
–––––––––––––

740,100
13,725,205
–––––––––––––
14,465,305
–––––––––––––
16,101,780
–––––––––––––
138,931,239
–––––––––––––

677,459
–
–––––––––––––
677,459
–––––––––––––
1,503,588
–––––––––––––
83,691,157
–––––––––––––

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 31

Financial Statements

Company Statement of Changes in Equity
For the year ended 31 December 2010

At 1 January 2009

Loss for the year

Total comprehensive loss for the year
New share capital subscribed
Transaction costs on issue of share capital
Remuneration and other emoluments paid in shares
Share-based payment expense

At 31 December 2009

At 1 January 2010

Loss for the year

Total comprehensive loss for the year
New share capital subscribed
Transaction costs on issue of share capital
Share options exercised
Remuneration and other emoluments paid in shares
Share-based payment expense
Share-based payment expense – Macquarie warrants (note 21)

At 31 December 2010

Share
capital
US$

2,919,041
–––––––––––––
–
–––––––––––––
–
1,797,899
–
7,073
–
–––––––––––––
4,724,013
–––––––––––––

4,724,013
–––––––––––––
–
–––––––––––––
–
872,841
–
27,406
580
–
–
–––––––––––––
5,624,840
–––––––––––––

Share
premium
US$

Share-based
payment and
other reserves
US$

57,193,950
–––––––––––––
–
–––––––––––––
–
25,560,368
(1,494,385)
68,237
–
–––––––––––––
81,328,170
–––––––––––––

81,328,170
–––––––––––––
–
–––––––––––––
–
42,307,945
(2,387,223)
813,714
19,782
–
–
–––––––––––––
122,082,388
–––––––––––––

2,240,829
–––––––––––––
–
–––––––––––––
–
–
–
–
464,100
–––––––––––––
2,704,929
–––––––––––––

2,704,929
–––––––––––––
–
–––––––––––––
–
–
–
–
–
460,500
811,635
–––––––––––––
3,977,064
–––––––––––––

Retained
loss
US$

(4,654,272)
–––––––––––––
(1,915,271)
–––––––––––––
(1,915,271)
–
–
–
–
–––––––––––––
(6,569,543)
–––––––––––––

(6,569,543)
–––––––––––––
(2,285,290)
–––––––––––––
(2,285,290)
–
–
–
–
–
–
–––––––––––––
(8,854,833)
–––––––––––––

Total
US$

57,699,548
–––––––––––––
(1,915,271)
–––––––––––––
(1,915,271)
27,358,267
(1,494,385)
75,310
464,100
–––––––––––––
82,187,569
–––––––––––––

82,187,569
–––––––––––––
(2,285,290)
–––––––––––––
(2,285,290)
43,180,786
(2,387,223)
841,120
20,362
460,500
811,635
–––––––––––––
122,829,459
–––––––––––––

32 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

Company Cash Flow Statement
For the year ended 31 December 2010

Cash flows from operating activities
Loss before taxation

Adjustment to reconcile loss before tax to net cash flows
Non-cash
Depreciation of property, plant and equipment
Share-based payment expense
Write off of financial assets
Remuneration and other emoluments paid in shares
Finance revenue
Other finance costs

Working capital adjustments
Increase in trade and other receivables
Increase in trade and other payables
Income tax received

Net cash flows used in operating activities

Investing activities
Purchase of property, plant and equipment
Investment in subsidiaries
Increase in restricted cash
Interest received

Net cash provided by investing activities

Net cash received from financing activities

Net increase in cash and cash equivalents
Translation adjustment
Cash and cash equivalents at the beginning of the year

Note

2010
US$

2009
US$

(1,432,861)

(1,596,799)

3,517
225,975
224,546
20,362
(3,405,833)
1,739,347

2,281
232,711
–
75,310
(1,276,343)
–

(42,094,642)
25,985
–
–––––––––––––
(44,693,604)
–––––––––––––

(11,591,597)
236,457
23,163
–––––––––––––
(13,894,817)
–––––––––––––

(4,809)
(78,285)
(2,500,000)
199,821
–––––––––––––
(2,383,273)
–––––––––––––

(4,425)
–
–
124,396
–––––––––––––
119,971
–––––––––––––

43,180,786
(2,387,223)
841,120
16,000,000
(584,467)
(1,788,000)
(835,467)
–––––––––––––
54,426,749
–––––––––––––

27,358,267
(1,494,385)
–
–
–
–
–
–––––––––––––
25,863,882
–––––––––––––

7,349,872
(293,485)
13,944,861
–––––––––––––

12,089,036
196,015
1,659,810
–––––––––––––

Cash and cash equivalents at the end of the year

21,001,248
–––––––––––––

13,944,861
–––––––––––––

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 33

Financial Statements

Notes to the Financial Statements
For the year ended 31 December 2010

1. General Information on the Company and the Group
PetroNeft Resources plc (‘the Company’, or together with its subsidiaries, ‘the Group’) is a Company incorporated in Ireland. The Company
is listed on the Alternative Investments Market (‘AIM’) of the London Stock Exchange and the Enterprise Securities Market (‘ESM’) of the Irish Stock
Exchange. The address of the registered office and the business address in Ireland is 20 Holles Street, Dublin 2. The Company is domiciled in the
Republic of Ireland.

The principal activities of the Group are oil and gas exploration, development and production.

2. Accounting Policies
2.1 Basis of Preparation
The financial statements have been prepared on a historical cost basis except for derivative financial instruments that have been measured at fair
value. The financial statements are presented in US Dollars (‘US$’).

Statement of Compliance
The consolidated financial statements of PetroNeft Resources plc and its subsidiaries have been prepared in accordance with International
Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’).

2.2 Basis of Consolidation
The consolidated financial statements comprise the financial statements of PetroNeft Resources plc and its subsidiaries as at 31 December
each year.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated
until the date that such control ceases.

The financial statements of the subsidiaries are prepared for the same reporting period as the Parent Company, using consistent accounting policies.

All intra-Group balances, income and expenses and unrealised gains and losses resulting from intra-Group transactions are eliminated in full.

2.3 Significant Accounting Judgments, Estimates and Assumptions
The preparation of the Group’s consolidated financial statements in compliance with IFRS requires management to make judgements, estimates
and assumptions that affect the reported amounts of assets, liabilities and disclosed contingent liabilities at the end of the reporting period and
the amounts of revenues and expenses recognised during the reporting period. Estimates and judgements are continuously evaluated and are
based on management’s experience and other factors, including expectations of the future events that are believed to be reasonable under the
circumstances. However, uncertainty about these assumptions and estimates could result in outcomes that require an adjustment to the carrying
amount of the asset or liability affected in future periods.

(a) Judgments
In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations,
which have a significant effect on amounts recognised in the consolidated financial statements.

Exploration and evaluation expenditure
Exploration and evaluation expenditure represents active exploration projects. These amounts will be written off to the Consolidated Income
Statement as exploration costs unless commercial reserves are established, or the determination process is not completed. The outcome of
ongoing exploration, and therefore whether the carrying value of these assets will ultimately be recovered, is inherently uncertain.

The Group has capitalised intangible exploration and evaluation assets in accordance with IFRS 6 Exploration for and Evaluation of Mineral
Resources, which are evaluated for indicators of impairment. Any impairment review, where required, involves significant judgment related to
matters such as recoverable reserves, production profiles, oil and gas prices, discount rate, development, operating and offtake costs and other
matters. The carrying amount of intangible exploration and evaluation assets at 31 December 2010 is US$21.4 million (2009: US$18.2 million).

Carrying value of oil and gas properties
Certain oil and gas properties are depreciated using the unit-of-production (‘UOP’) basis at a rate calculated by reference to proved and probable
reserves.

The calculation of the UOP rate of amortisation could be impacted to the extent that actual production in the future is different from current forecast
production based on proved and probable reserves. This would generally result from significant changes in any of the factors or assumptions used
in estimating reserves.

These factors could include:
• Changes in proved and probable reserves;
• The effect on proved and probable reserves of differences between actual commodity prices and commodity price assumptions; and
• Unforeseen operational issues.

34 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

(b) Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk
of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year, are discussed below:

Reserves base
Certain oil and gas properties are depreciated on a unit-of-production basis at a rate calculated by reference to proved and probable reserves,
determined in accordance with the Society of Petroleum Engineers Petroleum Resources Management System rules and incorporating the
estimated future cost of developing and extracting those reserves. Commercial reserves are determined using estimates of oil in place, recovery
factors and future oil prices. Future development costs are estimated using assumptions as to the number of wells required to produce the
commercial reserves, the cost of such wells and associated production facilities, and other capital costs. The current long-term Urals blend
oil price assumption used in the estimation of commercial reserves is an export price of US$80 and a Russian domestic price of US$38.

Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. When value-in-use
or fair-value-less-costs-to-sell calculations are undertaken, management must estimate the future expected cash flows from the asset
or cash-generating unit and determine a suitable discount rate in order to calculate the present value of those cash flows.

It is reasonably possible that the oil price assumption may change, which may then impact the estimated life of a field and may then require
a material adjustment to the carrying value of the assets. The Group continuously monitors internal and external indicators of possible/
potential impairment relating to its tangible and intangible assets.

Impairment of financial assets
Investments in subsidiaries are stated at cost and are reviewed for impairment if there are indications that the carrying value may not be
recoverable in the Parent balance sheet.

Share-based payment transactions
The Group measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date on which they are
granted. Estimating fair value requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on
the terms and conditions of the grant. This also requires determining the most appropriate inputs to the valuation model; including the expected life
of the option, volatility and dividend yield, and making assumptions about them. The model and assumptions used are discussed in Note 28.

Decommissioning costs
Decommissioning costs will be incurred by the Group at the end of the operating life of certain of the Group’s facilities and properties. The ultimate
decommissioning costs are uncertain and cost estimates can vary in response to many factors including changes to relevant legal requirements,
the emergence of new restoration techniques or experience at other sites. The expected timing and amount of expenditure can also change, for example,
in response to changes in reserves or changes in laws and regulations or their interpretation. As a result, there could be significant adjustments
to the provisions established which would affect future financial results. Refer to Note 22 for details of this provision and related assumptions.

2.4 Summary of Significant Accounting Policies
(a) Foreign currencies
The consolidated financial statements are presented in US Dollars, which is the Group’s presentational currency. The US Dollar is also the
Company’s functional currency. Each entity in the Group determines its own functional currency and items included in the financial statements
of each entity are measured using that functional currency. The Company’s Russian subsidiaries’ functional currency is the Russian Rouble.
Transactions in foreign currencies are initially recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated
in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date, including foreign exchange differences arising on
intercompany loans from the Company to the Russian subsidiaries. All differences are taken to profit or loss. Non-monetary items are translated
using the exchange rates ruling as at the date of the initial transaction.

