The Russian oil industry has been organized along the lines of vertically integrated companies, although these companies do not control their own transport infrastructure For more than ten years the industry has been "decapitalized", production has fallen by more than 55%, while exploration and reserves replacement has nearly ceased. Desperate for new capital, the major Russian companies have engaged Western auditors and reservoir engineers to put a value on their reserves. This process is neither straightforward, nor are the valuation going smoothly. There are a number of fundamental difficulties. This paper addresses the problems with valuation that have been encountered to date. The biggest problem is the system of reserves definition that includes an economic component, as is common practice and is recommended by SPE. Reserves estimates are based on data, which the companies often do not themselves possess. Field production decisions are based on fundamental economics that no longer apply in the Russian market, and basic assumptions about production and lifting costs, levels of depreciation all are fundamental issues which have not been determined and which are readily available to the valuer. This paper will review the problems encountered to date and the likely future progress that will be made in arriving at a fair market value and acceptable reserves figures for Western investors and lenders.

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