Upstream includes operations such as the exploration, production and delivery of crude oil and natural gas to export terminals, while downstreamincludes operations such as the transport, sale, refining and distribution of petroleum products in the form of fuel, heating oil or as raw materials for the petrochemical industry.

Oil is most often classified in accordance to its:

• Density (specific gravity), which specifies the proportions of the light-weight (more valuable) and heavy-weight (less valuable) components of crude oil
  
  - Light crude oil (API gravity higher than 33 °API*)
  - Medium oil (between 22 °API and 33 °API)
  - Heavy oil (below 22 °API)
  
  
• Sulphur content  - crudes containing less sulphur are more easily refined into products that fulfil specific  environmental and quality requirements
  
  - Sweet crudes (sulphur component below 0.5%)
  - Middle sweet crudes (sulphur component between 0.5% and 1.5%)
  - Sour crudes (sulphur component higher than 1.5%)
  
  
• Other qualities (chemical components, resin or paraffin content)

*API gravity = (141.5/SG at 15.5°C) - 131.5, where SG is the specific gravity of the fluid

Saudi Arabia	13.1% (515.3 million tonnes a year, 10.8 MMbbls/d)
Russia	12.4%
USA	7.8%
Iran	5.3%
China	4.8%
Mexico	4.0%
Canada	4.0%
United Arab Emirates	3.6%
Kuwait	3.5%
Venezuela	3.4%
Iraq	3.0%
Norway	2.9%
Nigeria	2.7%

Oil and natural gas liquids (based on the average API gravity - 33°API:

• Barrels (bbl) = 0.1364 metric tonnes = 0.1560 kilolitres = 42 US gallons
• Barrels per day (bbls/day) = 49.8 tonnes/year

Natural gas:

• Billion cubic feet (Bcf) = 0.028 billion m3 (Bcm) = 0.18 million barrels of oil equivalent (MMboe)

1 tonne of light crude oil (40°API) = 7.64 barrels, 1 tonne of heavy crude oil (25 °API) = 6.98 barrels

A trap is a configuration of impermeable rocks suitable for containing hydrocarbons and sealed by a relatively impermeable formation through which hydrocarbons cannot migrate, either vertically, or horizontally. Traps are the basic object of geologists’ exploration.

1. General analysis of the water reservoir or the area subject to the accumulation of rock material.
2. Initial analysis (surface)
3. Seismic acquisition
4. Drilling locations – field models (2D and 3D)
5. Exploration wells
6. Appraisal wells

The most often applied exploration techniques are:

Surface geology techniques – measuring the structure of the Earth’s magnetic field (magnetometers), rock gravity (gravimeters) and radiation. Surface geology is based on satellite and aerial surveys which help evaluate the likelihood of locating source, reservoir rocks and traps. It is a plemininary to seismic surveys.

Seismic techniques – are based on the measuring and analysis of sonic waves generated during “earthquakes” generated by way of a series of micro-explosions. The waves reflect back and are gathered by seismic sensors which help interpret the formation and composition of the rocks. There are different field models: 2D, 3D, 4D and full field models. The development of seismic techniques and computer technology has made it possible to significantly reduce the risk of not finding commercially recoverable deposits.

Gravity and magnetic surveys are techniques used in surface geology – the initial phase of the exploration process that precedes the seismic survey. Gravimetry is based on measuring the rock gravity while magnetic surveys determine the structure of magnetic fields.

In order to locate those geological features that are advantageous for oil and natural gas accumulations, different types of evaluations may be conducted and the most common of these, during the early stages of exploration, is geophysical seismic.

Sound waves travel at different speed in different materials and, at the transition between different materials, they partly bend and reflect back to the surface. Since rocks have different compositions it is possible, based on the variations in the speed of the sound waves and their angles, to estimate the location of features that could hold oil and/or natural gas reserves. Two-dimensional, or 2D seismic surveys provide data along two axes, length and depth, while three-dimensional, or 3D seismic surveys are done across multiple lines simultaneously thus gaining a third dimension. 3D-seismic surveys offer a far higher density of information concerning the subsurface, but are much more costly and cover a smaller area.

Exploration wells, which may confirm the presence of potential oil and gas accumulations, make it possible to carry out logging and evaluation.

• Discovery wells – the first wells drilled on a given field, where the presence of hydrocarbons has been confirmed by geological surveys. It takes 3 to 6 months to drill an exploration well
• Appraisal wells – drilled following a successful exploratory drilling when reserves of oil and gas have been discovered. Appraisal wells help better determine the size and quality of the oil or gas fields and how to develop them most efficiently.

