Ntog Equity Development Note

Nostra Terra Oil & Gas Company May 2008

VALUE

2

UKRAINE

2

THE OKTYABRSKOE LICENCE

3

The Joint Activity Agreement 3 Reserves

4

Oktyabrskoe

4

West Oktyabrskoe CASH FLOW ESTIMATES Assumptions

5

Estimates

8

Net present value

8

MANAGEMENT Non-executive director

Index:

Aim

Sector:

Mining

Key points •

First two reopened Ukranian wells confirm historic records

•

Initially will develop 7 wells with 29 in the pipeline

•

Recent placing should fund Well 1, and company looks cash positive now

•

Fair value for first phase of investment is 1.665p / share vs current 1.2p

5 5

Equity Development Limited is authorised and regulated by The Financial Services Authority

9 10

Nostra Terra Oil & Gas Company Company Description:

Nostra Terra was formed to develop former Soviet

Nostra Terra Oil & Gas Company

Union oil and gas wells in the Oktyabrskoe licence area in Crimea, an autonomous republic in Ukraine

NTOG Date:

20.05.08

Share price p

1.2

12 month Hi/Lo

2.75p / 0.875p

Nostra Terra has re-opened its first two oil wells in the Oktyabrskoe

Ord 25p (m) issued

licence area, in Ukraine, with results which confirm historic records.

Market cap £m

421.8 5

Initial Price target

The recent placing funds development of these wells, and we believe the company

1.665p

is now cash positive in its day-to-day operations. Nostra Terra’s initial plan is to re-open and develop seven wells, the first four for the production of oil from Oktyabrskoe and the other three for the production of liquid gas from West Oktyabrskoe. Development should be funded by cash flows from wells as and when they come on stream.

Exchange rate used £ : US$

1.9488

At 15 May 2008

The licence area contains another 29 wells, 15 in Oktyabrskoe and 14 in West Oktyabrskoe. These may be the subject of further exploitation by the company once it has completed the first phase of its investment programme. We have little or no information available on them, however, and are unable to assign any value. Our estimate of NPV based on the first phase of investment comes to 1.665p per share, which we choose as an initial price target. This will be subject to revision as results come through and also on receipt of information on the additional unexploited assets.

Figure 1: Price performance 3.5 3

pence

2.5 2

Nostra Terra is quoted on AIM and investors

1.5

should be aware that shares traded on AIM

1

are subject to lighter

0.5

due

0 Jul-07

diligence

than

shares quoted on the Sep-07

Nov-07

Jan-08

Mar-08

main market and are therefore more likely to

ADVFN

carry a higher degree of

risk

than

main

market companies.

Equity Development contact Andy Edmond 020 7405 7777 [email protected]

www.equity-development.co.uk

Nostra Terra

VALUE Nostra Terra came to aim in July 2007 by way of a reversal into the cash shell LHP Investments, with a placing at 0.5p per share to raise £350,000 for the business before expenses (fees satisfied by an issue of an additional 20m shares). The company was formed to re-activate the Oktyabrskoe and West Oktyabrskoe oil and gas field in Crimea, Ukraine. Under former Soviet control the field had been fully explored, but had not been moved to the production stage. Nostra Terra has to date re-opened two of the seven wells it intends to develop We believe the company is now cash flow positive on a day-to-day basis, and should soon generate substantial amounts of cash. Nostra Terra has only recently begun operations, and has yet to prove itself. Our numbers are, however, relatively conservative in that they relate only to seven wells, while there is a total of 36 possibly to be exploited. Our central estimate of NPV for the seven wells is 1.665p per share, which we think is a reasonable figure to choose as an initial price target.

UKRAINE Figure 2: Map of Ukraine

CIA

Ukraine borders Russia to the east, Belarus to the north, Poland, Slovakia and Hungary to the west, Romania and Moldova (including the disputed territory of Transnistria) to the southwest, and the Black Sea and Sea of Azov to the south. Ukraine is well developed culturally and economically. In the days of the former Soviet Union it was second only to Russia in its economic importance, producing about four times the output of the next-ranking republic. Shortly after independence in December 1991, the Government liberalised most prices and erected a legal framework for privatisation, but reform became stalled, and output by 1999 had fallen to less than 40% of the 1991 level.

