BUSINESS PLAN FOR GEORGIAN OIL AND GAS CORPORATION

Advisory Assistance to the Ministry of Energy of Georgia

P.E.D. IQC – Contract No. DOT-I-00-04-00020-00 Task Order #800

BUSINESS PLAN FOR GEORGIAN OIL AND

GAS CORPORATION (GOGC)

Dec 18, 2006

This publication was produced for review by the United States Agency for International

Development. It was prepared by CORE International, Inc.

GOGC BUSINESS PLAN

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Advisory Assistance to the Ministry of Energy of Georgia

P.E.D. IQC – Contract No. DOT-I-00-04-00020-00 Task Order #800

BUSINESS PLAN FOR GEORGIAN OIL

AND GAS CORPORATION (GOGC)

Disclaimer

The author’s views expressed in this publication do not necessarily reflect the views of the

United States Agency for International Development or the United States Government.

GOGC BUSINESS PLAN

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BUSINESS PLAN FOR GEORGIAN OIL AND GAS

CORPORATION (GOGC)

1. GOGC Cover Letter – Business Plan .............................................................................4

2. Appendix 1: Brief overview of the current status of the oil and gas sector in Georgia..10

3. Appendix 2: Recommendations on Legal and Regulatory Issues .................................14

4. Revenues of GOGC by Sources (2007-2016) ...............................................................19

5. Pro-forma Financial Statements 2006...........................................................................27

6. Pro-forma Financial Statements 2007...........................................................................41

7. Pro-forma Financial Statements 2008-2016..................................................................51

8. Notes to the Financial Statements ................................................................................55

10. Annexes .....................................................................................................................60

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1. GOGC Cover Letter – Business Plan

December 18, 2006

Alexander Khetaguri

President

Georgia Oil and Gas Corporation

Tbilisi Georgia

Dear. Mr. Khetaguri,

Subject: GEORGIA OIL AND GAS CORPORATION,

BUSINESS PLAN 2007-2016

In May 2006 the Ministry of Energy of Georgia requested that USAID, in the project

Advisory Services to the Ministry of Energy of Georgia

1

, undertake a business plan

for the newly merging Government of Georgia-owned company Georgia Oil and Gas

Corporation (GOGC). On June 15 2006 USAID and the Ministry agreed to undertake

such study. Concurrently, the GOGC sought and secured the services of Booz Allen

Hamilton (BAH) to undertake an analysis of the merger itself, especially as related to

Saknavtobi and GGIC. Subsequently the two contractors worked closely. The

attached Business Plan for the GOGC for the period 2007-2016 is the result of that

common effort, and reflects common assumptions and recommendations as to

purposes and structure of the merged company. As management further refines and

refines the merger, aspects of this plan may then need further revision.

Brief Background:

Summarizing briefly, the GOGC will be an integrated national gas and oil transport,

transit fee management, and oil and gas production management company. It will

comprise those principal components of the three predecessor companies which will

might remain after the reorganization is completed, and may include additional

services as summarized here. The predecessor companies, Georgia International

Oil Corporation (GIOC), Georgia Gas International Corporation (GGIC), and the

National Oil Company of Georgia (Saknavtobi) will retain, if at all, separate identities

only as subsidiaries of the GOGC.

1

Through its contractor CORE International. This Business Plan represents only the views and

opinions of the contractor and its employees and consultants. The Business Plan was compiled under

direction of Paul Ballonoff, Chief of Party for CORE International, Mariam Valishvili as lead energy

financial and accounts analyst for CORE International, Liana Jervalidze as analysis for storage

operations and tariff examples, consulting geologist Robert Robinson, and consulting attorney Thea

Khitarishvili an expert Georgian Oil and Gas law and institutions, and in international gas transit

issues. The opinions expressed here may not be those of the USAID nor of the United States

Government.

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Prior to the merger, the three companies had different undertakings on behalf of the

Government of Georgia.

− The GIOC represented the Government of Georgia in all Caspian oil and gas

transportation projects passing through the territory of Georgia.

− The GGIC owned and operated the medium and high pressure gas pipeline

network in Georgia, and handled domestic transportation as well as the gas

transit to Armenia.

− Saqnavtobi represented the state in all Production Sharing Agreements (PSA’s),

served as the state’s commercial agent in securing receipt of the state’s share of

oil and gas, monetizing it and transferring the taxes to the state budget; it was

also a player in the upstream field and held several exploration and production

licenses itself.

Assumed New Organization:

Based on discussions with Management, we assume that the reorganized structure

will include as follows: There will be four principal operating departments, each with

a Director (to whit: International Relations; Commercial operations for monetization of

oil and gas revenues; Upstream Department for PSA monitoring, data management

and analysis and shut-in well management; and Oil and Gas whose purposes include

management oversight on a gas transportation subsidiary). There will be a Shared

Services Department providing internal operations of the company. The GOGC will

retain three subsidiaries: the Gas Transportation Company (GTC) as a regulated

subsidiary providing domestic and international gas transit services, The Baku-Supsa

pipeline under management contact, and an Oil Preparation company servicing the

upstream industry.

Organization of Financial Statements:

To describe the financial status of the GOGC just prior to the merger, we estimate

pro-forma financial statements (income statements, and balance sheets) for 2006 for

each previously extant company, as well as create consolidated statements for the

common entity, if it had been combined in all of 2006. These statements are our

best estimates, based on information obtained from the respective companies,

combined with our best judgments when required, of a reasonable representation of

the status of those separate entities as of the end of 2006. We emphasize that the

authors of this study are not engaged as auditors, nor was the required product an

audited financial statement. Therefore, while we made best efforts, with support of

the respective corporate accounting departments, to give a fair and accurate

representation, we make no assurances that the accounts reflect accounting

standards.

Assumed Accounting Principles

In general, we adopt the reporting style of “regulatory accounting”. We do so since at

least some major assets of the company are and will remain regulated by the

GNERC, since other of the revenues and major revenue streams arise from contracts

that often reflect regulatory account concepts. But also, we believe that the GOGC

itself will in many ways act as a service company for government interests, and so we

believe it should be best understood as a form of “public utility” in an accounting

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perspective. That is, the entity should be expected to operate on a business basis,

which thus includes making returns (profits) from its operations, but those profits and

related investment policies should reflect incentives and levels of return appropriate

to a public utility in a market economy.

Treatment of Government Revenues

This public service role is emphasized by the recommendation that all revenues

collected by GOGC on behalf of the Government (such revenues and in-kind

volumes collected from international oil and gas transport services), be provided in

full amount to the Government; therefore such revenues are not treated as “earnings”

by the company. Thus, the amounts such revenues “earn” above costs are not

“profits” of the company; these entire revenue streams belong to and are paid to, the

Government. We assume that in return for those services, the GOGC or its

respective parts, are paid cost-based fees, including normal profits, by separate

accounts approved by the Government annually. In our cash flow estimates, we also

estimate the amount of the fee thus required. To clearly emphasize that this is a fee

to the company we show the amount explicitly. This in turn emphasizes that

revenues paid to the Government from monetization activities as fees for transit

rights, are not “profits” earned by the company (and thus, among other

consequences, is not subject to profit tax); such revenues belong to the Government.

The Government in turn pays the company for its services.

Structure of Statements for 2007 to 2016

We then project the effect of implementing the proposed restructure on the 2007

financial statements of each entity, and of the consolidated company. We assume

that for 6 months the companies retain their present structure, and for the remaining

6 months of 2007, and all remaining years 2008 through 2016, have the new

structures. The projections reflect our best estimates of actual conditions, on what

we consider “conservative” methods. That is, in general we assumed the sales

volumes and price levels also assumed in pre-existing corporate documents, or in

transport contacts, and price levels commonly assumed at time of development of

this analysis. Especially therefore, if fuels prices differ from the forecasts, then

revenue estimates may differ significantly. However, all values beyond 2006 must be

taken as simply our best current estimates. No warrantee of accuracy is made nor

implied.

Summary of Principles Assumed

Based on the common analysis of the consultants of USAID and BAH, and extensive

discussions between consultants and corporate management in the period August

through November 2006, we base our projections on the following financial principles

and organizational assumptions.

First, we assume that the integrated company will be operated on a business-basis,

paying its own proper operating expenses from the revenues earned on services

provided. The company will not be engaged in making nor conducting social nor

other economic policies of the Government. Those parts of the integrated company

(principally the GTC subsidiary), which provide services for fees set by the Georgian

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National Energy Regulatory Commission (GNERC), will continue to operate based on

such regulated fees and be expected to cover their operating costs from those fees.

Entities that operate as purely commercial entities (such as the oil production shares

of the pre-existing Saknavtobi, to the extent that those remain), and other retained

services of the former Saknavtobi in geological information management, will be

applied by the company to the costs of providing those services. Revenues (in cash

or in kind) from management of production sharing agreements (PSA’s), if belonging

to the Government as revenues or taxes, will be monetized at their market value and

the full proceeds conveyed to the Government. Only PSA revenues, if any,

belonging to the former Saknavtobi as from its own production, if any, may be

attributed to the accounts of GOGC and potentially applied for expenses of the

company.

The revenue collection services of the present GIOC will be retained in the form of a

Commercial Department of the common company. The Commercial Department will

perform the several services of the existing companies of receiving values in cash or

in kind, and monetizing them at the reasonable market value returning the full

proceeds to the Government. That is, the Commercial Department will receive cash

from the Baku-Supsa subsidiary of the present GIOC; or commodity as in- kind

payments for various natural gas transmission services of the North-South Pipeline of

the GTC or the South Caucasus Pipeline, as fee revenues owed to the Government

for various forms of transport, and will exercise option rights on behalf of the

Government. All revenues thus obtained will be paid to the Government. We

assume the purpose of the company, and especially the Commercial Department, is

to maximize the values of these revenue streams on behalf of the Government, and

to deliver to the Government the full cash value of all revenues derived.

Carbon Credit Revenues

The pre-merger GGIC, and its successor within GOGC, intended to sign an

agreement with the World Bank which may earn substantial values, estimated as

$120 million in total revenues, in “carbon credits” for various operations and

improvements in the GTC system. We assume that revenues earned by the GTC as

carbon credits will be applied by GOGC as required to (1) capital costs of

organizational improvements in operation of financial and accounting systems of

GTC and GOGC; (2) that 80 Million GEL will repay the principal of a Government of

Georgia credit to be used for rehabilitation of the southern portion of the North-South

line of the GTC; (3) that $45 million will be used to pay for the capital costs of

creating a gas storage operation within Georgia, as a part of GOGC; and (4)

remaining funds to the general revenues of the company. These assumptions would

easily meet the requirement of the carbon credit facility, that at least 50% of all

proceeds be used for capital improvements and operational maintenance of the gas

pipeline system.

Gas Storage Analysis:

Annex 3 of this study presents our economic analysis of the proposed gas storage

operation. We believe, based on that analysis, that if the storage operation is used

by the Monetization Unit to maximize values from various “optional” and

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“supplemental” gas purchases from the SCP system, that the storage operation can

be operated profitably at normal levels of return, and with substantial additional

values realized to the revenues of the Government. While Annex 3 discusses

alternative assumptions, we assume, and include in our forecasted accounts, that the

one implemented is that which relies on carbon credit revenues for the capital

financing of the construction, and that operation costs are paid on a normal

regulated-type storage fee basis covering all proper fixed and variable costs.

Unneeded Oil Field Gathering Pipe

In the course of this study, it became apparent that within the oil and gas producing

fields, are many oil collection system pipes, which serve no apparent proper purpose

in the operation of the fields, and lead to risks of improper use of, or under-reporting

of, oil production. It is assumed that a special project of the Oil and Gas

Transportation Department will be created by the Management of GOGC for the

purpose of removing these unnecessary pipes, and rehabilitating and reusing them

or selling them.

Summary of Longer Term Structure

Thus, after the middle of 2007, we assume the GOGC will consist of the following

principal operating units:

• An Oil and Gas Transportation Division, whose duties will include oversight of

the GTC, which will remain a GNERC-regulated gas transmission company for

services within Georgia; and the Baku-Supsa oil pipeline which will remain

under management contract.

• The Oil and Gas Transportation Division will have as a special project, the

removal of excess oil field gathering system pipes.

• The Oil and Gas Transportation Division will include a “Gas Storage entity”

operated under a separate account, providing service to the Commercial

Department of GOGC.

• A Commercial Department GOGC, whose duties will include maximizing value

to the Government of oil and gas transit revenues, in-kind payments of natural

gas and oil, oil production “profit” in-kind payments, and rights to “optional”

and “supplemental” gas under the SCP contract.

• An Upstream Management Department, whose duties will include a PSA

management unit, a geological information services unit, and a shut-in well

management unit.

• A Department of Common Services for internal corporate management. other

common services

For convenience, we continue to show the separate accounts of the operating

companies within the same organizational frameworks as at present, through the first

half of 2007.