Production wells / producers – production of commercially recoverable reserves

Resources – encompass all quantities of crude oil and natural gas naturally occurring on or within the Earth’s crust, discovered and undiscovered (recoverable and unrecoverable), plus those quantities already produced. Resources are divided into:

• Contingent Resources, those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies.
• Prospective Resources, those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by the application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development.

Reserves - are the estimate of the volume of crude oil and natural gas of a discovery that is viewed as commercially recoverable under present economic conditions.

• Proved Reserves, those quantities of oil and gas, which, through the analysis of the geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. Often referred to as 1P, also as “Proven.”
• Probable Reserves, those additional Reserves which, as the analysis of the geoscience and engineering data indicate, are less likely to be recovered than Proved Reserves, but more certain to be recovered than Possible Reserves. It is equally likely that the actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.
• Possible Reserves, those additional reserves which, as the analysis of the geoscience and engineering data suggest, are less likely to be recoverable than Probable Reserves. The total quantities ultimately recovered from the project have a low probability of exceeding the sum of Proved plus Probable plus Possible (3P) Reserves, which is equivalent to the high estimate scenario. In this context, when probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate.

The areas which have the highest probability of containing a reservoir are defined using 3D surveys. During the drilling phase, in order to evaluate a given reservoir, the following tools are used:

• Drill operation logs
• Coring
• Testing
  
  
  • Drillsteam test – one of the most important surveys carried out during the drilling, required by the SPE (Society of Petroleum Engineers), in order to classify given reserves as proved.
  • Wireline tests
  • IP tests
    
    
• Open hole logs:
  
  
  • Resistivity logs
  • Permeability logs (spontaneous potential and gamma ray logs)
  • Porosity logs (sonic, density and neutron logs)
  • Specialized logs

The terms 1P, 2P and 3P refer to the proved reserves of discovered hydrocarbon accumulations, especially:

• Proven reserves (1P), those quantities of oil and gas, which, through the analysis of the geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.
  
  
• Probable reserves (2P), it is equally likely that the actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.
  
  
• Possible reserves (3P), the total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P) Reserves, which is equivalent to the high estimate scenario. In this context, when probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate.

Best Estimate is a term used to describe an uncertainty category for resource estimates referring to the best estimate of the quantity that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the “best estimate”. The best estimate of Contingent and Prospective Resources is prepared independently of the risks associated with achieving commercial production.

In general, crude oil and natural gas resources are the property of the government of the country in which they are located. An oil and natural gas exploration company generally does not own the rights to the discovered oil and gas, but instead receives permissions to explore for and produce oil from the government of the country in question. These permissions are typically called concessions, permits, production sharing contracts and licenses.

They are usually divided into two parts — one for the exploratory phase and the second for the production. The award of a License is often done through an auction. In some cases, a fee has to be paid to the government in order to receive a License. However, the most common procedure is that oil companies pay indirectly for the rights to explore for and produce hydrocarbons by investing in exploration and development. An alternative system used by some countries is the open application system, in which oil companies can apply directly for unlicensed areas. If commercial volumes of oil or natural gas are discovered, the exploration license converts into a production license, where a royalty and/or a tax is applicable, or a production sharing agreement, where a certain share of the recovered oil or natural gas goes directly to the country. The duration of a production license is usually 20 to 30 years.

In Brunei, the exploration and production rights granted are set forth in the production sharing agreements entered into between exploration and production companies and the country’s national oil company, PetroleumBRUNEI. PetroleumBRUNEI manages offshore Blocks J and K and onshore Blocks L and M, which were granted to it by the Government of Brunei pursuant to the Brunei National Petroleum Company Order of 2002. Blocks J, K, L and M are covered by the production sharing agreements scheme. PetroleumBRUNEI aims to ensure that Brunei is represented in commercial petroleum activities, both nationally and internationally.

The oil and gas industry in Syria is governed by the Syrian Ministry of Oil and Gas. Under the terms of National Law No. 7 (1953), the petroleum resources found in the subsoil of Syria and off the Syrian continental shelf belong to the Syrian state. This legislation was supplemented by Decree 133/22 (1964), which stipulates that all petroleum activities shall be controlled by the state. The right to conduct petroleum operations within Syrian territory is granted in the form of a production sharing contract granted by the Syrian state to the contractor and the SPC. The SPC is entitled by Syrian law to explore, develop and invest in oil and gas projects on behalf of the Syrian government (as owner of all natural resources in Syria).

