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Khanty-Mansiysk Autonomous Area Salym Group of Fields Yuzhnoye Field Orekhovskoye Field Koltogorsky Blocks

30 | 06 | 2008

Sibir Audited Results for the Year to 31 December 2007

2007 Highlights

Net profit after tax increased over three-fold to $282.4 million
EBITDA more than doubled to $468.8 million
Earnings per share nearly tripled to 82.5 cents
Group production increased 80% to 17.8 million barrels
Daily oil production up 62% to 63,100 bopd by year end
Sales of gasoline attributable to Sibir’s interest totalled 765 million litres
Added 55,000 bopd of profitable refining capacity
Controlling interests in 134 petrol stations
City of Moscow acquired a strategic 18% stake in Sibir strengthening ties with the State
Launched intense exploration drilling programme at the Koltogorsky Blocks

REPORT OF THE CHAIRMAN AND CHIEF EXECUTIVE

Getting the fundamentals right

In September 2007 when we last reported to you we wrote about the importance of the City of Moscow becoming a strategic shareholder in Sibir as a result of Sibir acquiring 100% of Moscow Oil and Gas Company (“MOGC”). The predicted benefits from this development have continued to accrue as the Sibir share increased 37% in value from £5.11p on the day before the announcement of the deal to over £7 as we go to press.

The importance of this development was two fold:

First, we aligned the interests of the Russian Federation and the other shareholders in Sibir through shared ownership of Sibir, an essential move in a world where resource nationalism has gained momentum.

Second, we increased the extent to which our vertically integrated company participates in the full value chain of the sector - from well head to gasoline pump. With 100,000 barrels a day of refining capacity at Moscow Refinery, Sibir now holds an enviable position in the fastest growing and most dynamic fuels markets in Europe. The City of Moscow and the Moscow Region has a combined population of 17 million, making it the largest metropolitan area on the continent of Europe. Russia is now poised to overtake Germany as the largest automotive market in Europe, something that looked a remote possibility only a handful of years ago.

One challenge remained, namely that strained relations with fellow shareholders at Moscow Refinery created some anxiety in the financial markets as to our ability to maintain our position there. We expressed our aspirations and confidence that we would find a way to operate the Refinery without shareholder controversy. We confidently predict that we are days away from announcing that the security of our position at the Moscow Refinery will be well and truly established in an equitable and evergreen fashion. Together with Gazprom Neft, the oil subsidiary of state owned Gazprom, the world’s largest gas company, we will agree to operate the Refinery on a parity basis and through an independent management team of industry experts. Any agreement entered into will have a binding mechanism, independent of shareholders, to deal with deadlock issues should they arise.

Partnering with majors has been a hallmark of Sibir and being able to add Gazprom Neft to the list of our existing partners - Shell, TNK-BP and the City of Moscow - is a formidable achievement for your company.

We believe the positive spirit and the professionalism of the negotiations with Gazprom Neft and recent announcements by the Russian government about reductions in Mineral Extraction Taxes for oil production, the lowering of export duties on certain refined products, coupled with the overall growth rate of the Russian economy have confirmed our optimism in Russia’s long-term prospects and the opportunities that they provide for Sibir’s continued development.

In our view, the investment environment in Russia for Sibir has never been more stable or predictable. One of the fundamentals by now must be clear to all. The Russian government wants to see Russian control over its natural resources through state owned companies or Russian owned entities. Sibir anticipated these developments many years ago and has intentionally pursued a strategy of majority Russian ownership. In 2007 we have strengthened our position in this regard by bringing in an important arm of the Russian State, namely the City of Moscow, as a strategic shareholder bringing the total number of Sibir shares in Russian hands to 67% on a fully diluted basis. As our growth over the years has shown, this is a strategy which has worked and we believe it will continue so to do.

With the development of Salym in full swing, and as a sign of our confidence, we embarked upon our quest for replacement reserves. In March 2007 we acquired our first exploration asset - the eight Koltogorsky Exploration blocks – and launched an intensive exploration drilling programme to be completed by the end of 2008, weather permitting. To date, 3 of the 8 wells have been drilled and we are encouraged that the wells drilled so far have encountered hydrocarbon-bearing sands.

When we completed the MOGC deal, we agreed with the City of Moscow that we would undertake, on a best endeavours basis, to seek admission of Sibir’s shares to the Official List of the London Stock Exchange. We are taking all necessary steps to complete this move by the end of 2008. However, there are certain opportunities that your company is pursuing that may delay this move to the first half of 2009. In either case, the move to the Official List is a top priority of your management and will be completed in the earliest timeframe possible.