Staff Reductions:

A major problem faced by the integrated company is that of likely staff reductions.

Some part of that may be achieved by spin-offs of certain business units, especially

from Saknavtobi. However, some may be required as simple layoffs. For the

purposes of accounting cost estimates, in 2007 we assume that the costs of any lay-

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offs which occur reflect that each laid off employee is paid at least three months

normal wage, and that he/she receives paid health insurance for their family for one

year, paid by GOGC. The statutory minimum requirement is simply 30 days notice,

so this assumption reflects costs above the minimum of what the law requires. Other

options for achieving staff reductions are noted in Appendix 2 to this cover letter and

in Annex A to the Business Plan.

Additional Issues

In addition, we have analyzed certain issues at the request of the Management, and

include those analyses in Annexes of the Business Plan. Those special issues are:

(1) analysis of the legal and regulatory framework of the existing companies,

and how it will be affected by the merger (Annex A). Conclusions of that

analysis with recommendations are also included as Appendix 2 to this letter;

(2) geological overview of the prospects for oil and gas recovery in Georgia

(Annex B);

(3) analysis of the economics of natural gas storage operations within

Georgia, if owned by the GOGC (Annex C); and

(4) examples of how capacity fees might be charged for use of the GTC

pipeline services (Annex D).

Organization of this Report

The organization of this Business Plan is therefore as follows:

• Cover Letter with two Appendices:

o Appendix 1: Description of the Georgian Oil and Gas Industry.

o Appendix 2: Recommendations on Legal and Regulatory Issues.

• Pro-forma 2006 Financial Statements of GGIC, GIOC, Saknavtobi, and a

consolidated 2006 statement for GOGC

• Estimated 2007 Financial Statements reflecting restructuring in course of that

year for GGIC, GIOC, Saknavtobi, and a consolidated 2007 statement for

GOGC.

• Projected 2008-2016 Financial Statements for the consolidated GOGC.

• Explanatory Annexes:

o Notes to the Statements

o Annex A: Analysis of Legal and Contractual Framework of the GOGC;

o Annex B: Geological Overview of Georgian Oil and Gas Prospects;

o Annex C: Analysis of Potential Georgian Gas Storage Operations;

o Annex D: Examples of Gas Transmission Pipeline Capacity Tariffs.

We hope you may find this a useful analysis.

Paul Ballonoff

Chief of Party

CORE International

USAID Advisory Services to the Ministry of Energy of Georgia

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2. Appendix 1: Brief overview of the current status of the oil and gas

sector in Georgia

2

Exploration and Production

The Georgian upstream sector has nearly 80 years of history in oil and gas

exploration and production in Georgia. Having been centrally governed during the

Soviet Era, Saqnavtobi had undergone substantial changes during the 90s, when it

became the National Oil Company,

3

and then recently, when it has been merged in

Georgian Oil and Gas Corporation along with the GGIC and GIOC, Georgia’s state

owned oil and gas transportation companies. Since the declaration of Georgia’s

independence, the oil and gas sector has been opened up for foreign investment. A

number of international oil and gas companies have invested in Georgia’s upstream

fields. At present there are 7 leaseholders operating in the country under the

Production Sharing Agreements schemes that are negotiated or modified according

to the Oil and Gas Law of Georgia. These exploration and production licenses are

held by the following investors: Anadarko Georgia Company CanArgo Energy

Corporation, Swiss National Petroleum Limited (NPL), Frontera Recourses Georgia

and Saqnavtobi itself.

The recent bid held on June 15, 2006 shortlisted three companies for 5 license

blocks, and the Georgian National Regulatory Commission for Oil and Gas

Resources is currently negotiating production sharing agreements with Aksai BMC

(block V), Starait Oil and Gas Ltd (blocks VIA and VIB), and Global Oil & Energy Ltd

(blocks VII B and VIII).

Even though current Georgian legislation allows for other types of upstream

development agreements, namely Service and Risk Service Agreements, there are

no operators currently operating under these types of agreements in the country.

The investment guide for Georgia provides the following information on the country’s

oil and gas potential: “Eleven oilfields have confirmed reserves of 28 million tons of

oil yet to be explored. Larger oil reserves are assumed to exist. The oil potential of

the Black Sea shelf is estimated at 70 million (1.3 billion barrels) of oil. Larger

volumes of natural gas are also thought to exist along the black sea cost in Ajara.

Gas potential is thought to be about 125 billion cubic meters, while 8.5 billion cubic

meters have already been exploited”.

4

Pipelines

Georgia’s pipelines can be divided into two groups: pipelines built during the Soviet

Era and inherited after the break-up of the Soviet Union, and newly built pipelines for

2

Abstracted from Annex 1, Legal and Contractual Framework Analysis of the GOGC, by legal

consultant Thea Khitarishvili.

3

Established in 1929 as a trust, Saqnavtobi changed its status under the Oil and Gas Law of 1999 to

become the National Oil Company, and later restructured as the 100% state owned joint stock

company as of April 5, 2005 (is that so? – Salome)

4

Investment Guide of Georgia: Energy http://www.investmentguide.ge

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the transportation of oil and gas resources from the landlocked countries of the

Caspian Sea region to the world markets/Turkey and beyond.

There are three new pipelines in Georgia transporting oil and gas from the Caspian

region: the Early Oil Pipeline (western route, from Baku to Supsa), operating from

1999, the Baku Tbilisi Ceyhan Oil Pipeline (BTC), operating from 2005, and the

South Caucasus Pipeline (also referred to as the SCP or Shah Deniz Gas Pipeline),

construction of which will be completed by the end of 2006 and is expected to be

commissioned in early 2007. Negotiations on all three pipelines, as well as state

participation and implementation of state undertakings are carried out by the

Georgian International Oil Corporation (GIOC)

5

, a 100 % state-owned Joint Stock

Company created by special presidential decree for this purpose only.

As for domestic pipelines, Georgia has a 1,940-km high and medium pressure gas

pipeline network, built during the Soviet Era and owned and operated by the former

Georgian International Gas Corporation (GGIC),

6

along with its subsidiary company

GTC. At present, these are the facilities supplying the Georgian market with natural

gas and which also have major importance for transit to Armenia, as the north-south

branch of this pipeline network is Armenia’s only source of natural gas supply.

A similar presidential decree established the Georgian International Gas Corporation,

now as GOGC, with the mandate to own, operate and govern the pipeline network

and to undertake activities related to transiting Russian Gas to Armenia.

The domestic transportation licenses and tariffs for the transportation service within

the territory of Georgia are set by the Georgian National Regulatory Commission of

Oil and Gas Resources.

Transit tariffs for all pipelines are set by relevant international agreements and are

not subject to internal regulations.

5

Georgian International Oil Corporation has been established as a 100% state owned joint stock

company in accordance with the Presidential Decree Nr.178 of 20 February 1996

6

Georgian Gas International Corporation has been established as a 100% state owned joint stock

company in accordance with the Presidential Decree Nr. 206 of 20 April 1997

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Governing legislation

The energy sector in Georgia was the one of those fields that had strategic

importance for Soviet management and therefore was centrally governed. After the

break-up of the Soviet Union, Georgia found itself unprepared for managing the field

on its own and had very limited legislation essential for developing the sector. The

mid 90s had an inflow of foreign investors interested in the Caspian region and

growth in exploring possibilities for upstream projects in Georgia. Georgia opened its

doors wide to foreign investment and passed legislation to encourage foreign

investment in the country. However this did not appear to be enough to govern the

sector without a sound legislative framework. The first investors in Georgia

interested in upstream petroleum development included a Swiss investor operating

under Ioris Valley Company, the British Ramco and JKX, and the American Frontera

Resources.

These investors initially obtained subsoil mineral usage licenses, required under

legislation governing the country’s natural resources, which they regarded as

licensing agreements. However, Georgian Oil treated those licenses as merely the

permit to explore and develop Georgia’s oil and gas resources and required entering

into separate production-sharing agreements. This triggered the need for drafting

sound oil and gas legislation that would provide for clear procedures that any investor

would have to follow. The new law on Oil and Gas was passed on April 16, 1999

which gave Saqnavtobi the status of the National Oil Company with the exclusive

right to represent the Government in all production sharing agreements and provided

for setting up the regulatory agency to act on behalf of the state in the licensing

process and to protect the state’s sovereign interests in all upstream petroleum

projects.

Almost in parallel, amendments to the existing law on Electricity were prepared and

adopted on April 30, 1999 with the aim to allow Georgian National Energy Regulatory

Commission (GNERC) to regulate midstream and downstream arrangement for

natural gas. This meant adding requirements for licensing the natural gas supply and

transportation and distribution activities through the domestic natural gas networks.

Recent changes to the Oil and Gas Law substantially changed the above structure

by:

a) Changing the State Agency for the Regulation of Oil and Gas Resources into

the independent National Regulatory Commission of Oil and Gas Resources

7

.

The regulators are not yet appointed and therefore the activities of the

Commission are on hold at present.

b) Changing the authority issuing the licenses for transportation as well as setting

tariffs for domestic pipelines from GNERC to the National Regulatory

Commission of Oil and Gas Recourses

8

.

7

Amendments to the Oil and Gas Law, May 25, 2006

8

Amendments to the Oil and Gas Law, May 25, 2006

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c) Removed the reference to Saqnavtobi from the Oil and Gas law and put the

onus on the president to nominate the National Oil Company

9

.

Transit pipelines are governed by project-related bilateral or multilateral agreements,

developed for specific pipelines (also referred to as project-related intergovernmental

agreements).

All other downstream activities are subject to commercial legislation as for any other

commodity trades (except for refining and domestic transportation activities, recently

being made subject to licensing regimes).

In addition to this, all three companies are subject to the general application of

national legislation in their everyday activities (i.e. civil, employment, tax codes, etc.).

State Energy Policy course

The most recent policy

10

direction of the Energy Sector aims at replacing old and

outdated technologies in the Energy Sector, diversification of energy supplies, and

developing an economic model for the sector’s commercial viability.

The section of the energy policy on Energy Security prioritizes the need for the

rehabilitation of Georgia’s trunk pipelines and distribution networks, as well as

proposing the building of new pipelines to connect up with neighbouring countries

with oil and gas resources, an extension of the TransCaspian Energy Corridor, and

building on- and underground storage facilities.

Section 2.3 of the energy policy addresses issues related to the exploration and

production of local petroleum resources. It underlines the importance for the

exploration of those fields with potential projection, and the increase and

intensification of current productions.

The policy does not suggest any need for structural changes in the sector nor for any

substantial changes to the existing energy legislation.

9

Amendments to the Oil and Gas Law, October 24, 2006

10

Based on the draft Principal Directions of the State Policy for Energy Sector, April 2006.

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3. Appendix 2: Recommendations on Legal and Regulatory Issues11

Introduction:

The three companies merged into the newly established Georgian Oil and Gas

Corporation have different undertakings on behalf of the Government of Georgia.

− The Georgian International Oil Corporation represents the Government of

Georgia in all Caspian oil and gas transportation projects passing through the

territory of Georgia.

− The Georgian International Gas Corporation owns and operates the medium and

high pressure gas pipeline network in Georgia, and handles domestic

transportation as well as the gas transit to Armenia.

− Saqnavtobi, the Georgian National Oil Company, represents the state in all

Production Sharing Agreements, serves as the state’s commercial agent in

securing receipt of the state’s share of oil and gas, monetizing it and transferring

the taxes to the state budget; it is also a player in an upstream field and a holds

and operates few exploration and production licenses itself.

Government undertakings under the existing projects of all three companies need to

be unified in a way that does not jeopardize any existing commitments of the

Government. There are no impediments to transferring the rights in any of the

existing contracts; however, the need for detailed assessment of specific

requirements under each agreement (for actual procedures for change of names or

transfer of rights) should not be underestimated.

The sector is governed by the Constitution of Georgia, international agreements of

general application (international public law), project specific bilateral and multilateral

agreements, host government agreements, Energy and Oil and Gas Laws of Georgia

(amongst other applicable national legislation), existing licenses, transit and

transportation agreements and production-sharing agreements. A careful

observation of the above legislation is essential for error free merger and for

avoidance of potential conflicts between and parties of current contractual

arrangements throughout the merger process and for GOGC’s further business

relationships.

Recommendations

Transfer of rights in existing agreements

The new GOGC Company will need to assume all rights and responsibilities of the

three merged companies. Even if the change of name and transfer of all rights

happens through the amendments to the existing legislation, there still remains a

need for careful assessment of all existing agreements individually in order to comply

with the requirements of each individual agreement on transferring ownership rights.

The impact of the change of name and transfer of legal rights and responsibilities,

11

Abstracted from Annex 1, Legal and Contractual Framework Analysis of the GOGC, by legal

consultant Thea Khitarishvili.

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duties and liabilities should be individually assessed. It cannot be assumed that all

this will happen automatically, since state undertakings in these agreements differ.