The regulation of hydrocarbons in Ukraine is administered by a number of bodies, including the Ministry of Fuel and Energy of Ukraine and the Ministry of Environmental Protection and the State Geology Service. All special permits are generally awarded by way of an auction. An auction does not need to be undertaken to apply for an extension of exploration and development special permits. The Ministry of the Environment of Ukraine usually takes between six to nine months to grant a production special permit by way of an auction. During the transition between the exploration and production special permits (which can take up to 70 days) all test production must cease. Before the commencement of production the respective gas or oil fields have to be commissioned into production by the Ministry of Fuel and Energy of Ukraine.

It depends on the type of contract. In a license/concession system, the company owns the whole production (pays taxes and royalties). In a production sharing system, the state and a company share the production (PSC), revenue (risk services), or a contractor receives a specific remuneration (pure services).

On one hand, the commerciality of a given field depends on the income generated, while on the other, on the investment and operation obligations, tax type and rate, the state’s interest in profit oil, i.e. production sharing and the total costs (inter alia, operations costs, development costs, production costs and the costs of capital).

In case of E&P projects, the risk and uncertainty factors are multidimensional and change in the course of the project. The various risks are associated with*:

• Reservoir (depth, pressure, permeability, migration)
• Technology (sidetracked drilling, unproven technologies, deeply accumulated deposits)
• Quality of the product (sulphur content, body, asphaltic crude)
• Costs (investment expenditure, operational costs, project management costs)
• Employees (experience, labour consumption, abilities, work contracts)
• Time (delay in production, production stoppage, production efficiency)
• Environment (pollution, disposal costs)
• Safety (failures, staff training, procedures)
• Politics (government stability, arms conflicts, energy policy)
• Tax policy (tax stability, recourse possibility, extra taxes)
• Market (demand, competition, access to transport)

* The risk factors were listed in an accidental order which does not reflect the probability of their occurrence, scope or importance.

In the E&P sector the time lapse between the expenses and returns is large, and this significantly increases the business risk. Upstream projects may be characterized by large capital expenditures at the beginning, mainly during the exploration and development phase. In addition, it may be difficult to acquire capital during the first years. The debt of an E&P company depends on the development stage of the company. New concessionaire finances its operations mainly by its own capital (exploration), while at later stages of development, it uses other forms of financing. There are the following debt standards, with the supervision of the creditors and costs of capital gradually decreasing: project finance, debt based on reserves, debt facilities, balance sheet debt.

Upstream projects have a long-term character, and their duration may even exceed ten years. The production stage must be preceded by: selection of the field, acquisition of a license, numerous geological surveys and appraisals of the field potential, drilling and field development. If the production tests prove that commercial production is possible, with proper capital backup, it is possible to reach the production stage relatively quickly, after about 18 months.

The drilling of an exploration well usually takes around 3 to 6 months. Irrespective of the development of seismic technologies, very often it is only after the fourth, fifth or even sixth attempt that success is to be had, i.e. results in a discovery of reserves which have any commercial value.

The costs of drilling producing wells vary: onshore, the average costs exceed USD 2 million, while offshore, the costs are over USD 5.5 million. If we talk about the costs of drilling rig rental, onshore, they amount to about USD 10 thousand per day, while offshore, from USD 50 to even USD 150 thousand per day. The rates vary depending on the region and rise constantly.

Development occurs after exploration has proven successful, and before full-scale production. A plan to exploit a given field is created and the relevant infrastructure is provided.

A “working interest” is the legal interest held or owned in a license, production sharing agreement, concession or permit, which corresponds to its proportionate interest in all rights and obligations derived from the license and contracts pertaining to the license, production sharing agreement, concession or permit. It is common practice for several companies working together in a joint venture to share in the costs, risks and rewards of exploring and developing oil and gas assets. In such instances, one company is designated as being responsible for the performance of the work that all the joint venture companies have agreed to conduct in a given year. This company is commonly referred to as the “Operator” of that joint venture.

OPEC is a permanent intergovernmental organization created in September 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The membership of OPEC has grown over the years and is currently comprised of 12 oil producing nations which are heavily reliant on oil revenues as their main source of income. Together with some of the large non-member oil exporting countries, such as The Russian Federation and Kazakhstan, the actions of OPEC member countries have the potential to significantly impact the global price of crude oil. The current member countries of OPEC are: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. Together these countries produce approximately 45% of global oil output and possess almost 76% of the total proven crude oil reserves in the world.