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Nostra Terra

Since then the economy has improved, and reform in 2005 has helped to produce a strongly growing economy, with real GDP growing by about 7% in 2007. The country is heavily dependent on imports for its oil and gas needs, which are sourced mostly from Russia. Gas is particularly important, and sensitive politically – price rises and supply interruptions have caused problems. Ukraine has 24 provinces and one autonomous republic: Crimea. Crimea was part of Russia until the Ukrainian Nikita Khrushchev transferred it to Ukraine in 1954. Its population of about 1.8m people is for the most part ethnically and culturally Russian.

THE OKTYABRSKOE LICENCE Nostra Terra is not in the business of exploration or development of new prospects. The licence it has taken over was a confirmed production asset, under previous Soviet (‘FSU’) control. The nature of the acreage to be exploited is well known, and the existence of hydrocarbons an established fact. The licence area contains 36 wells drilled by the exploration arm of the USSR between 1960 and 1991 which were capped prior to the break-up of the USSR. The field was never advanced to production due to competing alternative higher priorities within the Soviet production department, and has lain dormant ever since. Only seven of these wells are the subject of the initial re-opening plan being carried out by Nostra Terra.

The Joint Activity Agreement Nostra Terra’s partner in Ukraine is NAK Nadra Krymgeologia (‘Krymgeologia’), a subsidiary of NAK Nadra Ukrainiy, which is wholly owned by the State of Ukraine. Krymgeologia holds exploration and pilot production licences renewed last year for five years, automatically convertible into production licences for a term of 15 years. The relationship between Nostra Terra and Krymgeologia is governed by a Joint Activity Agreement (‘JAA’) whose principal objective is the exploitation of the Oktyabrskoe area in Tarkhankut peninsula of northern Crimea (itself a peninsula off the south of Ukraine). Nostra Terra, through its local ‘Representation’ is the operator of the JAA. As operator, Nostra Terra is responsible for all operational matters, including capital expenditure, subject to the approval of a committee formed of three representatives from each side. JAA revenues, determined after all operating costs, royalties and tax, are distributed as follows:

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Nostra Terra

Table 1: Distribution of net revenues Net revenues

100%

Capex recovery to Nostra Terra

60%

Remaining

40%

Of which: Nostra Terra

70%

Krymgeologia

30%

Company

The net result of this is that Nostra Terra receives 88% of net revenues until capex is recovered, and thereafter 70%.

Reserves The licence area contains two reservoir horizons, the Necomian and the Cenomanian, at depths of 1,700m and 2,800m respectively. These have been confirmed from the results of wells re-opened so far. The AIM Admission document contained a Competent Person’s Report (‘Trimble CPR’)1 compiled after a site visit and review of previous documentation. This contained an estimate of possible developed reserves as follows:

Table 2: Summary of reserves (seven wells) Possible developed Oil - Mbbl Sales gas - MMcf Condensate - Mbbl

Gross 372.6 8,030.7 46.1

Trimble CPR

The Trimble CPR based its estimates on very conservative assumptions, the principal ones being that only 15% of initial oil in place would be recovered and, in addition, that recovery rates would deplete at a rate of 22% per annum. The price of oil was taken at $65.35/bbl and of gas at $3.66/Mcf. On this basis, NPV to Nostra Terra after royalties, tax and partner share was calculated at $19m, using a discount rate of 10%. The field is in two parts, Oktyabrskoe and West Oktyabrskoe, with West Oktyabrskoe producing gas rather than oil.

Oktyabrskoe This contains 19 wells, four of which are being re-opened at this stage. Three of these had previously been completed and tested with commercial hydrocarbon production rates. The fourth (Well 10) is assumed to be analogous to the others. The quality of oil is very high at 500API2, Russians anecdotally piping it straight from the well into their cars. Well 1 within the Neocomian reservoir was operated by Krymgeologia for about two years before Nostra Terra became the operator, producing oil at the rate of

1

‘Competent Person’s Report Anglo Crimean Oil Company Reserves and Present Worth Oktyabrskoe License, Crimea, Ukraine’ by Trimble Engineering Associates Ltd., dated 28 February 2007 2 Source: Nostra Terra

4

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Nostra Terra

about 20bbl/day for twelve hours per day, equal to 10bbl/day. The production zone is between 2,671m and 2,733m. Significantly, this production rate was confirmed by Nostra Terra for the month of March 2008, when oil production was 391 bbls (above the average for the previous operations). The well was opened every 36 hours, producing free flowing light oil of 0.78 specific gravity (500API). Well 24 in the Cenomanian was re-opened in April 2008 to a total depth of 1,784m, with all cement bridge plugs removed. The results of wire logging tests were consistent with historic records, with a pay zone between 1,750m and 1,755m: they also identified a previously unknown layer between 1,743m and 1,748m. A subsequent test locked in the packer at 1,650m. In addition to a flow of oil from the primary zone, the zone above the packer produced oil which flowed into the space between the tubing and the casing and rose to the surface, indicating another pay zone. Well 10 in the Cenomanian should be re-opened in August 2008 and Well 50 in the Cenomanian in October. They are expected to be similar in profile to the first two.