The assets and liabilities of foreign operations are translated into US Dollars at the rate of exchange ruling at the balance sheet date and their
Income Statements are translated at the average exchange rates for the year. The exchange differences arising on the translation are taken directly
to a separate component of equity.

The relevant average and closing exchange rates for 2010 and 2009 were:

US$1 =

Russian Rouble
Euro
British Pound

2010

2009

Closing

30.538
0.7546
0.6465

Average

30.434
0.7549
0.6803

Closing

30.272
0.698
0.628

Average

31.815
0.719
0.641

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 35

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

2. Accounting Policies (continued)
2.4 Summary of Significant Accounting Policies (continued)
(b) Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration
transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination,
the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net
assets. Acquisition costs incurred are expensed and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in
accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation
of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree
is remeasured to fair value at the acquisition date through profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair
value of the contingent consideration which is deemed to be an asset or liability, will be recognised in accordance with IAS 39 either in profit or loss
or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally
settled within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-
controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net
assets of the subsidiary acquired, the difference is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill
acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit
from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the
operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill
disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit
retained.

(c) Oil and gas exploration, evaluation and development expenditure
Oil and gas exploration, evaluation and development expenditure is accounted for using the successful efforts method of accounting.

Pre-licence costs
Pre-licence costs are expensed in the period in which they are incurred.

Exploration and evaluation costs
Payments to acquire the legal right to explore are capitalised at cost as intangible assets. If no future activity is planned, the carrying value of these
costs is written off. Costs directly associated with an exploration well are capitalised until the drilling of the well is complete and the results have
been evaluated. These costs include employee remuneration, materials and fuel used, rig costs and payments made to contractors. If hydrocarbons
are not found, the exploration expenditure is written off as a dry hole. If extractable oil is found and, subject to further appraisal activity, which may
include the drilling of further wells, is likely to be developed commercially, the costs continue to be carried as an intangible asset. All such carried
costs are subject to technical, commercial and management review as well as review for impairment at least once a year to confirm the continued
intent to develop or otherwise extract value from the discovery. If this is no longer the case, the costs are written off. When proved reserves are
determined and development is sanctioned, the relevant expenditure is transferred to oil and gas properties after impairment is assessed and any
resulting impairment loss is recognised. The net proceeds or costs of pilot production are allocated to exploration and evaluation costs.

Development costs
Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development
wells, including unsuccessful development or delineation wells, is capitalised within oil and gas properties and depreciated from the commencement
of production on a unit-of-production basis other than certain non-production related equipment and facilities which are expected to have a shorter
useful economic life and are depreciated on a straight-line basis.

(d) Oil and gas properties and other property, plant and equipment
Oil and gas properties and other property, plant and equipment are stated at cost, less accumulated depreciation.

The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation,
the initial estimate of the decommissioning obligation, and for qualifying assets, relevant borrowing costs. The purchase price or construction cost
is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.

36 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

Depreciation
Oil and gas properties are depreciated on the following basis:
• Production related items including the wells, production facility and pipeline are depreciated on a unit-of-production basis over the proved and

probable reserves of the field concerned. The unit-of-production rate for the amortisation of field development costs takes into account
expenditures incurred to date, together with sanctioned future development expenditure to extract these reserves. The related depreciation is
included within cost of sales.

• Certain non-production related equipment and facilities which are expected to have a shorter useful economic life are depreciated on a
straight-line basis over their estimated useful lives at annual rates ranging from 10% to 30%. The related depreciation is included within
administrative expenses.

Property, plant and equipment are generally depreciated on a straight-line basis over their estimated useful lives at the following annual rates:
• Land and buildings – 3% to 7% or remaining term of the lease, whichever is shorter.
• Plant and machinery – 10% to 35%.
• Motor vehicles – 14% to 35%.

(e) Impairment of property, plant and equipment and intangible assets
At each balance sheet date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine
whether there is any indication that those assets may be impaired. If such indication exists, the recoverable amount of the asset is estimated in
order to determine the extent of any impairment loss.

The recoverable amount is determined as the higher of the fair value less costs to sell for the asset and the asset’s value-in-use. If the carrying
amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to the Consolidated Income Statement
so as to reduce the carrying amount in the Balance Sheet to its recoverable amount.

Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and
willing parties. Direct costs of selling the asset are deducted. Fair value for oil and gas assets is generally determined as the present value of the
estimated future cash flows expected to arise from the continued use of the asset, including any expansion prospects, and its eventual disposal,
using assumptions that a market participant could take into account. These cash flows are discounted by an appropriate discount rate to arrive at a
net present value (NPV) of the asset.

Value-in-use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its
present form and its eventual disposal. Value-in-use is determined by applying assumptions specific to the Group’s continued use and cannot take
into account future development. These assumptions are different to those used in calculating fair value and consequently the value-in-use
calculation is likely to give a different result to a fair value calculation.

Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-
generating unit to which the asset belongs.

(f) Leasehold land payments
Leasehold land payments are upfront payments to acquire long-term leasehold interests in land. These payments are stated at cost, less
impairment and amortised on a straight-line basis over the respective period of the leases.

(g) Financial assets – investment in subsidiaries
Investments in subsidiaries are stated at cost and are reviewed for impairment if there are indications that the carrying value may not be recoverable.

(h) Cash and cash equivalents
Cash and cash equivalents on the balance sheet comprise cash at bank and on hand and short-term deposits with an original maturity of three
months or less.

(i) Financial assets
Financial assets within the scope of IAS 39 Financial Instruments: Recognition and Measurement (‘IAS 39’) are classified as financial assets at fair
value through profit or loss or loans and receivables, as appropriate. When financial assets are recognised initially, they are measured at fair value
plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification
of its financial assets on initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year-end.

The Group does not have held-to-maturity investments or available-for-sale financial assets or financial assets at fair value through the
Consolidated Income Statement.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
After initial measurements, loans and receivables are carried at amortised cost using the effective interest rate method (‘EIR’) less any allowance
for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral
part of the EIR. The EIR amortisation is included in finance revenue in the Consolidated Income Statement. The losses arising from impairment
are recognised in the Consolidated Income Statement in finance costs.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 37

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

2. Accounting Policies (continued)
2.4 Summary of Significant Accounting Policies (continued)
(i) Financial assets (continued)
The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. If there is objective evidence
that an impairment loss on assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the
asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred)
discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The amount of the
loss is recognised in the Consolidated Income Statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after
the impairment was recognised, the previously recognised impairment loss is reversed, to the extent that the carrying value of the asset does not
exceed its amortised cost at the reversal date. Any subsequent reversal of an impairment loss is recognised in the Consolidated Income Statement.

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant
financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying
amount of the receivable is reduced through use of an allowance account. Impaired debts are written-off when they are assessed as uncollectible.

(j) Financial liabilities
Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings,
or as derivatives, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs.

The Group’s financial liabilities include trade and other payables and loans and borrowings.

Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial
recognition at fair value through the Consolidated Income Statement.

Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated
embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on
liabilities held for trading are recognised in the Consolidated Income Statement.

Interest bearing loans and borrowings
After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate
method. Gains and losses are recognised in the Consolidated Income Statement when the liabilities are derecognised as well as through the
effective interest rate method (‘EIR’) amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR.
The EIR amortisation is included in finance cost in the Consolidated Income Statement.

Derecognition
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognised in the Consolidated Income Statement.

(k) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost of producing and processing crude oil is accounted on weighted average
basis. This cost includes all costs incurred in the normal course of business in bringing each product to its present location and condition.
The cost of crude oil includes appropriate proportion of depreciation, depletion and amortisation (‘DD&A’) and overheads based on normal capacity.
Net realisable value of crude oil is based on estimated selling price in the ordinary course of business less any costs expected to be incurred to
completion and disposal.

(l) Non-current assets held for sale and discontinued operations
Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.

Non-current assets once classified as held for sale are not depreciated or amortised.

38 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

(m) Provisions
General
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of
the obligation. Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement
is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the
Consolidated Income Statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using
a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision
due to the passage of time is recognised as a finance cost.

A contingent liability is disclosed where the existence of an obligation will only be confirmed by future events or where the amount of the obligation
cannot be measured with reasonable reliability. Contingent assets are not recognised, but are disclosed where an inflow of economic benefits
is probable.

Decommissioning liability
A decommissioning liability is recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable
that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. The amount
recognised is the estimated cost of decommissioning, discounted to its present value. A corresponding amount equivalent to the provision at the
time of recognition is recognised as part of the cost of the related oil and gas properties or in exploration and evaluation expenditure. Changes in the
estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision
and a corresponding adjustment to oil and gas properties or exploration and evaluation expenditure. The unwinding of the discount on the
decommissioning provision is included as a finance cost.

(n) Taxes
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the
taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, by the reporting
date, in the countries where the Group operates and generates taxable income.

Deferred income tax
Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary
differences, except:
•

In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the
timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the
foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to
the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused
tax credits and unused tax losses can be utilised except:
•

In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred
income tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and
taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax
assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow
the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax relating to items recognised directly in equity is recognised in equity and not in the Income Statement.

Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against
current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

(o) Revenue recognition
Revenue from the sale of crude oil is recognised when the significant risks and rewards of ownership have been transferred, which is when title
passes to the customer. This generally occurs when product is physically transferred into a pipe or other delivery mechanism.

Revenue is stated after deducting sales taxes, excise duties and similar levies.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 39

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

2. Accounting Policies (continued)
2.4 Summary of Significant Accounting Policies (continued)
(p) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time
to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the
period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

(q) Share-based payments
Employees (including senior executives) and Directors of the Group may receive fees and remuneration in the form of share-based payment
transactions, whereby employees render services as consideration for equity instruments (‘equity-settled transactions’).

In situations where equity instruments are issued and some or all of the goods or services received by the entity as consideration cannot be
specifically identified, the unidentified goods or services received (or to be received) are measured as the difference between the fair value of the
share-based payment transaction and the fair value of any identifiable goods or services received at the grant date. This is then capitalised or
expensed as appropriate.

Equity-settled transactions
The cost of equity-settled transactions is measured by reference to the fair value at the date on which they are granted. The fair value is determined
by an external valuer using an appropriate pricing model, further details of which are given in Note 28.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance
and/or service conditions are fulfilled. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting
date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will
ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning
and end of that period and is recognised in employee benefits expense.

