SB-2

 As filed with the Securities and Exchange Commission on May 13,2005 Registration # 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Big Sky Energy Corporation
(Exact name of small business issuer in its charter)
Nevada		4899	72-1381282
(State or jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)
Suite 750, 440 – 2nd Avenue SW Calgary, Alberta, Canada T2P 5E9 (403) 234-8282
(Address and telephone number of principal executive offices)
Suite 3, 132 Dostyk Avenue, Almaty, Kazakhstan 650051 7-3272-628-394
	(Address of principal place of business or intended principal place of business) Michael J.  Morrison, 1495 Ridgeview Drive, Reno, Nevada 89509, (775) 827-6300 (Name, address and telephone number of agent for service)
Copies to:
W. Scott Lawler, Esq., Lawler & Associates, 1530-9 Avenue SE, Calgary, Canada T2G 0T7, (403) 693-8014

Approximate date of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If this Form is filed to register additional securities for an offering pursuant to rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. []

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [  ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [  ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  [  ]

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Number of Shares to be registered	Proposed maximum offering price per unit (1)	Proposed maximum aggregate offering price	Amount of registration fee
Common Stock Common Stock underlying Warrants	41,271,865 2,438,505	1.19 1.19	$49,113,519.35 $2,901,820.90	$95,780.66 $341.55

(1)

Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(c) under the Securities Act of 1933.

(2)

These shares are additional shares being registered and are set out apart from the other shares registered for purpose of calculating the filing fee.

The information in this preliminary prospectus (“Prospectus”) is not complete and may be changed.  We may not sell these securities nor may offers to buy be accepted prior to the time the registration statement filed with the Securities and Exchange Commission becomes effective.  This Prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated May …2005

BIG SKY ENERGY CORPORATION

Up to a maximum of 43,710,370 common shares

All of the shares being offered, when sold, will be sold by the Selling Securityholders as listed in this prospectus on page 9.  The selling securityholders are offering:

· 41,271,865 shares of common stock; and

·  2,438,505 shares of common stock issuable on exercise of the warrants.

We will not receive any of the proceeds from the sale of the shares.

We have not engaged the services of any broker-dealer or other agent to assist in the selling of the securities offered under this prospectus.

The Selling Securityholders may sell the shares as detailed in the section entitled “Plan of Distribution”.

Pursuant to applicable U.S. securities laws and regulations, the selling securityholders identified in this prospectus are underwriters of the securities offered hereunder. Big Sky Energy Corporation will be distributing the securities to its securityholders without any compensation or other consideration.

This offering will terminate on May 6, 2007 unless completion by way of sales of all securities offered under this prospectus occurs at an earlier date.

Our common stock is presently not listed on any national securities exchange or the Nasdaq Stock Market.

Our common stock is quoted on the Over The Counter Bulletin Board quotation system (“OTC/BB”) under the symbol “BSKO”.  On May 6, 2005, the closing price of our common stock on the OTC/BB was $1.19.

YOU SHOULD CONSIDER THE RISK FACTORS WE DESCRIBE STARTING ON

PAGE 3 BEFORE INVESTING IN OUR COMMON STOCK.

NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED

OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS

PROSPECTUS IS TRUTHFUL OR COMPLETE.  ANY REPRESENTATION TO THE

CONTRARY IS A CRIMINAL OFFENSE.

TABLE OF CONTENTS

		Page
Prospectus Summary		1
	Risk Factors	2
Where You Can Find More Information		7
Use of Proceeds		7
Determination of Offering Price		7
Selling Security Holders		8
Plan of Distribution		10
Legal Proceedings		10
Directors, Executive Officers, Promoters and Control Persons		10
Security Ownership of Certain Beneficial Owners and Management		13
Description of Securities		15
Interests of Named Experts and Counsel		15
Disclosure of Commission Position of Indemnification for Securities Act Liabilities		16
Description of Business		16
Management’s Discussion and Analysis and Plan of Operation		22
Description of Property		31
Certain Relationships and Related Transactions		33
Market for Common Equity and Related Stockholder Matters		33
Executive Compensation		33
Financial Statements		37
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		38
Indemnification of Directors and Officers		38
Other Expenses of Issuance and Distribution		38
Recent Sales of Unregistered Securities		39
Exhibits		41
Undertakings		49
Signatures		49

PROSPECTUS SUMMARY

The following summary discusses all material information, however, for a more complete understanding of this offering, we encourage you to read the entire document and the documents we have referred you to.

BIG SKY ENERGY CORPORATION

We are a development stage company, which means we are in the process of developing our business.  We commenced operations in 2000 as an Internet service provider in China. In fall of 2003, we changed our focus to oil and gas exploration and production, seeking to partner with China’s national petroleum companies, at which time we changed our name to China Energy Ventures Corp. Through acquisition of other companies, in 2003 and 2004, we acquired five onshore licenses in the prolific pre-Caspian basin in the Republic of Kazakhstan. We determined to develop these blocks independently, by investing our capital or joint venturing with other companies.

At the Annual Meeting of Shareholders held in Calgary, Alberta, on December 3, 2004, shareholders approved changing the corporate name to Big Sky Energy Corporation, (“Big Sky”) to reflect the changed nature of the business of Big Sky. Shareholders also elected three new directors, each of which have extensive business and finance experience in the Republic of Kazakhstan. Three directors, whose extensive business experience is primarily focused in China, did not stand for re-election to the Board of Directors. Throughout this document we use Big Sky to denote the single legal entity unless the context requires otherwise.

In December 2004, we sold our 100% shareholding in Big Sky Network Canada Ltd., which held our remaining assets in China, Big Sky Chengdu Technology Services Ltd, 100% owned, and our interest in the Sichuan Huayu Big Sky Network Ltd. joint venture, 50% owned. With this sale, we exited the Internet business in China. The sale of Big Sky Network Canada Ltd. is presented as a discontinued operation in our financial statements.

In January 2005, we commenced negotiations with Mr. S.A. (Al) Sehsuvaroglu to secure his services as our president. A contract was signed with Mr. Sehsuvaroglu and he assumed his new position on March 1, 2005. We also signed a contract with Mr. Ruslan Tsarni, who joined Big Sky as Vice-President, Business Development on March 15, 2005.

We have incurred losses since inception and we anticipate that we will continue to incur losses in the foreseeable future. Energy exploration and development entails significant risk (see” Risk Factors”) that impact the sustainability of early stage development companies.

We have successfully raised new equity capital for new business ventures but may not be able to do so in the future. We are seeking to acquire producing oil and gas assets and to develop our own exploration potential. We will be unable to continue as a going concern if we are unable to earn sufficient revenues from our operations or raise additional capital through debt or equity financings to meet our working capital and joint venture capital contribution obligations.  Recent private placements have raised sufficient additional capital to meet our anticipated obligations until December 31, 2006. Furthermore, we expect to acquire at least one producing-oil asset in 2005, using equity and debt to ensure sustainable operations in the future.

Our principal executive office is located at Suite 750, 440 – 2^nd Avenue SW, Calgary, Alberta, Canada T2P 5E9, and our phone number there is 1-403-234-8282. Our principal business office, in Kazakhstan, is located in a recently constructed office tower in central Almaty at Suite 3, 132 Dostyk Avenue, Almaty, Kazakhstan 650051, and our phone number there is 7 3272 628 394.  

We maintain a representative office in China at 1003 W2 Oriental Plaza, #1 East Chang An Avenue, Beijing, Peoples Republic of China 100738 and our phone number there is 86 10 8518 2686.

We maintain a World Wide Web site address at www.bigskycanada.com. Information on our web site is not part of this document.

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FORWARD LOOKING STATEMENTS

Included in this report are various forward-looking statements, which can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate," "continue," "believe" or other similar words.  We have made forward-looking statements with respect to the following, among others: our goals and strategies; our ability to earn sufficient revenues; our ability to continue as a going concern; and our future revenue performance and our future results of operations.  These statements are forward-looking and reflect our current expectations.  These forward-looking statements are subject to a number of risks and uncertainties, some of which are beyond our control.  Some of the key factors that have a direct bearing on our results of operations are:

- Changes in general political, social, economic and business conditions in Kazakhstan;

- Economic and political uncertainties affecting the capital markets;

- The business of exploration, development, production and refining of oil and natural gas reserves, the levels of those reserves and the marketing of crude oil and refined products and the ability to increase the quality of refined products;

- Fluctuations in oil and gas and refined product prices;

- Changes in business strategy or development plans;

- Our future capital needs;

- Changes in, or failure to comply with, government regulations or changes in interpretation, application or enforcement of government regulations;

- Costs arising from environmental liability; and

- Our ability to manage currency fluctuations.

The factors described above and the risk factors referred to in "Risk Factors" could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements. Therefore, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 RISK FACTORS

An investment in our common stock involves a high degree of risk. You should read the following risk factors carefully before purchasing our common stock. We believe that these represent all the current material risk factors that may affect our business.  If any of the risks discussed below actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected. This could cause the trading price of our common stock to decline.

Risks Relating To Our Business

We have a limited operating history and have changed the focus of our operations by entering into the oil and gas industry.  The failure of our plans could ultimately force us to reduce or suspend operations and even liquidate our assets and wind-up and dissolve our company.

We have a limited operating history, a history of minimal revenues and a history of losses.  We began our current business activities in April 2000 in China.  Our operations in the Chinese Internet market produced only minimal revenues and we have divested this business, effective December 9, 2004. We have converted our operations to oil and natural gas

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exploration and production, an area in which our management have been successful, although we do not know if we will be successful in any of these plans due to our early stage of operations in the oil and gas industry.

We have incurred net losses since inception and anticipate that losses will continue. Should losses continue indefinitely, it would eventually result in us ceasing operations.

We have incurred losses since inception and had an accumulated deficit of $30,185,135 at December 31, 2004. We anticipate that we will continue to incur net losses due to an increased level of planned operating and capital expenditures, increased sales and marketing costs, high costs associated with oil and gas exploration and development, additional personnel requirements and our general growth objectives.  We anticipate that our net losses will increase in the near future as we implement our business strategy and increase our oil and gas exploration activities.  Our ability to earn a profit will depend on the success of our oil and gas exploration and development programs, which has not yet been achieved.  We may never achieve profitability.  

Our ability to continue as a going concern requires us to raise additional funds and produce working capital from oil and gas operations.

In light of our lack of profitability and the risks described in this section, our management and our independent registered chartered accountants have expressed substantial doubt as to our ability to continue as a going concern.   At December 31, 2004, we had net working capital deficiency of $1,705,240.  We will need additional capital or a farmout of our interests to third parties to fund any new ventures, which is uncertain and will likely result in the dilution to existing securityholders’ interests.

Our inability to retain our key managerial personnel could affect our ability to continue conducting our business.

Our success depends to a significant extent on the continued efforts of our executive officers, principally Messrs. Heysel, Sehsuvaroglu and Tsarni, who are responsible for the continuing development of our oil and gas assets. The loss of any one of these individuals could have a material adverse effect on our ability to continue to locate, negotiate and acquire oil and gas assets and financing to develop these assets. We would have to replace any such individuals with someone that has commensurate experience abilities if they were to leave us. We have entered into employment and non-competition agreements with all of these individuals.

Our business may be adversely affected by relationships between the United States and the countries in which we do business, which may impede our ability to operate in the countries in which we are located.

We are a Nevada corporation and subject to the laws of the United States.  Our principal businesses are conducted through wholly-owned subsidiaries that operate in Kazakhstan.  Our business is directly affected by political and economic conditions in Kazakhstan.  Our business may be adversely affected by the diplomatic and political relationships between the U.S., Canada, Russia and Kazakhstan.  These relationships may adversely influence the Kazakhstan government and public opinion of U.S. corporations conducting business in Kazakhstan and may affect our ability to obtain regulatory approval to operate effectively.  In addition, boycotts, protests, governmental sanctions and other actions could adversely affect our ability to operate profitably.

If our exploration and development programs prove unsuccessful, we may not be able to continue operations.

An investment in our company should be considered highly speculative due to the nature of our involvement in the exploration, development and production of oil and natural gas.  Oil and gas exploration involves a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to overcome.  Exploratory drilling is subject to numerous risks, including the risk that no commercially productive oil and natural gas reservoirs will be encountered.  The cost to drill, complete and operate wells is often uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors including unexpected drilling conditions, abnormal pressures, equipment failures, premature declines of reservoirs, blow-outs, sour gas releases, fires, spills or other accidents, as well as weather conditions, compliance with governmental requirements, delays in receiving governmental approvals or permits, unexpected environmental issues and shortages or delays in the delivery of equipment.  Our inability to drill wells that produce commercial quantities of oil and natural gas would have a material adverse effect on our business, financial condition and results of operations.

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Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after exploration, drilling, operating and other costs.  Completion of wells does not ensure a profit on the investment or recovery of exploration, drilling, completion and operating costs.  Drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect production.  Adverse conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions.

Fluctuations in commodity prices could have a material impact on our revenues, which would affect our profitability.

Commodity price risk related to conventional crude oil prices could become our most significant market risk exposure if we achieve oil and natural gas production.  Crude oil prices are influenced by such worldwide factors as the Organization of the Petroleum Exporting Countries actions, political events and supply and demand fundamentals.  At this time, we cannot accurately predict these fluctuations because we do not know when we will commence generating revenues from our oil and gas operations.  Furthermore, we cannot estimate, at this time, the impact of commodity price fluctuations until we can predict the level of revenues.

Application, interpretation and enforcement of government taxes is inconsistent making it difficult for us to ensure that we are compliant which could lead to penalties.

The tax environment in Kazakhstan is subject to change, inconsistent application, interpretation and enforcement.  Non-compliance with Kazakhstan laws and regulations can lead to the imposition of penalties and interest.  We intend to make every effort to conform to these laws and regulations. However, our interpretations and those of our advisors may not be the same as those of government officials, which could lead to penalties and interest.

Vector Energy West LLP and KoZhaN LLP, Big Sky’s operational subsidiaries,  face competition which could adversely affect their ability to penetrate the oil and gas market in Kazakhstan which may make it difficult to attain profitability.

The oil and gas market is competitive and some of the competitors of Vector Energy West LLP (“Vector”) and KoZhaN LLP (“KoZhaN”) are major international energy industry operators.

These competitors have various advantages over Vector and KoZhaN, including:

- substantially greater financial resources, which gives them greater flexibility when developing their exploration and drilling programs;

- greater recognition in the industry, which influences a potential partners’ decision to participate in programs;

- larger operations, which provides economies of scale and operating efficiencies not available to Vector or KoZhaN;

- longer operating histories; and

- more established relationships with government officials and other strategic partners.

Vector and KoZhaN may be unable to successfully compete with these established competitors, which may adversely affect their ability to acquire Hydrocarbon Contracts, licenses and drilling permits, which could impact their ability to generate revenue.  

Compliance, interpretation and enforcement with evolving environmental laws and regulations may impact our expenses in a negative manner, which would directly impact our profit margins.