West Oktyabrskoe Gas in liquid form will be the principal product from West Oktyabrskoe. The wells were suspended in 1982 due to hydrocarbon liquid loading: at the time, Krymgeologia did not have the financial resources or the mandate to install lifting equipment. Re-opening by Nostra Terra will involve the installation of such equipment. Trimble recommended that Well 9 in the Neocomian be re-opened as a gas injection well until gas gathering and compression facilities are constructed independently by third parties, at which point the JAA would be subject to fees of about $0.50/Mcf. We expect Well 31 in the Neocomian to be re-opened in December 2008, with Wells 9 and 28 in the Neocomian to follow at two-monthly intervals.

CASH FLOW ESTIMATES Assumptions Production rates When under FSU control the management did not have access to the capital to invest in methods of recovery assisted by lifting equipment – also, in part, there were fears that pumps might damage the wells. From

conversations

with

the

Nostra Terra

management

we

gather

that

substantially higher rates of recovery can be attained by the addition of pumps, at rates of up to 150bbls/day, and that more hydrocarbons can be recovered than at the 50bbls/day assumed in the Trimble report. We have assumed 100bbls/day peak production of oil per well in the case of Oktyabrskoe, implying greater

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5

Nostra Terra

production than stated recoverable reserves – which are only 15% of initial oil in place. This may be optimistic. In the case of West Oktyabrskoe we have followed the Trimble numbers. Taken to 2018, this results in the production profile shown in the following chart:

Figure 3: Production - Mboe Mboe 120 100 Well 28 Well 9

80

Well 31 Well 50

60

Well 10 Well 24

40

Well 1 20

Qtr3 18

Qtr1 18

Qtr3 17

Qtr1 17

Qtr3 16

Qtr1 16

Qtr3 15

Qtr1 15

Qtr3 14

Qtr1 14

Qtr3 13

Qtr1 13

Qtr3 12

Qtr1 12

Qtr3 11

Qtr1 11

Qtr3 10

Qtr1 10

Qtr3 09

Qtr1 09

Qtr3 08

Qtr1 08

0

ED/Company

This emphasises the importance of gas production from the later development of West Oktyabrskoe. It is, of course, less important than this in money terms because of the price differential:

Figure 4: Gross revenue ($000) $000 5,000 4,500 4,000

Well 28

3,500

Well 9 Well 31

3,000

Well 50

2,500

Well 10

2,000

Well 24

1,500

Well 1

1,000 500 Qtr3 18

Qtr1 18

Qtr3 17

Qtr1 17

Qtr3 16

Qtr1 16

Qtr3 15

Qtr1 15

Qtr3 14

Qtr1 14

Qtr3 13

Qtr1 13

Qtr3 12

Qtr1 12

Qtr3 11

Qtr1 11

Qtr3 10

Qtr1 10

Qtr3 09

Qtr1 09

Qtr3 08

Qtr1 08

0

ED/Company

6

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Nostra Terra

Oil Price Prices realised for product will be related to world market prices – there are no price controls for oil and gas prices within Ukraine, although gas prices are very sensitive politically – but the market, given that Nostra Terra will be a small producer, will be local. Wellhead price will apply for oil, with Nostra Terra not responsible for transport charges other than for storage on site. Transportation will be via 8m3 capacity trucks (about 50bbls), and will be the responsibility of the buyer. In our calculations we have used the Equity Development price assumptions for oil, which are $90-110/bbl current and $80/bbl from late 2008 on, against the present price for Brent crude of about $125/bbl. We have not applied any inflationary increases to this, nor have we done so far as costs are concerned.

Water content Oil from Oktyabrskoe contains about 5% water. Nostra Terra will not undertake any cleaning process, but will sell the oil in the form in which it comes out from the ground. We have assumed a discount of 5% to the ruling price of oil.