No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market
or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that
all other performance and/or service conditions are satisfied.

Where the terms of an equity-settled transaction are modified, the minimum expense recognised is the expense as if the terms had not been
modified, if the original terms of the awards are met. An additional expense is recognised for any modification that increases the total fair value
of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the
award is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the employee are
not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the
cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. All cancellations
of equity-settled transaction awards are treated equally.

Where appropriate, the dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per
share.

(r) Share issue expenses
Costs of share issues are written off against the premium arising on the issue of share capital.

(s) Operating leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, or whether
the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

Operating lease payments are recognised as an expense in the Consolidated Income Statement on a straight line basis over the lease term.

(t) Finance revenue
For all financial instruments measured at amortised cost, interest income or expense is recorded using the effective interest rate, which is the
rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period,
where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance revenue in the income
statement.

(u) Defined contribution pension costs
Pension benefits are funded over the employees’ period of service by way of contributions to a defined contribution scheme. Contributions are
charged to the Consolidated Income Statement in the year to which they relate.

40 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

2.5 Changes in Accounting Policy and Disclosures
International Accounting Standards (IAS/IFRSs) and IFRS Interpretations Committee (IFRIC) Interpretations adopted during the financial year

The Group has adopted the following new and amended IFRS and IFRIC interpretations in respect of the 2010 financial year-end:

Share-based Payment – Group Cash-settled Share-based Payment Transactions

International Accounting Standards (IAS/IFRSs)
IFRS 2
Amendment to IFRS 3 and IAS 27 Business Combinations and Consolidated and Separate Financial Statements
IAS 39
Financial Instruments: Recognition and Measurement – Eligible Hedged items
Improvements to IFRSs (May 2008) – Amendment to IFRS 5 Non-current Asset Held for sale and Discontinued Operations
Improvements to IFRSs (April 2009) – Amendments applicable in respect of the 2010 financial year-end
IFRS Interpretations Committee
IFRIC 17

Distributions of Non-Cash Assets to Owner

Effective date

1 January 2010
1 July 2009
1 July 2009

1 July 2009

The application of the standards and interpretations noted above did not result in material changes in the Group’s Consolidated Financial
Statements.

IFRS and IFRIC Interpretations effective in respect of the 2011 financial year-end

The Group has not applied the following standards and interpretations that have been issued but are not yet effective:

International Accounting Standards (IAS/IFRSs)
Amendment to IAS 24
Amendment to IAS 32

Related Party Disclosures
Financial Instruments: Presentation – Classification of Rights Issues
Improvements to IFRSs (May 2010)

IFRS Interpretations Committee
Amendment to IFRIC 14
IFRIC 19

Prepayments of a Minimum Funding Requirement
Extinguishing Financial Liabilities with Equity Instruments
Improvements to IFRSs

Effective date

1 January 2011
1 February 2010
Various effective dates

1 January 2011
1 July 2010
Various effective dates

The standards and interpretations addressed above will be applied for the purposes of the Group Consolidated Financial Statements with effect
from the dates listed. Their application is not currently envisaged to have a material impact on the Group’s Consolidated Financial Statements.

IFRS and IFRIC Interpretations effective subsequent to the 2011 financial year-end

International Accounting Standards (IAS/IFRSs)
IFRS 9
Amendment to IAS 12
Improvements to IFRS 7
Amendments to IAS 12
1 January 2012

Financial Instruments
Income Taxes
Transfers of Financial Assets
Deferred Tax: Recovery of Underlying Assets

Effective date

1 January 2013
1 January 2012
1 July 2011

Improvements to IFRSs

Various effective dates

IFRS 9 is yet to be endorsed in full by the EU. IFRS 9 as issued reflects the initial phases of the replacement of IAS 39 and applies to classification
and measurement of financial assets and financial liabilities. In subsequent phases, hedge accounting and derecognition will be addressed.
The adoption of the initial phases of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets and financial
liabilities, which will be quantified in conjunction with the other phases when issued.

The IAS 12 amendment is not anticipated to have a material impact on the Group’s Consolidated Financial Statements.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 41

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

3. Segment Information
At present the Group has one reportable operating segment, which is oil exploration and production. As a result, there are no further disclosures
required in respect of the Group’s reporting segment.

The risk and returns of the Group’s operations are primarily determined by the nature of the activities that the Group engages in, rather than the
geographical location of these operations. This is reflected by the Group’s organisational structure and the Group’s internal financial reporting
systems.

Management monitors and evaluates the operating results for the purpose of making decisions consistently with operating profit or loss in the
consolidated financial statements.

Geographical segments
All of the Group’s sales are in Russia. Substantially all of the Group’s capital expenditures are in Russia.

Non-current assets
Assets are allocated based on where the assets are located:

Russia
Ireland

4. Revenue

Revenue from crude oil sales

2010
US$

2009
US$

85,200,373
9,135
–––––––––––––
85,209,508
–––––––––––––

47,327,592
7,844
–––––––––––––
47,335,436
–––––––––––––

2010
US$

2009
US$

5,155,646
–––––––––––––
5,155,646
–––––––––––––

509,710
–––––––––––––
509,710
–––––––––––––

All revenue arises from sales to third parties based in the Russian Federation. More than 99% of revenue or US$ 5,139,106 (2009: Nil) arises from
sales of crude oil to NTK Finko.

42 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

5. Operating Loss

Operating loss is stated after charging:

Included in cost of sales
Cost of inventory recognised as an expense

Included in administration expenses
Amortisation on leasehold land payments
Impairment of leasehold land payment
Foreign exchange loss on intra-Group loans
Other foreign exchange (gains)/losses
Operating lease rentals – land and buildings

Depreciation of property, plant and equipment
Included in administrative expenses
Included in cost of sales
Capitalised during year

Depreciation of oil and gas properties
Included in cost of sales
Included in administrative expenses
Included in closing inventories

Auditors’ remuneration
-Audit of group financial statements
-Other assurance services
-Tax advisory services

Note

2010
US$

2009
US$

4,284,181

–

–
176,825
137,054
(285,038)
308,349

4,184
–
537,683
410,056
157,395

117,177
9,595
129,134
–––––––––––––
255,906
–––––––––––––

520,640
164,537
99,386
–––––––––––––
784,563
–––––––––––––

244,564
–
20,556
–––––––––––––
265,120
–––––––––––––

193,683
–
–
–––––––––––––
193,683
–––––––––––––

17,826
–
–
–––––––––––––
17,826
–––––––––––––

216,646
–
–
–––––––––––––
216,646
–––––––––––––

Loss on oil and gas properties
The loss on oil and gas properties in the previous year of US$1,552,350 relates to expenditure connected with the previous pipeline route from
Lineynoye to Lukpaiskaya in the Khanty-Mansiysk District, 65km to the north of Licence 61. In August 2009 the Group entered into a new crude oil
transportation agreement with Imperial Energy, which meant that the pipeline would now be built on a southerly 60km route to Imperial’s facility at
Kiev-Eganskoye. Certain costs incurred in respect of the engineering and design and permitting associated with the northerly route to Lukpaiskaya
were therefore written off. Further included in the loss on oil and gas properties recognised in 2009 is a US$168,333 loss on disposal of pipe not
required in the new southerly route.

6. Finance Revenue

Bank interest receivable

2010
US$

2009
US$

126,595
–––––––––––––
126,595
–––––––––––––

173,296
–––––––––––––
173,296
–––––––––––––

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 43

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

7. Finance Costs

Interest on bank loans
Unwinding of discount on decommissioning provision (Note 22)
Discount on deposit paid for pipeline usage (see below)
Share-based payment in relation to US$5 million loan facility (Note 21)

2010
US$

2009
US$

643,542
20,787
342,053
350,536
–––––––––––––
1,356,918
–––––––––––––

–
20,644
–
–
–––––––––––––
20,644
–––––––––––––

During the year the Group paid a deposit of US$400,000 to Nord Imperial for the usage of their pipeline. This deposit will be returned at the end of
the contract which is in 2033. In the consolidated financial statements this deposit has been discounted and the discount of US$342,053 has been
taken to finance costs in the current year.

8. Employees

Number of employees

The average numbers of employees (including Directors) during the year was:
Directors
Senior Management
Support Staff

Employment costs (including Directors)

Wages and salaries
Social welfare costs
Share-based payment expense
Contributions to defined contribution pension plan

An amount of US$1,389,177 (2009: US$678,711) in employment costs was capitalised during the year.

Directors’ emoluments

Remuneration and other emoluments – Executive Directors
Remuneration and other emoluments – Non-Executive Directors

Remuneration and other emoluments payable in shares

Contributions to defined contribution pension plan
Share-based payment expense

2010
Number

2009
Number

7
5
88
–––––––––––––
100
–––––––––––––

6
5
43
–––––––––––––
54
–––––––––––––

2010
US$

2009
US$

3,969,500
520,945
460,500
14,602
–––––––––––––
4,965,547
–––––––––––––

2,040,329
187,014
464,100
9,386
–––––––––––––
2,700,829
–––––––––––––

2010
US$

982,662
64,564

2009
US$

979,643
85,366

20,362

30,245

10,615
161,743
–––––––––––––
1,239,946
–––––––––––––

9,386
206,496
–––––––––––––
1,311,136
–––––––––––––

44 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

9. Income Tax

The tax expense comprises:

Current income tax
Current income tax charge

Deferred tax
Relating to origination and reversal of temporary differences

Income tax expense reported in the Consolidated Income Statement

All income tax charge relates to interest income received by the Company.

2010
US$

2009
US$

42,083

39,327

810,346
–––––––––––––
852,429
–––––––––––––

279,145
–––––––––––––
318,472
–––––––––––––

Reconciliation of the total tax charge
The tax assessed for the year differs from that calculated by applying the standard rate corporation tax in the Republic of Ireland of 12.5%.
The differences are explained below:

Loss before income tax

Accounting loss multiplied by Irish standard rate of tax of 12.5%

Share-based payment expense
Effect of higher tax rates on investment income
Non-deductible expenses
Tax deductible timing differences
Other
Losses available at higher rates
Taxable losses not utilised

Total tax expense reported in the Consolidated Income Statement

Deferred tax
Deferred tax at 31 December relates to the following:

Group and Company

Deferred tax liability
Accrued interest income

2010
US$

2009
US$

(6,272,965)
–––––––––––––

(6,153,080)
–––––––––––––

(784,121)

(769,135)

57,563
425,729
464,060
(560,665)
448,038
(481,094)
1,282,919
–––––––––––––

58,013
159,543
330,054
(69,964)
168,847
(264,671)
705,785
–––––––––––––

852,429
–––––––––––––

318,472
–––––––––––––

2010
US$

2009
US$

1,636,475
–––––––––––––
1,636,475
–––––––––––––

826,129
–––––––––––––
826,129
–––––––––––––

The Group has tax losses which arose in Russia that are available for offset against future taxable profits of the companies in which the losses
arose. Net deferred tax assets of US$3.8 million (2009: US$1.8 million), which expire in seven to ten years, have not been recognised in respect
of these losses as they may not be used to offset taxable profits elsewhere in the Group and they have arisen in subsidiaries that have been loss
making over recent years.

