OREANDA-NEWS. January 15, 2008. West Siberian today announced plans to merge with Alliance Oil and create a vertically integrated Russian oil company with a stable supply of crude oil, substantial refining capacity and important assets in distribution and marketing of petroleum products. The group will have proved and probable oil reserves of 430 million barrels, production of close to 51,000 barrels per day, refining capacity of 70,000 barrels per day, and 255 gas stations that will provide the basis for stable future earnings and improved margins.

The combined market capitalisation of the companies amounts to approximately USD 2.5 billion and combined pro forma revenues for the first nine months 2007 amounted to USD 1,398 million and combined EBITDA amounted to USD 228 million. West Siberian Resources Ltd (OMX:WSIB-SDB) ("WSR") and shareholders OJSC Oil Company Alliance ("Alliance Oil") today signed a Memorandum of Understanding ("MoU") that creates a leading independent vertically integrated oil company, with a mix of upstream and downstream businesses that operate in key oil regions of Russia. The parties intend to enter into and execute definitive merger agreements that will see Alliance Oil become a wholly-owned subsidiary of WSR in exchange for WSR issuing to Alliance Oil shareholders 1,783,540,968 ordinary shares representing 60% of its total issued share capital post-issue. Alliance Oil's shareholders will be represented on WSR's board of directors by two directors and WSR's management team will be complemented by the senior management of Alliance Oil adding downstream experience. Maxim Barski will continue as the Managing Director of the combined company.

Alliance Oil is a leading independent Russian oil company that engages in crude oil refining and marketing of refined products focused in the Russian Far East and neighbouring export markets. Alliance Oil conducts its refining operations at its Khabarovsk refinery, which has a refining capacity of 70,000 barrels per day. In 2007 the refinery processed 23.6 million barrels of oil in total (approx. 65,000 barrels per day). Alliance Oil also engages in exploration, development and production of crude oil in Tatarstan (Russian Federation) and in Kazakhstan. Alliance Oil's combined proved and probable (2P) Society of Petroleum Engineers (SPE) reserves according to Miller and Lents at 1 July, 2007 were 123.3 million barrels and proved, probable and possible reserves amounted to 157.1 million barrels.

Alliance Oil's average daily production in the fourth quarter of 2007 was 10,104 barrels of crude oil. Alliance Oil is incorporated in the Russian Federation, and is controlled by members of the Bazhaev family and Alliance Oil's management.

WSR is an independent Russian oil company incorporated in Bermuda. WSR's exploration and production assets provide a combination of current oil production with significant low-risk development and exploration potential. The company operates in three of Russia's largest oil basins: Western Siberia, Timano-Pechora and Volga-Urals. According to an evaluation conducted by DeGolyer and MacNaughton, the proved and probable SPE oil reserves amounted to 306.8 million barrels as at 31 December, 2006, while proved, probable and possible reserves amounted to 443.9 million barrels as at 31 December, 2006. In the fourth quarter 2007, WSR's average daily oil production amounted to 34,028 barrels and reached the level of 40,500 barrels per day by the end of December 2007.

Thus, the new group will have combined 2P SPE reserves of 430 million barrels of oil, combined production rate of nearly 51,000 barrels per day at the beginning of 2008 and 70,000 barrels per day of refining capacity, and will operate 255 petrol stations and 24 proprietary oil products terminals in the Russian Far EastWSR had total revenues of USD 245.9 million for the nine months ended 30 September 2007 (unaudited) and USD 245.2 million for the year ended 31 December 2006 (audited), resulting in a net profit of USD 25.05 million for the first nine months ended 30 September 2007 and USD 30.23 million for the year ended 31 December, 2006. Alliance Oil had total revenues of USD 1,151.8 million for the nine months ended 30 September 2007 (unaudited) and USD 1,677.1 million for the year ended 31 December 2006 (audited), resulting in net profit of USD 66.3 million for the first nine months ended 30 September 2007 and USD 101.63 million for the year ending 31 December 2006.

Transaction highlights

    * The merger brings together WSR, a leading upstream independent oil company operating throughout Russia and Alliance Oil, a leading downstream-focused integrated company with key refining assets located in the Russian Far East to form a vertically integrated oil company with self-sufficiency of crude supply
    * WSR has signed a MoU outlining the key terms and conditions for the acquisition of all outstanding shares in Alliance Oil in exchange for 1,783,540,968 newly issued ordinary shares in WSR. The merger values Alliance Oil at approximately USD 1.5 billion based on the WSR share price as of 14 January, 2008 of SEK 5.30 and exchange rate of SEK/USD 6.33. The combined market capitalisation of the companies amounts to approximately USD 2.5 billion
    * The pro forma ownership of WSR subsequent to the consummation of the merger will be 40.0% by the current shareholders in WSR and 60.0% by the current shareholders of Alliance Oil. Accordingly, members of the Bazhaev family, who currently control Alliance Oil, will become the largest shareholders in the combined entity
    * The signing and closing of the merger is conditional upon, inter alia, entry into definitive share purchase and subscription agreements, approval of the merger of Alliance Oil and WSR by the Russian Federal Anti-Monopoly Services and approval of the merger by WSR's shareholders at an extraordinary general meeting of shareholders, which is expected to occur in late February