We declared our maiden dividend in August last year and re-stated our commitment to pursue a robust and regular dividend policy. To achieve this, we are engaged in a restructuring of the Group designed to facilitate this policy. Further announcements can be expected after publication of our half year interim report in September.

Production Performance

Upstream production in 2007 rose 80% to a record high of 17.8 million barrels with 15.3 million barrels contributed by SPD and 2.5 million barrels coming from Magma’s upstream unit. The Group’s total daily production rate closed the year at 63,100 barrels of oil per day (bopd), an increase of over 60% compared to year-end 2006 production of 38,900 bopd.

In the downstream sector the Moscow Refinery processed 72.9 million barrels of crude in 2007. Sibir’s share of barrels refined averaged 58,630 bopd, as our tolling quota increased from 45,000 bopd to 100,000 bopd following the completion of the MOGC acquisition. Sibir’s portfolio of three retail fuel networks in Moscow and the Moscow Region sold over 1.5 billion litres of gasoline and diesel. Approximately 765 million litres of this is attributable to Sibir’s interest.

Financial Performance

Sibir presents its 2007 accounts in US dollars as Sibir’s primary commercial activities, the sale of oil and oil products, are dollar denominated. This will minimise the effect of currency fluctuations of the US dollar versus the British pound and thus more accurately reflect the true operating performance of our business.

This is the first time that we present our accounts in accordance with International Financial Reporting Standards (IFRS) in compliance with London Stock Exchange regulations.

2007 was the year when Sibir’s long held aspirations were realised in hard production and financial numbers. These include record results in profits and cash flow created by robust production growth at Salym, strong downstream trading margins from both our refining and retail operations, and rising crude prices. In addition, our refining operations at Moscow Refinery increased in volume in the fourth quarter of 2007 following our MOGC acquisition. This breakthrough performance is the harvest of many years of investment and industry and, as we complete 10 years of a Chairman and Chief Executive team innings, you can well imagine our pleasure in reporting to you.

Earnings contributions from our upstream operations at Magma and Salym grew over 255% to $249.6 million bolstered by growing production, strong oil prices and the realisation of income which had been deferred for accounting reasons. Downstream oil products trading, retail and refining operations contributed an additional $148.5 million, a 84% increase over 2006 as we took full advantage of our increased quota at the Moscow Refinery and enjoyed strong wholesale and retail refined products margins.

In September, we advised that after years of containing general and administrative costs, we expected them to increase. We draw your attention to the Financial Review where you will find an analysis of these costs. You will appreciate our growth comes at a cost but we have embarked upon a course of pruning and expect to make reductions through economies of scale in the second half of 2008.

The net results of these significant developments is that EBITDA more than doubled to $468.8 million and Net Profit after Tax grew 217% to $282.4 million compared to $89.0 million in net profit in 2006.

Earnings per Share increased by 169% to 82.5 cents compared to 30.6 cents in 2006.

Legacy Issue

Over time we have had to crave your indulgence in terms of the time it was taking to pursue restitution of our losses following the dilution of our interest in Sibneft Yugra. This matter is now being pursued by a Provisional Liquidator of Yugraneft (the subsidiary of Sibir which held the Sibneft Yugra interest) appointed by the High Court in England. Preliminary pleadings, essentially on issues of whether the English Courts have jurisdiction over the defenders and the efficacy of the appointment of the Provisional Liquidator, are to be heard over the two weeks beginning 7 July, 2008. We shall report the outcome of these preliminary issues as and when they are reported by the Provisional Liquidator

Looking Forward

In September 2007 we wrote in general terms of ambitious plans to double the size of the company in 18 months. In the same general way we are pleased to report that these plans to materially increase the size of your company remain on track save only that if the plan materialises it is likely to be sooner than later and well within the earlier 18 month forecast.

None of Sibir’s recent achievements or future plans would be possible without the extraordinary and ordinary contribution of the people who show up to work every day to make Sibir’s business a success. A number of them are being groomed to carry on the work of the last 10 years thereby ensuring seamless succession. Sibir is a young company, an energetic company and its people enthusiastically embrace the opportunities around them in the new Russia. They are a good sign that Sibir’s best days are still ahead.