Factors that may affect future tax charges
The Group commenced year-round oil production in Russia during 2010. Such production is likely to result in taxable profits in Russia in future,
where the applicable tax rate is 20%.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 45

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

10. Loss Per Ordinary Share
Basic loss per ordinary share amounts are calculated by dividing net loss for the year attributable to ordinary equity holders of the Parent by the
weighted average number of Ordinary Shares outstanding during the year.

Basic and diluted earnings per Ordinary Share are the same as the potential Ordinary Shares are anti-dilutive.

Numerator
Loss attributable to equity shareholders of the Parent for basic and diluted loss

Denominator
Weighted average number of Ordinary Shares for basic and diluted earnings per Ordinary Share

Diluted weighted average number of shares

Loss per share:
Basic and diluted – US Dollar cent

2010
US$

2009
US$

(7,125,394)
–––––––––––––
(7,125,394)
–––––––––––––

(6,471,552)
–––––––––––––
(6,471,552)
–––––––––––––

361,023,606
–––––––––––––
361,023,606
–––––––––––––

255,724,257
–––––––––––––
255,724,257
–––––––––––––

(1.97)
–––––––––––––

(2.53)
–––––––––––––

The Company has instruments in issue that could potentially dilute basic earnings per Ordinary Share in the future, but are not included in the
calculation for the reasons outlined below:
• Employee Share Options – Refer to Note 28 for the total number of shares related to the outstanding options that could potentially dilute basic

earnings per share in the future. These potential Ordinary Shares are anti-dilutive for the years ended 31 December 2010 and 2009.

• Warrants – At 31 December 2010, 6,200,000 Ordinary Shares are subject to warrants being exercised (refer to Note 28). These potential Ordinary

Shares are anti-dilutive for the year ended 31 December 2010. There were no warrants outstanding at 31 December 2009.

11. Assets Held For Sale
In January 2010 Licence 67 was registered thereby completing the acquisition. Under the August 2008 Area of Mutual Interest agreement, Arawak
Energy (‘Arawak’) exercised their option to participate as a 50% partner in the development of License 67, which will be operated by PetroNeft
through a jointly controlled entity. The legal agreements and documentation relating to the jointly controlled entity are expected to be completed
in June 2011 when the assets held for sale will transfer to the jointly controlled entity. No impairment is expected on these assets upon transfer.

The major classes of assets and liabilities reclassified as held for sale as at 31 December 2010 are as follows:

Assets
Exploration and evaluation assets

2010
US$

2,020,678
–––––––––––––
2,020,678
–––––––––––––

46 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

12. Oil and Gas Properties

Group

Cost
At 1 January 2009
Additions
Disposals
Transfer to property, plant and equipment
Translation adjustment

At 1 January 2010
Additions
Transfer from property, plant and equipment
Translation adjustment

At 31 December 2010

Depreciation
At 1 January 2009
Charge for the year

At 1 January 2010
Charge for the year
Translation adjustment

At 31 December 2010

Net book values
At 31 December 2010

At 31 December 2009

Wells
US$

Equipment
and facilities
US$

Pipeline
US$

Total
US$

13,426,925
2,105,146
–
(10,816)
(112,765)
–––––––––––––
15,408,490
19,999,210
–
(194,658)
–––––––––––––
35,213,042
–––––––––––––

715,508
38,712
–
174
(16,784)
–––––––––––––
737,610
12,816,849
48,884
(49,843)
–––––––––––––
13,553,500
–––––––––––––

9,627,547
3,859,608
(2,277,934)
–
(172,234)
–––––––––––––
11,036,987
3,244,417
–
(107,368)
–––––––––––––
14,174,036
–––––––––––––

23,769,980
6,003,466
(2,277,934)
(10,642)
(301,783)
–––––––––––––
27,183,087
36,060,476
48,884
(351,869)
–––––––––––––
62,940,578
–––––––––––––

–
16,316
–––––––––––––
16,316
535,613
(1,862)
–––––––––––––
550,067
–––––––––––––

–
1,510
–––––––––––––
1,510
217,360
(2,820)
–––––––––––––
216,050
–––––––––––––

–
–
–––––––––––––
–
31,590
(930)
–––––––––––––
30,660
–––––––––––––

–
17,826
–––––––––––––
17,826
784,563
(5,612)
–––––––––––––
796,777
–––––––––––––

34,662,975
–––––––––––––
15,392,174
–––––––––––––

13,337,450
–––––––––––––
736,100
–––––––––––––

14,143,376
–––––––––––––
11,036,987
–––––––––––––

62,143,801
–––––––––––––
27,165,261
–––––––––––––

The net book value at 31 December 2010 includes US$17,288,826 (2009: US$21,242,291) in respect of assets under construction,
which are not yet being depreciated.

Additions are construction works mainly in relation to production wells, Central Procession Facility (CPF) and oilfield infrastructure.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 47

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

13. Property, Plant and Equipment

Group

Cost
At 1 January 2009
Additions
Transfer from oil and gas properties
Disposals
Translation adjustment

At 1 January 2010
Reclassification
Additions
Transfer to oil and gas properties
Disposals
Translation adjustment

At 31 December 2010

Depreciation
At 1 January 2009
Charge for the year
Translation adjustment

At 1 January 2010
Charge for the year
Disposals
Translation adjustment

At 31 December 2010

Net book values
At 31 December 2010

At 31 December 2009

Land and
buildings
US$

Plant and
machinery
US$

Motor
vehicles
US$

Total
US$

310,805
–
–
–
(8,164)
–––––––––––––
302,641
800,795
1,669
–
–
(5,390)
–––––––––––––
1,099,715
–––––––––––––

1,731,548
61,592
10,642
–
(41,743)
–––––––––––––
1,762,039
(800,795)
171,706
–
–
(13,086)
–––––––––––––
1,119,864
–––––––––––––

62,002
81,217
–
–
2,513
–––––––––––––
145,732
–
45,818
(48,884)
(17,869)
(1,200)
–––––––––––––
123,597
–––––––––––––

2,104,355
142,809
10,642
–
(47,394)
–––––––––––––
2,210,412
–
219,193
(48,884)
(17,869)
(19,676)
–––––––––––––
2,343,176
–––––––––––––

17,744
7,872
(65)
–––––––––––––
25,551
64,365
–
(444)
–––––––––––––
89,472
–––––––––––––

196,868
174,591
3,742
–––––––––––––
375,201
176,496
–
(3,804)
–––––––––––––
547,893
–––––––––––––

22,346
11,220
(14)
–––––––––––––
33,552
15,045
(16,715)
(287)
–––––––––––––
31,595
–––––––––––––

236,958
193,683
3,663
–––––––––––––
434,304
255,906
(16,715)
(4,535)
–––––––––––––
668,960
–––––––––––––

1,010,243
–––––––––––––

571,971
–––––––––––––

92,002
–––––––––––––

1,674,216
–––––––––––––

277,090
–––––––––––––

1,386,838
–––––––––––––

112,180
–––––––––––––

1,776,108
–––––––––––––

48 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

Company

Cost
At 1 January 2009
Additions

At 1 January 2010
Additions

At 31 December 2010

Depreciation
At 1 January 2009
Charge for the year

At 1 January 2010
Charge for the year

At 31 December 2010

Net book values
At 31 December 2010

At 31 December 2009

14. Exploration and Evaluation Assets

Group

Cost
At 1 January 2009
Additions
Translation adjustment

At 1 January 2010
Additions
Reclassified as assets held for sale (Note 11)
Translation adjustment

At 31 December 2010

Net book values
At 31 December 2010

At 31 December 2009

Plant and
machinery
US$

10,666
4,425
–––––––––––––
15,091
4,809
–––––––––––––
19,900
–––––––––––––

4,966
2,281
–––––––––––––
7,247
3,517
–––––––––––––
10,764
–––––––––––––

9,136
–––––––––––––

7,844
–––––––––––––

Exploration and
evaluation
expenditure
US$

18,684,771
7,328
(474,857)
–––––––––––––
18,217,242
5,367,284
(2,020,678)
(172,357)
–––––––––––––
21,391,491
–––––––––––––

21,391,491
–––––––––––––

18,217,242
–––––––––––––

Exploration and evaluation expenditure represents active exploration projects. These amounts will be written off to the Consolidated Income
Statement as exploration costs unless commercial reserves are established, or the determination process is not completed and there are
no indications of impairment. The outcome of ongoing exploration, and therefore whether the carrying value of these assets will ultimately be
recovered, is inherently uncertain.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 49

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

14. Exploration and Evaluation Assets (continued)
In accordance with IFRS 6, once commercial viability is demonstrated the capitalised exploration and evaluation costs are transferred to oil and
gas properties or intangibles, as appropriate after being assessed for impairment.

Additions in 2010 relate mainly to drilling of an exploration well in Arbuzovskoye oilfield and the purchase of the license and exploration works
in relation to Licence 67. All expenditure in connection with License 67 has been reclassified as assets held for sale at year-end (refer to Note 11).

15. Financial Assets

Company

Cost
At 1 January 2009
Capital contribution in respect of share-based payment expense

At 1 January 2010
Capital contribution in respect of share-based payment expense
Additions
Impairment of investment in Pervomayka

At 31 December 2010

Net book values
At 31 December 2010

At 31 December 2009

Investment in
subsidiaries
US$

40,049,269
231,389
–––––––––––––
40,280,658
234,525
78,285
(224,546)
–––––––––––––
40,368,922
–––––––––––––

40,368,922
–––––––––––––

40,280,658
–––––––––––––

Based on the fact that the Board has no plans to develop the refinery site at Pervomayka, the decision was taken to write off the carrying amount
of the investment.

In January 2010 a new Russian subsidiary was formed named LLC Granite Construction. This will take over the activities of Lineynoye which
will then be utilised as the licence holder of Licence 67 in conjunction with Arawak Energy Limited who will hold a 50% interest in Lineynoye.