Gas price Gas prices are difficult to determine – typically, they are related to the equivalent energy rate for oil, but are less volatile. For our purposes, we have assumed 50% of the price of oil, on a boe basis. This will imply the construction of a pipeline to the gas plant being constructed by Indusmin about 1.5km away. We have factored in a capex cost of $500,000 for this, and assumed it will take place in Q4 2008.

Royalties Royalties are set as a percentage of gross receipts, calculated on a formula determined and payable monthly in arrears. They vary each month at about 50% of gross JAA receipts: we have assumed 55% throughout.

Rental Rental is payable as and when wells come into operation. We have assumed $2,000 per well per month.

Capex Development of the Oktyabrskoe field is not capital-intensive. We have assumed a starting cost of about $300,000 per well, to include the installation of pumps. In addition to this, we have assumed expenditure of $500,000 for the construction of a gas pipeline link to the Indusmin plant.

Overheads Site overheads are very low: we have assumed $2,200 per month per well.

Cash requirements The recent placing at 0.75p / share brought in £370,000, which should be sufficient to cover the development cost of Well 1. We have also assumed a final drawdown of the loan from Power Elite with conversion into equity.

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7

Nostra Terra

We estimate that the JAA is currently cash positive on a month by month basis and, with cash flow from wells as they come on stream, should be capable of funding the development of all seven wells without recourse to further external finance. We assume rapid development of all seven wells over a period of twelve months from now. This may prove to be an optimistic timescale: if unforeseen problems occur there could be delays impacting on our estimates.

Estimates We have modelled the field on a monthly basis to begin with, because of the importance of short term cash flow, and thereafter quarterly. Discounting is also on a quarterly basis. Parent company cash flows include the money received from the recent placing, and also from the presumed further drawdown from Power Elite. Also of importance is the recovery from revenue by Nostra Terra of General Sales Tax (Ukraine equivalent of Value Added Tax) already paid: this amounts to about $500,000. In the following estimates we have included all capital movements in the figures for Oktyabrskoe:

Table 3: Nostra Terra summary cash flows for first five years Year to end December Gross revenue Royalties

2008

2009

2010

2011

2012

$000

$000

$000

$000

$000

2,071

15,859

14,383

12,953

10,105

(1,139)

(8,723)

(7,911)

(7,124)

(5,558)

Net revenue

932

7,137

6,472

5,829

4,547

Cash flow to JAA

117

5,795

4,710

3,477

2,516

1,738

5,323

3,582

2,596

1,761

892

2,731

1,838

1,332

904

Cash flow to Nostra Terra ($000) Cash flow to Nostra Terra (£000) ED estimates

Net present value Our NPV estimates are calculated on a quarterly basis. At varying discount rates, they are as follows:

Table 4: NPV of cash flows Oktyabrskoe $000 West Oktyabrskoe $000

NPV in £000 Exercise of options etc Fully diluted per share p

8.00%

10.00%

12.00%

7,801

7,509

7,206

6,787

6,429

6,062

14,588

13,938

13,268

7,486

7,152

6,808

728

728

728

8,214

7,880

7,537

1.735

1.665

1.592

ED

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Nostra Terra

MANAGEMENT The following information is taken from the company’s web site:

Non-executive chairman Sir Adrian Blennerhassett holds a Masters of Geology from Imperial College, London and an MBA from Cranfield School of Business Management. Sir Adrian has previously held positions as general manager for Claremount Oil & Gas Ltd and has acted as technical director at Peninsula Petroleum Ltd. He has experience of corporate finance and securities activities and more recently had eleven years experience in corporate finance including mergers and acquisitions.

Chief executive Brian Courtney has been actively investing in the oil and gas business for over thirty years, first working with Desmond Smith on the Ingoldsby 10-12 horizontal well, and most recently by serving as the Chairman and CEO of Ucoco Energy, Inc. In addition Mr. Courtney has held many senior executive positions and public company directorships including being founding president and former VP of America’s Oracle Corporation Canada and director of EFT Canada Inc. Most recently Mr. Courtney served as CEO of Global Election Systems Inc. - an American Stock Exchange listed company, and was chairman and CEO of Patent Enforcement and Royalties, a TSX Venture Exchange listed company. Mr. Courtney has been investing in Ukraine for three years. Mr. Courtney is a graduate of the University of Manitoba (B. Comm.).