Upstream Operations Review

Sibir enjoyed excellent performance across its entire upstream asset portfolio as Group production rose 80% to 17.8 million barrels. Of the total, 15.3 million barrels was produced by Salym Petroleum Development (SPD), Sibir’s 50:50 joint venture with Shell which operates the Salym oilfileds in the Khanty Mansiysk District of Western Siberia, and the remainder was produced by Sibir’s subsidiary, Magma, which operates the Yuzhnoye and Orekhovskoye fields in the same region. Total Group production is expected to reach 25 million barrels in 2008.

The Group’s daily production at year end grew 62% to 63,143 barrels of oil per day (bopd) up from 38,901 bopd at the close of 2006 due to continued strong production growth at Salym.

SPD and Magma made significant investments to increase utilisation of gas associated with oil production which would otherwise be flared wastefully. A 45MW Power Generation Plant was constructed at Salym and is now fully operational, providing 65% of the field’s long-term electricity needs. In 2007 a wet gas pipe line for sale of gas to Sibur/Gazprom will allow for cessation of associated gas flaring at Yuzhnoye and Orekhovskoye fields and will be completed by the end of 2008.

In the spring of 2007 Sibir took its first major steps into exploration with the acquisition of eight exploration licenses, known collectively as the Koltogorsky blocks, in the Khanty-Mansiysk District of Western Siberia. By the end of 2007 the first of eight exploration wells had already been drilled and six exploration rigs had been contracted to carry out an aggressive exploration drilling program in 2008. The Koltogorsky project is now one of the leading exploration programmes in the region. With its proximity to the Yushnoye and Orekhovskoye fields, the exploration program is operated by Magma, resulting in many economies of scale.

Capital and Exploration Expense

The Group’s upstream capital expenditure for 2007 totalled $191.7 million of which $172.4 million was attributable to Sibir’s share of capex in the Salym fields and $19.3 million was invested at Magma’s Yuzhnoye and Orekhovskye fields. Exploration expenditure in 2007 for the Koltogorsky blocks totalled $9.8 million.

The Group’s upstream capital expenditure in 2008 is expected to total $164.5 million, with $128.7 million attributable to Sibir’s share of capex in the Salym fields and $35.8 million attributed to the Yuzhnoye ($9.6 million) and Orekhovskoye ($26.2 million) oilfields. 2008 exploration expenditure for the Koltogorsky blocks is expected to total $69.8 million, while SPD’s exploration at Salym attributable to Sibir is $7.5 million. Sibir share of abandonment expenditures in the Salym fields will be $2.2 million.

Operating Environment

Operations at all operating units were significantly hampered by remarkably mild and short winters, resulting in record high flood-waters in the swamp-like fields of western Siberia in 2007 and 2008. Changes in the Federal permitting process for construction and development likewise led to delays in the development of the Orekhovskoye oilfield. The experience of the past several years suggests these mild weather conditions could become a permanent feature of the operating environment in Western Siberia and future operations plans will have to take this into account.

Despite these climatic and administrative challenges, Sibir’s upstream team delivered impressive production results and laid the groundwork for continued growth in the future as the following detailed report shows.

Magma Oil Company

Magma (95% Sibir owned) is the operator of the Koltogorsky Exploration Blocks on behalf of the wholly owned Sibir subsidiary licencee and is also the licence holder and operator of the Yuzhnoye and Orekhovskoye oil fields in Khanty-Mansiysk District of West Siberia. Magma’s operations in 2007 focused primarily on development of the Orekhovskoye field and the exploration of the Koltogorsky resource.

Koltogorsky Exploration Blocks

The Koltogorsky exploration blocks cover 2,100 square kilometres and are located some 200 kilometres northeast of Nizhnevartovsk, Magma’s operation base. The licence area comprises a syncline structure and is surrounded by developed oilfields including the giant Samotlor oilfield some 70 kilometers to the west. In accordance with Russian GKZ categorisation the Blocks are estimated to contain a total of 970 million barrels of Russian category C3 oil resources. These estimates are based on the interpretation of 2,574 kilometers of 2D seismic profiles. In total, some 34 structures thought to bear hydrocarbons have been identified by the seismic profile interpretations.

The Blocks feature excellent available infrastructure including a Transneft oil pipe line, a Sibur wet gas pipe line, as well as paved roads and power lines passing through the licence area. This should limit eventual capex outlays and lead to earlier production should the exploration program be successful and move to the development stage.

