The board of Urals Energy, the independent exploration and production company with operations in Russia, provides the following updates. 

Auction commitment to purchase a passenger ship 

The Board has been made aware of a possible transaction outside of the Group's ordinary course oil business by Petrosakh, which the Board believes has been authorised by Mr Sergey Kononov, the President of Petrosakh, but without reference to the Board. 

Petrosakh has participated in and won a public auction for the acquisition of a passenger ship, which is being sold by the government of Sakhalin Island.  The Board understands that at present Petrosakh will not have paid for this auction commitment, although Petrosakh will be presented with a purchase agreement for the completion of this transaction and following the execution of this agreement, payment will be required.  Completion of this purchase would cost Russian Roubles 10.7 million (approximately US$161,000).  The Board further understands that this ship is currently being held at a South Korean port. This information became known to the Board on 14 December 2018 after it was disclosed via public state records in Russia on 13 December 2018. 

Based on the information that has been reported, the Board believes that this ship may not seaworthy, lacks a fully functioning engine and is currently incurring liabilities such as port charges which so far amount to approximately US$44,000. 

Mr Kononov did not inform the Board prior to committing to make this purchase or seek their approval of this auction commitment, and the Board believes that it is wholly unacceptable that the Board of a public company has only become aware of this matter through its own initiatives, after the auction took place. The Board is also disappointed that this auction commitment was made by Petrosakh, despite all senior employees having been made aware of the need for the Group's rules and practices to be adhered to and the consequences of non-compliance, as noted in the Company's announcement of 15 October 2018. 

The Board has requested an explanation from Mr Kononov of the business purpose for the purchase of a passenger ship in this condition but has not yet received a response.  The Board has also informed Mr Kononov that this transaction is unlikely to be approved by the Board. 

Negotiations with Mr Kononov 

As announced on 22 November 2018, the Board has insisted that Mr Kononov repays or refinances various loans made by Petrosakh and Articneft totalling over US$5 million, made without the authorisation of the Board, and resign from his position as President of Petrosakh. The Board has been in a dialogue with Mr Kononov and his representatives in respect of the above. 

Mr Kononov has refused to resign from his position as the President of Petrosakh, and to date the correspondence from Mr Kononov and his representatives does not indicate that he accepts proper responsibility for his actions and the negative impact that these actions have had on the Group and the Company's shareholders.  Mr Kononov continues to represent that, as the President of a joint stock company, he has authority under Russian Law to approve any action, including contracts, loans and asset sales within a limit of 25% of the capital employed of that company. However, as previously announced, it has been the rule and practice of the Group that these powers will only be used with the approval of the Board. 

Mr Kononov has made certain early stage indications that he may provide support in respect of the Group's working capital deficit.  However, the Board does not currently believe that Mr Kononov's indications are credible and has not made progress in respect of this matter.  No proof of funds has been provided by Mr Kononov in respect of providing any support in respect of the Group's working capital deficit and Mr Kononov is also querying the extent of the Group's working capital deficit. 

As announced on 11 December 2018, the Company has received a requisition notice from Adler Impex S.A., a company that is the registered holder of 44.59% of the Company's ordinary shares, which the Board believes is owned by a trust for the benefit of the family of Mr Kononov, for the replacement of all of the current Board directors.  The Company intends to convene an extraordinary general meeting of the Company in due course, in line with the applicable provisions of Cyprus law.  If a new board is appointed, the Board cannot guarantee that this new board will take any action against Mr Kononov or seek the repayments referred to above.  The Board also believes that Mr Kononov is seeking to take control of Urals Energy at board level without paying shareholders for such control.  

Group working capital position 

The Board continues to believe that the Group's working capital position over the coming months will be constrained and will remain subject to a number of variables, including, inter alia, the continued support of the Group's banks into 2019.  As announced on 22 November 2018, the Group is likely to face a total working capital deficit of up to approximately US$4.5 million in the coming months, unless the loans and transactions made/undertaken by Petrosakh that were not authorised by the Board (as described in the announcement of 22 November 2018) are repaid in the near term.