NOVATEK Announces Year-End 2010 Reserves

OREANDA-NEWS. February 11, 2011. NOVATEK announced that independent petroleum engineers, DeGolyer and MacNaughton (D&M), have completed their comprehensive reserve appraisals of the Company’s oil and gas reserves as of 31 December 2010. The Company added approximately 1,509 million barrels of oil equivalent (boe) of proved reserves under SEC1 reserves reporting methodology (SEC standards), inclusive of 2010 production, and produced approximately 274 million boe2 during the year.

Estimated total proved reserves (according to SEC standards) as of 31 December 2010 increased to 8,088 million boe from 6,853 million boe as of year-end 2009. Total proved reserves of natural gas increased from 967 billion cubic meters (bcm) in 2009 to 1,144 bcm in 2010, or by 214 bcm, inclusive of the Company’s 2010 production. The increase in proved reserves was mainly attributable to organic reserve growth, including development and exploration drilling at the Yurkharovskoye field, revisions at the South-Tambeyskoye field, discovery of the Severo-Russkoye field and reserve growth through the acquisitions of SeverEnergia and Sibneftegas in November and December 2010, respectively.

In 2010, on a barrel of oil equivalent basis, NOVATEK recorded an approximately five-fold (551%) reserves replacement rate3 for its appraised fields under the SEC standards, and at year-end 2010, the Company’s reserve to production ratio (or R/P ratio) was 30 years. The Company also recorded an approximately six-fold (577%) reserves replacement rate for natural gas while the R/P ratio increased to 31 years.

Under the Petroleum Resources Management System (PRMS4) reserves reporting methodology, the Company’s total proved reserves increased by 1,888 million boe, inclusive of 2010 production, and totaled 9,325 million boe, while proved plus probable reserves totaled 13,386 million boe as of 31 December 2010.

Natural gas reserves, bcm

Liquids reserves, mmt

Total reserves, mm boe

1 The Company’s 2010 net proved reserves are based on appraisal reports for the East-Tarkosalinskoye, Khancheyskoye, North Khancheyskoye, Severo-Russkoye, Yurkharovskoye,  West Yurkharovskoye and Olimpiyskiy fields and license areas based on NOVATEK’s 100% ownership interest, as well as the South-Tambeyskoye, Termokarstovoye, Yarudeyskoye, Beregovoy, Khadyryakhinskiy, Pyreinoye, Severo-Chaselskoye, Yaro-Yakhinskiy and Samburgskiy fields and license areas, according to NOVATEK’s shareholding in the respective fields and license areas. The appraisal reports were conducted under the reserves estimation, reporting and disclosures rules promulgated by the U.S. Securities and Exchange (“SEC”) reserves reporting methodology provided that due to a lack of clear and definitive SEC guidance, D&M has relied on management representations that we intend to (i) extend the term of our licenses to the end of the economic lives of the fields, where applicable, and (ii) proceed accordingly with the development and operation of the fields, in order to include certain volumes of reserves estimated to be producible beyond the primary terms of the licenses. The appraisal reports under the SEC reserves standards do not include estimates for probable and possible reserves.

On 31 December 2008, the SEC issued its final rule, Modernization of Oil and Gas Reporting (the “Final Rule”), which revises the disclosures required by oil and gas companies and certain definitions used in those disclosures. The Final Rule also changes the requirement for determining quantities of oil and gas reserves and certain accounting requirements under the Full Cost Method of accounting for oil and gas activities. NOVATEK uses the Successful Method for accounting for oil and gas activities in its consolidated IFRS financial statements.

On 6 January 2010, the FASB issued Accounting Standards Update 2010-03 – Extractive Activities – Oil and Gas (Topic 932), Oil and Gas Reserve Estimation and Disclosure, which substantially aligns the reserve estimation, disclosure requirements, and definitions of Topic 932 with the disclosure requirements of the Final Rule issued by the SEC.

2 Marketable (or sales) production for appraised fields (not including marketable production from assets acquired in 2010); total gross production, including fields not appraised by D&M, totaled approximately 278 million boe.

3 The reserves replacement rate is calculated by taking the difference between the opening balance of reserves and the ending balance of reserves plus production for the period and dividing the sum by production for the period.

4 The appraisal reports were conducted under the PRMS reserves reporting methodology which was approved in March 2007 by the Society of Petroleum Engineers, the World Petroleum Council, the American Association of Petroleum Geologist, and the Society of Petroleum Evaluation Engineers and differs in certain material respects from SEC standards. The Company’s 2010 reserves are based on appraisal reports for the East-Tarkosalinskoye, Khancheyskoye, North Khancheyskoye, Severo-Russkoye, Yurkharovskoye, West Yurkharovskoye, Olimpiyskiy and Zapadno-Urengoiskiy fields and license areas based on NOVATEK’s 100% ownership interest, as well as the South-Tambeyskoye, Termokarstovoye, Yarudeyskoye, Beregovoy, Khadyryakhinskiy, Pyreinoye, Severo-Chaselskoye, Yaro-Yakhinskiy, Samburgskiy, Yevo-Yakhinskiy and Zapadno-Zapolyarnoye fields and license areas, according to NOVATEK’s shareholding in the respective fields and license areas.

Conversion factors:

1,000 cubic meters equals 6.54 barrels of oil equivalent. Liquids have been converted from tons to barrels using D&M’s estimates from the reserve appraisal reports of the respective fields for the years ended 31 December 2006 through 2010.