Changes to the legislation

Oil and Gas Law

Despite of the post merger changes to the Oil and Gas Law adopted on May 25 and

October 24, 2006, the need to amend the oil and gas law still remains valid. One of

the most immediate and clear changes will be required to the Article 9 of the Law on

Oil and Gas, which provides the functions of the National Oil Company. It would be

highly advisable to distinguish clearly the rights and responsibilities between the

regulator and GOGC. The decision on a complete pull-out from exploration and

production activities may need to be reassessed.

The issues that would need to be specifically addressed in the addendum should

include:

− Requiring National Oil Company to transfer all revenues received from the state

share of oil and gas in full to the state budget/or under the clear and transparent

mechanism defined by the legislation

12

.

− Allowing National Oil Company to participate in exploration and production, even

if at present the decision is made to pull out from its current licenses/operations.

The National Oil Company should not be deprived the right to explore and

develop petroleum resources.

− Allowing National Oil Company to retain and manage existing data and develop,

receive, classify, analyse, store and manage all information and geological data

related to the Georgia’s petroleum reserves and operations, until state remains

the 100% owner of the NOC.

NOTE: Although creation and management of a centralized information bank on

oil and gas resources and operations in Georgia (including the collection,

systematization, analysis, storage and management of information and data) is

one of the main functions of the Commission it has not been implemented to date.

The Saqnavtobi is still in possession of the historic and current geological data

related to the petroleum operations in Georgia. It is the consultant’s firm belief,

that as long as the National Oil Company is delegated the power to represent the

Government in the arrangements with investors, it is the best placed to maintain

and manage the data for proper implementation of the PSAs. Obviously that

should not hinder the Commissions access to the databank at any time. NOC

should be obliges to take requests of the Commission on any data processing

related to/necessary for the implementation of oil and gas operations under

production sharing agreements and the licenses.

− Adding requirements for licensing (or referring to the exiting licensing procedures)

for the underground gas storage; additions to deal with the operational issues and

tariff/service charge structures of such storage facilities.

12

At present it has the right to dispose the state share of oil and gas produced in Georgia and transfer

all taxes to state budget according to Production Sharing Agreements, Article 9.2.c of the Oil and Gas

Law

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Law on Subsoil Minerals

The licensing authority for usage of underground natural vacuums for the

underground gas storages is the ministry of Environment and Natural Resources.

Law on Subsoil Mineral Resources

13

provides for the particulars for obtaining it,

however does not deal with neither its operational issues of such underground

storage, nor with the tariff structures or methods for its operation. These issues would

be advisable to be handled within the same scope and the authority dealing with the

upstream licensing. This would require modifications in Oil and Gas as well as

Subsoil Mineral laws.

National policy review for management of oil and gas resources

1) Recent changes to the Oil and Gas Law of Georgia modified the status of the

authority managing the national reserves of the petroleum resources from the State

Agency to the Regulatory Commission. The new regulatory authority is an

independent body, which by law is not allowed to be subordinated by any state body

or institution

14

.

The independence of the authority, dealing with the upstream sector and in particular

disposing country’s natural resources that are exclusively owned by the state, seem

to be out of the countries constitutional frame. It is consultant’s firm belief that this

issue needs urgent review/revisions. The relevant precedent of exiting regime,

governing country’s other natural resources, could be found under the Subsoil

Mineral Law. Decisions for opening up the natural resources for exploration and

development have to be made by the government, however tendering of the licensing

process and monitoring licensees could be outsourced to the Commission

2) The country continues to utilize old Soviet geological data. Any recent data

developed under existing licenses are not unified and Georgia does not possess a

modern assessment of its geological potential. There are talks on outsourcing this to

a firm with the necessary experience and allowing it to own the data in exchange for

funding the study. Aside from the need to have open, transparent bidding procedures

for outsourcing such an important study, it is this consultant’s firm belief that a study

of this nature should be fully funded by the government, and that proprietary rights on

any data related to the country’s natural resources should be exclusively owned by

the state.

3) And finally, the merger should not jeopardize the status of the National Oil

Company. It is important to develop a clear policy to what extent would it represent

the state in upstream operations and whether it should retain the right to explore and

develop oil and gas resources itself. This is especially relevant if there are any

expectations of major oil and gas discoveries in Georgia.

Existing Production Sharing Agreements

Even though the existing Production Sharing Agreements in Georgia may not offer

the best possible deal for the country, it is highly advisable not to open negotiations

13

Adopted on May 17, 1996

14

Article 7.1 as per the modifications to the Oil and Gas Law, adopted on May 25, 2006

GOGC BUSINESS PLAN

PAGE 17 OF 60

on any existing PSAs. Instead, the focus should be shifted to the best methods to

oversee the implementation of investor’s obligations under these PSAs. The

mechanisms of state control and supervision should be clearly assessed, and a

transparent monitoring policy would need to be developed.

Georgia would send negative signals to the international community if it starts

amending the PSAs at this stage, regardless of how unsatisfactory they may be for

the country. An exception would be those cases where assessment proves that

parties are in breach of their contractual obligations, in which case agreed dispute

resolution procedures should be invoked.

New production sharing agreements

The most recent bids short-listed three candidates for the new license awards, and

negotiations on new production sharing agreements are underway. All efforts should

be made to avoid unsatisfactory provisions that are in existing production-sharing

arrangements.

Accounting Procedures

Clear and transparent accounting procedures should be developed at all levels of the

Company’s activities.

NOTE: The model form of International Accounting Procedures developed by the

Association of International Petroleum Negotiators, as a suggested guide to the

accounting requirements for joint operations, is attached to the report as Annex II.

Human Resources

The merger may result in a staff reduction of 700 to 900 employees, by spin-off of

subsidiaries, and by direct lay-offs. There is a risk of losing highly skilled staff.

Therefore, sound policies for staff lay-offs should be developed.

This process could include the dismissal of staff with specific technical knowledge

that would be difficult to keep under the company’s umbrella since there are ready

markets for their expertise. It would be highly advisable to develop redundancy

packages, which might include offering possible share options that would promote

setting up new commercial entities from the existing subsidiaries. All such share

options and exercising of the rights of joint stock companies should be carefully

assessed in light of the privatization legislation of Georgia. This could include an

option for the right of first refusal in acquiring the machinery the Company decides to

dispose of. Apart from the political gesture, this will encourage the market and allow

staff with specific technical know-how to create new commercial entities serving the

market on a competitive basis. The open market would be the best test for their

future existence.

In the longer term, the need for clear definitions, functions and drafting of possible job

descriptions will be vital. It is best that this should take place as the merger process

develops further.

GOGC BUSINESS PLAN

PAGE 18 OF 60

Merger documentation

The completeness of arrangements for establishing the new entity is disputable,

based on the documents the consultant has to hand. The requirements for the

establishment of the new entity under Georgian legislation differ from the merger

procedures. All three entities are 100% government-owned and there is no doubt that

it falls under the government’s full discretion to choose whatever form it may wish the

new entity to have. However, documents issued by the ministry responsible (the

Ministry of Economy) establishes the new entity (in which case other entities named

in the document should be dissolved through the bankruptcy procedures according to

the Georgian legislation) while the document itself includes statements that are more

likely to fall under the merger procedures described under the Law on

Entrepreneurs.

15

Even though the merger is a process that will take some time

towards completion, it is essential that all the required procedures are be

straightened up throughout in order to ensure an error-free merger.

The statute of the newly created company GOGC does not specify its sphere of

activities. This should either derive from existing statutes of other entities that are to

be merged, or should be clearly defined by Law.

The latest changes to the Oil and Gas Law removed the references to Saqnavtobi as

being the National Oil Company. The President is given an exclusive authority to

nominate the National Oil Company. The changes to the Law were adopted on 24

October 2006. The consultant is not in a possession of a presidential decree

appointing the National Oil Company. Even though this may not have an immediate

affect on the management of oil and gas operations under the Production Sharing

Agreements, It would be strongly advisable to avoid existence of gaps in the merger

process, in order to prevent any complications at a later date.

15

Georgian Law on Entrepreneurs, October 28, 1994

GOGC BUSINESS PLAN

PAGE 19 OF 60

4. Revenues of GOGC by Sources (2007-2016)

GOGC BUSINESS PLAN

PAGE 20 OF 60

Year

TOTAL Collected

Revenues

GOGC Revenues from

Operations

Gross Revenues

Collected on Behalf of

the Government of

Georgia

Total GOGC Operating

Expenses (including

normal profit rate) +

Capital Outlays

Additional Fee to

GOGC from the

Government of Georgia

for services provided

Net Revenues

Collected on Behalf of

the Government of

Georgia

Excess Earnings by

GOGC to be paid as

Dividends to the

Government

2007

338,824,892

177,638,676

161,186,216

221,563,028

43,924,352

117,261,864

-

2008

332,364,589

105,567,763

226,796,826

171,691,048

66,123,285

160,673,541

-

2009

366,696,921

91,284,883

275,412,038

191,487,504

100,202,620

175,209,417

-

2010

398,382,457

99,523,854 298,858,603 186,858,070 87,334,216 211,524,387 -

2011

461,336,868

105,163,654

356,173,214

193,645,506

88,481,852

267,691,362

-

2012

508,973,982

92,757,516

416,216,466

169,631,275

76,873,759

339,342,707

-

2013

486,443,789

60,219,676

426,224,113

157,601,030

97,381,354

328,842,759

-

2014

504,906,671

61,187,101

443,719,570

161,180,583

99,993,482

343,726,088

-

2015

511,269,283

62,460,381 448,808,901 154,812,686 92,352,305 356,456,596 -

2016

514,766,207

62,460,381

452,305,826

63,052,132

591,751

451,714,075

-

Sum

4,423,965,660

918,263,887

3,505,701,772

1,671,522,862

753,258,975

2,752,442,797

0

Summary Of Revenue Reallocation (GEL)

GOGC BUSINESS PLAN

PAGE 21 OF 60

Year

TOTAL GOGC

Revenues

Internal Volume

Transportation

Revenues

Revenues from

Armenia Transit

Distribution

Margin Revenues

from Armenia

Transit

Baku Supsa

Pipeline Forecasts

BTC Pipeline

Forecasts

Shah Deniz Transit

Fee Volume

Estimates

Carbon Credit

Revenues

Sakanvtobi

Revenues

Total Other

Revenues

2007

195,852,538

$

$ 17,272,000 $ 11,000,000 $ 3,335,260 $ 11,336,000 $ 24,576,000 $ 33,000,000 $ 12,500,000 $ 9,923,963 $ 72,909,316

2008

192,118,260

$

$ 17,504,000 $ 11,000,000 $ 4,851,287 $ 11,544,000 $ 32,874,667 $ 66,250,000 $ 17,000,000 $ 9,427,765 $ 21,666,541

2009

211,963,538

$

$ 26,248,000

$ 16,000,000

$ 4,851,287

$ 11,752,000

$ 42,989,333

$ 79,500,000

$ 20,000,000

$ 8,956,376

$ 1,666,541

2010

230,278,877

$

$ 24,904,000

$ 16,000,000

$ 5,457,698

$ 11,960,000

$ 44,782,080

$ 91,500,000

$ 25,500,000

$ 8,508,558

$ 1,666,541

2011

266,668,710

$

$ 26,664,000

$ 18,000,000

$ 5,457,698

$ 12,168,000

$ 46,629,341

$ 121,000,000

$ 27,000,000

$ 8,083,130

$ 1,666,541

2012

294,204,614

$

$ 27,280,000 $ 18,000,000 $ 6,670,520 $ 12,376,000 $ 48,532,579 $ 154,000,000 $ 18,000,000 $ 7,678,973 $ 1,666,541

2013

281,181,381

$

$ 26,472,000 $ 22,000,000 $ 6,670,520 $ 12,584,000 $ 50,493,295 $ 154,000,000 $ - $ 7,295,025 $ 1,666,541

