"The Ministry of Natural Resources has estimated that the Izberbash and Sulak blocks contain Russian C3 resources of approximately three billion barrels of crude oil. Initial reserves estimates for Sulak should be completed during 2009 following our review of relevant seismic data. No wells have been drilled on either licensed area to date.
"The Geoterm blocks are also favourably positioned to distribution access points, with the Azerbaijan-Northern Caucasian-Novorossiysk branch of the Transneft pipeline only ten kilometres away and in close proximity to the Caspian oil terminal in Makhachkala.
"Geoterm's blocks are adjacent to crude oil and natural gas fields which are already in production. A new Baku to Ceyhan pipeline has been constructed which has the capacity to transport one million barrels per day.
"The Western Caspian region is well connected to the Russian pipeline network, with key pipelines to Novorossiysk in Russia and export terminals and refineries on the Black Sea. Additionally, rail transport is also well developed in the region and is an established method of shipping crude oil products.
"During 2007, the Group continued to acquire and interpret seismic data on the licences. From the results of the work on the Izberbash block, the Group indentified six prospective targets or future drilling, the largest of which has been estimated to contain Category C3 resources (Russian reserves classification) of 1.6bn barrels of oil.
"We have been evaluating our exploration options including seeking an experienced farm-in partner for these licences which would reduce our exploration risk.
"Apart from these assets, Geoterm also operates a relatively small scale geothermal heat and hot water supply business to local municipalities and organisations in Dagestan.
"These activities constituted a significant amount of our revenue for 2006 and 2007. However, in the future, once NGPT begins producing, we do not anticipate that these activities will generate a significant proportion of our revenue.
"Our Co-operation Agreement with Zapsibgazprom OAO, a Gazprom subsidiary
"In October 2007, we completed preliminary negotiations with SOCAR over the provision of a jack-up drilling rig and related offshore drilling facilities. SOCAR has confirmed a decision in principle to provide our subsidiary Geoterm with an exploration option on the jack-up rig "Khazar".
"Subject to contract, this should allow us to proceed with exploration drilling on the block held under the Izberbash licence. We view it as strategically important to secure a drilling rig in the Caspian Sea, particularly at a time when these rigs can be very difficult to procure due to high demand."