Petrosakh was founded in 1991 as a Russian-U.S. joint venture to develop the Okruzhnoye field on the Eastern coast of Sakhalin Island. In 1993 and subsequently in 1997, Petrosakh was licensed to produce oil from the Okruzhnoye field for a period of 20 years.

In 1993, a 50% interest in Petrosakh was acquired by Nimir Petroleum Petrosakh Limited (‘‘Nimir’’), a subsidiary of Nimir Petroleum Group. Nimir accelerated the development of the field by drilling four new producing wells and recompleting 12 wells as producers. Nimir also constructed a 4,100 BOPD refinery, oil processing facilities, a marine export terminal and a 240-man work camp. By 1999, Nimir had invested approximately $150 million in the development of the Okruzhnoye field and production peaked at a rate of approximately 4,900 BOPD. Since that time, production gradually declined due to the lack of any substantial additional capital investment.

In or about 2000, Nimir Petroleum Group sold its ownership interest in Nimir to an affiliate of the Alfa Group, Moscow. From 2001 to 2002, Petrosakh drilled an additional three producing wells. In 2001, Petrosakh was licensed for the geological study of the Pogranichnoye Block, which lies directly offshore and parallel to the existing Okruzhnoye field. In the summer of 2002, Petrosakh acquired a 480 square kilometre 3D seismic programme covering the central portion of the Pogranichnoye Block. In 2004, Petrosakh acquired an additional 65 square kilometres of 3D seismic in two programmes covering the Northern and Southern areas of the near-coastline transition zone. The Administration of Sakhalin Oblast currently controls a 2.84% minority ownership interest in Petrosakh which is held by its wholly-owned subsidiary, Sakhalin Oil Company.

The Company acquired full control of Alfa’s 97.16% ownership interest in Petrosakh on 19 November 2004. As part of the agreement to acquire Petrosakh, the Company agreed to pay to the seller, Alfa, a perpetual royalty payment for any commercial quantities of oil produced and landed from the currently non-producing offshore areas covered by the license for the Pogranichnoye Block equal to $0.25 per tonne ($0.03 per barrel).