Rationale for the merger

    * The combined company will be able to participate fully in all stages of the oil and gas industry value chain and enjoy the benefits of vertical integration
    * The Russian downstream oil industry is currently enjoying high refining margins and strong profitability driven by favourable taxation on oil products compared with crude and increasing domestic demand for petroleum products
    * The merger is expected to create meaningful synergies and improvement of the trading, marketing and crude supply business through more efficient utilization of export quotas amongst production subsidiaries, better arbitrage opportunities arising at different regional markets in Russia, as well as through elimination of trading intermediaries
    * The merger will enable WSR to capture the higher margins of the downstream segment, by allowing processing of own crude, and offers security of supply for refining and marketing operations
    * The merger combines two of the most experienced upstream and downstream management teams in Russia, with both teams contributing significant expertise in crude oil and petroleum product marketing.
    * The merger also allows WSR to significantly increase the size of its business, balance sheet and market capitalisation, leading to better financing opportunities, lower cost of capital and increased investor awareness.
    * The merger is accretive for WSR's shareholders on an earnings per share basis

Group strategy

    * Following the merger, the combined company will seek to capitalise on its larger size, increased financing capacity and strong cash flows to further strengthen its position within the upstream oil and refined products industry. In particular, it will focus on increasing oil reserves and production, as well as providing high-quality petroleum products and related services in the Russia, CIS, Asia Pacific, and other export markets
    * The combined company will have a balanced upstream and downstream mix and is expected to be self-sufficient in crude oil supply for the refinery from in 2009 onwards.
    * The combined company will be well positioned to capitalise on growth opportunities and optimally develop the existing asset base benefiting from the upstream and downstream experience of the combined management team
    * Alliance Oil has commissioned a significant modernisation program for its Khabarovsk refinery, under an USD 806 million turn-key contract with a major international contractor to be completed in the beginning of 2011. The ongoing upgrade of the Khabarovsk refinery, which does not lead to any interruptions of the refinery's operations, will increase the refinery's Nelson complexity index from 3.4 to 9.9 and the depth of refining from 61% currently to 93%. Thus, the upgrade will lead to an increase in the production capacity and the share of higher value-added light petroleum products in total output to meet a growing demand in the Russian Far East and the dynamic markets in the Asia-Pacific region, which is expected to result in refining margins improving significantly.
    * The combined company will modernise, rationalise, and expand the portfolio of existing retail refuelling stations and oil terminals in the Russian Far East with a focus on increasing the oil products throughput and the overall profitability through higher non-fuel goods sales at the retail stations and by capturing an increased share of federal programmes and heavy local industry fuel requirements
    * The combined company will continue to invest in new technologies and know-how and maintain high health, safety and environmental protection standards
    * The combined company will improve the capital structure and lower the cost of capital by financing capital requirements through an optimal combination of operating cash flow, long term debt available under existing credit agreements and additional external debt and equity capital.

Maxim Barski, WSR's Managing Director stated: "The proposed merger represents a unique opportunity to create large values for our shareholders. The addition of downstream operations positions us throughout the oil industry value chain and offers stable cash flow and margins". Maxim Barski also added: "We will become a much stronger company that can continue to capitalise on opportunities in the Russian oil industry. These visions and values we share with our new Russian core shareholders, the Bazhaev family, and Alliance Oil's management team."

Musa Bazhaev, Alliance Group President and core shareholder of Alliance Oil stated: "We believe that the combination of our two companies creates substantial new opportunities for growth, delivers supply security to the Khabarovsk Refinery, and achieves Alliance's goal of becoming a public company. As a significant shareholder of WSR we are excited by the prospect of the combined company and are fully committed to developing WSR as a transparent public entity, observing the best corporate governance standards, and increasing the market capitalization of WSR"

Pro Forma Ownership Structure

Following the merger, based on shareholder register as of 31 December, 2007 WSR's largest shareholders will be as follows:

Shareholder  Percentage of votes and capital
 Alliance Capital        30.3%
 Alliance Group          20.7%
 Daumier Investments      9.0%
 Alltech Investments Ltd  7.2%
 Repsol YPF               4.0%
 Meadowlane Holdings Ltd  3.0%
 Other                   25.8%
 Total                    100%

Memorandum of understanding

The Board of Directors of WSR and the shareholders of Alliance Oil have today signed a MoU outlining the principal terms and conditions for a merger between WSR and Alliance Oil by way of WSR's acquiring all outstanding shares in Alliance Oil in exchange for 1,783,540,968 newly issued ordinary shares in WSR, representing 60% of its total issued share capital post-issue. Additional information about the proposed Transaction will be made available to WSR's shareholders prior to an Extraordinary General Meeting ("EGM") to be convened in late February to approve the merger.

