Operations 2

The Company has been successful in establishing itself as an operating entity in the ROK and expects to continue with future growth through continued work there.

Prior to the end of the fourth quarter 2005, EZ#301 was drilled to a total depth of 4,846 metres and logged. The well was completed with the drilling rig before the rig was moved to the EZ#302 location. EZ#301 was matrix acidized and the two potentially productive hydrocarbon bearing zones were flow-tested. The lower zone (KT-2) was tested at 2,532 Bopd. The upper zone (KT-1) had difficulty maintaining an independent flow, so it was commingled with the lower zone and the well was tied-in to the Zhagabulak production facility. Subsequently, productions logs were ran and it was determined that the KT-1 was producing 100 Bopd. Well 301 was undergoing a government mandated pressure survey in November 2006, when a production logging tool and cable were lost in the hole. During the second quarter, the tool and wire were recovered and the well has resumed production. Well 301 is currently producing 926 BOPD, 8 BWPD, 1,274 MCFD with a FTP (flowing tubing pressure) of 588 psig and a shut in casing pressure of 1,896 psig on a 12 mm choke.

The second exploration effort, EZ#302, was spud on December 25, 2005. Acidizing and testing of the well were performed following removal of the drilling rig. The well showed indications of hydrocarbons while drilling and logging; however, the stimulation efforts failed to cause the well to flow naturally. In well 302, a workover is being evaluated to isolate the KT-1 and the lower portions of the KT-2 that exhibit higher water saturations on the logs.

The third location, EZ#303 is about 5.2 km southwest of EZ#302. EZ#303 spud on May 28, 2006. The well was permitted to a depth of 5,700 metres. EZ#303 reached a total depth of 4,630 metres in a sidetrack wellbore after the initial wellbore reached a depth of 5,430 metres, but was lost due to a drill string parting, while pulling out of the hole for logging. A total of 70 meters were perforated and acidized in both the KT-1 and KT-2 intervals. A combined test of both intervals yielded water with small amounts of oil, while the separate test on the KT-1 yielded water. The well is suspended pending a workover strategy.

The original producing well, EZ#213, drilled and completed during the Soviet period, was re-entered in November 2006 and perforations were added in the KT-1 reservoir. Due to different casing weights, problems were encountered with packer setting for the acid operation and consequently, only one-half of the productive zones were acidized. Despite the limits on the acidization, a significant improvement of daily production over the pre-workover rates was achieved. Well 213 is currently producing 384 BOPD, 54 BWPD, 528 MCFD with a flowing tubing pressure of 544 psig and a shut-in casing pressure of 1,970 psig on an 8.7 mm choke. A survey to determine the production contribution from the KT-1 and KT-2 intervals is planned for Q3, the results of which will be integrated into the final analysis and ranking of potential workover strategies for wells 302 and 303.

Further drilling in the remainder of the Zhagabulak area will be delayed while the Company focuses on shallower targets in the western side of the North Block.

The Company has initiated the development process for East Zhagabulak. While East Zhagabulak is small, a development contract will ultimately lead to commercialization. Expansion is planned as drilling in the surrounding Zhagabulak area unfolds.

Ongoing petrophysical analyses of all wells penetrating the below salt reservoirs is being completed and correlations of these wells will aid in the identification of future drilling locations in the North Block. Identification and acquisition of well data within the extended territory is also be evaluated for inclusion into this process.

The Baktygaryn 3-D seismic program was completed in early November 2005. PGS-GIS, in Almaty, ROK was awarded the processing contract. Due to the presence of large salt bodies in the Baktygaryn Area, the 3-D data set was processed through PSDM (Pre-Stack Depth Migration) and interpretation of this data has been completed. PSTM (Pre-Stack Time Migration) analysis, for the above salt section has also been conducted. The acquisition of the 367 kilometre regional 2-D seismic survey covering the west and north areas of the North Block and tying into the Zhagabulak and Baktygaryn 3-D seismic surveys that was completed in March 2007 has also been processed and interpreted. The Baktygaryn 3-D program and the regional 2-D program were fully interpreted at the end of October 2006. The interpreted data from all new seismic data acquired and from the earlier reprocessed Soviet-era 2-D seismic is being combined to create a geological model and identify additional leads and prospects across the North Block territory. This work is expected to be completed during 3Q 2007.

The Baktygaryn Area presents drilling targets in both the below salt Lower Permian and Carboniferous sections and the above salt Upper Permian and Mesozoic sections with depths ranging from approximately 400 to 2,300 metres and provides a second tier of exploration to the Company’s drilling portfolio. Three locations are being permitted with target depths of 600 to 800 metres. These targets are recognized in the forms of channel sands, traps against the Kungurian salt ridges and underneath salt overhangs. The Company expects to spud its first well in this area during October 2007.

Soviet-era seismic data interpretation, mapping and the associated shallow well drilling in the Itisay, Kozdesay and West Kozdesay areas, located in the southwestern portion of the North Block, yielded minor positive tests and shows of oil associated with the post-salt sediments of Jurassic, Triassic and Upper Permian ages. A review of this data has resulted in the identification of several prospects and leads ranging from 600 to 1,800 metres in trapping positions against Permian salt ridges and under-salt overhangs. Several lines from the Company’s 2006 2-D seismic program were shot across certain of these leads and prospects to verify this premise. The entire vintage and modern data sets are being fully interpreted and well-to-seismic ties performed for aiding in the creation of a geological model for these Areas. The Company expects to have identified several drillable prospects by the close of 3Q 2007.

Future, potential seismic activity, pending the results of the ongoing 2-D seismic interpretation, includes a third 3-D seismic acquisition late in the fourth quarter.