Extensive national, regional and local environmental laws and regulations in Kazakhstan affect the operations of Vector and KoZhaN.  These laws and regulations set various standards regulating certain aspects of health and environmental quality which provide for user fees, penalties and other liabilities for the violation of these standards and establish, in some circumstances, obligations to remediate current and former facilities and off-site locations. We believe we are currently in compliance with all existing Kazakhstan environmental laws and regulations.  However, as new environmental laws and legislation are enacted and the old laws are repealed, interpretation, application and enforcement of the laws may become inconsistent.  Compliance in the future could require significant expenditures, which would directly impact our profit margins.

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If Vector and KoZhaN repeatedly do not honor their capital expenditure commitments with the Republic of Kazakhstan, they may lose their exploration licenses.

Pursuant to the three Hydrocarbon Contracts, a commitment was made by KoZhaN to invest, in Kazakhstan, an aggregate of $16.43 million in capital expenditures, investments or other items that may be treated as capital assets of KoZhaN on or before December 31, 2009. KoZhaN has commenced this investment using loans from Big Sky Energy Kazakhstan Ltd. (“BSEK”) and intends to fund this investment using further loans from BSEK and, in the long term, from future production revenues.  These expenditures will be used to further exploit and develop existing fields and to explore for additional reserves to enhance future production and revenues.  If the required investment is not made within the agreed time period, KoZhaN may lose its exploration licenses.  If the exploration effort is unsuccessful or future exploration is determined to be not profitable, KoZhaN can elect not to invest the balance of the required exploration investment.  

Pursuant to the Liman-2 and Atyrau Hydrocarbon Contracts, Vector has committed to invest for its two exploration assets an aggregate of $53.9 million in capital expenditures, investments or other items that may be treated as capital assets of Vector on or before December 31, 2007. Vector has funded its operations using loans from its parent company and will further finance its subsoil use activities using funds of its parent company and further production revenues. If the required capital investment commitments are not met within the agreed exploration period, Vector may lose its exploration licenses. If the exploration effort is unsuccessful or future exploration is determined to be not profitable, Vector may withdraw from the Hydrocarbon Contracts without investing the balance of the required exploration investment.

We may suffer currency exchange losses if the Tenge depreciates relative to the U.S. dollar.

We report in U.S. Dollars.  Anticipated early oil production will likely be sold on the domestic market where selling prices are determined in the Tenge, the currency of Kazakhstan.  The majority of our Kazakhstan operating costs will be denominated in Tenge.  

Should we become profitable, we will be subject to Kazakhstan’s Excess Profits Tax, which would reduce our profit margin.

Through our Kazakhstan subsidiaries, we may become subject to Excess Profits Tax under the terms of the Hydrocarbon Contracts they have for oil and natural gas exploration and production.   Excess Profits Tax is in addition to statutory income taxes and takes effect after the field has achieved a cumulative internal rate of return higher than 20%.  The Excess Profits Tax ranges from 0% to 60% of taxable income.  

Other Risks

Our securityholders may not be able to enforce U.S. civil liabilities claims thereby limiting their ability to collect on claims against us.

Our assets are located outside the United States and are held through wholly owned subsidiaries incorporated under the laws of Canada and Kazakhstan.  Our current operations are conducted in Kazakhstan.  In addition, our directors and officers are nationals and/or residents of countries other than the United States.  All or a substantial portion of the assets of these persons are located outside the United States.  As a result, it may be difficult for you to effect service of process within the United States upon these persons.  In addition, there is uncertainty as to whether the courts of Canada or Kazakhstan would recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in these countries against us or such persons predicated upon the secu rities laws of the United States or any state thereof.

Broker-dealers may be discouraged from effecting transactions in our shares because they are considered penny stocks and are subject to the penny stock rules thereby potentially limiting the liquidity of our shares.

Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934, as amended, impose sales practice and disclosure requirements on NASD broker-dealers who make a market in "penny stocks". A penny stock generally includes any non-NASDAQ equity security that has a market price of less than $5.00 per share.  Our shares are quoted on the OTC/BB, and the price of our shares ranged from $0.01 (low) to $10.00 (high) during the period from September 25, 2000 to March 31, 2005.  The closing price of our shares on May 6, 2005 was $1.19.  NASD broker-dealers who act as market makers for our shares generally facilitate purchases and sales of our shares.  The additional sales practice and disclosure

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requirements imposed upon broker-dealers may discourage broker-dealers from effecting transactions in our shares, which could severely limit the market liquidity of the shares and impede the sale of our shares in the secondary market.

Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or "accredited investor" (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser's written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt.

In addition, the penny stock regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt.  A broker-dealer is also required to disclose commissions payable to the broker-dealer and the registered representative and current quotations for the securities.  Finally, a broker-dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer's account and information with respect to the limited market in penny stocks.

THE OFFERING

This prospectus covers up to 43,710,370 shares of Big Sky’s common stock to be sold by selling securityholders identified in this prospectus.

Shares offered by the selling securityholders:	43,710,370 shares of common stock, $0.001 par value per share
Offering price:	Determined at the time of sale by the selling securityholders
Common stock outstanding as of May 6, 2005: However, certain of the Selling Securityholders hold warrants to purchase an additional 2,438,505 shares at $0.50 per share.  The shares underlying such warrants are included in the 43,710,370 shares being registered and offered under this prospectus.  If the Selling Securityholders elect to purchase such shares in order to sell them hereunder, we will receive up to $1,219,252.50 from such purchase.	97,438,660 shares
Common stock outstanding assuming the maximum number of shares are sold pursuant to this offering:	99,877,165  Shares Assuming conversion of the warrants into shares of common stock registered under this prospectus, the shares of common stock subject to this prospectus represent approximately 44.8% of our issued and outstanding common stock as of May 6, 2005.
Number of shares owned by the selling securityholders after the offering:	4,662,350 shares.  (1)

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Use of proceeds:			We will not receive any of the proceeds of the shares offered by the selling securityholders. We intend to use the proceeds from the exercise of the warrants, if exercised, held by certain selling securityholders for working capital purposes.
Dividend policy:			We currently intend to retain any future earnings to fund the development and growth of our business.  Therefore, we do not currently anticipate paying cash dividends.  See “Dividend Policy.”
OTC/BB # symbol			BSKO
	(1)	This number assumes that each selling shareholder will sell all of its shares available for sale during the effectiveness of the registration statement that includes this prospectus.  Selling securityholders are not required to sell their shares.  See "Plan of Distribution."

Unless otherwise specifically stated, information throughout this prospectus excludes:

- 17,350,000 shares issuable upon the exercise of outstanding options of which 5,000,000 are vested , subject to an amendment of the 2000 Stock Award Plan being ratified at the next Annual Meeting of Shareholders and 12,350,000 are not vested; and

- 50,000 shares issuable upon the exercise of outstanding warrants.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form SB-2 covering the shares being sold in this offering.  We have not included in this prospectus some information contained in the registration statement, and you should refer to the registration statement, including exhibits and schedules filed with the registration statement, for further information.  You may review a copy of the registration statement from the public reference section of the SEC in Room 1024, Judiciary Plaza, 450 - 5^th Street, N.W., Washington, D.C.  20549.  You may also obtain copies of such materials at prescribed rates from the public reference section at the SEC, Room 1024, Judiciary Plaza, 450 - 5th Street, N.W., Washington, D.C.  20549.  In addition, the SEC maintains a Web site on the Internet at the address http://www.sec.gov that contains reports, proxy information statements and other information regarding registrants that file ele ctronically with the SEC.

USE OF PROCEEDS

This prospectus is part of a registration statement that permits selling securityholders to sell their shares.  Because this prospectus is solely for the purpose of selling securityholders, we will not receive any proceeds from the sale of stock being offered. If the Selling Securityholders holding warrants exercise their right to acquire common shares, we could receive proceeds of $1,219,252.50 from the issuance of 2,438,505 shares.  Should these Selling Securityholders choose to convert their warrants, any funds received will be used for working capital.   As of the date of this filing, we have not received any indication from any of the Selling Securityholders that they intend to exercise any of the warrants at anytime in the future.

DETERMINATION OF OFFERING PRICE

The shares offered by this prospectus are being offered by the Selling Securityholders on a continuous or delayed basis until sold.  The Selling Securityholders will offer the shares at the prevailing market price at the time of sale by each Selling Shareholder and therefore no specific price has been set for this offering.

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SELLING SECURITY HOLDERS

This prospectus covers the offering of shares of common stock by certain Selling Securityholders.  This prospectus is part of a registration statement filed in order to register, on behalf of the Selling Securityholders, a total of 43,710,370 shares of common stock issued to investors as follows:

(i)	1,506,027 shares of common stock issued to investors in March and April, 2005 as a result of an exercise of options and conversion under Big Sky’s Alternative Compensation Plan;
(ii)	27,250,000 shares of common stock issued to investors in February and March, 2005 in a private placement of shares of common stock;
(iii)	5,800,000 shares of common stock issued to investors in October and November, 2004 in a private placement of shares of common stock.;
(iv)	3,500,000 shares of common stock issued to an investor under a Share Exchange Agreement;
(v)	757,422 shares of common stock issued to investors in July, 2004 as part compensation for services rendered to Big Sky;
(vi)	26,666 shares of common stock issued to an investor in February 2004 as part compensation for services rendered to Big Sky;
(vii)	2,431,750 shares of common stock issued to investors in November, 2003 under the Alternative Compensation Plan, and
(viii)	a total of 2,438,505 shares of common stock issuable by us upon the exercise of certain outstanding warrants.

The shares issued to the Selling Securityholders are “restricted” shares under applicable federal and state securities laws and are being registered to give the Selling Securityholders the opportunity to sell their shares.  The registration of such shares does not necessarily mean, however, that any of these shares will be offered or sold by the Selling Securityholders.  The Selling Securityholders may from time to time offer and sell all or a portion of their shares in the over-the-counter market, in negotiated transactions, or otherwise, at prices then prevailing or related to the then current market price or at negotiated prices.

The registered shares may be sold directly or through brokers or dealers, or in a distribution by one or more underwriters on a firm commitment or best efforts basis.  To the extent required, the names of any agent or broker-dealer and applicable commissions or discounts and any other required information with respect to any particular offer will be set forth in an accompanying Prospectus Supplement.  See “Plan of Distribution.”  Each of the Selling Securityholders reserves the sole right to accept or reject, in whole or in part, any proposed purchase of the registered shares to be made directly or through agents.  The Selling Securityholders and any agents or broker-dealers that participate with the Selling Securityholders in the distribution of registered shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933 (“Securities Act”), and any commissions received by them and an y profit on the resale of the registered shares may be deemed to be underwriting commissions or discounts under the Securities Act.

We will receive no proceeds from the sale of the registered shares, and we have agreed to bear the expenses of registration of the shares, other than commissions and discounts of agents or broker-dealers and transfer taxes, if any.

We will issue the warrant shares to the holders of the above-described warrants if and when they choose to exercise them.  If this (or any subsequent) registration statement is then in effect, once the warrant holders have exercised their warrants, they will be free to re-sell the stock they receive at such time or times as they may choose, just as any purchaser of stock in the open market is allowed to do.  We do not know how much, if any, of such stock these investors will hold or re-sell upon exercise of their warrants.

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The following are the securityholders for whose accounts the shares are being offered; the number of shares beneficially owned by each selling shareholder prior to this offering; the number of shares to be offered for each selling shareholder's account; and the number of shares to be owned by each selling shareholder following completion of the offering:

Name		Number of Shares Beneficially Owned Before Offering	Number of Shares Offered	Percentage of Shares Owned After Offering (1)	Number of Shares Owned Upon Completion of Offering (1)
Aran Asset Management (2)		1,850,000	1,040,000	0.8%	810,000
AS Capital Partners LLC		50,000	50,000	0%	0
Barclay St James Capital Group Ltd(3)		1,208,000	1,208,000	0%	0
Big Sky Holdings Inc. (4)		594,422	513,422	0.08%	81,000
Brighton Capital		3,000	3,000	0%
Canaccord International Ltd.(5)		587,505	587,505	0%	0
Credit Suisse First Boston LLC Tax ID 05-0546650		5,500,000	4,000,000	1.53%	1,500,000
Domenic Gualtieri (6)		932,000	932,000	0%	0
Edward S Kaufman		242,000	242,000	0%	0
Eggar & Co Acct S98720		1,700,000	1,700,000	0%	0
Fullup Limited		3,500,000	3,500,000	0%	0
GMP Securities Ltd.		200,000	200,000	0%	0
Haywood Securities in trust for Berwick Capital Ltd.		200,000	200,000	0%	0
Jeffrey R. Costello Acct Ref 477486		242,000	242,000	0%	0
Jodi Larmour		176,666	176,666	0%	0
Kai Yang		2,223,750	750,000	1.51%	1,473,750
Kazimir Russia Master Fund LP		4,000,000	4,000,000	0%	0
Kiril Surikov - 87953609  Wachovia Securities		500,000	500,000	0%	0
Lombard Odier Darier Hentsch & Cie		1,000,000	1,000,000	0%	0
Mark A. Partington		400,000	400,000	0%	0
Mark and Nadia Crandall		700,000	700,000	0%	0
Matthew Heysel		559,467	529,367	0.03%	30,100
Maxim Topper		200,000	200,000	0%	0
MH Financial Management Limited (7)		2,759,910	2,752,410	0.07%	7,500
Oxford Management Ltd.		416,000	416,000	0%	0
Pangea Advisors Limited		800,000	800,000	0%	0
Perinvest Special Situations Fund		300,000	300,000	0%	0
Royal Trust Corporation of Canada as custodian for ARC Energy Venture Fund 4		8,000,000	8,000,000	0%	0
Roytor/US Global Investors/T18144017		500,000	500,000	0%	0
Roytor/US Global Investors/T18144024		1,000,000	1,000,000	0%	0
Roytor/US Global Investors/T18144099		100,000	100,000	0%	0
Shagwell S.A. (8)		148,000	148,000	0%	0
Société Priveé Gestion de Patrimonie		6,760,000	6,000,000	0.77%	760,000
Westwind Partners		1,020,000	1,020,000	0%	0
TOTAL		48,372,720	43,710,370
(1)	Unless otherwise annotated in this column, all percentages are based on 97,438,660 shares of common stock issued and outstanding on May 6, 2005.  Assumes that all shares registered for resale by this prospectus have been sold.  Does not include shares underlying issued stock options.
(2)	240,000 of these shares underlie a warrant
(3)	108,000 of these shares underlie a warrant
(4)	Big Sky Holdings Inc. is a company over which Mr. Matthew Heysel has control.
(5)	108,000 of these shares underlie a warrant.
(6)	432,000 of these shares underlie a warrant
(7)	MH Financial Management Limited is a company over which Mr. Matthew Heysel has control.
(8)	48,000 of these shares underlie a warrant.

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This table assumes that each shareholder will sell all of its shares available for sale during the effectiveness of the registration statement that includes this prospectus.  Securityholders are not required to sell their shares.  See "Plan of Distribution".  No other selling shareholder has held any position or office or had any material relationship with Big Sky Energy Corporation during the past three years.