Board of Directors and Management

The composition of WSR's Board of Directors is to be amended following the merger to reflect the new shareholdings. Alliance Oil shareholders can nominate a minimum of two candidates. Eric Forss is to remain as Chairman of the Board of Directors.

As a principle, WSR and Alliance Oil have agreed on continuity of senior management in both WSR and Alliance Oil. Mr Maxim Barski is to remain as Managing Director.

Lock-up Agreements

The MoU provides that Alliance Oil shareholders and Alltech Investments, a significant shareholder of WSR, are to agree not to sell or otherwise dispose of any of their shares or SDRs in WSR for a period of 180 days following completion of the Transaction.

Net Debt Threshold

The consideration is subject to the net debt of Alliance Oil remaining below USD 200 million (excluding the debt incurred in connection with the upgrade of the refinery) and the net debt of WSR being below USD 300 million as at 31 December, 2007.

Conditions for the merger

The merger is subject to, inter alia, the following conditions:

    * ( a ) satisfactory completion of both Alliance Oil's and WSR's due diligence;
    * ( b ) finalising satisfactory formal documentation including a Subscription Agreement, which will include customary terms, representations, warranties and indemnities for a

transaction of this nature;
    * ( c ) approval of the Board of Directors of WSR, as well as obtaining relevant

corporate approvals from the Board of Directors and/or shareholders of Alliance Oil;
    * ( d ) approval by the shareholders of WSR at the EGM
    * ( e ) receipt of applicable anti-trust approvals for the merger;
    * ( f ) other conditions as may be agreed in the merger documentation.

Preliminary pro forma financial information The selected consolidated pro forma financial information in this section is based on WSR's and Alliance Oil's unaudited interim reports for the first nine month 2007, prepared in accordance with IFRS.

The pro forma presentation is prepared based on the assumption that WSR acquired 100% of the shares in Alliance Oil as of 1 January 2007. The acquisition of Alliance Oil is being paid for by 1,783,540,968 newly issued shares in WSR. WSR shares, in the form of SDR (Swedish Depositary Receipts), are traded on the OMX Nordic Exchange Stockholm, in Swedish krona.

The pro forma presentation is prepared using the accounting model prescribed by IFRS 3 Business combination for "reversed acquisitions" since the shareholders of Alliance will own 60% of WSR following the transaction. This accounting treatment requires Alliance to be treated as the accounting acquirer for the consolidated financial information and WSR being presented as the acquiree. As a consequence the assets and liabilities of WSR, being the legal parent, should be recorded at fair value initially in the consolidated financial statements. The assets and liabilities of the legal subsidiary, Alliance Oil, should be recognized and measured in the combined financial statements at their pre-combination carrying amounts. WSR will as the legal parent continue to be presented as parent company in future financial reports.

As a result of IFRS 3 application the cost of combination for accounting purposes has been based on WSR's closing share price on 14 January 2008 of SEK 5.30 (USD 0.84 using the exchange rate SEK/USD 6.33) multiplied with the number of outstanding shares of WSR of 1 189 027 312. Total acquisition costs are estimated at USD 25 million, which have been added to the transaction value. Based on the fair values allocated to the Oil and Gas Properties the new depletion charge is calculated for the net profit in the pro forma income statement of the combined entity for the nine months ended 30 September, 2007 and for determination of the closing balances of the Oil and Gas Properties as of 30 September, 2007 of the combined entities. For pro forma purposes, the fair value of the cost of combination is compared to the consolidated net assets of WSR as of 1 January 2007. The difference between fair value of the cost of combination and consolidated net assets of WSR is allocated to WSR Oil and

Gas Properties and deferred tax liability and the residual difference is allocated to goodwill. The total fair values allocated to the Oil and Gas Properties are supported by external reserve reports as per D&M report dated 31 August, 2006. For pro forma purposes certain items of the Alliance financial statements representing the charity expenses of non-operating nature have been excluded from EBITDA. The final cost of combination and allocation of fair values at the date of the combination is expected to vary from the amounts used for the pro forma purposes mainly due to a) possible fluctuations of the market share price in the period between 14 January, 2008 and the transaction closing date, b) upcoming revision of the WSR reserve valuation report and c) possible changes of the WSR's consolidated net assets' book values as per the closing date instead of 1 January, 2007.

Advisors

Carnegie acts as a financial advisor to WSR, Morgan Stanley and Troika Dialog act as financial advisors to Alliance Oil in this transaction.