In August 2010 a new Russian subsidiary was formed named LLC Dolomite. This entity will be used as a licence holder for future licence acquisitions.

In December 2010 a new Dutch subsidiary was formed named Russian BD Holdings BV. This entity will be used as a holding company and will own
100% of LLC Lineynoye.

Details of the Company’s holding in direct and indirect subsidiaries at 31 December 2010 are as follows:

Name of subsidiary

Registered Office

WorldAce Investments Limited
Stimul-T
Lineynoye
Pervomayka
Granite Construction
Dolomite
Russian BD Holdings B.V.

3 Themistocles Street, Nicosia, Cyprus
147 Prospekt Lenina, Tomsk 634009, Russia
147 Prospekt Lenina, Tomsk 634009, Russia
Pobedy, Kolpashevo, Tomsk 634460, Russia
147 Prospekt Lenina, Tomsk 634009, Russia
147 Prospekt Lenina, Tomsk 634009, Russia
Prins Bernhardplein 200, 1097 JB Amsterdam,
the Netherlands

Proportion of
ownership
interest

Proportion
of voting
power held

100%
100%
100%
100%
100%
100%
100%

Principal activity

Holding company
Oil and Gas exploration
Oil and Gas exploration
Property holding
Construction
Oil and Gas exploration
Holding company

50 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

16. Leasehold Land Payments

Net book value at 1 January
Amortisation
Impairment during year

Net book value at 31 December

2010
US$

2009
US$

176,825
–
(176,825)
–––––––––––––
–
–––––––––––––

181,009
(4,184)
–
–––––––––––––
176,825
–––––––––––––

Based on the fact that the Board has no plans to develop the refinery site at Pervomayka, the decision was taken to write off the carrying amount
of the leasehold land.

17. Inventories

Oil stock
Materials

18. Trade and Other Receivables

Russian VAT
Other receivables
Advances to and receivables from related parties (Note 27)
Advances to contractors
Prepayments
Prepayment for Licence 67

Company

Amounts owed by subsidiary undertakings
Prepayments and accrued income

2010
US$

2009
US$

709,890
198,057
–––––––––––––
907,947
–––––––––––––

–
–
–––––––––––––
–
–––––––––––––

2010
US$

2009
US$

3,251,701
691,674
1,957,647
1,925,637
238,319
–
–––––––––––––
8,064,978
–––––––––––––

806,392
120,531
942,660
1,692,451
187,325
1,160,556
–––––––––––––
4,909,915
–––––––––––––

2010
US$

2009
US$

74,813,378
238,555
–––––––––––––
75,051,933
–––––––––––––

29,297,783
160,011
–––––––––––––
29,457,794
–––––––––––––

The Directors consider that the carrying amount of trade and other receivables approximates their fair value.

Other receivables are non-interest bearing and are normally settled on 60-day terms.

Amounts owed by subsidiary undertakings are interest-bearing. Interest is charged at rates ranging from 0% to 10%.

19. Cash and Cash Equivalents and Restricted Cash

Group

Cash at Bank and in Hand
Restricted cash

2010
US$

2009
US$

22,781,881
2,500,000
–––––––––––––
25,281,881
–––––––––––––

15,726,479
–
–––––––––––––
15,726,479
–––––––––––––

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 51

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

19. Cash and Cash Equivalents and Restricted Cash (continued)

Company

Cash at bank and in hand
Restricted cash

2010
US$

2009
US$

21,001,248
2,500,000
–––––––––––––
23,501,248
–––––––––––––

13,944,861
–
–––––––––––––
13,944,861
–––––––––––––

At 31 December 2010 restricted cash amounting to US$2.5 million is being held in a Macquarie Debt Service Reserve Account (“DSRA”). This
account is part of the security package held by Macquarie and may be offset against the loan in the event of a default on the loan or by agreement
between the parties.

Bank deposits earn interest at floating rates based on daily deposit rates. Short-term deposits are made for varying periods of between one day
and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.

20. Trade and Other Payables

Trade payables
Trade payables to related parties (Note 27)
Corporation tax
Other taxes and social welfare costs
Other payables
Accruals and deferred income

Company

Trade payables
Corporation tax
Other taxes and social welfare costs
Accruals and deferred income

2010
US$

2009
US$

3,858,187
614,078
105,569
176,804
128,099
518,742
–––––––––––––
5,401,479
–––––––––––––

1,924,521
6,501
68,836
206,387
38,819
420,910
–––––––––––––
2,665,974
–––––––––––––

2010
US$

2009
US$

224,218
105,569
112,398
297,915
–––––––––––––
740,100
–––––––––––––

216,374
68,836
74,556
317,693
–––––––––––––
677,459
–––––––––––––

The Directors consider that the carrying amount of trade and other payables approximates their fair value.

Trade and other payables are non-interest bearing and are normally settled on 60-day terms.

Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs.

21. Interest-Bearing Loans and Borrowings

Macquarie Bank – US$30,000,000 loan facility

Effective interest rate %

Maturity

2010
US$

2009
US$

17.21%

30 November 2011

13,725,205
–––––––––––––

–
–––––––––––––

On 30 March 2010, PetroNeft entered into a US$5 million loan facility with Macquarie Bank (“Macquarie”). As part of this agreement, Macquarie was
granted 4.7 million warrants over the ordinary shares of PetroNeft at a strike price of Stg30p, exercisable any time up to 28 February 2012. The loan
was set to mature on 30 June 2011.

52 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

On 28 May 2010 the US$5 million facility was re-financed with a new loan facility agreement for up to US$30 million with Macquarie. Under this
agreement Macquarie was granted an additional one million warrants at a strike price of Stg37.81p exercisable any time up to 28 May 2014 and the
possibility to acquire up to an additional one million warrants at a strike to be determined based on a 15% premium to the volume weighted average
share price up to the date of issue of any additional warrants. There was also a 1% cash arrangement fee associated with this new loan facility.

On 19 August 2010 Macquarie was granted an additional 500,000 warrants at a strike price of Stg50.1p in connection with US$30 million facility.

On the basis that Macquarie committed significant technical, engineering and legal resources to negotiating and agreeing the loan facility and
subsequent draw downs, the warrants granted to Macquarie were in lieu of arrangement fees. The cost of the warrants fall within the scope of IFRS
2 Share-based Payment. This share-based payment expense constitutes a transaction cost under IAS 39 Financial Instruments: Recognition and
Measurement and is included in the initial carrying amount of the loan facility and amortised over the duration of the loan. The total share-based
payment expense in connection with warrants granted to Macquarie during the year amounted to US$0.8 million of which an amount of US$350,536
was expensed to the income statement on extinguishment of the US$5 million loan facility.

Total transaction costs, including share-based payment expense, incurred in connection with the US$30 million facility amounted to US$1.0 million,
and are applied against the proceeds. The effective interest rate will be applied to the liability to accrete the transaction costs over the period of the
loan.

Borrowing costs relating to drilling of development wells and construction of other oil and gas properties that have been capitalised within oil
and gas properties during the period amount to US$745,300 (2009: Nil). The average capitalisation rate employed to determine the amount of
borrowing costs eligible for capitalisation was 17.21%. Only borrowing costs incurred up to September 2010 (start of production) were capitalised.
Certain OGP items (wells, central processing facility, pipeline), shares in WorldAce Investments Ltd, shares in LLC Stimul T, certain bank accounts
and inventories are pledged as a security for the loan facility agreement.

During the year the Group was in breach of certain financial and non-financial covenants and conditions subsequent to the loan agreement, relating
primarily to receipt of certain amount of cash by sale of oil, certain financial ratios and registration of pledge over certain assets of the Group in
favour of Macquarie and submitting the documents. These conditions were waived by Macquarie in a letter prior to year-end, such that the Group
was not in breach as at the year-end. The Group received another waiver letter post year-end to facilitate the finalisation of the new loan agreement
which contains revised financial and non-financial covenants.

22. Provisions

Decommissioning costs – non-current

At 1 January
Arising during the year
Unwinding of discount
Translation adjustment

At 31 December

2010
US$

2009
US$

269,654
457,219
20,787
(3,990)
–––––––––––––

254,646
–
20,644
(5,636)
–––––––––––––

743,670
–––––––––––––

269,654
–––––––––––––

The decommissioning provision represents the present value of decommissioning costs relating to the Group’s Russian oil interests, which are
expected to be incurred near 2030. These provisions have been created based on the Group’s internal estimates. Assumptions, based on the current
economic environment, have been made which management believe are a reasonable basis upon which to estimate the future liability. A discount
rate of 8.17% (2009: 9%) is used for the assessment of the provision. The charge relating to the unwinding of the discount on the provision is
reflected in finance costs in the Consolidated Income Statement.

These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs
will ultimately depend upon future market prices for the necessary decommissioning works required, which will reflect market conditions at the
relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease to produce at economically viable rates.
This in turn will depend upon future oil prices, which are inherently uncertain.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 53

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

23. Share Capital – Group and Company

Authorised
600,000,000 Ordinary Shares of e0.01 each

Allotted, called up and fully paid equity

At 1 January 2009
Issued in the year
Remuneration and other emoluments paid in shares

At 1 January 2010
Issued in the year
Remuneration and other emoluments paid in shares
Share options exercised in the year

At 31 December 2010

2010
e

2009
e

6,000,000
–––––––––––––
6,000,000
–––––––––––––

Number of Called up share
capital US$

Ordinary Shares

229,223,034
120,640,209
504,468
–––––––––––––
350,367,711
63,125,000
42,721
1,997,000
–––––––––––––
415,532,432
–––––––––––––

2,919,041
1,797,899
7,073
–––––––––––––
4,724,013
872,841
580
27,406
–––––––––––––
5,624,840
–––––––––––––

The Company issued 63,125,000 new shares for consideration of US$43.2 million during the year. The net proceeds of this share issue of US$40.8
million are being used to finance expenditure on oil and gas properties, exploration and evaluation costs and corporate overhead.

24. Financial Risk Management Objectives and Policies
The Group and Company’s principal financial instruments comprise cash and cash equivalents. The main purpose of these financial instruments
is to provide finance for the Group and Company’s operations. The Group has various other financial assets and liabilities such as receivables and
trade payables, which arise directly from its operations.

The Group also enters into derivative transactions, primarily forward currency contracts. The purpose is to manage the currency risks arising from
the Group and Company’s operations and its sources of finance. The Group and Company entered into forward currency contracts during the year,
however there are no contracts outstanding as at 31 December 2010. The Group and Company did not enter any derivative transactions during 2009.

It is the Group and Company’s policy that no trading in derivatives be undertaken.