The Koltogorsky exploration licences require Sibir to drill and test eight wells (one per block) and acquire an additional 180 kilometers of 2D seismic profiles by the end of February, 2009. Should the exploration program be successful, Sibir will apply for an extension and conversion of the licenses to 20/25 years exploration, appraisal and development licences. To meet the tight timeline of the licence requirements, Magma has engaged three drilling contractors, each providing two rigs, as well as several construction and testing services contractors.

The first well (141P) was spudded in Q4 2007 and reached total depth of 3,200 meters on Christmas Eve. After acquisition of a vertical seismic profile the rig was disassembled and remobilised to drill the second exploration well.

Koltogorsky Exploration Blocks 2008 Preview

By the end of the 2007-2008 winter season Magma had completed 71 kilometers of permanent and winter roads, prepared 7 well pads and mobilised five exploration rigs. The second exploration well (111P) was spudded in early April 2008 and reached total depth of 3,500 meters by late May. A third well (121P) was spudded at the end of April , and fourth well (151P) is expected to spud in July. Two additional wells (71P and 101P) are scheduled for September and the last two (81P and 91P) in December. Sibir is encouraged by the initial results from the first three wells as drilling cores and well logs show hydrocarbon saturations in Middle and Upper Jurassic sandstones.

Yuzhnoye Oil Field

The Yuzhnoye oil field lies 60 kilometers to the southwest of Magma’s operations base in Nizhnevartovsk. In 2007 Yuzhnoye celebrated the 15^th anniversary of the start of production during which time it has produced over 24.5 million barrels of oil.

In 2007 Magma completed design documents and land surveys for construction of a 27 kilometer wet gas pipeline from the Yuzhnoye Central Processing Facility (CPF) to a tie-in point for deliveries to Gazprom affiliate Sibur. Currently under construction, the pipeline will allow Magma to sell its associated wet gas, thus eliminating flaring in compliance with its licence obligations.

In 2007 three wells totalling 8,451 linear meters were drilled, ten wells were completed or recompleted, fifty-seven well workovers were carried and eighty-five well service jobs performed including nine hydraulic fracturing treatments. A new modelling and design plan (Technological Schema) for the Yuzhnoye field was submitted to the authorities for approval.

Yuzhnoye 2008 Preview

Activities at Yuzhnoye in 2008 are focused on completion of the wet gas pipeline to eliminate flaring. On the basis of results of recent development drilling (2004 to 2007) a revised Technological Schema will be approved in course of 2008 and is expected to include further development drilling in the southern area of Yuzhnoye.

Orekhovskoye Oilfield

The Orekhovskoye field is a greenfield property which lies 22 kilometers to the northwest of the Yuzhnoye oilfield. Sibir acquired the licence for Orekhovskoye as part of its purchase of Magma in 1997, but development was delayed because the economics of the project were thought to be unattractive in the lower oil price environment that prevailed at the time. Taking into consideration the long term outlook for crude prices, Magma re-engineered its development scenario based on four well pads and highly deviated wells. The resulting proposal was submitted to the authorities who approved it in August of 2006. The approved development proposal delivers positive economics at oil prices above $30 a barrel and increases Magma’s C1+C2 Russian classification reserves by 54 million barrels.

In April 2007 the Russian authorities approved the pilot Technological Schema for Orekhovskoye, allowing for the development of the field and re-completion of two old exploration wells which produced an incremental 43,877 barrels of oil.

In parallel with approval of pilot Technological Schema Magma submitted for approval design documents to construct roads, well pads, infield power and pipe lines. Unfortunately, the local authorities were slow to implement a recent set of new regulations and the approval process took much more time than expected, resulting in significant construction delays.

Despite these challenges Magma completed construction of 13 kilometers of permanent road linking the future Orekhovskoe processing facilities with Yuzhnoye and 9 kilometers of permanent infield roads. Infield power lines were laid to one of the well pads, allowing the start of production from the two re-completed exploration wells described above and the commencement of drilling operations in the spring of 2008.

Orekhovskoye 2008 Preview

Development drilling on pad 2 commenced in February 2008 and 12 wells, including one water source well are planned by year-end. The same rig will continue development of pad 2B, with a further 10 wells to be drilled before the end of 2008.