Based on information provided to us, none of the selling securityholders are or are affiliated with any broker-dealer in the United States.

PLAN OF DISTRIBUTION

We are registering the shares on behalf of the selling securityholders.  All costs, expenses and fees in connection with the registration of the shares offered under this registration statement will be borne by us.  Brokerage commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the selling securityholders.  Sales of shares may be effected by selling securityholders from time to time in one or more types of transactions (which may include block transactions) in the over-the-counter market, in negotiated transactions, through put or call options transactions relating to the shares, through short sales of shares, or a combination of such methods of sale, at market prices prevailing at the time of sale, or at negotiated prices.  Such transactions may or may not involve brokers or dealers.  The selling securityholders have advised us that they have not entered into any agreements, understan dings or arrangements with any underwriters or broker-dealers regarding the sale of their securities, nor is there an underwriter or coordinating broker acting in connection with the proposed sale of shares by the selling securityholders.

The selling securityholders may effect such transactions by selling shares directly to purchasers or to or through broker-dealers, which may act as agents or principals.  Such broker-dealers may receive compensation in the form of discounts, concessions, or commissions from the selling securityholders and/or purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions).

The selling securityholders and any broker-dealers that act in connection with the sale of shares will  be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, and any commissions received by such broker-dealers and any profit on the resale of shares sold by them while acting as principals will be deemed to be underwriting discounts or commissions under the Securities Act.  The selling securityholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against some liabilities arising under the Securities Act.

Because selling securityholders will be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, the selling securityholders will be subject to the prospectus delivery requirements of the Securities Act.  We have informed the selling securityholders that the anti-manipulative provisions of Regulation M promulgated under the Exchange Act may apply to their sales in the market.

LEGAL PROCEEDINGS

We are not a party to any material legal proceeding or litigation and we know of no material legal proceeding or contemplated or threatened litigation.  

We are subject to potential litigation in the normal course of operations.  There are no claims currently pending that we consider would materially affect our operations.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

We employ our executive officers as consultants under the terms of individual consulting agreements.  See “Employment and Consulting Agreements”.  Each member of the board of directors serves until their successor is appointed at a duly called Annual Meeting of Shareholders of Big Sky.

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The following table sets forth information, as of May 6, 2005, regarding our directors, executive officers and key employees:

Name	Age	Position	Since
Nurlan Balgimbayev	57	Director	March 31, 2005
Bruce Gaston	40	Director and Chief Financial Officer	Director -December 3, 2004 Chief Financial Officer - April 18, 2005
Matthew Heysel	49	Chairman of the Board, Chief Executive Officer & Director	April 14, 2000
Thomas Milne	58	Director	April 14, 2000
Philip Pardo	49	Director	December 3, 2004
S.A. (Al) Sehsuvaroglu	50	President & Director	March 9, 2005
Barry Swersky	66	Co-Chairman, Director & Vice President, New Developments	December 3, 2004
Ruslan Tsarni	34	Vice President, Business Development  & Corporate Secretary	March 29, 2005
Daming Yang	47	Director	April 14, 2000

Nurlan Utebovich Balgimbayev- Director

Mr. Nurlan Balgimbayev has been a Director of our Board since March 29, 2005. Mr. Balgimbayev is a former Prime Minister of the Republic of Kazakhstan, (October 1997-October 1999), a former Minister of Oil and Gas (1994-1997), and a former President of the government-owned National Oil and Gas Company “Kazakhoil” (October 1999-February 2002). Mr. Balgimbayev served as a director of Nelson Resources Limited (April 2002- May 2004) and currently is a director of Herson Oil Refinery System (Ukraine) since November 1999.  He is also a Member of the Kazakhstan Board for the Stable Development of the Republic of Kazakhstan.

Bruce Hill Gaston – Director, Chief Financial Officer

Mr. Gaston has been a Director of our Board since December 3, 2004, and was appointed Chief Financial Officer on April 18, 2005. Before joining the Company, during the period from June 1999 to March 2002 and January 2003 to December 2004, Mr. Gaston has been a consultant (through his own company “Independent Consulting Partnership”) with a boutique Eurasian corporate finance and risk management consultancy, supporting clients including the Royal Bank of Scotland Asia, Barclays Capital and an advisor to Eastern European governments on privatization, oil and gas clients on Financial Control Process Engineering.  He was a Senior Associate Director of Deutsche Morgan Grenfell based initially in London and then in Tokyo from March 2002 to December 2002. Mr. Gaston has also served as a Director of Deloitte & Touche Central Asia through 2002 and prior to that as a head of Russian Equities for Commerzbank AG in 1998 and 1999.

Matthew Heysel –Chairman of the Board, Chief Executive Officer, Director

Mr. Heysel has served as Chairman of the Board of Directors and Chief Executive Officer of Big Sky from April 14, 2000 to the present.  Mr. Heysel has been the Chairman of Big Sky Energy Kazakhstan Ltd. since July 2003 and Vice-Chairman of KoZhaN LLP since August 2003. From April 1999 to November 2001, he was the President of New Energy West Corporation. Prior to this, he served as an Investment Banker at Yorkton Securities, a Canadian independent securities firm, where he was responsible for corporate finance in the oil and gas sector from April 1997 through April 1999.  

Thomas Milne - Director

Mr. Milne has served on our Board of Directors and as Vice President of Finance and Chief Financial Officer since April 14, 2000. He resigned as Chief Financial Officer on April 18, 2005. He has also served as the Chief Financial Officer of Big Sky Network Canada Ltd., our subsidiary, since May of 1999.  From September 2002 to February 2004, Mr. Milne was the Regional Advisory Services Partner for Meyers Norris Penny LLP, a chartered accountancy and business advisory firm

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located in Calgary, Alberta.  From 2000 to 2002 Mr. Milne was employed by Big Sky. Since March 1998, Mr. Milne has served as Chief Executive Officer of Precise Details, Inc., a consulting, investment management, real estate and automotive services company. Mr. Milne also currently serves as a director of the Alberta Performing Arts Stabilization Fund and the Investment Committee of the University of Calgary Pension and Endowment Funds.

Philip Dean Pardo – Director

Mr. Pardo has been a Director of our Board since December 3, 2004. Mr. Pardo is Vice Rector on Academic Affairs and Director of Business School of Kazakh British Technical University. Previously (September 2000 to September 2004), he held the post of Associate Dean of the College of Continuing Education for the Kazakhstan Institute of Management, Economics and Strategic Research (KIMEP) where he taught courses in Small Business, Franchising, Public Administration and Finance.  He was Director, Business Valuation for the Rice Group, Central Asia LLP from July 2000 to January 2003. Mr. Pardo served as Strategic Planning Manager with Maverick Development Corp. and Golden Eagle Services from July 2003 to December 2003 on a part-time basis. He has worked for Deloitte & Touche as Tax Director as well as LeBoeuf, Lamb, Greene & MacRae, from August 1997 till June 2000. Mr. Pardo serves as an independent director and is Chairman of the Audit Committee an d Chairman of the Nominating & Compensation Committee.

S.A .(Al) Sehsuvaroglu – President & Director

Mr. Sehsuvaroglu has been serving as our President and Director of the Board since March 9, 2005. He is a Registered Professional Engineer in Texas since 1990. Commencing his 20-year with Halliburton Energy Services in 1978 through June 2000, he had increasing levels of responsibility in engineering in Algeria, France, Netherlands, United States, United Kingdom and Kazakhstan. In June 2000 till November 2001, he is Country Director for Kellogg Brown & Root Energy Services in Kazakhstan. In 2001, Mr. Sehsuvaroglu became Senior Vice-President of Operations with Nelson Resources, and up to February 2005, he led a team, which grew daily oil production from zero to 40,000 barrels per day in Kazakhstan.

Barry Raymond Swersky – Director, Co-Chairman  & Vice-President, New Developments

Mr. Swersky has been serving on our Board of Directors and as Co-Chairman & Vice-President since December 3, 2005. Mr. Swersky, with many years of experience as international attorney, has consulted on technology investments in Israel together with the Meitav group since 2000. He has been on the board and is currently Chairman of Netline Communications Technologies (NCT) since December 2000. In Israel he is also serving on various other boards, including Suntree Ltd. (since 1993), where he acts as Chairman and CEO and MACS Ltd. (since 1990). He served on the board of Ongas Limited in England from January 2000 to March 2004). Previously, and within the framework of his activities in energy in Kazakhstan, Mr. Swersky served on the board of AES Suntree Power Limited. He is engaged in an oil and oil products transport logistics project between Kazakhstan and China.  He is on the board of the Israel Festival, Jerusalem and, from October 2000 he serves as a Board Member of Tel-Aviv University's Jaffee Center for Strategic Studies.

Ruslan Z. Tsarni – Vice President, Business Development & Corporate Secretary

Mr. Ruslan Z. Tsarni has been serving as our Vice-President & Corporate Secretary since March 29, 2005. Before joining the Company, Mr. Tsarni served as Corporate Counsel of Nelson Resources Limited Group of companies, as well as Managing Director of several of its operating subsidiaries from February 2001 to March 2005. Prior to this, Mr. Tsarni was the Head of Legal Affairs of Golden Eagle Partners LLC from May 1999 to February 2000, where he developed downstream and upstream oil and gas businesses in Kazakhstan and served as Managing Director of its wholly owned subsidiary Tobe LLP. From July 1998 to May 1999 he was a Senior Associate with Salans Hertzfeld & Heilbronn Ltd.

Daming Yang - Director

Mr. Yang served as our President from April 14, 2000 until March 9, 2005. He continues to sit as a Director on our Board of Directors He also served as the President and a member of the board of directors of both Big Sky Network Canada Ltd. and Chengdu Big Sky Technology Services Ltd.  Mr. Yang was a director of Sichuan Huayu Big Sky Network Ltd.  Mr. Yang has been the President of Big Sky Energy Kazakhstan Ltd. since July 2003 and Chairman of KoZhaN LLP since August 2003. From 1995 through 1998, Mr. Yang served as Vice President and then President of Tongli Energy Technical Service Co. Ltd.  

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Within the last five years, none of our executive officers or directors have been involved in any bankruptcy proceedings filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.  None of our officers or directors been convicted in or has pending any criminal proceeding, been subject to any order, judgment or decree enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity or been found to have violated any federal, state or provincial securities or commodities laws.  None of our officers or directors have been found by any court of competent jurisdiction to have violated any federal or state securities or commodities law. There are no judgments, orders, or decrees against us or our officers or directors that limit in any manner our involvement or that of our officers or d irectors in any type of business, securities or banking activities. None of our officers or directors has been convicted of a felony or misdemeanor relating to securities or performance in corporate office.

BOARD AND COMMITTEES

Our board members are elected annually by our securityholders and hold office until the next annual securityholders meeting or until a successor is duly elected and qualified.  During 2004, the board of directors met five times including participants by telephone. All directors attended the board meetings.  Our board of directors also approved eleven additional corporate matters during 2004 through unanimous written consents.  

The Board of Directors has an Audit Committee and a Nominating and Compensation Committee, currently consisting of an  independent director, Mr. Philip Pardo.

The Audit Committee oversees the actions taken by our independent registered chartered accountants and reviews our internal financial and accounting controls and policies. The Audit Committee also holds responsibility for our corporate governance and internal controls. In 2005, Mr. Philip Pardo was designated as the Audit Committee financial expert and chairman.

The Nominating and Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for our officers, employees and consultants and administers our incentive compensation and benefit plans. The Nominating and Compensation Committee also holds responsibility for director selection and governance with respect to the conduct of our Board.  Our Nominating and Compensation Committee Chairman is Mr. Philip Pardo.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth information concerning the beneficial ownership of our outstanding common stock as of May 6, 2005 for:

- each of our directors and executive officers individually;

- each person or group that we know owns beneficially more than 5% of our common stock; and

- all directors and executive officers as a group.

Rule 13d-3 under the Securities Exchange Act defines the term "beneficial ownership". Under this rule, the term includes shares over which the indicated beneficial owner exercises voting and/or investment power.  The rule also deems common stock subject to options currently exercisable, or exercisable within 60 days, to be outstanding for purposes of computing the percentage ownership of the person holding the options but do not deem such stock to be outstanding for purposes of computing the percentage ownership of any other person.  The applicable percentage of ownership for each shareholder is based on 97,438,660 shares of common stock outstanding as of May 6, 2005, together with applicable options for that shareholder.  Except as otherwise indicated, we believe the beneficial owners of the common stock listed below, based on information furnished by them, have sole voting and investment power over the number of shares listed oppos ite their names.

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Name and Address of Beneficial Owner	Number of Shares Beneficially Owned	Percent of Shares Outstanding
Officers and Directors
Matthew Heysel 963 Pacific Heights Tower Apartments, Oriental Plaza #1 East Chang An Avenue  Dong Cheng District Beijing, China, 100738	3,913,799(1)	4.01%
Daming Yang #4, Mou Gate 25 Baiwanzhuang   Xicheng District Beijing, China, 100037	4,023,750 (2)	4.13%
Thomas Milne 224 Sienna Hills Drive SW Calgary, AB, Canada, T3H 2Z1	1,583,002 (3)	1.62%
Bruce Gaston La Rieulle Plenee Jugon 22640, Bretagne    France	0	0%
Philip Pardo c/o KIMEP Almaty, Kazakhstan	0	0%
Barry Swersky Box 110, 47100 Ramat Hasharon   Israel	0	0%
A.S. Sehsuvaroglu 67 Promenade des Anglais 06000 Nice  France	0	0%
N. U. Balgimbayev 5 Chaykina Street Almaty, Kazakhstan	5,000,000	5.1%
Ruslan Z. Tsarni 6150 Glacier Place Ferndale, Washington   98248	0	0%
Officers and Directors as a Group	14,520,551(4)	14.9%
5% Shareholders
Societe Privee de Gestion de Patrimonie 17 Avenue Matignon Paris 78008 France	6,760,000	6.93%
Wei Yang Room 837, China Merchant Building Shenzhen, Guong Dong, China 518067	6,653,750 (4)	6.82%(4)

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ARC Energy Fund C/o Royal Trust Corporation of Canada 200 Bay Street Toronto, Ontario M5J 2J5		8,000,000	8.2%
(1)	Includes 3,057,772 shares of common stock of which 594,422 shares are owned by Big Sky Holdings, a company over which Mr. Heysel has control, 2,719,910 shares are owned by MH Financial Management Ltd., a company over which Mr. Heysel has control and 559,467 shares which Mr. Heysel owns directly.
(2)	Includes 1,923,750 shares of common stock which Mr. Yang owns directly and options exercisable within 60 days of March 29, 2005 to acquire 2,100,000 shares of common stock.
(3)	Includes 983,002 shares of common stock of which 692,802 shares are owned by Precise Details, Inc., a company over which Mr. Milne has control, 285,200 shares owned directly by Mr. Milne and 5,000 shares owned by Mr. Milne indirectly through his spouse; and options exercisable within 60 days of May 6, 2005 to acquire 600,000 shares of common stock.
(4)	Includes 6,653,750 shares of common stock of which, 4,250,000 shares are owned by Big Sky Energy Canada Ltd., of which Mr. Wei Yang is a director.  The board of Big Sky Energy Canada has given him sole voting and dispositive powers over all equity investments.  The total also includes 1,923,750 shares which are owned directly by Mr. Wei Yang and options exercisable within 60 days of December 31, 2004 to acquire 500,000 shares of common stock.

