Project Overview and Operations | Risks | Russia’s Oil and Gas Industry | Market | Site Exploration and Development

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Project Overview and Operations

Strat Petroleum intends to acquire interests in licenses to explore and develop oil and gas properties in the Russian Federation. The Company’s management and advisory team have developed a very strong network of contacts within the various levels of government, banks and independent associations in the local oil and gas industry, which we believe will provide access to many opportunities to bring value to shareholders.

The Company initially will be targeting acquisition of interests in licenses to properties with proven reserves and where possible with commercially producing or capped wells, i.e. focusing on development and not exploration.

The Company has also established contacts with a number of refineries that will allow it to have access to refined products for sale into international markets. All sales of product will be in U.S. dollars and maybe to both international and local customers.

Risks

Investing in Russia is not without risks, a weak legal system and extensive bureaucracy but with tremendous potential for profit if you learn to navigate carefully through some unique stumbling blocks. In order to create the right environment for success, companies should carry out detailed research, Including the identification of the right potential partners, and seek professional advice where necessary.

Strat Petroleum through the network of contacts established and having chosen partners, who are very strong in the industry, expect to navigate through the various levels of government to increase the probability of success.

In addition, the President, Mr. Putin’s Government, is pushing through an extensive programme of economic reform that is changing the face of the country, and creating the conditions for long-term economic growth

Russia’s Oil and Gas Industry

Russia has always been one of the largest oil producers in the world. In fact, the first modern oil wells - sunk with American investment - were developed in what is now Azerbaijan in the 1860s, which remained under Moscow's control until the break-up of the old Soviet Union in 1991.

New Russia has had two major and paradoxical effects on the oil industry: production has dropped sharply but the industry's importance in terms of the foreign currency it earns has risen dramatically.

At its peak, the Soviet oil industry produced over 11 million barrels of crude oil per day in 1987 - that was more than Saudi Arabia, more than every other country in the world in fact except the United States and over a sixth of total world production.

In 1995, production was about 6 mbd - a reduction of almost half from the 12.5 mbd achieved in 1988. The reduction in production has several reasons; partly it was decline in the massive infrastructure needed to keep the oil fields going. Many Soviet oil fields were thousands of kilometres away from their markets and thousands of kilometres inland, in Siberia or Central Asia. The industry needed massive maintenance for pipeline systems and machinery.

Partly it was an effect of political chaos. In Soviet days, the strong machinery of the state had ensured that an industry like oil, vital for the whole economy, was kept running no matter what. Once central control was weakened, Russia's captains of industry started competing among themselves for resources and oil could not be guaranteed primacy.

That Russia has lots of oil is old news. What's new is the dramatically enhanced role that changes in Russian politics, oil technology, and energy markets have given to its petroleum sector. Throughout the 1990s, privatization in Russia and innovations in exploration and drilling technologies brought into production oil fields that had until then been under performing or completely off-limits, resulting in increased production to 8.2 mbd in 2003.

To energy companies worried about growing domestic instability among the major oil exporters of the Middle East, Russia became an even more attractive hedge. Regardless of its political turmoil, Russia will continue to appeal to oil companies, which know how to operate profitably in countries with weak property rights and unstable politics.

Market

World markets have seen oil prices rise significantly from under $15.00 U.S. per barrel in 1998 to the $40.00 U.S. per barrel range in 2004. Reasons for the dramatic increase are many and varied which will have a significant impact on world economies if it persists.

Increased prices are supported by:

1. rising demand,
2. low inventories,
3. OPEC strategy,
4. violence in the Middle East, and,
5. insufficient U.S. refinery capacity.

Predicting what direction prices will go in the future is anybody’s guess. Opinions sit at both ends of the spectrum, with some believing that $50.00 a barrel is not far off, with possibilities of $80 per barrel depending on terrorist action, while others believe that current prices are an overreaction to current conditions, and while it will not collapse, prices should settle in the $30 range.

Site Exploration and Development

The Company will use local expertise and labour where possible due to lower cost and availability. Given the long history of oil and gas exploration and development in Russia, local knowledge and expertise is extensive and can be secured for very competitive costs. However, it will ensure that technology is most current to determine the proven and probable reserves and maximize the output from each well.

The Company will hire a Western geologist and/or geological firm to oversee all exploration and development in at the sites secured.

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