The main risks arising from the Group and Company’s financial instruments are commodity price risk, foreign currency risk, credit risk, liquidity
risk, interest rate risk and capital risk. The Board reviews and agrees policies for managing each of these risks which are summarised below.

Foreign currency risk
The Group and the Company undertake certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations
arise. Exchange rate exposures are managed within approved policy parameters utilising forward exchange contracts where appropriate.

At 31 December 2010 and 2009, the Group and the Company had no outstanding forward exchange contracts.

Foreign currency sensitivity analysis
The Group’s and the Company’s principal currency exposures arise in the currencies of Russian Rouble, Euro, UK Sterling and US Dollar. The Group
has an exposure to US Dollars because the functional currency of its Russian subsidiaries is Russian Roubles. A change in the US Dollar:Russian
Rouble exchange rate will therefore result in a foreign exchange gain or loss on the US Dollar denominated balances in these subsidiaries. The
Company has an exposure to US Dollars because payments to some suppliers are effected in Euro and in UK Sterling, and the Company has bank
accounts in Russian Rouble, Euro, UK Sterling and US Dollar.

In accordance with IFRS 7, the impact of foreign currencies is determined based on the balances of financial assets and liabilities at 31 December
2010. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and largely results from payables and
receivables, and adjusts their translation at the period end for a 5% change in foreign currency rates. A positive number below indicates a reduction
in loss and increase in other equity where the US Dollar strengthens 5% against the relevant currency. For a 5% weakening of the US Dollar against
the relevant currency, there would be an equal and opposite impact on the loss and other equity, and the balances following would be negative.

54 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

If the US Dollar had gained/lost 5% against all currencies significant to the Group and Company at 31 December, the impact on loss and Equity for
the Group and the Company is shown below.

Group

Impact on loss [lower/(higher)]
Impact on net equity [lower/(higher)]

Company

Impact on loss and net equity [lower/(higher)]

2010
US$

2009
US$

28,886
116,724
–––––––––––––

168,280
783,521
–––––––––––––

2010
US$

2009
US$

27,693
–––––––––––––

694,441
–––––––––––––

Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.

The Group and Company’s financial assets comprise receivables and cash and cash equivalents. The credit risk on cash and cash equivalents is limited
because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. The Group and Company’s exposure
to credit risk arise from default of its counterparty, with a maximum exposure equal to the carrying amount of cash and cash equivalents in its
consolidated balance sheet. As the Group or the Company does not have any significant receivables outstanding from third parties, this risk is limited.

The Group and the Company do not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar
characteristics. The Group and the Company define counterparties as having similar characteristics if they are connected entities.

Liquidity risk management
Liquidity risk is the risk that the Group and the Company will not have sufficient funds to meet liabilities. Ultimate responsibility for liquidity risk
management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the
Group and Company’s short, medium and long-term funding and liquidity management requirements. The Group and the Company manage liquidity
risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Cash forecasts
are regularly produced to identify the liquidity requirements of the Group and the Company. To date, the Group and the Company have relied on
shareholder funding and normal trade credit to finance its operations. As at 31 December 2010 the Group and the Company have an outstanding
loan facility with Macquarie bank (see Note 21).

Loan facility is repayable on 30 November 2011. The rest of Group and Company’s financial liabilities as at 31 December 2010 and 2009 are all
payable on demand.

The expected maturity of the Group and Company’s financial assets (excluding prepayments) as at 31 December 2010 and 2009 was less than
one month.

The Group and the Company expect to meet its other obligations from operating cash flows and debt financing. The Group and the Company further
mitigate liquidity risk by maintaining an insurance programme to minimise exposure to insurable losses.

The Group and the Company had no derivative financial instruments as at 31 December 2010 and 31 December 2009.

Interest rate risk
The Group and Company’s exposure to the risk of changes in market interest rates relates primarily to the Group and Company’s holdings of cash
and short-term deposits which are on variable rates ranging from 0.2% to 5.75%.

It is the Group and Company’s policy, as part of its disciplined management of the budgetary process, to place surplus funds on short-term deposit
in order to maximise interest earned.

The effect of a 10% reduction in interest rates (e.g. from 10% to 9%) obtainable on cash and short term deposits would be to increase Group loss
before tax by US$12,660 (2009: US$17,330) and Company loss before tax by US$340,583 (2009: US$127,634).

Capital risk management
The Group and the Company manage capital to ensure that entities in the Group will be able to continue as a going concern while maximising the
return to stakeholders through the optimisation of the debt and equity balance. The Group and the Company manage its capital structure and makes
adjustments to it in light of changes in economic conditions. To maintain or adjust its capital structure, the Group and the Company may issue new
shares or raise debt. No changes were made in the objectives, policies or processes during the years ended 31 December 2010 and 31 December
2009. The capital structure of the Group and the Company consists of equity attributable to equity holders of the parent, comprising issued capital,
reserves and retained losses as disclosed in the Consolidated Statement of Changes in Equity.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 55

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

24. Financial Risk Management Objectives and Policies (continued)

Group

External borrowings
Less cash and cash equivalents

Net cash
Equity

Net debt ratio

Company

External borrowings
Less cash and cash equivalents

Net cash
Equity

Net debt ratio

2010
US$

2009
US$

13,725,205
(22,781,881)
–––––––––––––

–
(15,726,479)
–––––––––––––

(9,056,676)
99,978,163
–––––––––––––

(15,726,479)
64,210,073
–––––––––––––

-9%
–––––––––––––

-24%
–––––––––––––

2010
US$

2009
US$

13,725,205
(21,001,248)
–––––––––––––

–
(13,944,861)
–––––––––––––

(7,276,043)
122,829,459
–––––––––––––

(13,944,861)
82,187,569
–––––––––––––

-6%
–––––––––––––

-17%
–––––––––––––

Fair values
The carrying amount of the Group and Company’s financial assets and financial liabilities is a reasonable approximation of the fair value.

Hedging
At the year ended 31 December 2010 and 2009, the Group had no outstanding contracts designated as hedges.

25. Loss of Parent Undertaking
The Company is availing of the exemption set out in section 148(8) of the Companies Act 1963 and section 7(1) (A) of the Companies (Amendment) Act
1986 from presenting its individual Income Statement to the annual general meeting and from filing it with the Registrar of Companies. The amount
of the loss dealt with in the parent undertaking for the year was US$2,285,290 (2009: US$1,915,271).

26. Capital Commitments
26.1 Details of capital commitments at the balance sheet date are as follows:

Contracted for but not provided in the financial statements
Including contracted with related parties

2010
US$

2009
US$

26,320,142
22,714,974
–––––––––––––

13,274,160
7,899,735
–––––––––––––

26.2 Future minimum rentals payable under non-cancellable operating leases as at 31 December are as follows:

Within one year
After one year but not more than five years
More than five years

56 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

2010
US$

2009
US$

70,771
102,535
433,630
–––––––––––––
606,936
–––––––––––––

44,759
26,940
58,152
–––––––––––––
129,851
–––––––––––––

Financial Statements

27. Related Party Disclosures
Transactions between PetroNeft Resources plc and its subsidiaries, Stimul-T, Lineynoye, Granite, Pervomayka, Dolomite, WorldAce Investments
have been eliminated on consolidation. Details of transactions between the Group and other related parties are disclosed below.

In 2009 Stimul-T entered into a contract with LLC Tomskburneftegaz (TBNG) for the drilling of nine wells in 2010. Under this contract TBNG
assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total
value of the contract is US$9.5 million. Payments of US$8,243,900 (2009: US$1,057,032) were made during 2010 in relation to this contract of which
US$Nil (2009: US$942,660) are shown as advance payments as at 31 December 2010. As at 31 December 2010 the outstanding amount payable to
TBNG is US$77,309 (2009: Nil). Vakha Sobraliev, a Director of PetroNeft, is the principal of TBNG.

In 2010 Stimul-T entered into a contract with TBNG for the drilling of well #1 in Arbuzovskoye oilfield in 2010. Under this contract TBNG assumes
substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total value of the
contract is US$2.1 million. Payments of US$1,587,817 were made during 2010 in relation to this contract. As at 31 December 2010 the outstanding
amount payable to TBNG is US$455,587.

In 2010 Stimul-T entered into a contract with TBNG for the drilling of pad #2 in Lineynoye oilfield in 2011 and 2012. Under this contract TBNG
assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total
value of the contract is US$9.8 million. Payments of US$1,248,775 were made during 2010 in relation to this contract and are shown as advance
payments as at 31 December 2010.

In 2010 Stimul-T entered into a contract with TBNG for the drilling of pad #3 in Lineynoye oilfield in 2011 and 2012. Under this contract TBNG
assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated with drilling operation. The total
value of the contract is US$9.5 million. Payments of US$694,954 were made during 2010 in relation to this contract and are shown as advance
payments as at 31 December 2010.

In 2010 Stimul-T entered into a contract with TBNG for the drilling of well #2 of Kondrashevskoye oilfield and well #372 of Sibkraevskaya area in
2011. Under this contract TBNG assumes substantially all liabilities in relation to the health and safety, environmental and other risks associated
with drilling operation. The total value of the contract is US$5.6 million. No transactions have taken place in relation to this contract in 2010.

An amount of US$103,516 (2009: US$Nil) was received from TBNG during 2010 in relation to shared use of helicopter services, where the service
provider billed the entire amount to Stimul-T. Balance of US$5,529 (2009: US$Nil) is outstanding from TBNG at 31 December 2010.

An amount of US$42,091 (2009: US$Nil) was received from TBNG during 2010 for fines for not meeting all contract conditions. Balance of US$8,389
(2009: US$Nil) is outstanding from TBNG at 31 December 2010.

Stimul-T invoiced US$Nil (2009: US$15,945) to TBNG for supply of crude oil.

A total of US$ 81,182 (2009: US$2,407) is outstanding to other parties, related to Vakha Sobraliev, a Director of PetroNeft for repair works on wells
and transportation services. Payments of US$444,644 (2009: US$23,066) were made to these entities during the year.

Remuneration of key management
Key management comprise the Directors of the Company, the Vice President of Business Development and Operations, the General Director and
the Executive Director of the Russian subsidiary Stimul-T, along with both the Chief Geologist and the Chief Engineer of Stimul-T. Their remuneration
during the year was as follows:

Remuneration of key management

Compensation of key management
Contributions to defined contribution pension plan
Share-based payment expense

2010
US$

2009
US$

1,755,774
10,615
264,099
–––––––––––––
2,030,488
–––––––––––––

1,307,504
9,386
290,242
–––––––––––––
1,607,132
–––––––––––––

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 57

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

27. Related Party Disclosures (continued)
Transactions with subsidiaries
The Company had the following transactions with its subsidiaries during the years ended 31 December 2010 and 2009:
• The Company granted interest bearing loans to Stimul-T in the amounts of US$31,866,972 and US$9,931,514 during the years ended 31

December 2010 and 31 December 2009 respectively.