As of the filing date of this Prospectus, there are no arrangements that may result in a change in control.

DESCRIPTION OF SECURITIES

The following is a summary of provisions of the common stock.

We are authorized to issue 150,000,000 shares of common stock, of which 97,438,660 shares were issued and outstanding held by approximately 131 securityholders of record as of May 6, 2005.  This public offering consists solely of shares of common stock being resold by selling securityholders.  Therefore, this offering will not affect the total number of shares of common stock issued and outstanding.  This offering, however, includes shares that are underlying warrants held by certain Selling Securityholders that have not yet been exercised.  The exercise of any of such warrants would increase the total number of shares that are issued and outstanding.

A quorum for a general meeting of shareholders is one shareholder entitled to attend and vote at the meeting who may be represented by proxy and other proper authority, holding at least a majority of the outstanding shares of common stock.  Holders of shares of common stock are entitled to one vote per share on all matters to be voted on by the shareholders.  Action by the shareholders requires a vote by holders of a majority of the shareholders present, in person or by proxy, at a meeting of the shareholders.  The holders of shares of common stock are entitled to receive any dividends the board of directors declares out of funds legally available for the payment of dividends.  There are no limitations on the payment of dividends.  

In addition, there are no pre-emptive rights, no subscription rights, no sinking fund provisions, no conversion rights, no redemption provisions, no voting as a class, and no restrictions on alienability relating to the shares of common stock and none of the shares of common stock carry any liability for further calls.  There are no provisions discriminating against any existing or prospective holder of common stock as a result of such shareholder owning a substantial amount of securities.  

Upon any liquidation, dissolution, or winding up of our business, if any, after payment or provision for payment of all of our debts, obligations, or liabilities, the proceeds will be distributed to the holders of shares of common stock.  

The rights of holders of shares of common stock may not be modified other than by vote of majority of the shares of common stock voting on the modification.  Because a quorum for a general meeting of shareholders can exist with less than all of the shareholders (or proxy holders) personally present at a meeting of the shareholders, the rights of holders of shares of common stock may be modified by less than a majority of the issued shares of common stock.

There are no change of control provisions contained in our articles of incorporation or bylaws.

INTEREST OF NAMED EXPERTS AND COUNSEL

None of the experts named herein was hired on a contingent basis nor were any such experts a promoter, underwriter, voting trustee, director, officer or employee of Big Sky Energy Corporation.

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LEGAL MATTERS

Certain legal matters will be passed upon for us by our U.S. securities counsel, W. Scott Lawler, Esq. of Lawler & Associates, 1530-9 Avenue SE, Calgary, Alberta, T2G 0T7.

ACCOUNTING MATTERS

The consolidated financial statements of Big Sky Energy Corporation  as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 and for the period from February 1, 2000 (date of incorporation) to December 31, 2004 included in this prospectus have been audited by Deloitte & Touche LLP, independent registered chartered accountants, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph referring to substantial doubt about Big Sky Energy Corporation’s  ability to continue as a going concern) and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

The consolidated financial statements of Big Sky Energy Kazakhstan Ltd. as of December 31, 2003 and the period from August 11, 2003 (date of inception) to December 31, 2003, and the cumulative period from April 28, 2001 (date of incorporation of the Predecessor)  to December 31, 2003 (except for the cumulative period from April 28, 2001) to August 11, 2003 not separately presented herein)  included in this prospectus have been audited by Deloitte & Touche LLP, independent registered chartered accountants, as stated in their report appearing herein (which report expresses an unqualified opinion and includes explanatory paragraphs referring to substantial doubt about Big Sky Energy Kazakhstan Ltd.’s ability to continue as a going concern and status as a development stage enterprise), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

The financial statements of KoZhaN LLP as of December 31, 2002 and the period from January 1, 2003 to August 11, 2003, for the year ended December 31, 2002, and the period from April 28, 2001 to August 11, 2003 (not separately presented herein) included in this prospectus,  have been audited by TOO Deloitte & Touche, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph referring to KoZhaN LLP’s status as a development stage enterprise), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

The financial statements of Vector Energy West LLP as of and for the years ended December 31, 2003 and 2002, the period from July 4, 2001 to December 31, 2001, and the cumulative period from July 4, 2001 to December 31, 2003 included in this prospectus have been audited by TOO Deloitte & Touche, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes explanatory paragraphs referring to substantial doubt about Vector Energy West LLP’s ability to continue as a going concern and status as a development stage enterprise), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing

DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION

FOR SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.

DESCRIPTION OF BUSINESS

OVERVIEW OF CORPORATE STRUCTURE

We were incorporated in February 1993 as Institute for Counseling, Inc. under the laws of the State of Nevada.  On April 14, 2000, we acquired China Broadband (BVI) Corp., a British Virgin Islands company incorporated in February 2000, by issuing 13,500,000 shares of our common stock in exchange for all of the issued and outstanding common stock of China Broadband (BVI) Corp.  The former shareholders of China Broadband (BVI) Corp. became our controlling shareholders.  On April 14, 2000, subsequent to the above acquisition, we changed our name to "China Broadband Corp." and merged China Broadband (BVI) Corp. into China Broadband Corp. Our principal executive office is located at Suite 750, 440 – 2^nd Avenue SW, Calgary,

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Alberta, Canada T2P 5E9, and our phone number there is 403-234-8282. Our principal business office, in Kazakhstan, is located in a recently constructed office tower in central Almaty at Suite 3, 132 Dostyk Avenue, Almaty, Kazakhstan 650051, and our phone number there is 7 3272 628 394.  

We maintain a representative office in China at 1003 W2 Oriental Plaza, #1 East Chang An Avenue, Beijing, Peoples Republic of China 100738 and our phone number there is 86 10 8518 2686.

We maintain a World Wide Web site address at www.bigskycanada.com. Information on our web site is not part of this document.

On July 8, 2000, Big Sky Network and Chengdu Huayu Information Co. Ltd. entered into a cooperative joint venture contract to form a joint venture company, Sichuan Huayu Big Sky Network Ltd., referred to as our Chengdu joint venture, under the laws of the People's Republic of China on Cooperative Joint Ventures using Chinese Foreign Investment.  We had agreed to provide up to $5,500,000 in financing for the joint venture, in the form of cash and equipment.  The Chengdu joint venture was granted the exclusive right to provide equipment and technical services to our Chinese joint venture partner’s subscribers to enable these subscribers to access the Internet. Our Chinese joint venture partner failed to meet its obligations under the joint venture agreement. As we were unable to achieve a successful working partnership, the business of the joint venture was discontinued. After discussions and negotiations with the joint venture partner failed to achieve a satisfactory alternative, we commenced arbitration to seek damages. To date, such arbitration has not been successful. Although we sold this business in December 2004, we retain a 25% interest in any favorable settlement of this action. As the outcome of this arbitration is uncertain, we attribute no value to this residual interest.

We, through Big Sky Networks Canada Ltd, referred to as Big Sky Canada, held a 100% interest in Chengdu Big Sky Network Technology Services Ltd., referred to as Chengdu Technology Services, which resells high-speed broadband Internet service to companies and residents in the section of Chengdu designated as a high technology park. As noted above, we sold our shareholding in Big Sky Network Canada Ltd. on December 9, 2004 for $ 175,793.

Late in October 2003, we began investing in oil and gas assets, an area in which our management has knowledge and experience. We believed that it was the right time to diversify into the oil and natural gas industry using our management’s knowledge and experience.  We considered that this diversification would provide us with a revenue stream and financial stability, which would sustain our operations so that we could concentrate on growing our business in the oil and gas sector.

 On October 27, 2003, Big Sky entered into a Share Exchange Agreement with Big Sky Energy Kazakhstan Ltd., (“BSEK”) a private company incorporated in Alberta, Canada, and all its shareholders of record.  Under the terms of the Agreement, we were required to issue up to a maximum of 8,000,000 common shares in a share exchange offer with the shareholders of record of BSEK as of October 27, 2003.  Management determined the net asset value per share and the number of shares to be issued based upon various criteria including a third party valuation.   On January 12, 2004, we issued 8,000,000 of our common shares to the shareholders of BSEK in exchange for their shares in BSEK.  BSEK has a 90% interest in KoZhaN LLP, a Republic of Kazakhstan limited liability partnership, which has three petroleum licenses in the Atyrau region of Kazakhstan.

On December 29, 2003, we changed out name from China Broadband Corp. to China Energy Ventures Corp. On December 3, 2004 shareholders approved another name change to Big Sky Energy Corporation.

On May 6, 2004, Big Sky Energy Atyrau Ltd., at that time a 75% owned subsidiary, (“BSEA”), purchased 100% of Vector Energy West LLP, a Kazakhstan limited liability partnership,  for $4,430,000 which was determined by a valuation of Vector’s Atyrau and Liman-2 licenses which was performed by PetroGlobe (Canada) Ltd., an independent third party. On the same date, pursuant to the terms of an Agreement for Assignment of the Creditor’s Rights, BSEA paid $570,000 to Lorgate Management Inc.

On July 6, 2004, we closed a private placement of $8,050,000 and issued 16,100,000 shares.  

Initially, we estimated that our cash requirements for all five contract areas would be approximately $35 million for 2005.  Considering that the minimum capital investments required by the respective hydrocarbon contracts in 2005 amount to approximately $16 million, we may decrease the original amount filed with the Kazakh regulatory authorities for 2005 work commitment programs, to the expenditure level established by the five hydrocarbon contracts. In that case, we will re-file our annual work programs with the Kazakh authorities, to reflect this adjustment in our annual work programs.. Under applicable law, such adjustments in the work programs will require prior approval of the Kazakh regulatory authorities, which we believe can be obtained.

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We currently have enough cash on hand to cover the expected level of general and administrative and other overhead costs throughout 2006.

We had originally assumed work commitments on our licenses in Kazakhstan, which would require expenditures estimated at up to $35 million, which may be decreased upon prior approval of the Kazakhstan competent authority to the commitments defined in the respective five hydrocarbon contracts to a total amount of approximately $16 million. Our commitments are measured in actual work completed, not in money expended. We can successfully meet our work commitments for a lesser expenditure of money if we can perform the work more efficiently. Work commitments consist of well drilling, seismic shoots, data processing, workover and re-entry of existing wells and general business activity that serves to further develop, explore, produce and sell hydrocarbons in Kazakhstan.  

Work program commitments for 2004 have been completed only in part. To satisfy of the Kazakh  regulatory authorities the work commitment not completed in 2004 have to be completed in 2005.

On April 19, 2005, Big Sky executed a Letter of Intent with Sun Drilling LLP wherein Sun Drilling LLP agreed to provide turnkey drilling services for a minimum of two wells in the Morskoe Field and a minimum of 10 wells in the Atyrau Block.  The drilling schedule for Morskoe is set to commence in May 2005 with the Atryau block drilling schedule to start in July/August 2005.

The following figure sets forth our corporate structure as at December 31, 2004.

Big Sky Energy Corporation (formerly China Energy Ventures Corp.) (the “Corporation”) a Nevada corporation
		100%		100%
Big Sky Energy Atyrau Ltd. (“BSEA”) an Alberta Corporation			Big Sky Energy Kazakhstan Ltd. (“BSEK”) An Alberta corporation
	100%			90%
Vector Energy West LLP (“Vector”) a Kazakhstan limited liability partnership			KoZhaN LLP (“KoZhaN”) A Kazakhstan limited liability partnership

Neither we nor any of our subsidiaries have been subject to any bankruptcy, receivership or similar proceedings.

OVERVIEW OF BUSINESS STRATEGY

Oil and Gas Business

During the last half of 2003, we commenced the diversification of our efforts towards the exploration and exploitation of oil and gas in selected countries.  Our objective is to find fields with proven reserves that justify exploration and that require some enhanced recovery, workover, additional drilling or stimulation, and that have an exploration upside, located near infrastructure and markets, in countries with favorable fiscal and tax regimes and well developed commercial laws, including adequate environmental regulations. We determined that Kazakhstan was one country that meets these criteria and commenced efforts to locate acquisition opportunities there.

Big Sky Energy Kazakhstan Ltd.

Big Sky Energy Kazakhstan Ltd. was incorporated on July 29, 2003 in Alberta, Canada and holds a 90% interest in KoZhaN, which has three petroleum licenses in the Atyrau region of Kazakhstan.

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In late 2003 and early 2004, BSEK entered into various share purchase agreements with Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd., a wholly owned subsidiary of Sinopec Corp. for an investment into BSEK of $10,000,000.  We decided to pursue this project ourselves and on July 1, 2004, a Severance Agreement was completed by BSEK and Shengli that terminated all of the various share purchase agreements and BSEK repaid funds that had been received from Shengli. Management will consider other farm out options to third parties as opportunities arise.On October 27, 2003, Big Sky entered into a Share Exchange Agreement with BSEK and all its shareholders of record.  Under the terms of the Agreement, we forwarded $500,000 to BSEK as a short-term loan, which was to be repaid within 60 days.  As well, we were required to issue up to a maximum of 8,000,000 common shares in a share exchange offer with the shareholders of record of BSEK as of October 27, 2003.  Management determined the net asset value per share and the number of shares to be issued based upon various criteria including a valuation performed by PetroGlobe (Canada) Ltd., a third party independent petroleum engineering firm. In December 2003, we forwarded an additional $625,000 to BSEK as a short-term loan, which was to be repaid within 60 days. On January 12, 2004, we issued 8,000,000 of our common shares to the shareholders of BSEK in exchange for their shares in BSEK thereby giving us 100% ownership of BSEK.  On January 14, 2004, BSEK made a payment of $250,000 on the initial loan made in October 2003. On January 20, 2004, we extended the repayment terms on both loans to BSEK to June 1, 2004 and set the interest rate at 5% per annum.  As of December 31, 2004, these loans had not been repaid.  BSEK will repay them once it has started production.

Mr. Matthew Heysel, who is a shareholder, Chairman and Chief Executive Officer of Big Sky was Chairman and Chief Executive Officer of BSEK and also the Vice-Chairman of KoZhaN at the time of the Share Exchange Agreement with BSEK.  Mr. Heysel, as a board member of Big Sky and BSEK, voluntarily abstained from voting on the transaction with BSEK.  Mr. Heysel continues to hold his directorships with these entities, but has relinquished his Chief Executive Officer Designation to Mr. Sehsuvaroglu.