Kulczyk Oil Ventures is seated in Calgary (Suite 1170, 700 – 4th Avenue S.W., Calgary, Alberta, Canada, tel. +1403 264 8877). The company has its branch office in Dubai, UAE. In accordance with the Company’s Rules, the Shareholders’ Meetings may be held only in the province of Alberta. With respect to the Polish shareholders, additional procedures concerning notification and voting will be implemented.

Kulczyk Oil Ventures Inc. is the new name for Loon Energy Inc. after that company completed a plan of arrangement in December, 2008. The Plan structured the business to focus the technical, managerial and financial resources of KOV on the principal assets in Brunei and Syria and to create a new entity. The Loon Energy Corporation was incorporated to hold the assets in Colombia and Peru.

Kulczyk Oil Ventures is a company which explores for oil and gas in Asia, the Middle East and Central and Eastern Europe. We already hold an interesting portfolio of projects at different stages of development, with exploration projects in Brunei and Syria, appraisal projects in Brunei, and once we have closed the IPO in Warsaw, we will also have exploration, appraisal and production projects in the Ukraine, where we have signed an agreement to acquire a 70% stake in a company which is currently producing gas from 4 fields.

Kulczyk Investments is the majority shareholder of KOV and as at the date of the Prospectus approval, it holds 46.14% of the presently issued shares. Dr Jan Kulczyk, the Chairman of the Board of Directors and a Non-Executive Director of KOV, is the Chairman of the Supervisory Board and one of the ultimate beneficial owners of KI. The other two Non – Executive Directors of KOV, Mr. Manoj Narender Madnani and Mr. Dariusz Mioduski are the Board Members of KI. KOV has one wholly owned direct subsidiary, Kulczyk Oil Ventures Limited (KOV Cyprus) and four wholly owned indirect subsidiaries: Loon Brunei, Loon Latakia, Loon Ukraine Holding Limited and Triton Borneo Limited. Upon completion of the restructuring process of Triton, KOV Cyprus will hold 50% of Triton Petroleum Pte Ltd and 35% in Mauritania International Petroleum Inc.

The Polish stock exchange is one of the most dynamic markets in Central and Eastern Europe and one of the leading markets in Europe. WSE is the leader in Central and Eastern Europe as far as the number of IPOs and the capitalization of domestic companies are concerned. Poland has stable economic grounds and a strong group of institutional investors, as well as the fact that the upstream sector is poorly represented in this country. In addition, KOV’s cornerstone investor is a Polish rooted company, so the choice of the market was obvious.

The final date of KOV IPO and listing its shares on the Warsaw Stock Exchange was determined by the condition of the financial market.

KOV’s executive directors are very experienced experts, each of them having over 20 years international experience. KOV has its own experts and operational team who are able to carry out geological surveys, drilling campaigns and manage the field development plans worth hundreds of millions of US Dollars. In addition, we know how to evaluate international investment opportunities, estimate the technological and commercial risks, as well as structure transactions which will best secure the company’s interests.

Such projects should be evaluated from the point of view of the people who carry out the business, as well as the quality of the assets and markets in which the company operates. As in the case of any other types of projects, the economic and market risks should be evaluated – the prices and capital costs. The issues connected with the countries of investment play an important role in upstream investments. I mean here, the political and tax stability, safety. The more diversified the license portfolio, the more balanced the risk, since the overall success does not depend on one specific country. The persons managing the project are a key factor. One has to know how to look for oil, to evaluate the resource potential. Local contacts are also important, as well as the ability to operate locally. Asset management experience, knowing how to carry out complex transactions, arrange financing and having access to own capital are also very significant factors.

The market for oil is global, which is why it should be looked at from a global perspective. In contrast to the market for oil, the market for natural gas is more local due to the relatively high transportation costs and the need for transportation systems, which is why it can be divided into regions. As far as gas projects are concerned, KOV is going to operate on the European gas market. The acquisition of KUB-Gas, a gas producing company holding four gas production licenses in Ukraine would be the first step towards this strategy.

In Brunei, KOV co-owns two licenses which cover approximately 90% of the onshore area of the country. They contain the Belait field, from which Shell produced oil and gas in the 1920’s and the beginning of the 30’s and the Jerudong field which produced oil and gas in the late 1950’s through to 1961. Over US$50 million has been spent by KOV and its partners in acquiring over 450 sq. km. of 3D seismic information in these two licenses and the company will soon start a multi-well drilling program. Additionally, in Northeast Syria, KOV holds a license for an exploration block adjacent to the hydrocarbon producing Palmyride Basin, where the company has just signed a contract to acquire 350 sq. km of 3D data, and this program will commence shortly. We also have minor assets in Mauritania and Slovenia. Upon finalizing the transaction with KUB-Gas, our portfolio will be enriched with four currently producing gas fields located in Eastern Ukraine, in the Dnieper-Donets basin. 90% of Ukraine’s gas production comes from this region.