2014

291,853,567

$

$ 26,728,000

$ 22,000,000

$ 6,973,726

$ 12,792,000

$ 52,513,027

$ 162,250,000

$ -

$ 6,930,273

$ 1,666,541

2015

295,531,377

$

$ 27,464,000

$ 23,000,000

$ 6,973,726

$ 13,000,000

$ 54,593,351

$ 162,250,000

$ -

$ 6,583,760

$ 1,666,541

2016

297,552,721

$

$ 27,464,000

$ 23,000,000

$ 6,973,726

$ 13,208,000

$ 56,735,882

$ 162,250,000

$ -

$ 6,254,572

$ 1,666,541

Sum

2,557,205,584

$

248,000,000

$

180,000,000

$

58,215,449

$

122,720,000

$

454,719,556

$

1,186,000,000

$

120,000,000

$

79,642,393

$

107,908,185

$

Summary Of Revenues From All Sources

Year

TOTAL Collected

Revenues

Internal Volume

Transportation

Revenues

Revenues from

Armenia Transit

Distribution

Margin Revenues

from Armenia

Transit

Baku Supsa

Pipeline Forecasts

BTC Pipeline

Forecasts

Shah Deniz Transit

Fee Volume

Estimates

Carbon Credit

Revenues

Sakanvtobi

Revenues

Total Other

Revenues

2007

338,824,892

29,880,560

19,030,000

5,770,000

19,611,280

42,516,480

57,090,000

21,625,000

17,168,456

126,133,116

2008

332,364,589

30,281,920

19,030,000

8,392,727

19,971,120

56,873,173

114,612,500

29,410,000

16,310,033

37,483,116

2009

366,696,921

45,409,040

27,680,000

8,392,727

20,330,960

74,371,547

137,535,000

34,600,000

15,494,531

2,883,116

2010

398,382,457

43,083,920

27,680,000

9,441,818

20,690,800

77,472,998

158,295,000

44,115,000

14,719,805

2,883,116

2011

461,336,868

46,128,720

31,140,000

9,441,818

21,050,640

80,668,760

209,330,000

46,710,000

13,983,814

2,883,116

2012

508,973,982

47,194,400

31,140,000

11,540,000

21,410,480

83,961,362

266,420,000

31,140,000

13,284,624

2,883,116

2013

486,443,789

45,796,560

38,060,000

11,540,000

21,770,320

87,353,401

266,420,000

0

12,620,392

2,883,116

2014

504,906,671

46,239,440

38,060,000

12,064,545

22,130,160

90,847,537

280,692,500

0

11,989,373

2,883,116

2015

511,269,283

47,512,720

39,790,000

12,064,545

22,490,000

94,446,497

280,692,500

0

11,389,904

2,883,116

2016

514,766,207

47,512,720

39,790,000

12,064,545

22,849,840

98,153,077

280,692,500

0

10,820,409

2,883,116

Sum

4,423,965,660

429,040,000

311,400,000

100,712,727

212,305,600

786,664,832

2,051,780,000

207,600,000

137,781,340

186,681,160

Summary Of Revenues From All Sources (GEL)

GOGC BUSINESS PLAN

PAGE 22 OF 60

Year

Transported

Volume cm/year

GNERC

Regulated*

Transit Tariff

per 1000cm

Transportation

Fee Revenue

2007

2,259,000,000 $8 17,272,000$

2008

2,288,000,000 $8 17,504,000$

2009

3,381,000,000 $8 26,248,000$

2010

3,213,000,000 $8 24,904,000$

2011

3,433,000,000 $8 26,664,000$

2012

3,510,000,000 $8 27,280,000$

2013

3,409,000,000 $8 26,472,000$

2014

3,441,000,000 $8 26,728,000$

2015

3,533,000,000 $8 27,464,000$

2016

3,533,000,000 $8 27,464,000$

Internal Volume Transportation Revenues

Year

Transported

Volume cm/year

Pipeline

Losses %

Pipeline

Losses

cm/year

Gas Price

(per 1000

c.m)

Pipeline Losses ($)

2007

2,259,000,000 3.0% 67,770,000 110$ 7,454,700$

2008

2,288,000,000 3.0% 68,640,000 160$ 10,982,400$

2009

3,381,000,000 3.0% 101,430,000 160$ 16,228,800$

2010

3,213,000,000 2.5% 80,325,000 180$ 14,458,500$

2011

3,433,000,000

2.5%

85,825,000

180

$

15,448,500

$

2012

3,510,000,000 2.5% 87,750,000 220$ 19,305,000$

2013

3,409,000,000 2.0% 68,180,000 220$ 14,999,600$

2014

3,441,000,000 2.0% 68,820,000 230$ 15,828,600$

2015

3,533,000,000 1.5% 52,995,000 230$ 12,188,850$

2016

3,533,000,000

1.5%

52,995,000

230

$

12,188,850

$

SUM

32,000,000,000

734,730,000

139,083,800

$

Pipeline Losses

GOGC BUSINESS PLAN

PAGE 23 OF 60

Revenues from Armenia Transit

Fee Volume

Year

Initial Volume

cm/year

10%

Gas Price

(per 1000

c.m)

Revenues from

Optional Gas

Sales

2007

1,000,000,000 100,000,000 $110 11,000,000$

2008

1,000,000,000 100,000,000 $160 16,000,000$

2009

1,000,000,000 100,000,000 $160 16,000,000$

2010

1,000,000,000 100,000,000 $180 18,000,000$

2011

1,000,000,000 100,000,000 $180 18,000,000$

2012

1,000,000,000 100,000,000 $220 22,000,000$

2013

1,000,000,000 100,000,000 $220 22,000,000$

2014

1,000,000,000 100,000,000 $230 23,000,000$

2015

1,000,000,000 100,000,000 $230 23,000,000$

2016

1,000,000,000 100,000,000 $230 23,000,000$

Distribution Margin Revenues from Armenia Transit

Fee Volume

Year

Initial Volume/

cm/year

10%

Gas Price

(per 1000

c.m)

Gas Sale

Price (per

1000 c.m)

Margin

Revenues

2007

1,000,000,000 100,000,000 $110 $143 3,335,260$

2008

1,000,000,000 100,000,000 $160 $209 4,851,287$

2009

1,000,000,000 100,000,000 $160 $209 4,851,287$

2010

1,000,000,000 100,000,000 $180 $235 5,457,698$

2011

1,000,000,000 100,000,000 $180 $235 5,457,698$

2012

1,000,000,000 100,000,000 $220 $287 6,670,520$

2013

1,000,000,000 100,000,000 $220 $287 6,670,520$

2014

1,000,000,000 100,000,000 $230 $300 6,973,726$

2015

1,000,000,000 100,000,000 $230 $300 6,973,726$

2016

1,000,000,000 100,000,000 $230 $300 6,973,726$

GOGC BUSINESS PLAN

PAGE 24 OF 60

Baku Supsa Pipeline Forecasts

Year

Transit Volume

Tons/year

Fee

Transit Fee

Revenue

2007

52,000,000 $0.22 11,336,000$

2008

52,000,000 $0.22 11,544,000$

2009

52,000,000 $0.23 11,752,000$

2010

52,000,000 $0.23 11,960,000$

2011

52,000,000 $0.23 12,168,000$

2012

52,000,000 $0.24 12,376,000$

2013

52,000,000 $0.24 12,584,000$

2014

52,000,000 $0.25 12,792,000$

2015

52,000,000 $0.25 13,000,000$

2016

52,000,000 $0.25 13,208,000$

BTC Pipeline Forecasts

Year

Transit Volume

Tons/year

% Growth Fee $/ton

Transit Fee

Revenue

2007

204,800,000 $0.12 24,576,000$

2008

268,000,000 $0.12 32,874,667$

2009

343,000,000 $0.13 42,989,333$

2010

349,860,000 2.00% $0.13 44,782,080$

2011

356,857,200 2.00% $0.13 46,629,341$

2012

363,994,344 2.00% $0.13 48,532,579$

2013

371,274,231 2.00% $0.14 50,493,295$

2014

378,699,715 2.00% $0.14 52,513,027$

2015

386,273,710 2.00% $0.14 54,593,351$

2016

393,999,184 2.00% $0.14 56,735,882$

GOGC BUSINESS PLAN

PAGE 25 OF 60

Shah Deniz Transit Fee Volume Estimates

Fee Percent:

5%

Contract Price:

$55

Year Transit Volume

Transit Fee

Volume

(Optional)

Transit Fee

Volume

(Supplemental)

Gas Market

Price (per

1000 c.m)

Revenues from

Optional Gas

Sales

Net Revenue from

Supplemental Gas

Sales at Market

Price

Total Revenues

2007

3,500,000,000 175,000,000 250,000,000 $110 19,250,000$ 13,750,000$ 33,000,000$

2008

5,000,000,000 250,000,000 250,000,000 $160 40,000,000$ 26,250,000$ 66,250,000$

2009

6,000,000,000 300,000,000 300,000,000 $160 48,000,000$ 31,500,000$ 79,500,000$

2010

6,000,000,000 300,000,000 300,000,000 $180 54,000,000$ 37,500,000$ 91,500,000$

2011

6,500,000,000 325,000,000 500,000,000 $180 58,500,000$ 62,500,000$ 121,000,000$

2012

9,000,000,000 325,000,000 500,000,000 $220 71,500,000$ 82,500,000$ 154,000,000$

2013

13,000,000,000 325,000,000 500,000,000 $220 71,500,000$ 82,500,000$ 154,000,000$

2014

15,000,000,000 325,000,000 500,000,000 $230 74,750,000$ 87,500,000$ 162,250,000$

2015

15,000,000,000 325,000,000 500,000,000 $230 74,750,000$ 87,500,000$ 162,250,000$

2016

15,000,000,000 325,000,000 500,000,000 $230 74,750,000$ 87,500,000$ 162,250,000$

GOGC BUSINESS PLAN

PAGE 26 OF 60

Sakanvtobi Revenues

Year Own Production PSA Decline Rate Total

2007

5,265,085$ 4,658,878$ 5% 9,923,963$

2008

5,001,831$ 4,425,934$ 5% 9,427,765$

2009

4,751,739$ 4,204,637$ 5% 8,956,376$

2010

4,514,152$ 3,994,405$ 5% 8,508,558$

2011

4,288,445$ 3,794,685$ 5% 8,083,130$

2012

4,074,022$ 3,604,951$ 5% 7,678,973$

2013

3,870,321$ 3,424,703$ 5% 7,295,025$

2014

3,676,805$ 3,253,468$ 5% 6,930,273$

2015

3,492,965$ 3,090,795$ 5% 6,583,760$

2016

3,318,317$ 2,936,255$ 5% 6,254,572$

Carbon Credit Revenues

Year

Total

2007

12,500,000$

2008

17,000,000$

2009

20,000,000$

2010

25,500,000$

2011

27,000,000$

2012

18,000,000$

2013

2014

2015

Total

120,000,000$

Total Other Revenues

Year MCG Grant

Other

Operating

Revenues

State Budget

Funding

Other Non-

Operating

Revenues

Total Other

Revenues

2007

25,000,000$ 46,242,775$ 1,666,541$ 72,909,316$

2008

20,000,000$ 1,666,541$ 21,666,541$

2009

1,666,541$ 1,666,541$

2010

1,666,541$ 1,666,541$

2011

1,666,541$ 1,666,541$

2012

1,666,541$ 1,666,541$

2013

1,666,541$ 1,666,541$

2014

1,666,541$ 1,666,541$

2015

1,666,541$ 1,666,541$

2016

1,666,541$ 1,666,541$

GOGC BUSINESS PLAN

PAGE 27 OF 60

5. Pro-forma Financial Statements 2006

GOGC BUSINESS PLAN

PAGE 28 OF 60

2005

2006

ASSETS

NON-CURRENT ASSETS:

(GEL)

Property, plant and equipment, net 79,921,184 79,885,330

Intangible assets, net 18,037 18,037

Investments available for sale 6,600 6,600

Other non-current assets 12,389,100 11,596,319

Total non-current assets

92,334,921

91,506,286

CURRENT ASSETS:

Inventories 2,914,340 1,475,699

Prepaid Expenses 8,502,558 9,173,820

Taxes refundable and prepaid 9,748,262 11,710,539

Accounts receivables, net 23,802,938 10,746,141

Cash and Cash equivalents 5,254,747 31,117,093

Total current assets

50,222,846

64,223,291

TOTAL ASSETS

142,557,766

155,729,578

LIABILITIES AND SHAREHOLDERS" EQUITY

SHAREHOLDERS" EQUITY:

Share Capital 91,310,431 91,310,431

Additional paid in capital - -

Retained Earnings (10,476,051) (4,019,097)

Reavaluation Reserves 8,354,100 8,354,100

Total shareholders' equity

89,188,480

95,645,434

NON-CURRENT LIABILITIES

Deferred revenue - -

Long-term debt 15,782,436 15,608,436

Taxes payable - -

Other non-current liabilities 9,661,061 9,661,061

Total non-current liabilities

25,443,497

25,269,497

CURRENT LIABILITIES:

Trade and other payables 22,044,347 32,921,452

Short-term loans 462,000 -

Accrued expenses 125,367 348,012

Taxes payable 4,747,475 1,545,183

Other current liabilities 546,600 -

Total current liabilities

27,925,790

34,814,647

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

142,557,766

155,729,578

COMPANY:

GOGC

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 29 OF 60

2006

Gross Revenues

(GEL)

Operating Income 85,015,757

Non-operating Income 2,904,237

Gross Revenues

87,919,994

Operation and Maintenance Expenses

Labor Costs 4,998,070

Special Projects 400,000

Consulting Fees 372,096

Non-income taxes 13,595,184

Maintenance and repair costs 1,438,641

Insurance 293,153

Production Costs 10,183,432

Losses and stolen gas 11,693,438

Bad debt expense 12,493,857

Other operating expenses 1,009,573

Total O& M Expenses

56,477,444

General and Administrative Expenses

Travel, training and related costs 356,405

Office Supplies 766,565

Headquarters Labor Expenses 4,988,395

Other G&A Expenses 414,485

Total G&A Expenses

6,525,849

Non-Operating Expenses

Non-operating expenses 0

Net Foreign Exchanges losses (gain) -285,668

Interest on loans 1,191,592

Total Other Non-Op. Exp

905,924

Expensed Changes in Capital

Depreciation (of capital assets) 5,898,535

Amortization (of consumable assets) 1,067,407

Amortization (of other assets or liabilities) 6,032

Impairment of current assets 0

Total Capital Related Expenses

6,971,974

Total Expenses:

70,881,191

Gross Profit

17,038,803

Income Taxes 3,407,761

Inc. Tax Effect of items not deductible for income

tax purposes

0

Total Income Taxes

3,407,761

Net Income (after taxes)

13,631,042

Other non-operating expenses

UNDP Co-financing 6,800,000

Net Profit

6,831,042

(Net Change in Assets and Liabilities)

COMPANY:

GOGC

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 30 OF 60

(GEL)

Cash Flows from Operating Activities

Cash collected from buyers and clients 88,482,935

Gas purchase and related costs (5,346,992)

Cash paid to suppliers (9,178,805)

Paid non-profit taxes (17,995,801)

Paid profit tax (5,692,401)

Cash paid to employees (8,158,889)

Net cash provided by operating activities

42,110,047

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(1,797,901)

Purchase of long-term investments -

Gain of long term investments (19,800)

Cash from joint ventures -

Received Dividend -

UNDP Project (6,800,000)

Net cash used for investing activities

(8,617,701)

Cash Flows from Financing Activities

Purchase of Investments -

Repayment of long-term loans and other liabilities (385,000)

ITOCHU Credit (1,045,000)

Paid dividends (6,200,000)

Net cash provided by financing activities

(7,630,000)

Net increase in Cash

25,862,345

Cash Balance, December 31, 2005

5,255,102

Cash Balance, December 31, 2006

31,117,448

COMPANY:

GOGC

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 31 OF 60

2005

2006

ASSETS

NON-CURRENT ASSETS:

(GEL)

Property, plant and equipment, net 19,475,300 19,512,908

Intangible assets, net 9,800 9,800

Investments available for sale - -

Other non-current assets 4,918,100 4,125,319

Total non-current assets

24,403,200

23,648,027

CURRENT ASSETS:

Inventories 1,150,700 839,933

Prepaid Expenses 688,300 -

Taxes refundable and prepaid - 817,465

Accounts receivables, net 1,250,300 1,250,300

Cash and Cash equivalents 4,074,900 8,620,888

Total current assets

7,164,200

11,528,585

TOTAL ASSETS

31,567,400

35,176,612

LIABILITIES AND SHAREHOLDERS" EQUITY

SHAREHOLDERS" EQUITY:

Share Capital 18,837,300 18,837,300

Additional paid in capital - -

Retained Earnings 6,817,200 11,344,355

Reavaluation Reserves 4,073,100 4,073,100

Total shareholders' equity

29,727,600

34,254,755

NON-CURRENT LIABILITIES

Deferred revenue - -

Long-term debt - -

Taxes payable - -

Other non-current liabilities - -

Total non-current liabilities

-

CURRENT LIABILITIES:

Trade and other payables 236,200 921,857

Short-term loans - -

Accrued expenses - -

Taxes payable 1,057,000 -

Other current liabilities 546,600 -

Total current liabilities

1,839,800

921,857

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

31,567,400

35,176,612

COMPANY:

SAKNAVTOBI

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 32 OF 60

2005

2006

ASSETS

NON-CURRENT ASSETS:

(GEL)

Property, plant and equipment, net 19,475,300 19,512,908

Intangible assets, net 9,800 9,800

Investments available for sale - -

Other non-current assets 4,918,100 4,125,319

Total non-current assets

24,403,200

23,648,027

CURRENT ASSETS:

Inventories 1,150,700 839,933

Prepaid Expenses 688,300 -

Taxes refundable and prepaid - 817,465

Accounts receivables, net 1,250,300 1,250,300

Cash and Cash equivalents 4,074,900 8,620,888

Total current assets

7,164,200

11,528,585

TOTAL ASSETS

31,567,400

35,176,612

LIABILITIES AND SHAREHOLDERS" EQUITY

SHAREHOLDERS" EQUITY:

Share Capital 18,837,300 18,837,300

Additional paid in capital - -

Retained Earnings 6,817,200 11,344,355

Reavaluation Reserves 4,073,100 4,073,100

Total shareholders' equity

29,727,600

34,254,755

NON-CURRENT LIABILITIES

Deferred revenue - -

Long-term debt - -

Taxes payable - -

Other non-current liabilities - -

Total non-current liabilities

-

CURRENT LIABILITIES:

Trade and other payables 236,200 921,857

Short-term loans - -

Accrued expenses - -

Taxes payable 1,057,000 -

Other current liabilities 546,600 -

Total current liabilities

1,839,800

921,857

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

31,567,400

35,176,612

COMPANY:

SAKNAVTOBI

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 33 OF 60

2006

Gross Revenues

(GEL)

Operating Income 19,198,602

Non-operating Income 296,374

Gross Revenues

19,494,976

Operation and Maintenance Expenses

Labor Costs 1,763,327

Special Projects 0

Consulting Fees 4,388

Non-income taxes 39,936

Maintenance and repair costs 310,767

Insurance 188,153

Production Costs 4,836,440

Losses and stolen gas 0

Bad debt expense 0

Other operating expenses 738,130

Total O& M Expenses

7,881,139

General and Administrative Expenses

Travel, training and related costs 136,004

Office Supplies 101,303

Headquarters Labor Expenses 2,127,019

Other G&A Expenses 414,485

Total G&A Expenses

2,778,811

Non-Operating Expenses

Non-operating expenses 0

Net Foreign Exchanges losses (gain) 110,510

Interest on loans 0

Total Other Non-Op. Exp

110,510

Expensed Changes in Capital

Depreciation (of capital assets) 772,792

Amortization (of consumable assets) 792,781

Amortization (of other assets or liabilities) 0

Impairment of current assets 0

Total Capital Related Expenses

1,565,573

Total Expenses:

12,336,033

Gross Profit

7,158,943

Income Taxes 1,431,789

Inc. Tax Effect of items not deductible for income

tax purposes

0

Total Income Taxes

1,431,789

Net Income (after taxes)

5,727,155

Other non-operating expenses

Charity and donations 0

Net Profit

5,727,155

(Net Change in Assets and Liabilities)

COMPANY:

Saknavtobi

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 34 OF 60

Cash Flows from Operating Activities

Cash collected from buyers and clients 19,494,976

Gas purchase and related costs -

Cash paid to suppliers (5,163,800)

Paid non-profit taxes (2,461,000)

Paid profit tax (1,431,789)

Cash paid to employees (3,862,200)

Net cash provided by operating activities

6,576,188

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(810,400)

Purchase of long-term investments -

Gain of long term investments (19,800)

Cash from joint ventures -

Received Dividend -

UNDP Project -

Net cash used for investing activities

(830,200)

Cash Flows from Financing Activities

Purchase of Investments -

Repayment of long-term loans and other liabilities -

ITOCHU Credit -

Paid dividends (1,200,000)

Net cash provided by financing activities

(1,200,000)

Net increase in Cash

4,545,988

Cash Balance, December 31, 2005

4,074,900

Cash Balance, December 31, 2006

8,620,888

COMPANY:

Saknavtobi

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 35 OF 60

2005

2006

ASSETS

NON-CURRENT ASSETS:

(GEL)

Property, plant and equipment, net 52,965,884 49,152,484

Intangible assets, net 4,237 4,237

Investments available for sale 6,600 6,600

Other non-current assets - -

Total non-current assets

52,976,721

49,163,321

CURRENT ASSETS:

Inventories 1,751,640 623,766

Prepaid Expenses 1,399,258 1,399,258

Taxes refundable and prepaid 9,748,262 10,893,075

Accounts receivables, net 20,648,638 7,591,841

Cash and Cash equivalents 1,108,847 22,496,560

Total current assets

34,656,646

43,004,500

TOTAL ASSETS

87,633,366

92,167,822

LIABILITIES AND SHAREHOLDERS" EQUITY

SHAREHOLDERS" EQUITY:

Share Capital 64,669,131 64,669,131

Additional paid in capital - -

Retained Earnings (25,735,251) (30,605,691)

Reavaluation Reserves - -

Total shareholders' equity

38,933,880

34,063,439

NON-CURRENT LIABILITIES

Deferred revenue - -

Long-term debt 15,608,436 15,608,436

Taxes payable - -

Other non-current liabilities 9,661,061 9,661,061

Total non-current liabilities

25,269,497

CURRENT LIABILITIES:

Trade and other payables 21,028,147 31,999,595

Short-term loans - -

Accrued expenses 125,367 125,367

Taxes payable 2,276,475 709,923

Other current liabilities - -

Total current liabilities

23,429,990

32,834,885

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

87,633,366

92,167,822

COMPANY:

GGIC

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 36 OF 60

2006

Gross Revenues

(GEL)

Operating Income 46,817,155

Non-operating Income 2,607,863

Gross Revenues

49,425,018

Operation and Maintenance Expenses

Labor Costs (GTC) 3,234,743

Special Projects 0

Consulting Fees 147,709

Non-Income Taxes 13,494,049

Maintenance and repair costs 1,127,873

Insurance 100,000

Cost of Gas Purchase for Resale 5,346,992

Losses and stolen gas 11,693,438

Bad debt expense 12,493,857

Other operating expenses 29,444

Total O& M Expenses

47,668,105

General and Administrative Expenses

Travel, training and related costs 180,401

Office Supplies 45,262

Headquarters Labor Expenses 1,950,376

Other G&A Expenses 0

Total G&A Expenses

2,176,038

Non-Operating Expenses

Non-operating expenses 0

Net Foreign Exchanges losses (gain) -396,178

Interest on loans 96,592

Total Other Non-Op. Exp

-299,586

Expensed Changes in Capital

Depreciation (of capital assets) 4,470,243

Amortization (of consumable assets) 274,626

Amortization (of other assets or liabilities) 6,032

Impairment of current assets 0

Total Capital Related Expenses

4,750,901

Total Expenses:

54,295,458

Gross Profit

-4,870,440

Income Taxes 0

Inc. Tax Effect of items not deductible for income

tax purposes

0

Total Income Taxes

0

Net Income (after taxes)

-4,870,440

Other non-operating expenses

Charity and donations 0

Net Profit

-4,870,440

(Net Change in Assets and Liabilities)

COMPANY:

GGIC

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 37 OF 60

Cash Flows from Operating Activities

Cash collected from buyers and clients 49,987,958

Gas purchase and related costs (5,346,992)

Cash paid to suppliers (2,481,717)

Paid non-profit taxes (15,060,601)

Paid profit tax (1,144,813)

Cash paid to employees (3,628,622)

Net cash provided by operating activities

22,325,214

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(937,501)

Purchase of long-term investments -

Gain of long term investments -

Cash from joint ventures -

Received Dividend -

UNDP Project -

Net cash used for investing activities

(937,501)

Cash Flows from Financing Activities

Purchase of Investments -

Repayment of long-term loans and other liabilities -

ITOCHU Credit -

Paid dividends -

Net cash provided by financing activities

-

Net increase in Cash

21,387,713

Cash Balance, December 31, 2005

1,108,847

Cash Balance, December 31, 2006

22,496,560

COMPANY:

GGIC

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 38 OF 60

2005

2006

ASSETS

NON-CURRENT ASSETS:

(GEL)

Property, plant and equipment, net 7,480,000 11,219,938

Intangible assets, net 4,000 4,000

Investments available for sale - -

Other non-current assets 7,471,000 7,471,000

Total non-current assets

14,955,000

18,694,938

CURRENT ASSETS:

Inventories 12,000 12,000

Prepaid Expenses 6,415,000 7,774,562

Taxes refundable and prepaid - -

Accounts receivables, net 1,904,000 1,904,000

Cash and Cash equivalents 71,000 (355)

Total current assets

8,402,000

9,690,206

TOTAL ASSETS

23,357,000

28,385,144

LIABILITIES AND SHAREHOLDERS" EQUITY

SHAREHOLDERS" EQUITY:

Share Capital 7,804,000 7,804,000

Additional paid in capital - -

Retained Earnings 8,442,000 15,242,240

Reavaluation Reserves 4,281,000 4,281,000

Total shareholders' equity

20,527,000

27,327,240

NON-CURRENT LIABILITIES

Deferred revenue - -

Long-term debt 174,000 -

Taxes payable - -

Other non-current liabilities - -

Total non-current liabilities

174,000

-

CURRENT LIABILITIES:

Trade and other payables 780,000 -

Short-term loans 462,000 -

Accrued expenses - 222,645

Taxes payable 1,414,000 835,260

Other current liabilities - -

Total current liabilities

2,656,000

1,057,905

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

23,357,000

28,385,145

COMPANY:

GIOC

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 39 OF 60

2006

Gross Revenues

(GEL)

Operating Income 19,000,000

Non-operating Income 0

Gross Revenues

19,000,000

Operation and Maintenance Expenses

Labor Costs 0

Special Projects 400,000

Consulting Fees 220,000

Taxes 61,200

Maintenance and repair costs 0

Insurance 5,000

Cost of Gas Purchase for Resale 0

Losses and stolen gas 0

Bad debt expense 0

Other operating expenses 242,000

Total O& M Expenses

928,200

General and Administrative Expenses

Travel, training and related costs 40,000

Office Supplies 620,000

Headquarters Labor Expenses 911,000

Other G&A Expenses 0

Total G&A Expenses

1,571,000

Non-Operating Expenses

Non-operating expenses 0

Net Foreign Exchanges losses (gain) 0

Interest on loans 1,095,000

Total Other Non-Op. Exp

1,095,000

Expensed Changes in Capital

Depreciation (of capital assets) 655,500

Amortization (of consumable assets) 0

Amortization (of other assets or liabilities) 0

Impairment of current assets 0

Total Capital Related Expenses

655,500

Total Expenses:

4,249,700

Gross Profit

14,750,300

Income Taxes 2,950,060

Inc. Tax Effect of items not deductible for income

tax purposes

0

Total Income Taxes

2,950,060

Net Income (after taxes)

11,800,240

Other non-operating expenses

UNDP Co-financing 6,800,000

Net Profit

5,000,240

(Net Change in Assets and Liabilities)

GIOC

PERIOD: CALENDAR 2006

COMPANY:

GOGC BUSINESS PLAN

PAGE 40 OF 60

Cash Flows from Operating Activities

Cash collected from buyers and clients 19,000,000

Gas purchase and related costs -

Cash paid to suppliers (1,533,289)

Paid non-profit taxes (474,200)

Paid profit tax (3,115,800)

Cash paid to employees (668,067)

Net cash provided by operating activities

13,208,645

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(50,000)

Purchase of long-term investments -

Gain of long term investments -

Cash from joint ventures -

Received Dividend -

UNDP Project (Non-operating expense) (6,800,000)

Net cash used for investing activities

(6,850,000)

Cash Flows from Financing Activities

Purchase of Investments -

Repayment of long-term loans and other liabilities (385,000)

ITOCHU Credit (1,045,000)

Paid dividends (5,000,000)

Net cash provided by financing activities

(6,430,000)

Net increase in Cash

(71,355)

Cash Balance, December 31, 2005

71,355

Cash Balance, December 31, 2006

(0)

COMPANY:

GIOC

PERIOD: CALENDAR 2006

GOGC BUSINESS PLAN

PAGE 41 OF 60

6. Pro-forma Financial Statements 2007

GOGC BUSINESS PLAN

PAGE 42 OF 60

2006

2007

ASSETS

NON-CURRENT ASSETS:

(GEL)

Property, plant and equipment, net 79,885,330 198,950,215

Intangible assets, net 18,037 18,037

Investments available for sale 6,600 6,600

Other non-current assets 11,596,319 11,596,319

Total non-current assets

91,506,286

210,571,171

CURRENT ASSETS:

Inventories 1,475,699 1,475,699

Prepaid Expenses 9,173,820 9,173,820

Taxes refundable and prepaid 11,710,539 11,710,539

Accounts receivables, net 10,746,141 10,746,141

Cash and Cash equivalents 31,117,093 95,179,649

Total current assets

64,223,291

128,285,848

TOTAL ASSETS

155,729,578

338,857,019

LIABILITIES AND SHAREHOLDERS" EQUITY

SHAREHOLDERS" EQUITY:

Share Capital 91,310,431 91,310,431

Additional paid in capital - -

Retained Earnings (4,019,097) 101,651,165

Reavaluation Reserves 8,354,100 8,354,100

Total shareholders' equity

95,645,434

201,315,696

NON-CURRENT LIABILITIES

Deferred revenue - -

Long-term debt 15,608,436 79,608,436

Taxes payable - -

Other non-current liabilities 9,661,061 9,661,061

Total non-current liabilities

25,269,497

89,269,497

CURRENT LIABILITIES:

Trade and other payables 32,921,452 45,919,028

Short-term loans - -

Accrued expenses 348,012 348,012

Taxes payable 1,545,183 2,004,786

Other current liabilities - -

Total current liabilities

34,814,647

48,271,827

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

155,729,578

338,857,019

COMPANY:

GOGC

PERIOD: CALENDAR 2007

GOGC BUSINESS PLAN

PAGE 43 OF 60

(Jan-Jun)

(Jul-Dec)

2007

Gross Revenues

(GEL)

Operating Income 106,909,160 106,345,888 213,255,047

Non-operating Income 1,579,185 1,303,931 2,883,116

Gross Revenues

108,488,344

107,649,819

216,138,163

Operation and Maintenance Expenses

Labor Costs 2,499,035 3,392,412 5,891,446

Special Projects 0 0 0

Consulting Fees 186,048 183,854 369,903

Non-income taxes 18,725,066 18,890,811 37,615,877

Maintenance and repair costs 719,320 563,937 1,283,257

Insurance 146,577 120,300 266,877

Production Costs 2,418,220 0 2,418,220

Losses and stolen gas 3,727,350 3,727,350 7,454,700

Bad debt expense 0 0 0

Other operating expenses 504,787 330,687 835,474

Total O& M Expenses

28,926,402

27,209,351

56,135,753

General and Administrative Expenses

Travel, training and related costs 178,202 55,100 233,303

Office Supplies 213,282 46,667 259,949

Headquarters Labor Expenses 2,494,198 0 2,494,198

Other G&A Expenses 207,242 69,081 276,323

Total G&A Expenses

3,092,925

170,848

3,263,772

Non-Operating Expenses

Non-operating expenses 0 0 0

Net Foreign Exchanges losses (gain) -142,834 -142,834 -285,668

Interest on loans 2,848,296 2,848,296 5,696,592

Total Other Non-Op. Exp

2,705,462

5,410,924

Expensed Changes in Capital

Depreciation (of capital assets) 3,034,003 2,565,821 5,599,824

Amortization (of consumable assets) 523,817 127,427 651,244

Amortization (of other assets or liabilities) 2,799 2,799 5,597

Impairment of current assets 0 0 0

Total Capital Related Expenses

3,560,619

2,696,047

6,256,666

Total Expenses:

38,285,408

32,781,707

71,067,115

Gross Profit

70,202,936

74,868,112

145,071,048

Income Taxes 14,040,587 14,973,622 29,014,210

Inc. Tax Effect of items not deductible for income

tax purposes

0 0 0

Total Income Taxes

14,040,587

14,973,622

29,014,210

Net Income (after taxes)

56,162,349

59,894,490

116,056,838

Other non-operating expenses

MCG 21,625,000 21,625,000 43,250,000

Net Profit

34,537,349

38,269,490

72,806,838

(Net Change in Assets and Liabilities)

COMPANY:

GOGC

PERIOD: CALENDAR 2007

GOGC BUSINESS PLAN

PAGE 44 OF 60

(GEL)

Cash Flows from Operating Activities

Jan-June July-December

2007

Cash collected from buyers and clients 108,488,344 107,649,819 216,138,163

Gas purchase and related costs - - -

Cash paid to suppliers (4,589,403) (1,632,200) (6,221,603)

Paid non-profit taxes (18,725,066) (18,890,811) (37,615,877)

Paid profit tax (14,040,587) (14,973,622) (29,014,210)

Cash paid to employees (4,979,160) (3,392,412) (8,371,571)

Net cash provided by operating activities

66,154,129

68,760,774

134,914,903

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(62,523,951) (62,807,500) (125,331,451)

Purchase of long-term investments 40,000,000 40,000,000 80,000,000

Gain of long term investments (9,900) - (9,900)

Cash from joint ventures - - -

Received Dividend - - -

UNDP Project - - -

Net cash used for investing activities

(22,533,851)

(22,807,500)

(45,341,351)

Cash Flows from Financing Activities

Purchase of Investments - - -

Repayment of long-term loans and other liabilities (8,000,000) (8,000,000) (16,000,000)

ITOCHU Credit - - -

Paid dividends - - -

Net cash provided by financing activities

(8,000,000)

(16,000,000)

Net increase in Cash

35,620,278

37,953,274

73,573,552

Cash Balance, December 31, 2006

31,117,448

99,503,379

31,117,448

Cash Balance, December 31, 2007

99,503,379

174,803,198

COMPANY:

GOGC

PERIOD: CALENDAR 2007

GOGC BUSINESS PLAN

PAGE 45 OF 60

(Jan-Jun)

(Jul-Dec)

2007

Gross Revenues

(GEL)

Operating Income 9,147,500 8,584,228 17,731,727

Non-operating Income 275,253 0 275,253

Gross Revenues

9,422,753

8,584,228

18,006,980

Operation and Maintenance Expenses

Labor Costs 881,663 0 881,663

Special Projects 0 0 0

Consulting Fees 2,194 0 2,194

Non-income taxes 0 0 0

Maintenance and repair costs 155,384 0 155,384

Insurance 94,077 0 94,077

Production Costs 2,418,220 0 2,418,220

Losses and stolen gas 0 0 0

Bad debt expense 0 0 0

Other operating expenses 369,065 194,965 564,030

Total O& M Expenses

3,920,602

194,965

4,115,567

General and Administrative Expenses

Travel, training and related costs 68,002 0 68,002

Office Supplies 50,651 0 50,651

Headquarters Labor Expenses 1,063,510 0 1,063,510

Other G&A Expenses 207,242 0 207,242

Total G&A Expenses

1,389,405

0

1,389,405

Non-Operating Expenses

Non-operating expenses 0 0 0

Net Foreign Exchanges losses (gain) 55,255 55,255 110,510

Interest on loans 0 0 0

Total Other Non-Op. Exp

55,255

110,510

Expensed Changes in Capital

Depreciation (of capital assets) 468,182 0 468,182

Amortization (of consumable assets) 396,390 0 396,390

Amortization (of other assets or liabilities) 0 0 0

Impairment of current assets 0 0 0

Total Capital Related Expenses

864,573

0

864,573

Total Expenses:

6,229,835

250,220

6,480,055

Gross Profit

3,192,918

8,334,008

11,526,925

Income Taxes 638,584 1,666,802 2,305,385

Inc. Tax Effect of items not deductible for income

tax purposes

0 0 0

Total Income Taxes

638,584

1,666,802

2,305,385

Net Income (after taxes)

2,554,334

6,667,206

9,221,540

Other non-operating expenses

Charity and donations 0 0 0

Net Profit

2,554,334

6,667,206

9,221,540

(Net Change in Assets and Liabilities)

COMPANY:

Saknavtobi

PERIOD: CALENDAR 2007

GOGC BUSINESS PLAN

PAGE 46 OF 60

Cash Flows from Operating Activities

Jan-June July-December

2007

Cash collected from buyers and clients 9,422,753 8,584,228 18,006,980

Gas purchase and related costs - - -

Cash paid to suppliers (2,581,900) - (2,581,900)

Paid non-profit taxes - - -

Paid profit tax - - -

Cash paid to employees (1,931,100) - (1,931,100)

Net cash provided by operating activities

4,909,753

8,584,228

13,493,980

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(405,200) - (405,200)

Purchase of long-term investments - - -

Gain of long term investments (9,900) - (9,900)

Cash from joint ventures - - -

Received Dividend - - -

UNDP Project - - -

Net cash used for investing activities

(415,100)

-

(415,100)

Cash Flows from Financing Activities

Purchase of Investments - - -

Repayment of long-term loans and other liabilities - - -

ITOCHU Credit - - -

Paid dividends - - -

Net cash provided by financing activities

-

Net increase in Cash

4,494,653

8,584,228

13,078,880

Cash Balance, December 31, 2006

8,620,888

13,115,540

8,620,888

Cash Balance, December 31, 2007

13,115,540

21,699,768

COMPANY:

Saknavtobi

PERIOD: CALENDAR 2007

GOGC BUSINESS PLAN

PAGE 47 OF 60

(Jan-Jun) (Jul-Dec)

2007

Gross Revenues

(GEL)