Mr. Daming Yang, who is a shareholder and director of Big Sky, was the President and a director of BSEK and also the Chairman of KoZhaN at the time of the Share Exchange Agreement with BSEK.  Mr. Yang, as a board member of Big Sky and BSEK, voluntarily abstained from voting on the transaction with BSEK. Mr. Yang continues to hold his directorships and offices with these entities.

Mr. Kai Yang, at the time of the Share Exchange Agreement with BSEK, was a major shareholder of Big Sky, the sole shareholder of Big Sky Energy Canada Ltd., which held 80% of the stock of BSEK and Mr. Daming Yang’s brother.

 On February 27, 2004, Big Sky entered into an Asset Purchase Agreement with IbrizOil Inc., an Alberta corporation, hereinafter referred to as Ibriz.  Under the terms of the agreement, Ibriz assigned its 5% over-riding royalty in BSEK’s interest in KoZhaN in exchange for common stock of Big Sky.  The value of the royalty was determined using the results of the valuation report performed by PetroGlobe (Canada) Ltd., an independent third party, in connection with the Share Purchase Agreement entered into by Big Sky and BSEK on October 27, 2003.  The amount of common stock issued was determined using the average closing price of our common stock for the five days prior to February 27, 2004.  On March 4, 2004, we issued 681,475 common shares to Ibriz in connection with the agreement. At the time of this transaction, Mr. Van Doorne was our Executive Vice President, the Managing Director of BSEK and a shareholder of Big Sky, as well a s, the Chief Executive Officer, a director and a shareholder of Ibriz. On March 18, 2005, Mr. Van Doorne resigned as Chief Executive Officer and a director of Ibriz.

KoZhaN

KoZhaN was incorporated as a limited liability partnership on April 28, 2001 in the Republic of Kazakhstan by five Kazakhstani nationals unrelated to us.

On February 17, 2003, KoZhaN entered into agreements with the Government of Kazakhstan for the exploration and development of three petroleum licenses in the Atyrau region of western Kazakhstan.

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- The Morskoe license covers an area of 18,434 acres.  The Morskoe field was discovered in 1965 and has proved undeveloped reserves of 3 million barrels, as determined by PetroGlobe (Canada) Ltd., an independent engineering company based in Calgary, Canada (the Government of Kazakhstan established proven recoverable reserves of 506kt (4.2 million barrels).  In 1965, five wells were drilled in the field, resulting in four oil wells.  One well tested a combined oil flow of 1300 barrels of oil per day (“bopd”).  The wells were shut-in and have never produced oil. A development well was started in the fourth quarter, 2004. Adverse weather conditions and mechanical problems have delayed the completion of this well.  On March 30, 2004, Big Sky announced that it had finished drilling and logging of its Well No. 10 which was drilled to a total depth of 1308 m and encountered 22 m of total oil pay in tw o principal sands at 1168 to 1173 and 1243 to 1260 m KB, respectively. Big Sky is currently completing Well No. 10 in preparation of a flow test through facilities which have been assembled on lease.

- The Karatal license, which covers an area of 103,982 acres.  Several wells drilled in the late 1960s on the property tested small oil flows. The Government of Kazakhstan has established proven recoverable reserves of 337kt (2.8 million barrels).

- The Dauletaly license covers an area of 33,359 acres.  No reserves have been established on the license, which is adjacent to the Krykmyltyk field, which is currently producing approximately 2,000 bopd.

In August 2003, in an arms-length transaction, the five shareholders of KoZhaN, each holding a 20% interest in KoZhaN, entered into a Sale and Purchase Agreement with BSEK whereby BSEK purchased a 90% interest in KoZhaN for future consideration based upon the achievement of KoZhaN production milestones.  BSEK entered into this agreement in order to obtain the contractual rights for exploration and development for the Morskoe, Karatal and Dauletaly fields owned by KoZhaN. BSEK currently owns a 90% interest in KoZhaN and the remaining five shareholders each own a 2% interest.  BSEK is required to make the following payments to the five shareholders, as a group, upon KoZhaN achieving the following milestones:

- $100,000 after the receipt by KoZhaN of payment in full for two sales of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN.  Each sale shall not be of less than 4,000 tonnes of oil and shall be calculated after deducting the government’s share of production, if any.

- $300,000 after the receipt by KoZhaN of payment in full for a cumulative production of 40,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN.  The 40,000 tonnes shall be calculated after deducting the government’s share of production, if any.

- $400,000 after the receipt by KoZhaN of payment in full for a cumulative production of 150,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN.  The 150,000 tonnes shall be calculated after deducting the government’s share of production, if any.

- $500,000 after the receipt by KoZhaN of payment in full for a cumulative production of 250,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN.  The 250,000 tonnes shall be calculated after deducting the government’s share of production, if any.

- A quarterly payment per barrel of oil produced, saved, marketed and sold by KoZhaN (“Production Payment”).  Such production is to be calculated after deducting the government’s share of production, if any. The Production Payment shall equal $0.35 per barrel if the price of oil is equal to or less than $14.00, $0.75 per barrel if the price of oil is greater than $14.00 and less than or equal to $18.00, $1.00 per barrel if the price of oil is greater than $18.00 and less than or equal to $22.00, or $1.50 per barrel if the price of oil is greater than $22.00.  The price of oil shall be determined as a quarterly average based on a calendar year and calculated based on the actual value of oil realized by sale of the oil, net of transportation and tariff costs.

- Upon awarding of a new tender for subsurface use rights outside the Contract Territories, KoZhaN shall pay a bonus of $0.05 multiplied by the number of barrels of oil attributed to the oilfield reserves associated with that award as defined in State Balance of Reserves (Oil) of Kazakhstan as of January 1, 2000.  Payment of the bonus shall be made within 30 days of the tender being awarded.

- Under the terms of the Sale and Purchase Agreement, 1 tonne equals 7 barrels.

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Big Sky Energy Atyrau Ltd.

Big Sky Energy Atyrau Ltd. was incorporated on April 8, 2004 in Alberta, Canada.  Initially, Big Sky owned 75% of this subsidiary and Fullup Limited, a Cypriot registered corporation, owned 25%.   We entered into this corporate arrangement with Fullup Limited based upon representations from it that it would be able to present us with oil and gas opportunities in the Atyrau area of western Kazakhstan.

As consideration for facilitation of the successful acquisition of Vector, BSEA granted a royalty to Fullup Limited of $1.00 per barrel on oil sold by Vector from the Atyrau and Liman-2 licenses. On November 10, 2004, BSEA and Fullup Limited, entered into a Share Exchange Agreement whereby Fullup Limited agreed to exchange its 25% interest in BSEA for 3,500,000 common shares of Big Sky.

Vector Energy West

Vector was incorporated as a limited liability partnership in the Republic of Kazakhstan on July 4, 2001.

On December 28, 2002, Vector entered into agreements with the Government of Kazakhstan for the exploration and development of two petroleum licenses in western Kazakhstan.

- The Atyrau license covers an area of 2,599,044 acres.  The Atyrau field is located on the north shore of the Caspian Sea, near the city of Atyrau.  This block has some 33 salt domes identified by seismic. Of these, 8 post salt prospects have been identified and drilled.  The Kazakh government has assigned 172 million barrels of potential reserves to these post salt prospects on this block.

- The Liman-2 license covers an area of 1,015,599 acres.  The Liman-2 field is located immediately west of the Atyrau license on the north shore of the Caspian Sea.  This block has some 10 un-drilled salt domes.  The Kazakh government has assigned 167 million barrels of potential reserves to 4 of these prospects.

On June 1, 2004, Vector granted a royalty of $1.00 per barrel of oil sold by Vector from the Atyrau and Liman-2 licenses to the former President of Vector. This royalty expires June 1, 2005.

Big Sky Energy Ltd.

Big Sky Energy Ltd. was incorporated on May 31, 2004 in Alberta, Canada in order to have a representative oil and natural gas office in China.  We own 100% of this subsidiary, which is currently inactive.

Oil and Gas Business

In Kazakhstan, producers have the right to negotiate sales contracts directly with purchasers, allowing the market to determine the price of oil.  Under the terms of the three Contracts for Exploration and Production of Hydrocarbons (“Hydrocarbon Contracts”) entered into by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan and KoZhaN on the Morskoe, Karatal and Dauletaly Fields, referred to as the Hydrocarbon Contracts, all production has to be sold into the domestic market during the Exploration Phase of the Hydrocarbon Contracts. The Exploration Phase has a maximum term of 6 years.  We have the right to accelerate the exploration activities and thus shorten the exploration phase.  During the Exploitation Phase we can sell up to 80% of our production on the international markets.  Currently domestic prices are approximately US$145 per tonne. If the domestic market cannot absorb the produced hydrocarbons we can sell our product on the international market.  

Competition

Oil and Gas Business

Several domestic and international companies operate in Kazakhstan.  The Government of Kazakhstan issues licenses on a regular basis through bidding rounds.  Shares in existing licenses can be freely sold and purchased, subject to the terms of the individual Charter and Foundation Agreements in place.  Late in 2004, the Government of Kazakhstan passed legislation providing certain pre-emptive rights whereby the government has the right to acquire interests in fields if there is an intention of the license holder to sell or farm out to a third party. However, there is little competition from foreign

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companies for the assets targeted in Kazakhstan by us.  Major international companies target the large high-risk offshore blocks in the Caspian Sea.

Local refineries are generally amply supplied by existing producers.  Although we are required to sell our crude into the local markets, we can sell our produced hydrocarbons into the international markets if the refineries are not capable of accepting our production.  There are no restrictions to access the pipelines exporting crude from Kazakhstan, except that a transportation agreement has to be signed with KazTransOil and export quotes have to be obtained from the Ministry of Energy.

Employees and Consultants

As the focus of business of Big Sky centers in Kazakhstan, more of the officers and management will be located in the Almaty office. Beginning with our President, we expect to operate our business from Almaty. Field operations personnel will work from an office in Atyrau or will be located at various field work sites.

Vector and KoZhaN engage local staff as required to manage their business.  We anticipate that we and our subsidiaries on an as-needed basis will hire additional employees over the next fiscal year. We are consolidating our two offices in Almaty. Set forth below is an indication of current operations and the numbers of employees and consultants required by our subsidiaries and us to maintain current operations, as at March 31, 2005:

	Number of Employees/Consultants
	Management	Sales	Technical	Administrative
Kazakhstan	4	0	5	7
China	1	0	0	1
Canada	1	0	0	2
Other	1	0	0	0

Should our development necessitate, we will hire additional employees and consultants in sales, marketing, and administration over the current fiscal year and will hire additional management and employees on an as-needed basis.  If the need arises for additional technical employees and we are unable to hire qualified employees in a timely manner, we may outsource projects to third parties.

MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

The following summary financial data should be read in conjunction with the remainder of "Management's Discussion and Analysis or Plan of Operation" and the consolidated financial statements and notes to such consolidated financial statements included in this Prospectus.  The selected historical financial as at December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003, 2002 and from inception date (February 1, 2000) to December 31, 2004 has been derived from our audited consolidated financial statements.  

SUMMARY FINANCIAL DATA

Statement of Operations Data:

	YEAR ENDED DECEMBER 31, 2004	YEAR ENDED DECEMBER 31, 2003	YEAR ENDED DECEMBER 31, 2002	PERIOD FROM FEBRUARY 1, 2000 TO DECEMBER 31, 2004
Loss from continuing operations	$6,816,252	$3,194,368	$2,215,324	$20,071,119
Income (Loss) from Discontinued operations	$24,204	$64,606	($376,156)	($10,114,016)
Net loss	$6,792,048	$3,129,762	$2,591,480	$30,185,135
Basic loss per share	($0.13)	($0.13)	($0.12)	-
Basic weighted average
Common Shares Outstanding	51,585,004	23,536,537	21,774,775

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Balance Sheet Data:

	December 31, 2004	December 31, 2003
Cash and cash equivalents	$983,734	$1,068,451
Working capital (deficiency)	($1,705,240)	$2,241,254
Total assets	$24,583,455	$2,790,706
Total stockholders’ equity	$13,397,829	$2,528,393

NATURE OF OPERATIONS

Late in 2003, Big Sky began investing in oil and gas assets in addition to its Internet service business in China, a transition which concluded December 9, 2004 from selling Big Sky Network Canada Ltd., to become an oil and gas exploration and production company. We acquired KoZhaN and Vector.  By acquiring these companies Big Sky gained a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan, located close to infrastructure and transportation.   

In the fourth quarter, Big Sky spudded its first well, Morskoe # 10. Our near term objectives include the drilling completion and testing of Morskoe #10, followed by the drilling or working over of additional wells offsetting Morskoe #10, should we have positive test results.  

We are also intent on farming out selected high risk exploration targets.  Initially, Big Sky focused its partnership initiatives on China’s major national oil and gas production and service companies and since has expanded its farm out discussions to include established multinational energy companies.  We believe that these activities will lead to a sustainable platform on which to build Big Sky in Kazakhstan. In addition to building a base in Kazakhstan, Big Sky is trying to secure additional licenses in other countries, using the diverse expertise of its officers and consultants.

Big Sky raised over US$12 million of new common equity in 2004. Big Sky is basing its growth strategies on attaining a sustainable level of cash flow from low risk energy development of existing licenses while securing additional licenses subject to available financing on economic terms.  Big Sky raised an additional $13.7 million in equity capital in February/March  2005.

RESULTS OF OPERATIONS

Revenues

For 2004 and 2003, Big Sky did not earn revenues. We have added oil and gas properties through the acquisition of KoZhaN and Vector; however these properties are currently undeveloped and consequently did not provide revenue during the period.

Expenses

During 2004 and 2003, we incurred operating expenses of $6,591,615 and $3,208,603 respectively. The following table provides a breakdown of operating expenses by category.

General Operating Expenses

	YEAR ENDED DECEMBER 31, 2004 $	YEAR ENDED DECEMBER 31, 2003 $	PERIOD FROM FEBRUARY 1, 2000 TO DECEMBER 31, 2004 $
Office Costs	5,586,469	3,073,825	17,330,204
Professional Services	759,984	122,672	2,724,450
Investor Relations	245,162	12,106	1,415,251
Extinguishment of debt	-	-	(1,422,225)
Miscellaneous	-	-	212,114
TOTAL	6,591,615	3,208,603	20,259,794

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Office costs include the costs of executive management, administrative consultants, rent, insurance, travel and general offices costs associated with maintaining our business offices and operation in Canada and Kazakhstan. The increase in office costs from 2003 is due to acquisition of additional subsidiaries during the year and their related costs.  There is $385,690 (2003 – $455,000) of office costs related to maintaining an office in Beijing. These costs decreased as a result of Big Sky’s change in focus to oil and gas operations.  Professional services include accounting, audit and legal advisory costs.  Professional costs have increased in 2004 compared to 2003.  The overall increase in professional services was due to increased legal, audit and accounting fees due to the increased activity of the oil and gas operations in the subsidiaries.