• The Company granted interest bearing loans to Lineynoye in the amount of US$843,006 and US$1,189,230 during the year ended 31 December

2010 and 31 December 2009 respectively.

• The Company granted interest bearing loans to Granite Construction in the amount of US$810,000 and US$Nil during the year ended

31 December 2010 and 31 December 2009 respectively.

• The Company granted interest bearing loans to Dolomite in the amount of US$10,050,000 and US$Nil during the year ended 31 December 2010

and 31 December 2009 respectively. This loan was repaid in full during 2010.

• The Company granted non-interest bearing loans to WorldAce Investments in the amount of US$8,501,342 and US$Nil during the year ended

31 December 2010 and 31 December 2009 respectively.

• The Company earned interest on loans to Stimul-T in the amounts of US$3,115,747 and US$1,109,247 during the years ended 31 December 2010

and 31 December 2009 respectively.

• The Company earned interest on loans to Lineynoye in the amounts of US$116,855 and US$7,334 during the years ended 31 December 2010 and

31 December 2009 respectively.

• The Company earned interest on loans to Granite Construction in the amounts of US$8,775 and US$Nil during the years ended 31 December

2010 and 31 December 2009 respectively.

• All interest on loans to Stimul-T, Lineynoye and Granite Construction remains outstanding as at 31 December 2010.The Company earned interest
on loans to Dolomite in the amounts of US$67,000 and US$Nil during the years ended 31 December 2010 and 31 December 2009 respectively.
This interest was paid in full as at 31 December 2010.

• The Company charged amounts of US$232,828 and US$213,640 for technical services provided to Stimul-T during the years ended 31 December

2010 and 31 December 2009 respectively.

• The Company made contributions to the assets of Pervomayka in the amount of US$13,739 and US$Nil during the years ended 31 December

2010 and 31 December 2009 respectively.

• The Company made contributions to the assets of Granite Construction in the amount of US$40,432 and US$Nil during the years ended

31 December 2010 and 31 December 2009 respectively.

• The Company made contributions to the assets of Dolomite in the amount of US$314 and US$Nil during the years ended 31 December 2010 and

31 December 2009 respectively.

• The Company made contributions to the assets of Russian BD Russia B.V. in the amount of US$23,800 and US$Nil during the years ended

31 December 2010 and 31 December 2009 respectively.

28. Share-Based Payment
Share options
The expense recognised for employee services during the year is US$460,500 (2009: US$464,100). The Group share-based payment plan
is described below. There was no cancellation or modification to the plan during 2010 and 2009.

Under the Group share option plan, employees of the Group can receive conditional awards of share options depending on their performance,
seniority and length of service. The options typically vest in tranches and are subject to the achievement of vesting conditions related to drilling,
production and shareholder return. The maximum term for options is seven years. There are no cash settlement alternatives.

Movement in the year
The fair value of the options is estimated at the grant date using an option pricing model considering the terms and conditions upon which the
instruments were granted. The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in,
share options during the year.

2010
Number

2010
WAEP

2009
Number

2009
WAEP

13,537,000
5,390,000
(70,000)

e0.297/£0.272
£0.66
£0.3261
(1,997,000) e0.3029/£0.3467
e0.295/£0.44
e0.295/£0.342

16,860,000
7,158,200

10,072,000 e0.297/£0.347
£0.1925
3,465,000
–
–
–
–
13,537,000 e0.297/£0.272
4,219,600 e0.297/£0.32

Outstanding as at 1 January
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at 31 December
Exercisable at 31 December

58 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

The range of exercise prices for options outstanding at the year-end is £0.19 to £0.66 (2009: £0.19 to €0.42).

The weighted average remaining contractual life for the share options outstanding as at 31 December 2010 was 5 years (2009: 5 years).

The weighted average fair value of options granted during the year was £0.282 (2009: £0.096).

The weighted average share price of exercised options at the date of exercise in 2010 was £0.575. No options were exercised in 2009.

The weighted average share price of forfeited options in 2010 was £0.3261. No options were forfeited in 2009.

The following table lists the inputs to the models used for the years ended 31 December 2010 and 2009:

Grant date

Dividend yield
Expected volatility
Risk-free interest rate
Expected life of option
Expected early exercise %
Share price at date of grant and exercise price
Model used

2010
December
Share price growth-based

2010
December
TSR-based

2009
December

0%
70%
1.6%
7
100%
£0.66
Monte Carlo Monte Carlo

0%
70%
1.6%
7
100%
£0.66

0%
75%
2.8%
7
5%
£0.19
Binomial/
Monte Carlo

The expected life of the options is based on the expectation of management and is not necessarily indicative of exercise patterns that may occur.
The expected volatility was determined based on historical data of peer companies, taking into account the impact of financial crisis, which lead to
extraordinary volatility, and also the fact that the Group has recently moved out of its early pure appraisal and development phase into a more stable
production phase, which is likely to lead to reduction in volatility in the future. It reflects the assumption that historical volatility is indicative of future
trends, which may also not necessarily be the actual outcome. The fair value is measured at the grant date.

Share-based payment – Macquarie loans
Movement in the year
The fair value of the warrants is estimated at the grant date using an option pricing model considering the terms and conditions upon which
the instruments were granted. The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in,
warrants during the year.

Outstanding as at 1 January
Granted during the year
Outstanding at 31 December
Exercisable at 31 December

2010
Number

–
6,200,000
6,200,000
6,200,000

2010
WAEP

–
£0.33
£0.33
£0.33

2009
Number

2009
WAEP

–
–
–
–

The range of exercise prices for warrants outstanding at the year-end is £0.30 to £0.50 (2009: Nil).

The weighted average remaining contractual life for the warrants outstanding as at 31 December 2010 was 1.71 years (2009: Nil).

The weighted average fair value of warrants granted during the year was £0.09 (2009: Nil).

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 59

Financial Statements

Notes to the Financial Statements (continued)
For the year ended 31 December 2010

28. Share-Based Payment (continued)
Share-based payment – Macquarie loans (continued)

The following table lists the inputs to the models used for valuing the warrants and the calculated value:

Dividend yield
Expected volatility
Risk-free interest rate
Expected life of warrant
Expected early exercise

Share price at date of grant
Exercise price
Model used
Total fair value of warrant

August 2010

May 2010

March 2010

0%
70%
1.5%
3.8
Financially
optimal
£0.47
£0.5012
Binomial
US$182,000

0%
70%
2%
4
Financially
optimal
£0.32
£0.3781
Binomial
US$224,000

0%
70%
1.3%
1.9
Financially
optimal
£0.31
£0.3000
Binomial
US$406,000

The expected life of the warrants is based on the expectation of management and is not necessarily indicative of exercise patterns that may occur.
The expected volatility was determined based on historical data of peer companies, taking into account the impact of financial crisis, which lead to
extraordinary volatility, and also the fact that the Group has recently moved out of its early pure appraisal and development phase into a more stable
production phase, which is likely to lead to reduction in volatility in the future. It reflects the assumption that historical volatility is indicative of future
trends, which may also not necessarily be the actual outcome. The fair value is measured at the grant date.

29. Important Events After the Balance Sheet Date
In April 2011 PetroNeft signed a new loan facility agreement with Macquarie Bank Limited for up to US$75 million subject to the satisfaction
of conditions precedent primarily related to the perfection of security over certain physical assets of the Group’s Russian subsidiaries.

30. Approval of Financial Statements
The financial statements were approved, and authorised for issue, by the Board of Directors on 10 May 2011.

60 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

Notice of Annual General Meeting

Notice is hereby given that the Annual General Meeting of PetroNeft Resources plc will be held at the Herbert Park Hotel, Ballsbridge, Dublin 4 at
11.00 am on Wednesday 22 June 2011, for the purposes of considering and, if thought fit, passing, the following Resolutions, of which Resolutions
numbered 1, 2, 3, 4, 5, 6 and 7 will be proposed as Ordinary Resolutions and Resolutions numbered 8, 9 and 10 will be proposed as Special Resolutions.

Ordinary Business
1. To receive, consider and adopt the accounts for the year ended 31 December 2010 together with the Directors’ and Auditors’ Reports thereon.

2. To re-elect Mr. Golder as a Director, who retires by rotation in accordance with Article 83 of the Articles of Association of the Company.

3. To re-elect Mr. Dowling as a Director, who retires by rotation in accordance with Article 83 of the Articles of Association of the Company.

4. To elect Mr. Fagan as a Director.

5. To re-appoint Ernst & Young, Chartered Accountants, as Auditors and to authorise the Directors to fix the remuneration of the Auditors.

Special Business
6. That the authorised share capital of the Company be and is hereby increased from €6,000,000 divided into 600,000,000 Ordinary Shares of

€0.01 each to €8,000,000 by the creation of 200,000,000 new Ordinary Shares of €0.01 ranking equally in all respects with the other existing
issued and unissued Ordinary Shares of €0.01 each.

7. That, in substitution for all existing authorities of the Directors pursuant to Section 20 of the Companies (Amendment) Act, 1983, the Directors
be and are hereby generally and unconditionally authorised pursuant to Section 20 of the Companies (Amendment) Act, 1983 to exercise all the
powers of the Company to allot relevant securities (within the meaning of the said Section 20) up to a maximum amount equal to the aggregate
nominal value of the authorised but unissued share capital of the Company as at the date of passing of this Resolution. The authority hereby
conferred shall expire (unless previously renewed, varied or revoked by the Company in general meeting) on the earlier of the date of the next
annual general meeting of the Company held after the date of passing of this Resolution, and the close of business on 22 September 2012, save
that the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such
expiry and the Directors may allot relevant securities in pursuance of such offer or agreement notwithstanding that the authority hereby
conferred has expired.