Chief operating officer Neville Desmond Smith is a geologist who has worked in the oil and gas business for over thirty years and is an honours graduate in geology from the University of British Columbia. Mr. Smith has held several senior executive positions with upstream oil and gas international companies including companies in Canada, the USA, Azerbaijan and Ukraine. Amongst his most recent endeavours were his role as president and CEO of Tai Energy Corporation, formerly a public Canadian oil and gas company and recent senior international assignments as COO of A&B Geoscience Corporation (Arawak Energy Corp.) and Nostra Terra (Overseas) Ltd. Mr. Smith has been working in the FSU since 1995 and in Ukraine for the last six years.

Chief financial officer Glenn MacNeil has been actively investing in the oil and gas business for over fifteen years and recently served as a director for Hegco Canada, Inc. - a Toronto Stock Exchange junior oil and gas company. Mr MacNeil holds a Bachelor of Business Administration degree (B.B.A.) and is also a Chartered Accountant (Canada), a Certified Management Accountant (Canada) and a Certified Public Accountant (USA). Mr MacNeil has also held a number of international senior executive positions with various publicly traded insurance companies over the past twenty years. In addition, he worked in public accounting with Deloitte and Touche. He is also a director of three FSA regulated companies and has been a director of a financial services company - Lancaster Sierra Capital Corporation, which trades on the Toronto Stock Exchange.

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Nostra Terra

Non-executive director Stephen Vaughan Oakes has over 30 years experience in financial markets and is a Fellow of the Securities Institute. He began his career with stockbrokers Vickers da Costa Ltd, becoming a Member of the Stock Exchange in 1984. In 1985 he joined the then James Capel & Co (now HSBC Investment Bank plc) as a portfolio manager. Increasing management responsibility culminated in the position of Chief Executive Officer, HSBC Investment Management, firstly in respect of the international business and subsequently as acting CEO of the combined UK and international operations. He left HSBC in December 2002 and in October 2003 he joined Alfred Henry Corporate Finance Limited. He is currently a director of Alltrue Investments Plc and Chief Executive Officer of Falcon Securities (UK) Ltd. He is Chairman of Timestrip plc and is also a director of a number of companies whose shares are traded on AIM.

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Nostra Terra

I certify that this report represents my own opinions Conor Fahy, Consultant 020 7405 7777 [email protected]

This document has been provided to you solely for your information and may not be reproduced or redistributed, in whole or in part to any other person. The information contained in this document has not been approved for the purposes of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom (FSMA’). As such this document is being distributed only to and is directed only at persons falling within the categories of exempt person described in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 as amended, (the Order) or pursuant to any applicable exemption under FSMA (together ‘relevant persons”). Any person who is not a relevant person should not act or rely on this document or any of its contents. This report is intended for intermediate clients, market makers, Self-certified High Net Worth or Self-certified sophisticated investors only. Self certification can be completed free of charge at www.fisma.org This document may not be distributed in or into, directly or indirectly to any persons with addresses in Australia, Canada, Japan, The Republic of Ireland, The Republic of South Africa or the United States (or any of its territories or possessions). This report is being provided to relevant persons by Equity Development Limited (“ED”) to provide background information about the corporate client. ED are regulated by the Financial Services Authority, and are retained to act as financial adviser for various clients, some or all of whom may now or in the future have an interest in the contents of this document and/or in the Company, In the preparation of this report, ED has had access to publicly available information, the Company’s management and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated herein are accurate and that the forecasts opinions and expectations contained herein are fair and reasonable, neither the author nor ED has verified the information contained herein and accordingly none of the author, ED nor any of their respective directors, officers or employees makes any representation or warranty, express or implied as to the accuracy or completeness of the information or opinions contained herein and shall not be in any way responsible or liable for the contents hereof and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document. No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Nothing in this paragraph shall exclude liability for any representations or warranties made fraudulently. Any opinions, forecasts or estimates herein constitute a judgment as at the date of this report. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. This information is subject to change without notice. It may be incomplete or condensed and it may not contain all material information concerning the Company. This document does not constitute or form part of and should not be construed as any offer for sale or purchase of (or solicitation of or invitation to make any offer to buy or sell) any securities nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever. ED may In the future or may have in the past have provided investment banking services to the Company. ED or its directors or officers may in the future or in the past have had a material investment in the Company. © Copyright Equity Development Limited. All rights reserved.

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Equity Development 91 Farringdon Road London EC1M 3LN Telephone 020 7405 7777 Facsimile 020 7405 7773 Email [email protected]

Equity Development Limited is authorised and regulated by the Financial Services Authority