The financial statements of Big Sky’s two subsidiaries have been translated into US Dollars from Kazakhstan Tenge.  The subsidiaries maintain their accounting records in Tenge.  A majority of KoZhaN’s and Vector’s capitalized costs, expenses, liabilities, loans and cash flows are denominated in US Dollars.  Accordingly, KoZhaN and Vector have determined that the US Dollars is its functional currency.  KoZhaN’s and Vector’s long-lived assets and equity are translated using historic exchange rates.  Gains and losses arising from these translations are reported in the consolidated statement of operations.  The foreign currency loss related to this translation was $193,130.  Big Sky maintains offices in Canada and China and may incur foreign exchange losses in meeting its operating expenses in local currencies relative to the US dollar. In 2004, foreign exchange losses for operat ions in China and Canada were $33,808. The Kazakhstan Tenge is not a fully convertible currency outside of the Republic of Kazakhstan. The translation of Tenge denominated assets and liabilities into US Dollars for the purpose of these financial statements does not indicate that Big Sky could realize or settle in US Dollars the reported values of the assets and liabilities.  

We record the fluctuations in the fair value of certain unexercised stock options as a deferred compensation asset (reported as a reduction of stockholders’ equity on the balance sheet). This asset is amortized over the life of the stock options as non-cash compensation expense. The non-cash compensation expense in 2004 was $758,264 (2003 – $1,541,174).

Summary of Non-cash Compensation Expense since inception:

	Expense	Unamortized Deferred Compensation
Options
Options granted June 29, 2001	3,841	-
Options granted November 13, 2001	-	-
Options granted October 21, 2002	-	-
Options granted October 21, 2002	707,006	-
Options granted April 26, 2003	14,749	4,594
Options granted June 24, 2004	32,668	23,332
Total	$758,264	$27,926

Losses

Since we are in the development stage, all losses accumulated since inception is considered as part of our development stage activities.

Discontinued Operations

In December 2004, we sold our 100% shareholding in Big Sky Network Canada Ltd., which held our remaining assets in China, Big Sky Chengdu Technology Services Ltd, 100% owned, and our interest in the Sichuan Huayu Big Sky Network Ltd. joint venture, 50% owned. With this sale, we exited the Internet business in China. The sale of Big Sky Network Canada is presented as a discontinued operation in our financial statements.

CAPITAL EXPENDITURES AND INVESTMENTS

Big Sky sold all of its Internet assets in China on December 9, 2004.  Collaterally to this initiative, Big Sky began investing in oil and gas assets in addition to its Internet service business in China, with the intent to become an international oil and gas exploration and production company. Our first acquisition was of KoZhaN and continued with Vector.  By acquiring these companies Big Sky gained a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan located close to infrastructure and transportation.

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In the fourth quarter of 2004, Big Sky spudded its first well, Morskoe # 10.  We farmed out 45% of out interest in the Morskoe license in exchange for a turnkey completion of the Morskoe # 10 well with cost of completing the well to be paid by the farmee.   On May 6, 2005, Big Sky announced that it has signed a term sheet relating to a convertible debenture to secure a US$17.5 million facility from Sun Drilling LLP ("Sun Drilling") to finance the 2005 drilling program of its two subsidiaries, KoZhaN LLP and Vector Energy West LLP. Sun Drilling has agreed to provide full well construction services for these wells on a turnkey basis, specified under a formal drilling contract, finalized on May 5th.

Material Commitments for Capital Expenditures

As a result of the acquisition of KoZhaN and Vector, we have acquired significant commitments for future capital expenditure. The majority or these commitments are not required to be settled until we are in the production phase, at which time we expect to have sufficient cash-flows from production to meet these commitments and will rely primarily on production cash-flows to meet future capital expenditures. If the future cash flows from production are insufficient to meet these commitments, we will likely have to rely on additional equity financing.  

Certain commitments relating to KoZhaN require capital expenditure prior to the production phase. These include investment commitments of $16.43 million.  We anticipate we will be able to meet these capital costs through a number of financing alternatives. The investment commitment of $16.43 million is required to be spent in exploration phase in the Republic of Kazakhstan during the exploration phase, which is expected to last until approximately 2009.  We plan to finance this commitment through a combination of the sale of exploration related production and future equity financing.   The governments’ objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the license holder, including drilling new wells and seismic activity. The government will measure the degree to which Big Sky has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of Big Sky towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure.

Commercial discovery bonuses will be equal to 0.1% of the value of proved reserves if found.  We anticipate that any commercial discovery bonus will be small enough to be financed out of our working capital.

 For 2004, we have partially met the work commitments expected of Vector and KoZhaN. For 2005, we defined work commitments as follows:

•

KoZhaN – Expected Capital Expenditures are $5.2 million of which $1.6 million is allocated for 3 work-over wells in Karatal; $0.5 million is allocated to new drilling in Dauletaly. We expect to spend an additional $1.4 million developing the Morskoe area, subject to results of drilling Morskoe #10. The balance of spending will be made up from administration, training and related business activities.

•

Vector – Expected Capital Expenditures $29.4 million of which $9.0 million is allocated for seismic work and $17.0 million allocated for drilling 10 wells. The balance will be made up of administration, training and related business activities. The Vector and KoZhaN work commitments are measure by actual work undertaken and completed. The cost to complete the work can be lower, or higher, than the estimated cost. Actual cost is not the determining factor in meeting work commitment obligations. As the undertaken work commitments in 2005 are higher than those defined in the Hydrocarbon Contracts, Vector and KoZhaN expects to apply to the government to amend the commitment to the lesser amounts defined in the Hydrocarbon Contracts.

LIQUIDITY AND CAPITAL RESOURCES

During 2004, Big Sky utilized cash for management and corporate administrative activities of approximately $200,000 per month. Management anticipates that Big Sky currently has sufficient working capital to fund this minimum level of operations through December 2006. However, Big Sky may require additional financing to continue as a going concern beyond December. Current cash resources are not anticipated to be sufficient to fund the work commitment for existing licenses, acquire producing properties or additional licenses. It will consider seeking additional private equity or debt financing. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve Big Sky’s objective, or result in commercial success. Big Sky cannot assure you that it will be able to obtain sufficient capital to satisfy all of its obligations or that its operating subsidiaries will be commercially su ccessful. In February 2005, we raised an additional $13.7 million of common equity from institutional investors and accredited private investors in Europe, Russia, USA and Canada.

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The ability of Big Sky to continue operations will depend on its ability to finance, acquire, explore for and produce oil and natural gas on a profitable basis.

As of December 31, 2004, we had cash and cash equivalents of $983,734 that were included in the working capital deficit of $1,705,240.  This compared to a working capital surplus of $2,241,254 at December 31, 2003.  The decrease largely reflects the working capital deficit acquired on the acquisition of BSEK and Vector that occurred during the year. We closed on the first tranche of a private placement and issued 13,483,750 shares for proceeds of $6,741,875. .  A second tranche was closed July 6, 2004, raising an additional $1,308,125 by issuing an additional 2,616,250 shares.   The third tranche was closed September 20, 2004, raising an additional $1,220,000 by issuing an additional 2,440,000 shares. The fourth tranche was closed November 17, 2004 raising $2,900,000 by issuing an additional 5,800,000 shares.  Costs associated with all tranches of the private placement include a finder’s fee equal to 6% of the gross proceed s received by us and warrants to be issued to the finders that equal 6% of the shares issued under the private placement totaling to $1,116,041 of share issuance costs.  As well, Canaccord Capital (Europe) Limited exercised a warrant for 299,716 shares for proceeds of $74,929.  $4,430,000 of these funds was directed towards the purchase of Vector and $570,000 was directed towards the acquisition of creditor’s rights from Lorgate Management Inc.

On February 11, 2004 we issued 66,666 shares for proceeds of $3,333 on the exercise of non-employee options. As part of the exercise agreement, the remaining 33,334 unvested options outstanding to the option holder were cancelled and returned to the stock option plan.  On June 24, 2004, the Nominating and Compensation Committee granted 100,000 options to a consultant.

On November 10, 2004 we issued 3,500,000 shares in exchange for the 25% minority interest in BSEA at a deemed price of $0.73 per share, being the closing market price for Big Sky’s Common Shares on November 10, 2004 for total proceeds of $2,555,000.

On November 15, 2004 we issued 35,000 shares for proceeds of $1,750 on the exercise of non-employee options.

On a consolidated basis, our minimum cash requirement for maintenance of operations, without conducting a drilling program or acquisitions of other potential fields, is estimated at approximately $400, 000 per month in 2005.  With the acquisition of BSEK, Vector and our diversification into oil and natural gas exploration and production, we anticipate that we will be required to raise additional capital to fund future exploration and development programs or farm out some of our interest in various higher risk/cost projects to third parties.  Such farm-outs would be intended to cover up to 100% of project costs in return for a percentage interest in the project. Big Sky decided to enter into such a farm out with a local civil construction firm to defray expenses associated with higher than expected lease construction costs of the Morskoe #10 well. On October 12, 2004 KoZhaN signed a farm out agreement under which KoZhaN transfers 45% of the subsurfa ce rights of the Morskoe license to ABT Limited LLP (“ABT”).  This transfer of these rights is subject to the approval by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan. ABT, in turn, paid for the cost of lease access and lease construction (Construction Works) and pay up to $650,000 towards the cost of drilling, completion and testing of Morskoe #10 well (Drilling Works).  KoZhaN will contribute $150,000 to the Drilling Works.  Both companies equally share future costs associated with the development of the Morskoe license. At December 31, 2004 there is $166,000 of the ABT fund remaining to be spent.

Cash Requirements

The following aggregated information about our contractual obligations and other commitments aim to provide insight into our short and long-term liquidity and capital resource need and demands as at December 31, 2004.

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		Exploration phase			Production phase
Time period	Total	Within 1 year	1 - 3 years	3 - 5 years	Over 5 years
Estimated dates		2005	2006 – 08	2009 - 10	2011	2012	2013	2014	2014-2030
Production levels (tonnes of oil) (One tonne of oil equals approximately 7.4 barrels)					4,000t	40,000t	150,000t	250,000t	Over 250,000t
Operating leases	348,800	174,900	173,900	Nil	Nil	Nil	Nil	Nil	Nil
Historical costs (Owed to Kazakhstan Government)	11,424,278					182,012	182,012	700,948	10,359,306
Social sphere development liability (Astana and Atyrau)	3,030,000					151,500	151,500	151,500	2,575,500
Social development commitment (Astana and Atyrau)	1,389,000					69,450	69,450	69,450	1,180,650
Investment commitment (Including investment in local personnel)	121,900,000	1,500,000*	3,000,000*	8,500,000*		5,445,000	5,445,000	5,445,000	92,565,000
Liquidation fund (Obligations incurred to date)	40,000								40,000
Commercial production milestone payments	1,300,000				100,000	300,000	400,000	500,000	-
Total	$139,432,078	$1,674,900	$3,173,900	$8,500,000	$100,000	$6,147,962	$6,247,962	$6,866,898	$106,720,456

* As disclosed in note 13 g) to the consolidated financial statements, we are obliged to spend $14,000,000 during the exploration phase, which is expected to end in 2009. As we are entitled to make these payments at any point over the exploration period, the timing of payments presented in the table reflects management’s estimate as to when these expenditures will be incurred by us.

On May 6, 2005, Big Sky announced it had entered into a Convertible Debenture in the principal amount of US$17,500,000 at an interest rate of LIBOR plus 4.0% with Sun Drilling LLP to finance our 2005 drilling program.   This Convertible Debenture is part of a payment arrangement with Sun Drilling LLP which calls for Big Sky to pay 20% of Sun Drilling LLP’s pre-agreed well construction costs in cash as each well is completed.  The balance of 80%, due within one year of the completion of each well, is secured by the Convertible Debenture which provides, in part, for Sun Drilling LLP to have the right to convert to common shares of Big Sky at a rate of the daily average of high and low quotation of each common share, during the 30 days preceding, and inclusive of the Conversion date, less 20%, but not to exceed US$2.00 per common share.

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The following commitments have been excluded based on the inability to estimate the timing

* As disclosed in Note 24 to the consolidated financial statements, we are obliged to spend $16.43 million during the exploration phase, which is expected to end in 2009. As we are entitled to make these payments at any point over the exploration period, the timing of payments presented in the table reflects management’s estimate as to when these expenditures will be incurred by us.

The following commitments have been excluded based on the inability to estimate the timing of payment and or the dollar amount of the future payments:

1.

Quarterly payments to the non-controlling partners in KoZhaN – these payments will be charged based net sales of oil, in accordance with the following schedule:

- $0.35 per barrel if the price of oil is equal to or less than $14.00;

- $0.75 per barrel if the price of oil is greater than $14.00 and less than or equal to $18.00;

- $1.00 per barrel if the price of oil is greater than $18.00 and less than or equal to $22.00; or

- $1.50 per barrel if the price of oil is greater than $22.00

2.

Commercial discovery bonus – these payments to the government are required within 30 days of the approval by the State Committee of Kazakhstan of proved commercial hydrocarbon reserves. Payments amounts are currently set at 0.1% of the value assigned to the proved commercial reserves.

3.

A royalty of $1 per barrel for oil produced

PLAN OF OPERATION

As of December 31, 2004, our management anticipates that we currently have sufficient working capital to fund our operations, without conducting a drilling program or acquisitions of other potential fields, through December 2006.  As at March 31, 2005, after raising an additional $13.7 million in new common equity, we had sufficient working capital to fund our operations and carry out a significant portion of our annual work commitments.

With the acquisition of BSEK, Vector and our diversification into oil and natural gas exploration and production, we anticipate that we will be required to raise additional capital to fund future exploration and development programs or farm-out some of our interest in higher risk exploration projects to third parties.  Such farm-outs would be intended to cover up to 100% of project costs in return for a percentage interest in the project.

Meeting our future financing requirements will be dependent on our ability to develop oil and gas farm outs or joint venture partnerships on favourable terms, our ability to access equity capital markets and, after achieving or acquiring sustainable production, our ability to maintain credit facilities from institutional lenders. We may not be able to raise additional equity when required, or we may raise the equity on terms that are dilutive to existing shareholders.

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OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance sheet arrangements at December 31, 2004.

SUBSEQUENT EVENTS

In February 2005, Big Sky raised additional common equity in a series of private placement transactions, which raised $13,625,000. Big Sky issued 27, 250,000 common shares at a price of $0.50 per share.

Big Sky paid a finders fee of 6% in cash and warrants equal to 6% of the common shares issued. Finders fees of $817,140. were paid and 1,634,280 Warrants to purchase additional 1,634,280 common shares at $0.50 per share were issued.

On March 7, 2005, Big Sky entered into a contract with Matrix-Regent and Matrix-Regent Securities Limited, carrying on business as Matrix Corporate Finance) for the provision of corporate financial advice and services as a financial adviser to Big Sky. The terms of the agreement provide that if Big Sky is admitted to the Alternative Investment Market of the London Stock Exchange, Big Sky will appoint Matrix Corporate Finance as its Nominating Advisor (“NOMAD”)

On March 9, 2005, Big Sky awarded 8,050,000 stock options to officers, directors and consultants under the terms of Big Sky's 2000 Stock Award Plan. The options have an exercise price of $0.50 per share and an expiry date of March 8, 2008. The options vest in four annual increments beginning March 9, 2006.  In addition, Big Sky granted stock awards to the Chief Executive Officer and the Chief Financial Officer of 500,000 and 250,000 shares respectively, for prior period service with reduced compensation.