8. That the Directors be and are hereby empowered pursuant to Sections 23 and 24 (1) of the Companies (Amendment) Act, 1983 to allot equity

securities (within the meaning of the said Section 23) for cash pursuant to the authority conferred by Resolution numbered 7 above as if the said
Section 23 does not apply to any such allotment provided that this power shall be limited to the allotment of equity securities;

a) In connection with the exercise of any options or warrants to subscribe granted by the Company;

b) (Including, without limitation, any shares purchased by the Company pursuant to the provisions of the Companies Act 1990 and held as

treasury shares) in connection with any offer of securities, open for a period fixed by the Directors, by way of rights, open offer or otherwise in
favour of shareholders holding ordinary shares and/or any persons having a right to subscribe for, or convert securities into, ordinary shares
in the capital of the Company (including, without limitation, any person entitled to options under any of the Company’s share option schemes
or any other person entitled to participate in any of the Company’s profit sharing schemes for the time being) and subject to such exclusions
or other arrangements as the Directors may deem necessary or expedient in relation to legal or practical problems under the laws or the
requirements of any recognised body or stock exchange in any territory; and

c) Up to an aggregate nominal value equal to the nominal value of 10% of the issued share capital of the Company from time to time:

each of (a), (b) and (c) above being separate powers, which powers shall expire on the earlier of the date of the next annual general meeting
of the Company held after the date of passing of this Resolution and the close of business on 22 September 2012, save that the Company
may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the
Directors may allot equity securities in pursuance of such offer or agreement as if the power conferred hereby had not expired.

9. That the Articles of Association of the Company (the “Articles”) be and are hereby amended by:

a) The deletion of the existing Article Nos. 1, 40 (e), 60, 61 (a), 80, 108 and 122;

b) The insertion of new Article Nos. 1, 5, 9, 10, 22, 45, 65, 66 (a), 85, 87, 114, 120, 121, 122, 131, 136, 137 and 140 which are set out in the form
of Articles which have been signed for identification by the Chairman of the meeting and which have been available for inspection at the
registered office, and on the website of, the Company since the date of this Notice; and

c) The re-numbering of the Articles (and cross-references within the Articles) to reflect the changes referred to in this Resolution 9.

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 61

Financial Statements

Notice of Annual General Meeting (continued)

10. That the Memorandum of Association of the Company be and is hereby amended by the insertion of the following new object in clause 3(1)(r)

and the renumbering of the existing objects to reflect the change in this Resolution 10:

“(r) As an object of the Company and as a pursuit in itself or otherwise, and whether for the purpose of making a profit or avoiding a loss or

for any other purpose whatsoever, to engage in currency, interest rate, equity, commodity bond and credit derivative transactions and any
other financial or other transactions of whatever nature, including any transaction for the purpose of, or capable of being for the purposes of,
avoiding, reducing, minimising, hedging against or otherwise managing the risk of any loss, cost expense or liability arising, or which may
arise, directly or indirectly, from a change or changes in any interest rate, currency exchange rate, equity values or the credit worthiness
of third parties or in the price or value of any property, asset, commodity, index or liability or from any other risk or factor affecting the Company’s
undertaking and business, including but not limited to, dealings, whether involving purchases, sales or otherwise in any currency, spot and
forward exchange rate contracts, forward rate agreements, caps, floors and collars, futures, options, swaps, credit derivatives and any other
currency, interest rate, equity, commodity, bond, credit and other hedging arrangements and such other instruments as are similar to, or
derivatives of, any of the foregoing.”

Dated this 10th day of May 2011
By Order of the Board

David Sanders
Company Secretary
Registered Office:
20 Holles Street
Dublin 2

Note
The Memorandum and Articles of Association of the Company as well as a copy of the Memorandum and Articles of Association showing the
amendments that would be made if Resolutions 9 and 10 are passed is available for inspection: (i) on the Company’s website, http://petroneft.com,
and during normal business hours on any weekday (public holidays excepted) at the registered office of the Company at 20 Holles Street, Dublin 2,
Ireland from the date of this letter to the close of the Annual General Meeting; and (ii) at the location of the Annual General Meeting for at least 15
minutes before, and during, the meeting.

62 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Financial Statements

Notes

PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010 | 63

Financial Statements

Glossary

AGM

AIM

API Gravity

bbl

bfpd

boe

bopd

Company

CSR

Proved reserves according to SPE standards.

Proved and probable reserves according to SPE standards.

Proved, probable and possible reserves according to SPE standards.

Annual General Meeting.

Alternative Investment Market of the London Stock Exchange.

A specific gravity scale developed by the American Petroleum Institute (API) for measuring the relative density
of various petroleum liquids, expressed in degrees.

Barrel.

Barrels of fluid per day.

Barrel of oil equivalent.

Barrels of oil per day.

Proved resources according to Russian standards.

Probable resources according to Russian standards.

Possible resources according to Russian standards.

PetroNeft Resources plc.

Corporate and Social Responsibility.

Custody Transfer Point

Facility/location at which custody of oil transfers to another operator.

ESM

Enterprise Securities Market of the Irish Stock Exchange.

ESPO pipeline

East Siberia-Pacific Ocean pipeline which is expected to be completed in 2012.

Exploration resources

An undrilled prospect in an area of known hydrocarbons with unequivocal 4-way dip closure at the reservoir horizon.

Hydraulic fracturing,
fracture stimulation

The process of cracking open the rock formation around a well bore to increase productivity.

Group

HSE

IAS

IFRIC

IFRS

km2/ sq km

KPI

Licence 61

Licence 67

Lineynoye

mmbbls

mmbo

Oil pay

Pervomayka

PetroNeft

SPE

Spud

Stimul-T

TSR

VAT

WAEP

Company and its subsidiary undertakings.

Health, Safety and Environment.

International Accounting Standard.

IFRS Interpretations Committee.

International Financial Reporting Standard.

Kilometres.

Square kilometres.

Key Performance Indicator.

The Group’s Exploration and Production Licence in the Tomsk Oblast, Russia. It contains five known oil fields,
Lineynoye, Tungolskoye, West Lineynoye, Arbuzovskoye and Korchegskaya, and 24 Prospects and Leads that
are currently being explored.

The Group’s Exploration and Production Licence in the Tomsk Oblast, Russia. It contains two existing drilled
structures, Ledovoye and Sklonavaya, that have previously tested oil.

Limited Liability Company Lineynoye, a wholly owned subsidiary of PetroNeft, registered in the Russian Federation.

Metres.

Million barrels.

Million barrels of oil.

A formation containing producible hydrocarbons.

Proved reserves according to SPE standards.

Probable reserves according to SPE standards.

Possible reserves according to SPE standards.

Limited Liability Company Pervomayka, a wholly-owned subsidiary of PetroNeft, registered in the Russian Federation.

PetroNeft Resources plc.

Society of Petroleum Engineers.

To commence drilling a well.

Limited Liability Company Stimul-T, a wholly-owned subsidiary of PetroNeft, based in the Russian Federation.

Total Shareholder Return.

Value Added Tax.

Weighted Average Exercise Price.

64 | PETRONEFT RESOURCES PLC ANNUAL REPORT AND ACCOUNTS 2010

Producing six years
of strategic progress

Debt and equity fundings
US$30 million debt facility
agreed with Macquarie Bank
and US$43 million equity raised
leaving the Group fully funded
for 2011 expansion programme.
May and October 2010

2011 and
beyond

Drilling commences
Three wells drilled to delineate
the Lineynoye and Tungolskoye
oil fields and discover the West
Lineynoye oil field.
March 2007

3,100 bopd

production reached
in March 2011

Stock market listing
Admission to AIM and
ESM Markets completed.
September 2006

US$23.5m

raised in private
placings and at IPO.

February 2006 to September 2006

Pilot production
First pilot production from
Lineynoye and West Lineynoye
oil fields.
February 2008

Five new
exploration
wells
2011 will see a five well
exploration programme
target additional reserves
of approximately 120 mmbbls
net to PetroNeft.

17 new
production
wells
At Licence 61, 2011 will see
17 additional production wells
drilled at the Lineynoye oil
field and three exploration
wells also drilled in the
Licence area.

Expansion
of processing
facilities
The current design capacity
of the process facilities
is 7,400 bfpd which will be
expanded to 14,800 bfpd
in 2011.

2005

2006

2007

2008

2009

2010

2011

Preparing to produce.
The Company prepared the facilities,
equipment and staff necessary to
achieve year-round production in 2010.

A transformational year.
The Group went from being just an exploration company to an exploration and
production company. 2P reserves also grew by a further 37% to 97 mmbbls.

Group Information

Nominated and
ESM Adviser
Davy
49 Dawson Street
Dublin 2
Ireland

Joint Brokers
Davy
49 Dawson Street
Dublin 2
Ireland

Canaccord Genuity
Cardinal Place
80 Victoria Street
London
SW1E 5JL
United Kingdom

Principal Bankers
Macquarie Bank Limited
Citypoint
1 Ropemaker Street
London
EC2Y 9HD
United Kingdom

AIB Bank
1 Lower Baggot Street
Dublin 2
Ireland

KBC Bank Ireland
Sandwith Street
Dublin 2
Ireland

Directors*
David Golder (U.S. citizen)
(Non-Executive Chairman)

Dennis Francis (U.S. citizen)
(Chief Executive Officer)

Paul Dowling
(Chief Financial Officer)

David Sanders (U.S. citizen)
(General Legal Counsel)

Gerard Fagan
(Appointed 8 September 2010)
(Non-Executive Director)

Thomas Hickey
(Non-Executive Director)

Vakha Sobraliev (Russian citizen)
(Non-Executive Director)

Registered Office
and Business Address
20 Holles Street
Dublin 2
Ireland

Secretary
David Sanders

Auditor
Ernst & Young
Chartered Accountants
Harcourt Centre
Harcourt Street
Dublin 2
Ireland

*Irish citizens unless otherwise stated.

Solicitors
Eversheds O’Donnell Sweeney
One Earlsfort Centre
Earlsfort Terrace
Dublin 2
Ireland

White & Case
5 Old Broad Street
London
EC2N 1DW
United Kingdom

White & Case
4 Romanov Pereulok
125009
Moscow
Russia

Registered Number
408101

Registrar
Computershare
Heron House
Corrig Road
Sandyford Industrial Estate
Dublin 18
Ireland

PetroNeft Resources plc

Dublin Office
20 Holles Street,
Dublin 2,
Ireland.

Houston Office
Suite 518, 10333 Harwin Drive,
Houston, TX 77036,
USA.

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PetroNeft Resources plc
is an international oil
and gas exploration and
production company
focused on Russia.

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Producing
Results

PetroNeft Resources plc
Annual Report and Accounts 2010
ГГГГГГГ ГГГГГ 2010

www.petroneft.com

find out more at www.petroneft.com

What is our key objective or goal?
PetroNeft’s aim is to deliver shareholder value by developing oil
and gas assets in Russia.
≥ more info on p2

What are the values which guide
our corporate behaviour?
Our core values are based in honesty, hard work, professionalism,
respect for others and teamwork throughout the Group.
≥ more info on p9