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AIM newcomer Volga Gas argues Russian pricing changes could help it unlock potentially massive reserves.

Backed by private equity group and successful sector player Baring Vostock, Volga raised £58 million at 300p with its AIM float last month and expects, in six weeks, to start producing modestly from a shallow well on its Karpensky licence in European Russia’s Saratov region. Russia faces an acute shortage of gas as its economy grows and plans to allow regulated domestic prices to rise 25 per cent a year until 2011, thus providing the industry with a strong incentive to develop its resources.

With ex-Schlumberger and Baring Vostock luminary Mikhail Ivanov as chief executive officer and Baring Vostock founding partner Alistair Stobie as chief financial officer, the company professes particular excitement about Karpensky’s long-term potential. Meanwhile, Volga expects the first significant annual cash flow, of around £15 million a year, in 2009 from another deposit, Vostochny-Makarovskoye.

Stobie said proven and probable reserves of 7.2 billion cubic metres have already been established at Vostochny-Makarovskoye, with a claimed net present value of £141 million. Volga hopes to increase this to 18.3 billion cubic metres, worth some £383 million.

Developments at Karpensky are at an earlier stage, but Stobie said prospective resource estimates range from 15.3 billion to 48.6 billion cubic metres, several times the size of Vostochny-Makarovskoye. Stobie added the company has future off-take deals with a floor price of $60 (£30.2) per thousand cubic metres for Vostochny-Makarovskoye and $80 for Karpensky, and contends that the proximity of these deposits to pipelines and population centres will give them a big price advantage over larger but far-flung rival producers, mostly operating thousands of miles away.

Baring Vostock, a key early backer of star performer Burren Energy, now holds a diluted 54 per cent of Volga Gas, which, said Stobie, has ample cash for its current programme. He claims the company is minimising Russia’s political risk by dealing in a simple and straightforward manner.

At 305p, valuing the company at £158 million, the shares carry risk but also offer significant long-term speculative potential.

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