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Chairman's Letter to Shareholders

18 May 2011

The following letter to shareholders in the Company has been released today.



Dear Shareholder,



It is my pleasure to review your Company's activity over the last few months. It has been a productive period with the Company working closely with the Ministry of Industry, Mines and Technology, State oil and gas company, (“SNH”) and the offices of the President of Cameroon to secure a Decree for an Exploitation Licence for its Logobaba gas and gas condensate field in Douala, Cameroon.



Highlights:

  • Decree signed by His Excellency, President Paul Biya granting a 25 year exploitation licence with an option to extend for an additional 10 years
  • Inaugural ‘ground breaking’ ceremony in Douala with His Excellency Minister of Industry, Mines and Technology, Ndanga Ndinga Badel to be held on the 24th May
  • First gas sales scheduled for beginning of Q4 2011
  • No further delays anticipated in executing the project to cost, quality and schedule targets
  • VOG fully funded through to first gas from Logbaba
  • Commencement of feasibility studies for an early production scheme in West Med, Russia
  • Termination of Falcon Option Agreement

Logbaba Project, Cameroon



The President of Cameroon, His Excellency Paul Biya signed Presidential Decree No. 2011/112 on the 29th April 2011, awarding Exploitation Rights to and appointing Rodeo Development Limited (“RDL”), VOG’s wholly owned subsidiary, as operator of the Logbaba gas and gas condensate field.This followedextensive due diligence carried out by the Ministry of Industry, Mines & Technology, SNH, and the offices of the President and other Ministries.



Under the terms of the Logbaba Concession Agreement signed in 2001, SNH has exercised its right to participate in the concession and will contribute its share of development costs. Victoria’s revised ownership of 57 per cent remains the significant controlling stake. SNH’s participation in Logbaba is very positive news. Their direct involvement will help us to maximise the full potential of the project both technically and in developing the market and infrastructure.



The exploitation rights, which were awarded over the entire 20 square kilometre development area applied for by VOG, are for 25 years with an option to extend for a further 10 years. This is a huge milestone for the Company and paves the way for project delivery and the commencement of first gas sales in early Q4 2011. To mark this success, RDL has arranged an inaugural ceremony, with 150 dignitaries and official guests invited, where His Excellency Minister of Industry, Mines, and Technology,  Ndanga Ndinga Badel will perform the first ‘breaking of the ground’ for the pipeline at the Logbaba site.



There remain four key tasks to the execution of the Logbaba gas field development:

  • Re-opening wells La-105 and La-106;
  • Installation and commissioning of the leased process plant;
  • Trenching, jointing, installation and commissioning of the gas pipeline network; and
  • Arrangements on customer sites for installation of pressure reduction and metering stations and boiler conversions.

All of the equipment required to re-open the wells, and commission and install the process plant and pipeline is now located on-site in Douala.  The civil engineering contracts for construction of the process plant plinths, bunding and installation of the gas pipeline network have been tendered and are ready for award to Cameroon civils contractors. Mobilisation of these contractors will be completed by the end of May and construction work will begin immediately using double shifts working seven days per week. In addition, three construction teams will be utilised on the pipeline for trenching, jointing and installation.



Concerning gas sales agreements (“GSAs”), we currently have 11 GSAs signed and executed together with a further 10 GSAs which have been contractually agreed subject to legal due diligence and signature approval. All contracts will be signed at a price of $16 per thousand cubic feet of gas, ($96 per barrel of oil equivalent,) fixed for five years from the date of first gas delivery. Logbaba has proven and probable reserves of 212 billion cubic feet of gas (35.3 million barrels of oil equivalent).



The Company is currently focused on gas sales to end users to replace alternative liquid fuels for industrial heat requirements.  However, our near term strategy (1 to 3 years) is to serve three markets with the sale of natural gas, namely:

  • Substitution of  HFO, LPGs and waste oil used by industrial customers for their heat requirements; 
  • Gas sales to industrial customers to supply their own gas fired generators;
  • On-site power generation to a group of customers to limit reliance on the grid.