In March 2005 Big Sky issued 1,750,000 common shares to four option holders who exercised their options   under Big Sky’s 2000 Stock Award Plan. Big Sky realized proceeds of $ 87,500.

On March 29, 2005, Big Sky appointed Mr. Nurlan U. Balgimbayev to its Board of Directors. Mr. Balgimbayev will receive options to purchase 5,000,000 common shares of Big Sky under the 2000 Stock Award Plan. Options for 1,000,000 have been issued to Mr. Balgimbayev in accordance with the terms of the Plan and the remaining 4,000,000 options will be issued subsequent to amendments to the plan increasing the available shares and the vesting provisions, such amendments subject to shareholder approval at the next Annual Meeting of Shareholders.

In March 2005, Big Sky paid $80,000 to a company affiliated with Mr. Bruce Gaston, a director since December 3, 2004, for introductions to potential investors. Certain of these potential investors subsequently participated in the private placement of $13.7 million raised by Big Sky in February 2005.

NEW ACCOUNTING PRONOUNCMENTS

In December 2003, the Financial Accounting Standards Board (“FASB”) revised FIN No. 46, “Consolidation of Variable Interest Entities”, which clarifies the application of Accounting Research Bulletin No. 51 “Consolidated Financial Statements” to those entities (defined as VIEs) in which either the equity at risk is not sufficient to permit that entity to finance its activities without additional subordinated financial support from other parties, or equity investors lack voting control, an obligation to absorb expected losses or the right to receive expected residual returns. FIN No. 46(R) requires consolidation by a business of VIEs in which it is the primary beneficiary. The primary beneficiary is defined as the party that has exposure to the majority of the expected losses and/or expected residual returns of the VIE. Big Sky does not have an interest in any VIE, and therefore there is no impact on the Company's financial positi on, results of operations or cash flows from adoption.

In June 2004, the FASB issued an exposure draft of a proposed statement, “Fair Value Measurements” to provide guidance on how to measure the fair value of financial and non-financial assets and liabilities when required by other authoritative accounting pronouncements. The proposed statement attempts to address concerns about the ability to develop reliable estimates of fair value and inconsistencies in fair value guidance provided by current U.S. GAAP, by creating a framework that clarifies the fair value objective and its application in GAAP. In addition, the proposal expands disclosures required about the use of fair value to re-measure assets and liabilities. The standard would be effective for financial statements issued for fiscal years beginning after June 15, 2005. Big Sky is reviewing The Exposure Draft to determine the potential impact, if any, on its consolidated financial statements.

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In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges, and to require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted. Big Sky does not believe there will be a material impact on it’s financial position, results of operations or cash flow from operations.

In December 2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion 29, Accounting for Non-monetary Transactions. This amendment eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. Under Statement 153, if a non-monetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. This statement is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005. Big Sky is reviewing the guidance to determine the potential impact, if any, on its consolidated financial statements.

In November 2004, the EITF ratified Issue No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations”. The EITF reached a consensus that classification of a disposed of or held-for-sale component as a discontinued operation is only appropriate if the ongoing entity (i) expects to have no continuing “direct” cash flows, and (ii) does not retain or expect to retain an interest, contract or other arrangement sufficient to enable it to exert significant influence over the disposed component’s operating and financial policies after the disposal transaction. Application of this consensus did not have a material impact on Big Sky’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, that will require compensation costs related to share-based payment transactions to be recognized in financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. The standard replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. It is effective for small business issuers for the first interim or annual reporting period beginning after December 15, 2005, meaning that Big Sky will apply the guidance to all employee awards of share-based payment granted, modif ied or settled in the first quarter of 2006. Big Sky is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

Oil and Gas Properties

Big Sky follows the successful efforts method of accounting for its oil and gas operations, whereby expenditures for property acquisitions and all development costs (including development dry holes) and support equipment and facilities are capitalized. The costs of unsuccessful exploratory wells are charged to expense at the time the wells or other exploration activities are determined to be non-productive. Production costs, overheads and all exploration costs other than exploratory drilling are expensed as incurred.

Costs incurred for acquisition of rights to explore and develop the Morskoe, Karatal, Dauletaly, Atyrau and Liman-2 oilfields, including but not limited to payment for geological information use, payment to participate in tender, signature bonuses, obligations on professional training of personnel, obligations on social programs and programs on infrastructure development are capitalized and classified as a right to subsurface use. Payroll and related costs incurred during the acquisition and exploration phases and directly related to oil and gas operations are capitalized as part of oil and gas properties.

Impairment of Oil and Gas Properties

Big Sky evaluates its long-lived assets, including oil and gas properties, for possible impairment by comparing the carrying values with the undiscounted future net before-tax cash flows. Among other things, this might be caused by falling oil and gas prices, a significant revision to reserve estimates, adverse changes in operating costs, tax or political environment. Asset

30

impairment may occur if a field discovers lower than anticipated reserves, write downs of proved reserves based on field performance, significant changes in commodity prices, significant decreases in the market value of an asset, and significant change in the extent or manner of use or physical change in an asset. Impaired assets will be written down to their estimated fair values, generally their discounted future net before-tax cash flows. For proved oil and gas properties, Big Sky performs the impairment test on an individual field basis. Unproved properties are reviewed periodically to determine if there has been impairment of the carrying value with any such impairment charged to expense in the current period. We assessed our oil and gas properties for impairment at the end of 2004 and found no impairments were required based on our assumptions.

Stock Based Compensation

We account for stock-based awards to employees using the intrinsic method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees”.  Under APB 25, compensation expense is accounted for in accordance with the intrinsic method where the expense is recognized upon exercise of the option as being the difference between the quoted market price and the exercise price, or if resulting from awards under variable plans, the expense is measured at each reporting period as the difference between the quoted market price and the exercise price.  We account for stock-based awards to non-employees in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”.  SFAS No. 123 requires that stock options awarded to non-employees be valued at fair value on the date of the award.  Management estimates the fair value of the stock options using the Black-Scholes option-pricing model and makes assumptions for the applicable interest rates, volatility and dividend yield.  In all cases, the calculated compensation is recognized as an expense over the period that the employee performs the related services.  For the year ended December 31, 2004, an amount of $758,264 was recorded as non-cash stock compensation expense in respect of employee and non-employee-stock based compensation (2003 - $489,654)

OUTLOOK

We have focused our operations on oil and natural gas exploration and production, an area in which our management has extensive experience. Our primary business operations are in Kazakhstan, although we continue to seek opportunities in other countries. To complete our transition to oil and gas business, we have engaged a new President and Vice President, Business Development.

 The oil and natural gas industry is cyclical in nature. During peaks in this cycle, oil prices are higher, exploration activities are more prolific and the costs associated with investing are generally lower that during the downward phase of the cycle.  Commodity prices have been relatively high for at least three years and the industry is very active.  Many companies have instigated exploration programs or are interested in investing in exploration.  

Our objective is to find shallow (less than approximately 3000 feet) oil and gas fields with proven reserves that require some enhanced recovery, work over, additional drilling or stimulation, and that have an exploration upside and are located near infrastructure and markets.   The strategy for our entry into the oil business is to act as the principal in researching, negotiating and acquiring licensees to explore and produce hydrocarbons and then to partner with the other oil companies and have these companies provide the initial funding that is required to establish production at the selected oil and gas fields.  

Our current capital resources are limited.  There can be no assurances that we will have sufficient financial, technical and human resources to undertake new opportunities or maintain our current operations. We have consistently been able to raise new capital, attract experienced management and operating people and locate new opportunities. In the current environment of energy prices at higher levels than in the past, we expect to continue to be able to develop our business.

Our focus is on finding or acquiring oil production to ensure sustainable cash flows and ongoing operations.

DESCRIPTION OF PROPERTY

Our principal Kazakhstan business office is located at Suite 3, 132 Dostyk Avenue, Almaty, Kazakhstan 650051. The office consists of approximately 4,000 square feet of office space held under a lease that expires November 30, 2005. We intend to renew this lease for the foreseeable future. Monthly rental cost for this space is approximately 1 million Tenge, approximately US$7,700. This is also the registered office for Vector.

Our principal executive office and our offices of BSEK and BSEA are located at Suite 750, 440 – 2nd Avenue SW., Calgary, Alberta, Canada, T2P 5E9 and consists of approximately 4,000 square feet of office space held under a lease that

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expires on May 30, 2007 subject to certain early termination provisions after one year.  The monthly rental cost of this space is Cdn.$10,308, plus variable operating costs.

KoZhaN has an office located at 1/1 Dzhandosov Street, Almaty, 480008, Kazakhstan and consists of approximately 590 square feet of office space held under a lease that expires on June 30, 2005 at a monthly rental cost of $3,000. The lease is renewable for consecutive three-month periods.  We plan to discontinue this lease in the near future.

Our Beijing representative office is located at 1003 W2 Oriental Plaza, #1 East Chang An Avenue, Beijing, Peoples Republic of China 100738. The office consists of 197 square metres, approximately 1200 square feet, held under a lease that expires February 28, 2006 at a monthly rent of $4,925 plus management fees.

OIL AND GAS PROPERTIES

Morskoe License

The Morskoe License is located near Tengiz in western Kazakhstan, about 90 kilometers southwest of Kulsary railway station.  Neighboring producing oilfields include Tengiz 10 miles to the northeast and Prorva, 10 miles to the south.  The field was identified by seismic investigation in 1963 and proven through drilling in 1965.  It shows the anticlinal structures draped over the top of the salt dome and delineated to the northwest by a fault.  The oil-bearing horizons belong to the Lower Cretaceous Series at a depth of 4,000 feet.

The oil has been trapped in sandstones with a porosity exceeding 20%.  Net pays of over 20 feet have been established.  Three wells are prime candidates for re-completion, having tested oil at combined rates of over 1,000 bopd.  The quality of the crude ranges from 35° to 25° American Petroleum Institute (“API”).  An independent consultant established a fair market value of $7.l7 million using a Discount rate of 15% for the Morskoe reserves. An independent consultant has established proved undeveloped reserves of 3 million barrels.

The License has an area of 18,434 acres.  We have the rights from surface to the Lower Permian.

Karatal License

The Karatal License is located near Makat in western Kazakhstan, about 50 miles north of Atyrau, western Kazakhstan’s major city.  All large North American and European service companies are operating out of Atyrau.  Neighboring producing oilfields include Daraimola 10 miles to the northwest and Tanatar, 5 miles to the east.  The field was identified by seismic investigation in 1958 and proven through drilling in 1959.  It shows several anticlinal structures draped over the top of salt domes and delineated by faults.  The oil-bearing horizons belong to the Lower Cretaceous Series at depths between 300 and 3,000 feet.  The oil has been trapped in sandstones with a porosity exceeding 20%.  Two wells are prime candidates for re-completion, having tested small amounts of oil.  Although some oil production has been established, the license is considered an exploration block.

The License has an area of 103,982 acres.  We have the rights from surface to the basement.  

Dauletaly License

The Dauletaly License is located near Emba in western Kazakhstan, about 60 miles northeast of Kulsary.  Neighboring producing oilfields include Krykmyltyk 1 mile to the north and Zhubantam, 10 miles to the east.    It shows several typical anticlinal structures draped over the top of salt domes and delineated by faults.  The license is considered an exploration block, with substantial deep potential, based on regional maps.  The License has an area of 33,359 acres.  We have the rights from surface to the basement.

Atyrau and Liman-2 Licenses

On December 28, 2002, Vector entered into a Hydrocarbon Contractor contract with the Government of the Republic of Kazakhstan to explore for and produce hydrocarbons in the Atyrau and Liman-2 oilfields in the Atyrau region. From that date to December 31, 2003, no major exploration activities have been carried out. In accordance with the Hydrocarbon Contract  #1077, dated December 28, 2002. Vector received the right to perform exploration activities on the Atyrau oilfield during 6 years from 2003 to 2008. In accordance with the Hydrocarbon Contract dated December 28, 2002, Vector received

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the right to perform exploration activities on the Liman-2 oilfield during 5 years from, 2003 to 2007 inclusive and to perform production activities during the subsequent 20 years.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

1)

On September 4, 2003 the board of directors approved the issuance of 300,000 options to three new directors, Messrs. Feng, Jia and Qu with each person receiving 100,000 options.  These options were priced at fair market value on the date of the grant with an exercise price of $0.15 per share.  One third of the options vested immediately upon issuance with one third vesting one year from the date of grant and the last third vesting two years from the date of grant.  All unexercised options expire on September 4, 2008. Although these individuals have left the Board of Directors effective December 3, 2004, we have permitted them to retain these options in consideration of their otherwise unpaid service to Big Sky.

2)

In March 2005, Big Sky paid $80,000 to a company affiliated with Mr. Bruce Gaston, a director since December 3, 2004, for introduction to potential investors.  Certain of these potential investors subsequently participated in the private placement of $13.7 million raised by Big Sky in February 2005

MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock, par value $0.001 per share is traded in the over-the-counter market and is quoted on the Over-the-Counter Bulletin Board (“OTC-BB”), under the symbol "BSKO".  The following information was obtained from http://finance.yahoo.com:

Period	High	Low
2003:
First Quarter	$0.08	$0.04
Second Quarter	$0.39	$0.01
Third Quarter	$0.45	$0.14
Fourth Quarter	$1.06	$0.16
2004:
First Quarter	$0.91	$0.58
Second Quarter	$0.65	$0.53
Third Quarter	$0.64	$0.45
Fourth Quarter	$0.79	$0.49
2005:
January 1 – March 31	$1.16	$0.47

Quotations commenced on the OTC-BB on September 25, 2000.  These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

We have never paid dividends on our common shares.  There are no restrictions that may limit our ability to pay dividends currently or in the future.  We do not anticipate paying any dividends in the foreseeable future.  As of May 6, 2005 we had approximately 131securityholders of record and  97,438,660 common shares issued and outstanding.

EXECUTIVE COMPENSATION

We employ our executive officers as consultants.  The following table sets forth the compensation paid to our Chief Executive Officer and two other most highly compensated executive officers for the years indicated.  No other executive officer of Big Sky earned a salary and bonus for such fiscal year in excess of $100,000.