2008 will see significant infrastructure buildout at Orekhovskoye, completing the following projects:

4.1 km of infield roads
21.3 km of pipe line, linking temporary processing facilities on Orekhovskoye and the Yuzhnoye CPF;
7.5 km of infield pipe lines
5.2 km power lines
Temporary processing facilities
Power substation

Production and Injection

Total 2007 Magma production reached 2.5 million barrels of which Yuzhnoye contributed 2,460,962 barrels at an average production rate of 6,742 bopd from 44 wells. 5.5 million barrels of water were injected through 23 injector wells for reservoir pressure maintenance. Orekhovskoye contributed 43,877 thousand barrels of incremental production from two recompleted exploration wells.

In 2008 Magma expects to produce a total of 2.5 million barrels for an average daily production rate of 6,850 bopd.

Capital Spending

Capital expenditure for Magma in 2007 totalled $19.3 million of which $14.6 million was invested in Yuzhnoye projects and $4.7 million in the Orekhovskoye development.

Projected 2008 capital expenditure is $35.8 million of which $9.6 million has been allocated to Yuzhnoye and $26.2 million to Orekhovskoye.

Salym Petroleum Development N.V. (SPD)

SPD is Sibir’s 50/50 joint venture between its 100% owned subsidiary Evikhon and Shell Salym Development B.V. , a member of the Royal Dutch Shell Group. SPD operates the Salym Group of fields (West Salym, Vadelyp and Upper Salym) in the Khanty-Mansiysk District in West Siberia. With 1.1 billion barrels of Russian classification C1+C2 reserves, the Salym development represents the largest single on-shore project in Russia with foreign participation. SPD launched production from the Salym fields in late November of 2005 and has grown production to over 127,000 bopd as of today.

Salym Fields

2007 was a year of spectacular production growth at Salym as the final key infrastructure projects were commissioned and drilling operations developed momentum. SPD’s highly efficient drilling programme continued with four rigs operating in 2007, one heavy duty rig was replaced with a 200-tonne mobile rig, and six service rigs/hoists were at work on completions and work-overs. The SPD drilling team continued to set records for drilling time, completing wells in as few as 6.7 days. Well completion efficiency has been improved to 4.1 days per well and well hook-up times have reached technical limits.

Production slowdowns in the first quarter stemming from the failure of water injection pumps were resolved, first by installation of Russian modular water injection pumps and later, with the repair and reinstallation of high-volume mega-pumps getting production back on track.

SPD drilled four dedicated producing wells and one injector for the pilot development of the Achimov reservoir. The Achimov is a tight heterogeneous reservoir that lies beneath the main producing reservoir and has significant volumes of oil resources in place. The plan is to perform large volume hydraulic fracturing treatments in 2008 and produce the wells to evaluate economic potential of large scale development of the reservoir.

SPD commenced construction of a three-turbine, 45 MW Power Generation Plant (PGP) to utilise most of Salym’s produced associated gas and provide a material part of the electric power needed to run the project for decades to come. The PGP will also allow SPD to reduce flaring in line with environmental protection requirements while reducing exposure to anticipated increases electricity prices resulting from the deregulation of the power sector. The plant was fully commissioned and operational as of early April 2008.

Other operational highlights at Salym included:

Completion of the second phase of Custody Transfer Facilities (CTF) with two 20,000 m3 tanks, transfer pumps and fire pumps;
Construction of 5 new pads with infield roads, power lines and pipe lines
Total of 100 new wells drilled, 78 on West Salym, 1 on Upper Salym and 21 on Vadelyp
106 new wells hooked up
108 initial well completions
118 well workovers and well service jobs
8 hydraulic fracturing treatments
Expansion of the operations base with two accommodation units, office block, car wash and covered storage area
Completion of an office block on the Salym CPF
Construction of phase one of waste handling and processing facilities
Installation of modular water injection facilities on Upper Salym;

Production and Injection

Total 2007 production at Salym doubled to 30.7 million barrels (15.3 million barrels Sibir share) up from 14.9 million barrels (7.5 million barrels Sibir share) in 2006. The daily production rate grew 77% from 64,000 bopd at the beginning of the year to 113,000 bopd by year end. Water injection for reservoir pressure maintenance totalled 36.4 million barrels reaching required volumes to balance depletion and manage reservoir pressure support.

Capital Expenditure

Sibir’s share of capital, exploration and abandonment expenses for the period totalled $172.4 million including $87.9 million for construction of facilities and infield infrastructure and $79.5 for drilling and completion of the wells. $1.9 million was spent on exploration and $3.1 million on abandonment expenditures.