The acquisition of KUB-Gas, one of the largest independent gas producers in Ukraine will give KOV access to four producing gas fields located in the region which accounts for 90% of Ukraine’s oil and gas production. In December 2009, net to the 70% interest of KOV, was 4.23 MMcf of natural gas and approximately 13.6 barrels of condensate per day.

KOV’s production, development and exploration assets are as follows:

Yes – they are very stable and have had the same governments for a very long time. Brunei has been ruled as a sultanate by the same family for more than six centuries and is a very peaceful and prosperous country. It became a British protectorate in 1888 and gained independence in 1984. Shell has been working successfully in the country since 1914. Total is also working in Brunei. Syria has been governed by the Baa’th Party since 1963. There are many international oil and gas companies working in Syria, including Shell, Total and PetroCanada.

In all the countries in which KOV operates, the work and the equipment is outsourced. Such contracts are by no means limited by the state and are concluded on arms’ length conditions.

According to the reports made by independent experts representing international institutions dealing with the professional appraisal of resources, such as McDaniels & Associates, Netherland Sewell & Associates and RPS Energy, our contingent resources, i.e. those which have already been discovered and are recoverable, but we do not know whether on a commercial scale, amount to: 51 MMboe. Our prospective resources, i.e. their existence has not been finally confirmed, but may be recovered using future technologies, are estimated at 53.4 MMboe in Brunei and 40.3 MMbbls in Syria. Please, note that these are just estimates even if confirmed by the sector’s most renowned professionals.

Brunei is the third largest oil producer in Southeast Asia and a significant LNG producer. The country benefits from extensive petroleum and natural gas fields, the source of one of Asia’s highest per capita GDPs. KOV co-owns two license areas, called blocks, which, cover approximately 90% of the country’s onshore area. Brunei is an interesting target, neglected by the upstream giants. Because it is covered with jungle and there is the necessity to reclaim the onshore area, it “lost out to” the extensively exploited, relatively shallow waters of the offshore area. Initially, Shell produced oil and gas onshore to later move on to exploit the larger and far more easily available discoveries located offshore. For a much smaller company like KOV, Brunei was a opportunity to acquire attractive assets. Taking into consideration the limited scale of our present activity, even smaller discoveries may turn out to be highly profitable.

For 80 years Block M was held by Shell Petroleum and was then reluctantly abandoned. Block M contains the Belait oil and gas field, which has never been explored in full since Shell’s large oil and gas discoveries offshore shifted attention away from the onshore area.

Syria opens exploration opportunities which stem from a large block with an unexplored potential. Initially, the company will focus on the Southeastern part of Block 9, close to the prolific Palmyride Basin, in close vicinity to the transport infrastructure. Significant oil and gas discoveries have been made close to Block 9 in Mudawara and Sfayem-Wahab. The geological surveys conducted by KOV indicate the large potential of the area, since its geological composition is in many ways similar to the areas on which significant discoveries have already been made. At the same time, this potential has to be confirmed with more detailed 3D surveys.

During the 3D seismic survey on Block L taken from May 2008 to May 2009, the company faced difficulties connected with swampy terrain, rain forest and steep hills. This caused delays and problems with access to the exploration areas. The surveys were, however, completed in the Q4 of 2009 and the process of data processing has now been completed.

To a limited scale, the Belait field produced oil and gas. In accordance with the published data, the total production from the field is 32 000 barrels and the tested gas productivity equals no less than 15 million cubic feet per day. This area is considered as promising because many wells have positively tested the existence of hydrocarbons. In addition, the mud analysis and logging indicate the existence of hydrocarbons. Exploration of Block M shall initially focus on the Belait area. Most significantly, it has now been identified that the Belait Anticline trend runs into Block L where the Issuer has recently completed the acquisition of a 350 km2 3D seismic survey. Following a petroleum industry best practice, the Issuer has acquired a 3D seismic survey to help in the detection of hydrocarbon accumulations and volumetric estimates of Prospective Resources which are considerably enhanced by the direct hydrocarbon indications observed on the 3D seismic data. Thanks to technological advancements, the area may be considered attractive again.