Petro Kamchatka

In terms of potential markets for any commercial oil volumes, PetroKamchatka's exploration licences are within easy access to the large and fast growing oil markets of Asia and western North America. The Kamchatka exploration licences are approximately 2,500 kilometres from the large refineries in Japan and South Korea, and 5,000 kilometres from the west coast of North America.

A 392-kilometre natural gas pipeline, approximately 100 kilometres from the Icha Block, is currently under construction from the Kolpakovsky Block located on the west coast of Kamchatka to Petropavlovsk-Kamchatsky, the regional capital. This project is being commissioned by Gazprom, with the gas intended to supply local demand. It is not known if and when Gazprom would seek additional gas supplies to meet local demand, so PetroKamchatka has assumed that there are presently no markets for natural gas discoveries on its exploration licences.

PetroKamchatka’s three exploration blocks are located on the western coast of the Kamchatka Peninsula, bordering the Sea of Okhotsk. Access to the licence areas from outside Kamchatka is by sea, and during the winter months, by winter road connecting 250 kilometres to the paved road that leads to the city of Petropavlovsk, an all-season port.

The Icha, Ichinskaya and Vorovskaya Blocks, have wet marshy conditions that make summer travel of tracked or wheeled vehicles very difficult, petroleum operations (seismic data acquisition and drilling) are normally conducted during the winter months, from late December until early April. As there are no permanent roads in these blocks, operational surface transport is by ice roads constructed during the winter. The western part of these blocks is completely free of forest cover. The higher elevation areas in the eastern part of the licence areas are sparsely treed.

In the event of a commercial discovery in the Company’s blocks, initial crude oil production could be exported seasonally from a temporary facility. This would be located on the Sea of Okhotsk. As PetroKamchatka's first two exploratory locations will be drilled within 30 kilometres of the coastline, tie-in to such a facility could be achieved within two years of drilling a commercial discovery. PetroKamchatka has not conducted detailed studies or finalized plans regarding the development of such a facility and related infrastructure, which will be required in order to obtain Russian Government and regional approvals.

The Sea of Okhotsk is icebound during the winter months with shipping restricted and subject to Russian Government approval. Initial test production to determine commerciality of the potential discovery will likely be done on a seasonal basis. For reference, onshore oil production in the northern part of Sakhalin Island has been produced year-round since the 1990s, but shipped seasonally in this way. Offshore oil production from the Sakhalin-II project was also seasonal between 1999 and May 2008. The project moved to year-round production after May 2008 after a pipeline was constructed and commissioned to the ice-free port of Prigorodnoye in southern Sakhalin Island.

In the event of significant oil discoveries (greater than 300 million barrels of oil in aggregate) on PetroKamchatka's properties in Kamchatka, the Company believes that a pipeline could be built to the ice-free east coast of Kamchatka, an approximate distance of 400 kilometres from PetroKamchatka's exploration area in western Kamchatka. That approximate location would be suitable for the construction of an all season export facility.

Such development is subject to economic stability, financing and requisite government approvals, among other factors.