The present market for substitution of existing customers’ heavy fuel oil (“HFO”), liquid petroleum gas (“LPG”) and waste oil, together referred to as liquid fuels, is approximately 8 million cubic feet of gas per day (“mmscf/d”). This market has the capacity to treble over three years as RDL proves itself a reliable energy supplier and existing industrial customers are sufficiently confident to invest in new production lines and expand output, whilst attracting new customers.



The market for gas fired power generation on customer sites is estimated at 35 mmscf/d. This is more than the expected market for the substitution of liquid fuels. Given the higher capital requirement on the part of the customer to invest in gas fired generation and equipment lead times, we expect this market to develop over the next couple of years. In aggregate, RDL’s management base case forecasts envisage a potential supply of 44 mmscf/d (7,300 barrels of oil a day equivalent) by 2014.



In the longer term, as further reserves are proven, gas may be supplied to large gas fired power stations connected to the grid, with either RDL investing in an independent power producer joint venture or selling the gas to third parties.



West Medvezhye Project, Russia



The Company’s activities on our West Medvezhye (“West Med”) licence block in Siberia, Russia have progressed on target and within budget.



VOG holds a 100% interest in the West Med field, which is located in the Nenets region of Siberia with a licence area covering 1224square kilometres. The Company has a discovery well, 103, and the current reserves and resources estimate in the licence area are as follows:



West Med Reserves & Resources Estimates

Category MMstb Remarks
C1 + C2 Reserves 14.4 Russian Classification
C3 Resources 170 Russian Classification
Prospective Resources 1100 Independently Assessed by DeGolyer and MacNaughton

Under the 2011 work programme, the Company is assessing alternative plans for the commercialisation of the large prospective resources and exploiting the well 103 discovery. To achieve this objective, integrated appraisal and development studies are being coordinated by Blackwatch Petroleum Services Limited, ("Blackwatch"), which acts as consultants to the Company. This includes:

  • Seismic re-processing and re-interpretation by Mineral LLC in Tyumen-Siberia;
  • Geological modelling, mapping and ranking of prospects;
  • Reservoir and petroleum engineering studies to assess the reservoirs and well performance;
  • Appraisal and development of well 103 discovery;
    • Drilling and well engineering design, costing and scheduling
    • Surface facilities and infrastructure conceptual design, operational strategy and HSE considerations
    • Downstream options
    • Economic modelling
    • Option screening
  • Appraisal / Delineation of Prospective Resources and quantitative assessment of development potential.

Preliminary development assessment work on the well 103 discovery indicates that it is conceivable to plan for first oil sales in 2015 subject to further refinement and screening. We shall update you on our West Med programme as the results of our pre-feasibility studies lead to concrete plans.



Falcon Petroleum Limited



Further to an independent competent person’s evaluation to determine the prospectivity of the assets of Falcon Petroleum Limited, (“Falcon”) and ultimately, a valuation range, the Board of Directors of VOG was unable to reach agreement with the Directors of Falcon on a consideration price and transaction structure.



Therefore, the option over the assets of Falcon Petroleum has been terminated. The Board remains committed to expanding in Africa and is appraising other growth opportunities in Cameroon and elsewhere.



Company Financing



The Board works in your interest to optimise the shareholder returns of your Company. VOG is well capitalised and has just $3m in debt. In November 2010, the Company raised £10.8m to fund Logbaba to first gas. In addition, the Company constantly reviews investment opportunities that will increase our exploration and production asset portfolio, including acquisitions, which may require additional funding in the future.



With the award of the Logbaba Exploitation Decree, the transformation of our Company begins. We shall not stop there. I am very positive about future opportunities and look forward to providing regular updates.



I should like to thank shareholders for their patience over the last months and assure them that the future looks bright.

Yours sincerely



Kevin Foo    

Chairman