In operational control of VOG is Executive Director William Kelleher, who previously held a senior position within the now dismembered Russian oil & gas giant Yukos. When the end came for Yukos, rather than break up what he felt was a strong team with worthwhile experience in bringing oil & gas assets into production in a Russian setting, Kelleher transplanted his immediate staff into VOG, and set about seeking opportunities. Chairman Kevin Foo, also of Celtic Resources [AIM:CER], among other endeavours, lends VOG his London financial connections.

Although Celtic’s present situation, in which it faces a gruelling title contest for what could become a major new Russian gold mine, is an unfortunate example of the travails that can await foreign companies doing business in Russia, VOG has yet to run into any such difficulties, and given Kelleher’s experience in the country, plus the high quotient of Russians among the company’s personnel, may succeed in avoiding serious pitfalls altogether.

VOG is currently drilling what is intended to be its first producing well, which is expected to come on stream in April yielding gas and condensate at rates yet to be determined. This first well is projected to come in at a cost of around $3 million. The number of wells that the West Medvezhye project is ultimately likely to be able to support is still unknown, more thorough appraisal of the resources that exist being needed first. Partly to this end, VOG is looking to have two other rigs at work on the project during the year.

An attractive aspect of the West Medvezhye project is that condensate yields are expected to be relatively high, which is a plus point for the project as condensate can usually be sold for several dollars above the going rate for the Brent oil contract. Oil from the West Medvezhye project should be saleable for close to the same rate as the benchmark Russian light crude, the Urals blend, which goes for a price slightly below that of Brent. Importantly, protocols are already in place with Russia’s gas distribution monopoly Gazprom for the sale of the project’s gas.

In addition to the West Medvezhye project, VOG has the Kemerkol oil project in Kazakhstan. The Kemerkol project is estimated at present to host 26 million barrels of recoverable reserves to the Russian C2 standard of surety and 9 million barrels to the C1 standard, C1 category reserves generally being considered as proven, and C2 as probable. The reserves were previously stranded from a logistical standpoint, there being no means of transport in place to take them to market, however the government of Kazakhstan has now set up a rail system that will allow the oil to be extracted and sold.

VOG is currently attaining production levels of 3-500 barrels per day from the Kemerkol project as a whole, and is targeting a level of 1500-2000 barrels per day by the end of the year. This is to be achieved through the re-completion of three existing wells and the drilling of eight new ones. A three dimensional seismic survey is planned in order to help determine the locations for the new wells. According to Kelleher, the oil from the Kemerkol project is saleable inside Kazakhstan for around $33 per barrel, while for export should make the Brent contract minus around $6 per barrel. VOG expects to sell oil from the Kemerkol project inside Kazakhstan to begin with, before commencing exports later on.

Investment Outlook

As meteoric as the recent rises in VOG’s market capitalisation have already been, Kelleher is not shy about revealing a personal target of $1 billion in market capitalisation by the end of 2006, from a current level of just over GBP200 million, or roughly $350 million. With the markets for oil & gas as tight as they are this goal might not be unrealistic. The competent development of the West Medvezhye project to production, and perhaps the acquisition of further oil & gas assets, the latter being something that Kelleher indicates is definitely a possibility, could quite easily see VOG win yet more fans in the market, with a corresponding, apprising effect on the company’s share price.