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Malka Oil * Income from oil sales amounted to TSEK 24,155 (0) * The net result after tax for the period was TSEK -812 (-3,951) * EPS was SEK 0.00 (-0.02) for the report period * Borehole 210 strikes oil - confirms that ZL and LL oil fields are connected * Production targets for May and June delayed two months. Production target for year-end remains * Malka Oil becomes 100% owner of its subsidiary STS-Service * Western reserve study, "CPR", will be completed in June
MD's Report
Dear Shareholders, The oil sector right now is clearly in focus all over the world with oil prices reaching record levels. Oil is one of the most sought after resources on the planet. It is a resource that affects all mankind in one way or another and it is also finite. I foresee a continued strong demand which supports continued high price levels and that inspires us in our daily work to supply the world with crude oil.
From January 1, 2008 commercial production has formally been started which also means that we will start to amortize our oil assets from this date. For Malka Oil operations during the first quarter were very much centered around hydro fracturing of a number of wells. This work has also lowered production levels over the period but it has been necessary to raise production during the rest of the year. Even if we still have not reached the targeted production levels we can still find satisfaction in that we have been able to adjust our own reserve estimate upwards with 32%. This was based upon data from borehole 580 which indicated that the two oil fields Zapadno-Luginetskoye (ZL) and Lower Luginetskoye (LL) are connected.
In May we also completed the first phase of the drilling of exploration well 210 and it has struck oil. The well which is situated just between the two oil fields finally confirms the thesis that the two oil fields are connected into one large oil field. This will have a clear and positive impact on coming reserve evaluations. A Western reserves evaluation is in progress and is expected to be completed in June. The recently announced delay in production is not according to plan which shows how important it is to have your own oil treatment equipment and infrastructure in place. We have had problems with capacity for separating a higher than normal water cut after hydro fracturing and have therefore not been able to treat the oil at the desired rate. We have therefore been forced to limit production flows. This will be resolved and stabilised step by step and by the end of the year we will have our own infrastructure for production and delivery in place including a direct connection to Transneft.
The importance of the outcome from exploration well 210 must not be understated. It has been impressive to follow the theories of our skillful geologists having been translated into real assets. We can now discern the foundation and the reserve base that is needed to realize our vision of 30,000 barrels produced per day by 2012. The road forward is well defined but probably not without issues and curves along the way. We encounter unexpected situations which will affect us both positively and negatively but we know where we want to go, we have a long term perspective and the next main target is to produce 8,000 barrels per day by the turn of the year.
Finally, I would like to mention that our updated web page has gone live and I invite you all to visit and read more about Malka, our operations and plans.
Stockholm May 30, 2008
Fredrik Svinhufvud MD Malka Oil AB
Comments on the group's result and financial position
Turnover and result
Operating income for the report period amounted to TSEK 26,579 (0), of which revenues from oil sales was TSEK 24,155 (0)
The gross profit amounted to TSEK -323 (TSEK 0). Costs in relation to the hydro-fracturing has been charged to the gross profit.
Selling and distribution expenses was TSEK -5,878 (0) and consists of extra overhead costs depending on lack of own Transneft connection.
Transaction costs of TSEK -450 (-7,668) relating to the share and convertible bond issues during the report period have been booked against equity.
Net financial items for the period Jan-Mar 2008 were TSEK 14,824 (-680). Exchange gains on the Company's dollar denominated convertible loans have had a positive effect on net financial items during the period.
The tax cost for the period amounted to TSEK -2,243 (0).
The group reports a net result after tax for the period 1 January - 31 March 2008 of TSEK -812 (-3,951), equivalent to an earnings per share of SEK 0.00 (-0.02).
Investments Investments in tangible and intangible fixed assets in the group during the period January - March 2008 amounted to TSEK 122,579 (102,469), of which intangible fixed assets represented TSEK 119,580 (56,707).
Financing and liquidity In January 2008, Malka Oil AB issued a senior convertible debenture in the nominal amount of MUSD 20 (equivalent to approximately MSEK 119) before transaction costs. Cash balances in the group amounted to TSEK 57,124 (45,258) at 31 March 2008. During the period
Employees The number of employees in group companies at the end of the report period was 99 persons, of which 11 were women and 88 were men.
Operations
Summary Malka Oil AB is an independent oil company active in Russia involved in exploration and production of hydrocarbons in the form of oil, gas condensates and gas. In conjunction with this, the subsidiary OOO STS-Service owns an oil licence valid for 25 years as from April 2005, which gives the company the right to extract all hydrocarbons found within the Tomsk licence block during the licence period. The licence block measures just over 1,800 square kilometres and is located in the north-western part of the Tomsk region. It is surrounded by a large number of producing oil and gas fields.
During the Soviet era six boreholes were drilled in the licence block, five of which were discovered to produce hydrocarbons. The existing seismic investigation within the block has, besides the three existing oil fields, identified another seven structures, i.e. potential oil fields. These will be subject to exploration drilling over the next few years. It should be mentioned that around one third of the licence block has recently been covered by seismic investigation and the final interpretation will be completed during the 3rd quarter 2008.
For further information, please contact:
Fredrik Svinhufvud, Managing Director Malka Oil, tel +46 8 5000 7811, mobile +46 708 708 708 Richard Tejme, CFO, tel +46 8 5000 7812 mobile +46 707 31 52 17