Operating Income 38,152,780 38,152,780 76,305,560

Non-operating Income 1,303,931 1,303,931 2,607,863

Gross Revenues

39,456,711

78,913,423

Operation and Maintenance Expenses

Labor Costs (GTC) 1,617,372 1,617,372 3,234,743

Special Projects 0 0 0

Consulting Fees 73,854 73,854 147,709

Non-Income Taxes 0 0 0

Maintenance and repair costs 563,937 563,937 1,127,873

Insurance 50,000 50,000 100,000

Cost of Gas Purchase for Resale 0 0 0

Losses and stolen gas 3,727,350 3,727,350 7,454,700

Bad debt expense 0 0 0

Other operating expenses 14,722 14,722 29,444

Total O& M Expenses

6,047,234

12,094,469

General and Administrative Expenses

Travel, training and related costs 90,200 90,200 180,401

Office Supplies 22,631 0 22,631

Headquarters Labor Expenses 975,188 0 975,188

Other G&A Expenses 0 0 0

Total G&A Expenses

1,088,019

90,200

1,178,219

Non-Operating Expenses

Non-operating expenses 0 0 0

Net Foreign Exchanges losses (gain) -198,089 -198,089 -396,178

Interest on loans 2,848,296 2,848,296 5,696,592

Total Other Non-Op. Exp

2,650,207

5,300,414

Expensed Changes in Capital

Depreciation (of capital assets) 2,074,199 2,074,199 4,148,398

Amortization (of consumable assets) 127,427 127,427 254,854

Amortization (of other assets or liabilities) 2,799 2,799 5,597

Impairment of current assets 0 0 0

Total Capital Related Expenses

2,204,424

4,408,849

Total Expenses:

11,989,885

10,992,066

22,981,951

Gross Profit

27,466,826

28,464,645

55,931,471

Income Taxes 5,493,365 5,692,929 11,186,294

Inc. Tax Effect of items not deductible for income

tax purposes

0 0 0

Total Income Taxes

5,493,365

5,692,929

11,186,294

Net Income (after taxes)

21,973,461

22,771,716

44,745,177

Other non-operating Revenues

MCG Grant 21,625,000 21,625,000 43,250,000

Net Profit

43,598,461

44,396,716

87,995,177

(Net Change in Assets and Liabilities)

COMPANY:

GGIC

PERIOD: CALENDAR 2007

GOGC BUSINESS PLAN

PAGE 48 OF 60

Cash Flows from Operating Activities

Jan-June July-December

2007

Cash collected from buyers and clients 39,456,711 39,456,711 78,913,423

Gas purchase and related costs - - -

Cash paid to suppliers (1,240,858) (1,500,000) (2,740,858)

Paid non-profit taxes - - -

Paid profit tax - - -

Cash paid to employees (2,592,560) - (2,592,560)

Net cash provided by operating activities

35,623,293

37,956,711

73,580,005

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(62,093,751) (62,625,000) (124,718,751)

Purchase of long-term investments 40,000,000 40,000,000 80,000,000

Gain of long term investments - - -

Cash from joint ventures - - -

Received Dividend - - -

UNDP Project - - -

Net cash used for investing activities

(22,093,751)

(22,625,000)

(44,718,751)

Cash Flows from Financing Activities

Purchase of Investments - - -

Repayment of long-term loans and other liabilities (8,000,000) (8,000,000) (16,000,000)

ITOCHU Credit - - -

Paid dividends - - -

Net cash provided by financing activities

(8,000,000)

(16,000,000)

Net increase in Cash

5,529,543

7,331,711

12,861,254

Cash Balance, December 31, 2006

22,496,560

28,026,103

22,496,560

Cash Balance, December 31, 2007

28,026,103

35,357,815

COMPANY:

GGIC

PERIOD: CALENDAR 2007

GOGC BUSINESS PLAN

PAGE 49 OF 60

Jan-June

July-December

2007

Gross Revenues

(GEL)

Operating Income 59,608,880 59,608,880 119,217,760

Non-operating Income - - -

Gross Revenues

59,608,880

119,217,760

Operation and Maintenance Expenses

Labor Costs - - -

Special Projects - - -

Consulting Fees 110,000 110,000 220,000

Taxes - - -

Maintenance and repair costs - - -

Insurance 2,500 2,500 5,000

Cost of Gas Purchase for Resale - - -

Losses and stolen gas - - -

Bad debt expense - - -

Other operating expenses 121,000 121,000 242,000

Total O& M Expenses

233,500

467,000

General and Administrative Expenses

Travel, training and related costs 20,000 20,000 40,000

Office Supplies 140,000 140,000 280,000

Headquarters Labor Expenses 455,500 - 455,500

Other G&A Expenses - - -

Total G&A Expenses

615,500

160,000

775,500

Non-Operating Expenses

Non-operating expenses - - -

Net Foreign Exchanges losses (gain) - - -

Interest on loans - - -

Total Other Non-Op. Exp

-

Expensed Changes in Capital

Depreciation (of capital assets) 491,622 491,622 983,245

Amortization (of consumable assets) - - -

Amortization (of other assets or liabilities) - - -

Impairment of current assets - - -

Total Capital Related Expenses

491,622

983,245

Total Expenses:

1,340,622

885,122

2,225,745

Gross Profit

58,268,258

58,723,758

116,992,015

Income Taxes 11,653,652 11,744,752 23,398,403

Inc. Tax Effect of items not deductible for income

tax purposes

- - -

Total Income Taxes

11,653,652

11,744,752

23,398,403

Net Income (after taxes)

46,614,606

46,979,006

93,593,612

Other non-operating expenses

UNDP Co-financing - - -

Net Profit

46,614,606

46,979,006

93,593,612

(Net Change in Assets and Liabilities)

GIOC

PERIOD: CALENDAR 2007

COMPANY:

GOGC BUSINESS PLAN

PAGE 50 OF 60

Cash Flows from Operating Activities

Jan-June July-December

2007

Cash collected from buyers and clients 59,608,880 59,608,880 119,217,760

Gas purchase and related costs - - -

Cash paid to suppliers (766,644) (200,000) (966,644)

Paid non-profit taxes - - -

Paid profit tax - - -

Cash paid to employees (455,500) - (455,500)

Net cash provided by operating activities

58,386,736

59,408,880

117,795,616

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(25,000) (25,000) (50,000)

Purchase of long-term investments - - -

Gain of long term investments - - -

Cash from joint ventures - - -

Received Dividend - - -

UNDP Project (Non-operating expense) - - -

Net cash used for investing activities

(25,000)

(50,000)

Cash Flows from Financing Activities

Purchase of Investments - - -

Repayment of long-term loans and other liabilities - - -

ITOCHU Credit - - -

Paid dividends - - -

Net cash provided by financing activities

-

Net increase in Cash

58,361,736

59,383,880

117,745,616

Cash Balance, December 31, 2006

(0) 58,361,735 (0)

Cash Balance, December 31, 2007

58,361,735 117,745,615 117,745,615

COMPANY:

GIOC

PERIOD: CALENDAR 2007

GOGC BUSINESS PLAN

PAGE 51 OF 60

7. Pro-forma Financial Statements 2008-2016

GOGC BUSINESS PLAN

PAGE 52 OF 60

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

ASSETS

NON-CURRENT ASSETS:

Property, plant and equipment, net 198,950,215 223,580,741 257,808,156 293,285,626 290,229,387 290,269,391 291,319,855 292,704,229 294,199,391 295,731,359

Intangible assets, net 18,037 18,037 18,037 18,037 18,037 18,037 18,037 18,037 18,037 18,037

Investments available for sale 6,600 6,600 6,600 6,600 6,600 6,600 6,600 6,600 6,600 6,600

Other non-current assets 11,596,319 11,596,319 11,596,319 11,596,319 11,596,319 11,596,319 11,596,319 11,596,319 11,596,319 11,596,319

Total non-current assets

210,571,171

235,201,698

269,429,112

304,906,583

301,850,344

301,890,347

302,940,812

304,325,186

305,820,347

307,352,315

CURRENT ASSETS:

Inventories 1,475,699 1,475,699 1,475,699 1,475,699 1,475,699 1,475,699 1,475,699 1,475,699 1,475,699 1,475,699

Prepaid Expenses 9,173,820 9,173,820 9,173,820 9,173,820 9,173,820 9,173,820 9,173,820 9,173,820 9,173,820 9,173,820

Taxes refundable and prepaid 11,710,539 11,710,539 11,710,539 11,710,539 11,710,539 11,710,539 11,710,539 11,710,539 11,710,539 11,710,539

Accounts receivables, net 10,746,141 10,746,141 10,746,141 10,746,141 10,746,141 10,746,141 10,746,141 10,746,141 10,746,141 10,746,141

Cash and Cash equivalents 95,179,649 156,036,509 358,350,667 607,485,361 1,056,012,229 1,583,746,211 2,068,190,000 2,571,096,671 3,080,365,954 3,593,132,161

Total current assets

128,285,848

189,142,708

391,456,866

640,591,560

1,089,118,428

1,616,852,409

2,101,296,199

2,604,202,870

3,113,472,153

3,626,238,360

TOTAL ASSETS

338,857,019

298,810,134

269,429,112

304,906,583

301,850,344

301,890,347

302,940,812

304,325,186

305,820,347

307,352,315

LIABILITIES AND SHAREHOLDERS" EQUITY

SHAREHOLDERS" EQUITY:

Share Capital 91,310,431 91,310,431 91,310,431 91,310,431 91,310,431 91,310,431 91,310,431 91,310,431 91,310,431 91,310,431

Additional paid in capital - - - - - - - - - -

Retained Earnings 101,651,165 184,424,668 296,445,735 432,212,116 704,413,855 1,016,697,708 1,306,277,676 1,607,295,606 1,916,706,720 2,302,833,489

Reavaluation Reserves 8,354,100 8,354,100 8,354,100 8,354,100 8,354,100 8,354,100 8,354,100 8,354,100 8,354,100 8,354,100

Total shareholders' equity

201,315,696

284,089,199

396,110,266

531,876,647

804,078,385

1,116,362,238

1,405,942,206

1,706,960,137

2,016,371,250

2,402,498,019

NON-CURRENT LIABILITIES

Deferred revenue - - - - - - - - - -

Long-term debt 79,608,436 63,608,436 47,608,436 31,608,436 15,608,436 15,608,436 15,608,436 15,608,436 15,608,436 15,608,436

Taxes payable - - - - - - - - - -

Other non-current liabilities 9,661,061 9,661,061 9,661,061 9,661,061 9,661,061 9,661,061 9,661,061 9,661,061 9,661,061 9,661,061

Total non-current liabilities

89,269,497

73,269,497

57,269,497

41,269,497

25,269,497

CURRENT LIABILITIES:

Trade and other payables 45,919,028 64,632,912 105,203,936 142,064,942 179,991,248 223,941,902 260,444,213 298,380,694 330,020,407 361,660,121

Short-term loans - - - - - - - - - -

Accrued expenses 348,012 348,012 348,012 348,012 348,012 348,012 348,012 348,012 348,012 348,012

Taxes payable 2,004,786 2,004,786 101,954,268 229,939,045 381,281,629 552,821,108 712,233,083 877,569,716 1,047,283,334 1,143,815,026

Other current liabilities - - - - - - - - - -

Total current liabilities

48,271,827

66,985,710

207,506,215

372,351,999

561,620,889

777,111,022

973,025,307

1,176,298,422

1,377,651,753

1,505,823,159

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

338,857,019

424,344,406

660,885,978

945,498,143

1,390,968,772

1,918,742,757

2,404,237,011

2,908,528,056

3,419,292,500

3,933,590,676

COMPANY:

GOGC

PERIOD: CALENDAR YEAR 2007-2016 (GEL)

GOGC BUSINESS PLAN

PAGE 53 OF 60

COMPANY:

GOGC

PERIOD: CALENDAR YEAR 2008-2016 (GEL)

2008

2009

2010

2011

2012

2013

2014

2015

2016

Gross Revenues

Operating Income 329,481,473 363,813,805 395,499,341 458,453,752 506,090,866 483,560,673 502,023,555 508,386,167 719,483,091

Non-operating Income 2,883,116 2,883,116 2,883,116 2,883,116 2,883,116 2,883,116 2,883,116 2,883,116 2,883,116

Gross Revenues

332,364,589

366,696,921

398,382,457

461,336,868

508,973,982

486,443,789

504,906,671

511,269,283

722,366,207

Operation and Maintenance Expenses

Labor Costs 3,234,743 3,234,743 3,234,743 3,234,743 3,234,743 3,234,743 3,234,743 3,234,743 3,234,743

Special Projects 0 0 0 0 0 0 0 0 0

Consulting Fees 367,709 367,709 367,709 367,709 367,709 367,709 367,709 367,709 367,709

Non-income taxes 60,533,683 65,079,774 71,334,441 80,451,646 87,027,946 84,482,579 87,541,035 90,153,208

Maintenance and repair costs 1,127,873 1,127,873 1,127,873 1,127,873 1,127,873 1,127,873 1,127,873 1,127,873 1,127,873

Insurance 266,877 266,877 266,877 266,877 266,877 266,877 266,877 266,877 266,877

Production Costs 0 0 0 0 0 0 0 0 0

Losses and stolen gas 18,999,552 28,075,824 25,013,205 26,725,905 33,397,650 25,949,308 27,383,478 21,086,711 21,086,711

Bad debt expense 0 0 0 0 0 0 0 0 0

Other operating expenses 661,374 661,374 661,374 11,251,947 15,682,319 14,741,396 14,778,687 12,925,993 12,049,318