Operational Highlights by Field

West Salym:

West Salym continues to be the focus of SPD’s activities as the field contains some 70% of total Salym reserves. 2007 operational highlights for West Salym include:

Three well pads completed, drilling, completions and hook-ups underway, production commenced;
Infield infrastructure (oil and injection water pipe lines, roads and power lines) completed for 3 pads;
Water Injection facilities fully in place with two big flow serve (15,000 m3/day each) and back up Russian modular pumps;
78 wells drilled;
85 wells completed;
54 new producing wells brought on stream;
5 dedicated Achimov wells drilled and one hydraulically fractured;
Construction of phase 2 Custody Transfer Facilities (CTF) at the tie in of the export pipeline to Transneft pipeline system completed
Phase one of waste processing facilities completed

Upper Salym

The Upper Salym license area has significant potential. SPD is continuing studies and investments to fully valuate its upside. 2007 accomplishments at Upper Salym include:

Completion of modular pump station for water injection;
Completion of well pad K-2;
1 well drilled;
Preparation of new Technological Schema.

Vadelyp profile

Vadelyp consists of two structures, Vadelyp North and Vadelyp South. The development of Vadelyp North commenced in 2006, and continued during 2007.Studies and preparation of the development of Vadelyp South took place in 2007 to be continued through 2009. In 2007, the following progress was recorded at Vadelyp:

new well pad built;
21 wells drilled;
23 wells completed.

Salym 2008 Preview

Continued development of the Salym fields in 2008 is expected to bring total production of up to 45 million barrels. Daily production is expected to reach 130,000 bopd by year-end based on currently approved projects. SPD is preparing several incremental projects such as hydraulic fracturing treatments, flank and in-fill drilling which could bring 2008 year-end production to 140,000 bopd and add incremental production in the years to come.

Development projects for 2008:

To support steady production growth SPD plans to drill additional water source wells to increase water injection capacity injection of water for reservoir pressure maintenance.
Exploration and appraisal activities at Salym will continue in 2008, with the Achimov Pilot Development on West Salym, and the drilling of exploration wells on Upper Salym and South Vadelyp. SPD plans to drill two more prospects on Upper Salym (Lebed and Glukhar) in the winter 2008/2009 and pilot development of Middle Cretaceous BS8 reservoir on Upper Salym. This pilot, consisting of 9 wells, will be initiated in 2008 and will continue during 2009.
The CPF on West Salym will be upgraded with two 100m3 inlet separators, one 100 m3 final stage separator and two 5,000 m3 water skim tanks.
Two new well pads will be completed, and the three pads already completed in 2007 (21, 25 and 27) will produce first oil in 2008.
An operations base fuel filling station, sport hall and ambulance garage will be completed.
Drilling with four rigs, and completions and well servicing with 6-7 rigs/hoists will continue.
To manage remaining volumes of associated gas not utilised by the 45MW power plant, SPD has entered into an agreement with a third party which will build and operate an LPG plant next to the Salym CPF. The plant will take wet gas deliveries from Salym as well as neighboring producing properties and is expected to be commissioned in 2010.

Group Reserves Summary

The Group’s interests in commercial reserves of oil as of 31 December 2007 are included in the unaudited table below:

Russian reserves classification (1)

Million barrels	A+B+C1	C2	Total

Magma’s Yuzhnoe and Orekhovskoe Oilfields	125	11	136

Salym Group of Fields (50%) (2)	376	156	532

Total	501	167	668

1. Russian reserves are classified as follows:

A = reserves proved and developed in accordance with approved (by Russian Authorities) development plan.

B = reserves proved and developed in accordance with early development plan.

C1= reserves tested and mostly proved but not developed.

C2= reserves contiguous to C1 and substantiated by geological data and lie within probable, possible and contingent.

2. As noted previously, SPD uses a reserves classification known as proven, expected and scope for recovery reserve estimate based on the field development plan which total 888 million barrels (or Sibir share – 444 million barrels). The difference between the SPD estimates and the Russian reserves numbers are due primarily to the exclusion of the lower reservoirs in the SPD numbers.

Downstream Operations Review

In the second half of 2007 Sibir successfully completed its acquisition of MOGC, materially increasing its interests in the downstream business – truly a landmark event in the history of the company.

The completion of the MOGC deal has also allowed for a resolution of the long-standing conflicts between shareholders at the Moscow Refinery, thus clearing the way for long overdue investment to make it a world class facility. Likewise our ownership of the MTK and MNP retail fuels networks has allowed us to start implementing an aggressive plan to upgrade those networks to ensure a leadership position in the marketplace.

