The Russian oil industry is one of the largest in the world. Russia produced approximately 6.4 million barrels per day in 2000, which made it the world's second largest producer of crude oil that year. In addition, with approximately 49 billion barrels of proved and some probable reserves, Russia is estimated to hold the largest source of oil reserves outside of OPEC.

Prior to the dissolution of the Soviet Union, the oil industry in Russia was state-owned and -operated. Following a major privatization program commenced in the early 1990s, the majority of Russia's production now comes from companies not controlled by the government.

The Russian Ministry of Energy periodically establishes export quotas for oil producing companies. Exporters must submit their projected production volume and requested destinations on a quarterly basis in order to obtain a quota. Generally, each exporter is notified of its allocated quota 15 to 20 days prior to the start of each quarter. Subject to certain exceptions, Russian companies

are allocated an export quota equal to approximately 30% of their production in prior periods.

For the year ended December 31, 2000, Potanay represented 84% and East Kamennoye represented 16% of the total production of the Company’s consolidated subsidiaries. For the first half of 2001, Potanay represented 83% and East Kamennoye represented 17% of the total production of the Company’s consolidated subsidiaries.

The Company’s East Kamennoye and Potanay fields currently produce using natural reservoir energy, with production enhanced where necessary by artificial lift methods, including beam pumps and electrical submersible pumps. Production from Chernogorskoye is supported by an extensive waterflood program.

The Company produces sweet (low sulphur content), light oil. Potanay and East Kamennoye have very low gas to oil ratios, and therefore produce relatively small volumes of gas. A portion of the associated gas from the Company’s operations is used for power

generation in the field. The remainder of the gas is flared in compliance with local requirements.

The Company is reducing its reliance on contracted services in the areas of drilling, workovers, procurement, construction and technical services. The Company has modified its own rigs to enable them to perform more efficiently and more reliably than had previously been available through the use of contracted rigs.

All of the Company’s fields are located in the Khanty Mansiysk region of western Siberia, one of the largest hydrocarbon basins in the world. This region covers about 1.3 million square miles east of the Ural Mountains in north central Russia. Major hydrocarbon reserve discoveries in the area began approximately 40 years ago and since that time, according to the Russian government, more than

50 billion barrels of oil have been produced from the basin's Cretaceous and Jurassic reservoirs.

As of June 30, 2001, the Company’s fields contained 57 wells that have been drilled since 1998 and 205 wells that were previously drilled predominantly by KMNGG during the time it was a Russian state exploration enterprise. Productive wells not currently producing are wells that have produced, but are awaiting work-over activity such as pump maintenance, recompletion or stimulation.

Total operating expenses increased by 72% from $17.4 million in the six months ended June 30, 2000 to $30.0 million in the six months ended June 30, 2001.

Production expenses increased 138% from $1.6 million in the six months ended June 30, 2000 to $3.7 million in the six months ended June 30, 2001.

Interest income increased 104% from $0.3 million in the six months ended June 30, 2000 to $0.7 million in the six months ended June 30, 2001.

Income increased 14% from $4.8 million in the six months ended June 30, 2000 to $5.4 million in the six months ended June 30, 2001.