Total O& M Expenses

85,191,811

98,814,174

102,006,223

123,426,700

141,105,117

130,170,485

134,700,401

129,163,113

38,133,230

General and Administrative Expenses

Travel, training and related costs 110,200 110,200 110,200 110,200 110,200 110,200 110,200 110,200 110,200

Office Supplies 93,333 93,333 93,333 93,333 93,333 93,333 93,333 93,333 93,333

Headquarters Labor Expenses 4,838,400 4,838,400 4,838,400 4,838,400 4,838,400 4,838,400 4,838,400 4,838,400 4,838,400

Other G&A Expenses 138,162 138,162 138,162 138,162 138,162 138,162 138,162 138,162 138,162

Total G&A Expenses

5,180,095

Non-Operating Expenses

Non-operating expenses 0 0 0 0 0 0 0 0 0

Net Foreign Exchanges losses (gain) -285,668 -285,668 -285,668 -285,668 -285,668 -285,668 -285,668 -285,668 -285,668

Interest on loans 3,236,994 2,589,595 1,942,197 1,294,798 0 0 0 0 0

Total Other Non-Op. Exp

2,951,326

2,303,927

1,656,528

1,009,129

-285,668

Expensed Changes in Capital

Depreciation (of capital assets) 6,256,666 15,855,388 17,624,026 19,672,454 21,631,731 20,536,118 19,585,755 18,755,146 18,024,475

Amortization (of consumable assets) 0 0 0 0 0 0 0 0 0

Amortization (of other assets or liabilities) 0 0 0 0 0 0 0 0 0

Impairment of current assets 0 0 0 0 0 0 0 0 0

Total Capital Related Expenses

6,256,666

15,855,388

17,624,026

19,672,454

21,631,731

20,536,118

19,585,755

18,755,146

18,024,475

Total Expenses:

99,579,898

122,153,584

126,466,872

149,288,379

167,631,275

155,601,030

159,180,583

152,812,686

61,052,132

Gross Profit

232,784,691

244,543,337

271,915,585

312,048,490

341,342,707

330,842,759

345,726,088

358,456,596

661,314,075

Income Taxes 46,556,938 48,908,667 54,383,117 62,409,698 68,268,541 66,168,552 69,145,218 71,691,319 132,262,815

Inc. Tax Effect of items not deductible for income tax

purposes

0 0 0 0 0 0 0 0 0

Total Income Taxes

46,556,938

48,908,667

54,383,117

62,409,698

68,268,541

66,168,552

69,145,218

71,691,319

132,262,815

Net Income (after taxes)

186,227,753

195,634,670

217,532,468

249,638,792

273,074,165

264,674,208

276,580,870

286,765,277

529,051,260

Other non-operating expenses

MCG 34,600,000 0 0 0 0 0 0 0 0

Net Profit

220,827,753

195,634,670

217,532,468

249,638,792

273,074,165

264,674,208

276,580,870

286,765,277

529,051,260

(Net Change in Assets and Liabilities)

GOGC BUSINESS PLAN

PAGE 54 OF 60

COMPANY:

GOGC

PERIOD: CALENDAR YEAR 2008-2016 (GEL)

2008

2009

2010

2011

2012

2013

2014

2015

2016

Cash Flows from Operating Activities

Cash collected from buyers and clients 332,364,589 366,696,921 398,382,457 461,336,868 508,973,982 486,443,789 504,906,671 511,269,283 722,366,207

Gas purchase and related costs - - - - - - - - -

Cash paid to suppliers (6,002,523) (5,355,124) (4,707,725) (14,650,898) (17,786,473) (16,845,550) (16,882,841) (15,030,147) (14,153,472)

Paid non-profit taxes (60,533,683) (65,079,774) (71,334,441) (80,451,646) (87,027,946) (84,482,579) (87,541,035) (90,153,208) -

Paid profit tax (46,556,938) (48,908,667) (54,383,117) (62,409,698) (68,268,541) (66,168,552) (69,145,218) (71,691,319) (132,262,815)

Cash paid to employees (8,073,143) (8,073,143) (8,073,143) (8,073,143) (8,073,143) (8,073,143) (8,073,143) (8,073,143) (8,073,143)

Net cash provided by operating activities

211,198,303

239,280,213

259,884,031

295,751,482

327,817,878

310,873,966

323,264,435

326,321,465

567,876,777

Cash Flows from Investing Activities

Purchase of fixed and intangible assets

(36,600,000) (40,925,000) (40,925,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000)

Purchase of long-term investments - - - - - - - - -

Gain of long term investments - - - - - - - - -

Cash from joint ventures - - - - - - - - -

Received Dividend - - - - - - - - -

UNDP Project - - - - - - - - -

Net cash used for investing activities

(36,600,000)

(40,925,000)

(2,000,000)

Cash Flows from Financing Activities

Purchase of Investments - - - - - - - - -

Repayment of long-term loans and other liabilities (16,000,000) (16,000,000) (16,000,000) (16,000,000) - - - - -

ITOCHU Credit - - - - - - - - -

Paid dividends - - - - - - - - (207,008,249)

Net cash provided by financing activities

(16,000,000)

-

(207,008,249)

Net increase in Cash

158,598,303

182,355,213

202,959,031

277,751,482

325,817,878

308,873,966

321,264,435

324,321,465

358,868,528

Cash Balance, Current Year-1

174,803,198

333,401,501

515,756,714

718,715,745

996,467,227

1,322,285,105

1,631,159,071

1,952,423,506

2,276,744,972

Cash Balance, Current Year

333,401,501

515,756,714

718,715,745

996,467,227

1,322,285,105

1,631,159,071

1,952,423,506

2,276,744,972

2,635,613,499

GOGC BUSINESS PLAN

PAGE 55 OF 60

8. Notes to the Financial Statements

1. Tax Rates applied in the calculations are based on the Tax Law of Georgia in

compliance with the following Table:

Type of Tax Rate

1 2

Income tax 12%

Social Tax 20%

Property Tax 1%

Profit Tax 20%

VAT 18%

Taxes

2. Exchange Rate applied in the calculations is based on the average exchange

rate (USD to GEL) for the period October-November, 2007 and equals 1,73.

3. Depreciation for the year 2006 is calculated based on the rates defined by Tax

Law of Georgia in compliance with the following table:

Group Rate, %

Group 1 20

Group 2 20

Group 3 8

Group 4 5

Group 5 15

Depreciation

As for the years from 2008 through 2016, average depreciation rate is applied for the

portion of the assets prior to 2008 and specific rate for new investments (capital

projects for pipeline rehabilitation and construction of gas storage). Rate shown in

table is for the most recent group of assets acquired. Details are given in the

following table:

GOGC BUSINESS PLAN

PAGE 56 OF 60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Book Value of Assets at

the end of the year

92,334,921 91,506,286 216,837,737 253,437,737 294,362,737 335,287,737 337,287,737 339,287,737 341,287,737 343,287,737 345,287,737 347,287,737

Asset Purchase

(Pipeline Capital

Projects)

1,797,901 125,331,451 36,600,000 40,925,000 40,925,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000

Depreciation Rate for

Pipeline/ Gas Storage

8% 8% 8% 8% 8% 8% 15% 15% 15% 15% 15% 15%

Total Depreciation &

Amortization

6,971,974 6,256,666 15,855,388 17,624,026 19,672,454 21,631,731 20,536,118 19,585,755 18,755,146 18,024,475 17,378,092

Average Rate

8% 7% 7% 7% 7% 6% 6% 6% 5% 5% 5%

Depreciation

GOGC BUSINESS PLAN

PAGE 57 OF 60

4. Salaries

Total Number Net

Gross

(Estimated)

Total Cost Total Net Total Gross Payroll

Social and

Income tax

President

1

5,280

6,000

7,200

5,280

6,000

7,200

1,920

Directors

7

4,400

5,000

6,000

30,800

35,000

42,000

11,200

Advisory Council

10

3,520

4,000

4,800

35,200

40,000

48,000

12,800

Middle Management

12

2,640

3,000

3,600

31,680

36,000

43,200

11,520

Experts

40

2,024

2,300

2,760

80,960

92,000

110,400

29,440

Leading Specialist

40

1,144

1,300

1,560

45,760

52,000

62,400

16,640

Specialists

60

880

1,000

1,200

52,800

60,000

72,000

19,200

Others

30

440

500

600

13,200

15,000

18,000

4,800

Total

200

295,680

336,000

403,200

107,520

GOGC Payroll (GEL)

Income and Social taxes are calculated based on the salaries for the employees. By

special agreement, social taxes for Frontera employees are paid by Saknavtobi, (now

by GOGC), which amounts to 80 000 GEL per month.

Assumed severance package payments to employees in 2007 include payment of three

month salaries to those employees, who will be released in accordance with the new

organizational structure. Assumptions and relative calculations are presented below:

No of

employees

Total Gross

(GEL)

Average

monthly

Salary

GIOC

69 41,520 602

Saknavtobi without

Subsidiaries

630 280,000 444

GGIC without

Subsidiaries

79 132,000 1671

Total

778

453,520

583

However it appeared that salaries reported by the companies were underestimated.

Assumption made in the business plan regarding average monthly salary to be paid

within the severance packages is that instead of 583 it is 800 GEL (net 587 GEL).

Based on this assumption total net severance package payment equals:

3(months)*587(monthly Net Payment)*678 (No of employees) = 1 193 820 GEL

5. Capital Projects and Source of Funding

Two major capital expenditures are planned to take place during the next 10 years

1. $ 45,000,000 grant from MCG, which will be spent during the years 2007-

2008 on the rehabilitation of the North-South pipeline.

2. Rehabilitation of the southern part of the North-South Pipeline, for which 80

million GEL (about $ 46,000,000) will be allocated from the budget in 2007. This will

be as a the state loan to GOGC which is planned to be covered starting from the end

of 2007 from the Carbon Credit Revenues. The schedule for loan repayment and

Carbon credit revenues are given below:

GOGC BUSINESS PLAN

PAGE 58 OF 60

SCHEDULE OF BUDGET LOAN REPAYMENT

Period

5 Years

Amount

Interest Rate

7%

80,000,000

GEL

2007

2008

2009

2010

2011

Total

Base Amount

16,000,000

80,000,000

Interest

5,600,000

4,480,000

3,360,000

2,240,000

1,120,000

16,800,000

Annual Payment

21,600,000

20,480,000

19,360,000

18,240,000

17,120,000

96,800,000

Balance

64,000,000

48,000,000

32,000,000

16,000,000

-

SCHEDULE OF CARBON CREDIT REVENUE ALLOCATION

Year

Carbon Credit

Revenues

State Loan

Repayment Gas Storage

Accumulated

Balance*

2007

21,625,000 21,600,000 0 25,000

2008

29,410,000 20,480,000 0 8,955,000

2009

34,600,000 19,360,000 24,195,000

2010

44,115,000 18,240,000 38,925,000 11,145,000

2011

46,710,000 17,120,000 38,925,000 1,810,000

2012

31,140,000 0 32,950,000

2013

0 0 32,950,000

2014

0 0 32,950,000

2015

0 0 32,950,000

2016

0 0 32,950,000

Total

207,600,000

96,800,000

77,850,000

Carbon Credit Revenues used to cover State Loan and Gas Storage

Construction Cost (GEL)

Note: Accumulated Balance at the end of the year is additional cash that

may be available for other capitl projects and/or operating costs

3. Construction of Gas Storage starting from 2009 through 2010. This project

supposed to be financed from carbon credit revenues as well (estimated cost is

$45,000,000)

6. Baku-Supsa Pipeline Fee Forecast

Assumption applied in this forecast is: from 1997 to 2007 the tariff increased from

0,18 to 0,22 USD, which is 22% increase over 10 years (0,004 USD annually).

7. BTC Pipeline Forecast

Assumption applied in this forecast is the same as in case of Baku Supsa: 22%

increase over 10 years (0,00267 USD annually).

8. Revenue Forecast from Oil Sales

GOGC BUSINESS PLAN

PAGE 59 OF 60

Assumption applied to forecasted volumes of oil sales is: Oil Production will be sold

to the Investors with the mandatory condition to retain current production level with 5

% of decline rate. No forecast is done regarding future PSA revenues. Sale price for

oil and associated gas remains the same

9. There were no financial statements developed particularly for GTC (the

daughter company of GIGC). The objective was to work on the consolidated

statements for the companies, relatively consolidated financial statements for previous

year was used for the future forecasts. But we may assume that Profit and Loss

Statement and Cash flow of GGIC for 2006 basically reflects revenues and expenses

for GTC minus labour expenses and other administrative expenses for Headquarters.

GOGC BUSINESS PLAN

PAGE 60 OF 60

10. Annexes

Annex A – GOGC Legal Report

Annex B – Oil and Gas Potential

Annex C – GOGC Gas Storage

Annex D – Pipeline Tariff Models