In summary, 2007 was a watershed year for Sibir’s downstream business and set the stage for 2008 during which the planning, designing, securing of building permits, and the building of the management team will allow us to start to turn our vision into growing operations that will deliver enhanced earnings quality for years to come.

The Moscow Market

The City of Moscow and the surrounding Moscow Region represent one of the largest and most dynamic fuels markets in Europe. The region has a combined population of over 17 million making it the largest metropolitan area on the continent of Europe. With Russia’s economic revival Moscow has become a magnet for domestic and foreign investment, leading to increases in living standards and consumer spending which are reflected in a 10% annual growth rate in the number of automobiles on the road over the past three years. Russia is now poised to overtake Germany as the largest automotive market in Europe by the end of 2008 supporting continued strong growth in fuels demand.

Moscow Refinery

The Moscow Refinery is a 240,000 bopd nameplate capacity facility currently processing 200,000 bopd and supplies over 50% of Moscow’s motor fuel requirements. Located in the southeastern district of the city it receives crude supply via the Russian national Transneft pipeline system whilst refined products are supplied to local markets and export customers through pipelines, rail cars and trucks. Over 3,200 staff are employed at the facility.

The Moscow Refinery is designed to process a high sulphur Urals blend crude slate. The facility comprises over forty processing units producing approximately 57% high-value light products including gasoline (RON octane grades 80, 92 and 95), Diesel (winter and summer) and aviation kerosene (jet fuel). The Refinery is also a leading producer of heating oil, bitumen and LPG. A large part of the Refinery’s output is sold into the local market, though a significant percentage (up to 50%) of diesel is exported.

The Refinery operates as a tolling operation and does not buy crude or sell oil products itself. Trading activities are carried out by trading companies which supply crude to the Refinery, pay the Refinery a per-barrel tolling fee to process the crude and then market the refined product directly. The Refinery’s tolling fees are sufficient to cover operating costs, regular maintenance, on-going capital expenditure leaving profits sufficient to cover payment of dividends on preferred shares. Thus, the full economic value of the refining operation is reflected in the results of our trading operation.

Refining Volumes

In 2007 the Moscow Refinery processed 72.9 million barrels of crude. Sibir’s share of total tolling capacity was 21.4 million barrels or an average 58,630 bopd, an increase over 2006 as Sibir benefited from increased tolling capacity after the completion of the MOGC acquisition in September. Refinery production was temporarily reduced by nearly 40% during the month of October due to routine maintenance.

2008 total crude processing volumes are expected to be 71.4 million barrels of which Sibir is expected to have tolling access to 35.7 million barrels or 97,800 bopd. Maintenance works are expected to slow processing in April and May, resulting in lower volumes for the first half of the year.

Future Development Plans

The Moscow Refinery has recently completed a feasibility study which outlines several scenarios for upgrading the facility over the next several years. The most likely option currently under study anticipates a robust, three-stage investment program to increase light high-value products yields to 90%, improve capacity utilisation and produce Euro 5 specification motor fuels. Total capital expenditure for the upgrade is expected to be in excess of $1 billion which will be the shared responsibility of the shareholders.

Marketing and Distribution

With increasing car ownership, population and affluence, Moscow and the Moscow region are witnessing record fuel consumption growth. However, due to a lack of available real estate in Moscow suitable for petrol service station construction, the market remains significantly under supplied in terms of the number of filling stations (845 in total). The market is thus characterised by very high and growing per-station throughput volumes and retail fuels margins well above European averages. This is not expected to change anytime soon.

Sibir has a significant position in this exciting market with an interest in over 185 petrol service stations in Moscow and surrounding region. Our retail assets are held through three distinct entities:

Moscow Fuel Company: a network of 71 wholly-owned and operated MTK-branded service stations in the city of Moscow with sales of over 485 million litres of motor fuels in 2007. It is the largest network of existing stations in the city. The company also has a 100% interest in a large oil products storage and distribution terminal in the northwest district of Moscow.

The MTK network is primarily a fuels only network which has had minimal investment over the past 20 years. Sibir has announced a major investment program of over $200 million over the next five years to significantly upgrade this network to international retail standards to include modern, multi-product fueling facilities, convenience retail stores, ready-to-serve food offering and automatic carwashes where real estate dimensions permit. In 2008 the company’s activities will focus on planning and securing the necessary building permits to launch this ambitious development program.

Mosnefteproduct: A network of 63 NEFTO-branded service stations 51% owned by Sibir in the economically vibrant region surrounding Moscow. This region is experiencing tremendous development and growth as Muscovites have developed a taste for suburban living. This is leading to increased road construction, development of housing and consumer retail facilities and local employment. The NEFTO-branded network is comprised of Soviet-era facilities that have suffered from years of under-investment as reflected in its 2007 sales volumes of 65 million litres. Approximately half of the network stations are being targeted for demolition and rebuild over the next 5 years requiring some $75 million in capital investment. The renewed network will form the basis for significant expansion to develop a leading position in the Moscow region and surrounding territory.

STBP: In 2006 Sibir acquired its 25% +1 share interest in this BP-branded service station network of 51 facilities in Moscow and the surrounding region. Established over 10 years ago, the BP network is a greenfield development that has been built to the highest international retail standards. All facilities feature modern, high-volume fueling facilities, large convenience stores with in-store bakeries and cafes. Automatic carwashes are available on approximately fifty percent of locations. With 2007 sales of over 988 million litres the BP network is the clear market leader in Moscow. Future development plans call for the network to grow to between 90 and 120 filling stations over the next 5 years.

Retail Sales Summary

2007 retail fuels sales volumes from all networks totalled 1.5 billion litres of which 765.15 million litres are attributable to Sibir:

Retail Networks	Total Sales mltrs	Sibir Interest %	Net Sibir Share mltrs
MTK Network	485,000	100	485,000
Mosnefteproduct	65,000	51	33,150
STBP	988,000	25	247,000
Total	1,538,000		765,150

Financial Review

In 2007 Sibir’s integrated operations produced record financial results driven by production growth at Salym, higher crude oil prices combined with increased refined products volumes and refined product and retail margins downstream.

Key Financial Indicators ($ millions)

	2007	2006	% change
EBITDA*	$468.8	$163.8	109
Net Profit	$282.4	$85.4	231
Net Debt/(Net Cash)	$320.4	($12.8)	n/a
Gearing %	29%	n/a	n/a

*EBITDA comprises the Group's earnings before interest, tax, depreciation and amortisation and includes the Group's share of EBITDA of joint ventures

Operating Environment

The average Brent price for the year was $71.66 or 8.8% higher than the $65.38 average for 2006.

Russian Mineral Extraction Taxes (MET) and export taxes are set every two months based on average prices for the previous two months. Sibir enjoyed a positive tax effect from this structure throughout the year as lower MET and export tax calculations trailed rising crude prices. The reverse will apply in any period if and when the crude oil price is in decline.

General Observations on Accounts

Because Sibir’s revenues are denominated primarily in US dollars the dollar is its functional currency and Sibir reports its results in US dollars rather than pounds sterling as was done previously. Reporting in US dollars eliminates the effect of fluctuations in the dollar/sterling exchange rate and provides a more accurate picture of the company’s financial performance.

Sibir also, for the first time, presents its full-year accounts in accordance with International Financial Reporting Standards (IFRS).

A guide to the Group Income Statement

In our Group Income Statement, IFRS requires that in line items “Turnover”, “Gross Profit”, and “Operating Profit”, we show only the results of those businesses which we control, namely Magma’s upstream and downstream operations and, from 18 September 2007, the business of MOGC. The line item “Administrative and General Expenses” represents expenses of those controlled businesses and includes the general corporate expenses for the Group. The results from SPD, Moscow Refinery and STBP are shown net of directly related expenses including profits tax as a separate line item under “Share of Profit from Joint Ventures and Associates”.

Analysis by Business Segment

While the results presented in this manner ensure we comply with IFRS, an analysis of the same numbers by business segment provides, in our view, a more helpful explanation to you as shareholders of the Company’s performance.

The segment analysis below breaks out contributions to profitability from the key business segments in upstream and downstream sectors. Administrative expenses of Magma and MOGC are similarly broken out from the corporate expenses in the IFRS accounts and allocated to the relevant segment to provide a clear picture of segment profitability.

Profit contribution by segment	2007	2006	%
	$000	$000	Change
Upstream
Salym	219,109	49,774	340
Yuzhnoye and Orekhovskoye	30,500	20.537	49
Total Upstream Contribution	249,609	70,311	255

Downstream
Products trading, refining and retail	127,482	80,797	58
Share of net profit from BP retail	21,049	-
Total Downstream Results	148,531	80,797	84