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Summary Compensation Table
			Annual Compensation					Long Term Compensation
									Awards	Payouts
Name and Principal Position		Fiscal Year Ended (1)		Salary (US$)	Bonus (US$)	Other Annual Compen-sation (Shares)	Securities under Option/SAR Granted (#)		Restricted Shares or Restricted Share Units (US$)	LTIP Payouts (US$)	All Other Compensa tion
Matthew Heysel, Chief Executive Officer		2004 2003 2002		160,748 140,865 72,956 (2)	0 0 0	0 0 856,027 (2)	0 0 0		0 0 0	0 0 0	0 0 0
Daming Yang, President		2004 2003 2002		55,000 64,915 72,860	0 0 0	0 0 0	0 0 3,100,000(5)		0 0 0	0 0 0	0 0 0
Thomas Milne, Chief Financial Officer (8)		2004 2003 2002		30,000(7) 4,114 (7) 29,426 (3)	0 0 0	0 0 682,802(3)	0 0 950,000(6)		0 0 0	0 0 0	0 0 0
Barry Swersky Co-chairman & Vice-President, New Developments		2004		20,000	0	0	0		0	0	0
(1)	December 31
(2)	During 2002, Mr. Heysel took a voluntary deferral in his salary.  As of December 31, 2002, Mr. Heysel was owed $75,654 in salary, which he indicated he intended to convert to our common stock under the terms of the Alternative Compensation Plan.  On April 28, 2005, Mr. Heysel has converted his salary owing and 856,027 shares issued accordingly.  Mr. Heysel’s services are provided through his personal management company M.H. Financial Management Ltd.
(3)	During 2002, Mr. Milne took a voluntary deferral in his salary.  As of December 31, 2002, Mr. Milne was owed $60,443 in salary, which he had indicated he would convert to our common stock under the terms of the Alternative Compensation Plan.  On August 27, 2003, Mr. Milne elected to convert all salary owing to him to our common stock under the terms of the Alternative Compensation Plan and we issued 682,802 shares to Precise Details, Inc., a company over which Mr. Milne has control.
(4)	Mr. Heysel surrendered these options to Big Sky on July 23, 2002 and they were subsequently cancelled on October 21, 2002 by our board of directors.  Mr. Heysel currently holds 2,000,000 options granted on March 9, 2005.
(5)	Mr. Yang surrendered 1,050,000 of these options to Big Sky on July 23, 2002 and they were subsequently cancelled on October 21, 2002 by our board of directors.  Mr. Yang holds 2,100,000 options at December 31, 2004.
(6)	Mr. Milne surrendered a further 500,000 of these options to Big Sky on July 23, 2002 and they were subsequently cancelled on October 21, 2002 by our board of directors.  Mr. Milne holds 600,000 options at December 31, 2004.
(7)	During 2002, 2003 and early 2004, Mr. Milne provided services on a part-time basis.
(8)	Mr. Milne resigned as Chief Financial Officer as of April 18, 2005.

Option Grants

The following table sets forth information regarding stock option grants to our officers and directors as of December 31, 2004 under Big Sky’s 2000 Stock Award Plan, as amended by a vote of the Shareholders on December 3, 2004:

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Individual Grants
Name	Number of Securities Underlying Options Granted (#)	% of Total Options Granted (1)	Exercise or Base Price ($/Share)(2)	Expiration Date
Daming Yang	2,100,000	20.3	$0.05	October 21, 2007
Thomas Milne	600,000	5.8	$0.05	October 21, 2007
Richard Wing Kit Lam (3)	250,000	2.4	$0.05	October 21, 2007
(1)	Based on options exercisable to acquire a total 10,350,000 shares to executive officers, directors and employees as at December 31, 2004. An additional 450,000 options were outstanding to former directors and an employee of the Chinese Internet business, which was sold on December 9, 2004.
(2)	The exercise price per share was equal to or greater than the fair market value of the common stock on the date of grant as determined by the Board of Directors.  Each option expires five years from the date of grant and is fully vested.
(3)	Mr. Lam resigned on January 16, 2005 to return to the United States. He continues to provide service, under contract, as our webmaster.

On March 9, 2005, Big Sky issued the following additional stock options and common shares to Officers, Directors and Consultants:

Option	Amount	Exercise Price	Expiry
S.A. (Al) Sehsuvaroglu	4,000,000	$0.50	March 8, 2008
Bruce Gaston	1,000,000	$0.50	March 8, 2008
Barry Swersky	200,000	$0.50	March 8, 2008
Philip Pardo	200,000	$0.50	March 8, 2008
Ruslan Tsarni	600,000	$0.50	March 8, 2008
Matthew Heysel	2,000,000	$0.50	March 8, 2008
Zaure Makhembetova	100,000	$0.50	March 8, 2008

These Options vest in full over the course of four years from date of grant as follows:  twenty five percent (25%) of the total number of Shares granted under the Option shall vest after one (1) year of Continuous Status as an Employee or Consultant; and the remaining seventy-five percent (75%) of the Shares granted under the Option shall vest pro-rata monthly, on the same date of the month as the date of grant of the option, over the following thirty-six (36) months of Continuous Status as an Employee or Consultant.

On March 9, 2005, Big Sky issued the following shares to Officers and Directors under the provisions of the 2000 Stock Option Plan:

Shares	Amount
Matthew Heysel	500,000
Thomas Milne	250,000

On March 29, 2005, Big Sky issued the following options:

Option	Amount	Exercise Price	Expiry
Nurlan U. Balgimbayev	5,000,000 (1)	$0.89	March 28, 2008

⁽¹⁾

The 2000 Stock Award Plan was amended by a vote of the Shareholders at the Annual Meeting of Shareholders on December 3, 2004 wherein the maximum number of options which Big Sky could issue under the 2000 Stock Award Plan was increased from 8,000,000 to 15,000,000.  This grant of 5,000,000 options to Mr. Balgimbayev exceeds the maximum number of share options available. Therefore, Big Sky issued 1,000,000 options to Mr. Balgimbayev on March 29, 2005, with a further 4,000,000 options to be issued further to amendment to the Plan to

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increase the maximum number of options as well as amendments to the vesting provisions, such amendments  to be presented to the Shareholders at the next Annual Meeting of Shareholders.

Option Exercises

The following table sets forth details of each exercise of stock options as of  May 6, 2005 by any of the Named Executive Officers, and the May 6, 2005 value of unexercised options on an aggregate basis.

None of the Named Executive Officers have exercised options to purchase shares of our common stock as of May 6, 2005

Aggregated Options Exercised

Name	Securities Acquired on Exercise (#)	Aggregate Value Realized ($)	Unexercised Options as of May 6, 2005 Exercisable (2)/ Unexercisable	Value of Unexercised in the Money-Options at May 6, 2005 Exercisable/ Unexercisable (1)
Matthew Heysel	Nil	Nil	0 (exercisable) $2,000,000 (unexercisable)	$0 (exercisable) $2,228,000(unexercisable
Bruce Gaston	Nil	Nil	0 (exercisable) 1,000,000 (unexercisable)	0 (exercisable) $1,119,000 (unexercisable)
(1)	Based on closing price of $1.19 on May 6, 2005.
(2)	Includes Options to purchase common shares within 60 days after May 6, 2005.

Director Compensation

Prior to December 31, 2004, we did not pay our directors any cash or stock compensation. Independent directors received stock options as compensation for their services to Big Sky. In 2005, we have begun to pay independent directors a cash amount of $4,000 per calendar quarter. Directors who are executive officers do not receive this cash payment. In addition, independent directors receive stock options for their service to Big Sky. Big Sky made this change in recognition that qualified independent directors are a valuable, scarce resource to Big Sky. We wish to remain competitive in our ability to attract qualified independent directors.

We reimburse directors for out-of-pocket expenses for attending board and committee meetings.  Our independent directors receive stock options to purchase shares of our common stock as compensation for their service as directors.  The terms of stock option grants made to independent directors are determined by the board of directors.  See “Option Grants”.  We do not provide additional compensation for committee participation or special assignments of the board of directors.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS

We either directly or through our subsidiaries, have entered into consulting agreements with key individuals, including our executive officers, who perform services for us, as specified in the agreements.  We use a standard form of consulting agreement, which defines terms of the agreement, services to be performed, compensation and benefits, confidentiality and individual specific benefits based on the requirements of the position.  The following contracts are in place at March 31, 2005.

Mathew Heysel Consulting Agreement: Mathew Heysel provides services as our Chief Executive Officer on a full-time basis through his company, M. H. Financial Management Ltd. under a consulting agreement, which expires December 31, 2005.  M. H. Financial Management is paid at a rate of $1,500 per day to a minimum of $25,000 per month exclusive of travel expenses and Goods and Services Tax for Mr. Heysel’s services.  The agreement contains non-compete provisions

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that restrict Mr. Heysel from doing any business whatsoever with our clients or doing substantially similar work for a period of one year in the event Mr. Heysel is no longer contracted by us for any reason.  Mr. Matthew Heysel’s consulting contract provides that should we terminate the agreement, Mr. Heysel would be paid $300,000 at the time of termination. The agreement provides that in the event of a change of control, Mr. Heysel is to be paid five percent (5%) of the value of the sale of our assets or the value of the transaction which would constitute a takeover of Big Sky.  This amount is to be paid within 10 days of the transaction.  A takeover of Big Sky is defined as:

- any change in the holding, either direct or indirect, of shares of Big Sky, or any reconstruction, reorganization, recapitalization, consolidation, amalgamation, merger, arrangement or other transaction, that results in a person who was, or a group of persons acting in concert who were, not previously in a position to exercise effective control of Big Sky, in excess of the number that would entitle the holders thereof to cast twenty (25%) percent or more of the votes attaching to all shares of Big Sky, and

- the exercise of such effective control to cause or result in the election or appointment of two or more directors of Big Sky, or of the successor to Big Sky, who were not previously directors of Big Sky

Daming Yang Consulting Agreement:  Daming Yang provided Big Sky services as our President on a full-time basis under a consulting agreement, which expires in December 15, 2005.  We pay a consulting fee in the monthly amount of $5,000, subject to annual adjustments at the discretion of our board of directors, for Mr. Yang’s services. The agreement contains non-competition provisions that restrict Mr. Yang from doing any business whatsoever with our clients or doing substantially similar work for a period of one year in the event Mr. Yang is no longer contracted by us for any reason.  Mr. Yang resigned as President, effective March 1, 2005 to make way for Mr. Sehsuvaroglu to join the executive team. He remains as a director.

Thomas Milne Consulting Agreement:  During 2002 and 2003, Thomas Milne provided services as our Chief Financial Officer on a part-time basis through his company, Precise Details Inc.  From April 2003 until January 1, 2005, Precise Details Inc. had no contract and received no compensation. Since January 1, 2005, Precise Details Inc. has operated under a consulting agreement, which expires June 30, 2005, at a rate of $600 per day, with a minimum of Cdn.$15,000 per month.  On April 18, 2005, Mr Milne resigned as Chief Financial Officer, he remains a director of Big Sky.  No compensation relative to this resignation was paid to Mr Milne.,

Barry Raymond Swersky Consulting Agreement:  Mr. Swersky provides consulting services to Big Sky through his company, Suntree Ltd.  Big Sky and Suntree Ltd. executed a consulting agreement as of October 1, 2004 terminating on March 31, 2006.  Suntree Ltd. is compensated at a rate of $10,000 per month, plus expenses other than travel.

A.S. Sehsuvaroglu Employment Agreement:  Mr. Sehsuvaroglu commenced providing services as President of Big Sky on March 1, 2005.  A consulting agreement was entered into as of that date for a term to continue until February 29, 2008.  The compensation under this agreement was initially set at the rate of $395,000 per annum, paid monthly, together with stock options for 3,250,000 share of common stock of Big Sky.   By resolution of the Board of Directors dated March 29, 2005, the number of stock options was increased to 4,000,000.

Ruslan Z Tsarni Employment Agreement:  Mr. Tsarni provides service to Big Sky as Vice President, Business Development and a Corporate Secretary. A consulting agreement for his services commenced on March 14, 2005 until March 14, 2008. His compensation is set at $216,000 annually, paid monthly, together with stock options to acquire 600,000 common shares of Big Sky under the terms of Big Sky’s 2000 Stock Award Plan.

FINANCIAL STATEMENTS

The information required by this item is included in pages 52 through 137 attached hereto. The index to the consolidated financial statements can be found on page 51.

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On April 18, 2005, Deloitte & Touche LLP (“Deloitte & Touche”), the principal accountant previously engaged to audit our financial statements, resigned as our independent registered chartered accountants. Deloitte & Touche audited our  consolidated financial statements for two most recent fiscal years ended December 31, 2004.

The report of Deloitte & Touche accompanying the audit for our two most recent fiscal years ended December 31, 2004 was not qualified or qualified as to audit scope or accounting principles. However, such report did contain a modification with regards to substantial doubt about our ability to continue as a going concern.

During our two most recent fiscal years ended December 31, 2004, preceding the date of resignation there were no disagreements between us and Deloitte & Touche on any matter of accounting principles or practices, financial statements disclosure, or auditing scope or procedure.

We are in the process of searching for a new independent registered public accounting firm.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Nevada Revised Statutes Section 78.7502 and 78.751, mandatory indemnification is required for present and former directors.  However, the director must have conducted himself in good faith and reasonably believes that his conduct was in, or not opposed to, our best interests.  In a criminal action he must not have had a reasonable cause to believe his conduct was unlawful.  Advances for expenses may be made if the director affirms in writing that he believes he has met the standards and that he will personally repay the expense if it is determined he did not meet the standards.  We provide permissive indemnification for officers, employees or agents.  Our Board must approve such indemnification and the standards and limitations are the same as for a director.

We will not indemnify a director or officer adjudged liable due to his negligence or willful misconduct toward us, adjudged liable to us, or if he improperly received personal benefit.  Indemnification in a derivative action is limited to reasonable expenses incurred in connection with the proceeding.  Also, we are authorized to purchase insurance on behalf of an individual for liabilities incurred whether or not we would have the power or obligation to indemnify him under our bylaws.

On June 29, 2001, we entered into an Indemnity Agreement with Matthew Heysel.  Under this agreement, we indemnified Mr. Heysel, our Chairman and Chief Executive Officer, against any and all damages, costs, liabilities, charges and expenses arising from a claim against Mr. Heysel and us which was subsequently discontinued.

On August 8, 2001, we amended our By-laws to provide that, to the fullest extent permitted by law, we may indemnify our directors, officers and others who were or are a party to, or are threatened to be made a party to, any threatened, pending or completed action, suit or proceeding.

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

We have agreed to pay all expenses associated with the preparation and filing of this registration statement, including registration fees, transfer agent's fees, printing and engraving fees and legal and accounting fees.  The Selling Securityholders shall be responsible for any commissions or selling fees incurred in connection with the sale of the securities registered under this registration statement.

The following table sets forth the estimated costs and expenses we will pay in connection with the offering described in this registration statement:

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		Amount (1)
SEC Registration Fee		$
Blue Sky Fees and Expenses		2,000.00
Printing and Shipping Expenses		400.00
Accounting Fees and Expenses		90,000.00
Legal Fees		30,000.00
Transfer and Miscellaneous Expenses		500.00
TOTAL		$100,244.91
(1)	All expenses, except the SEC registration fee, are estimates.

RECENT SALES OF UNREGISTERED SECURITIES

Issuances pursuant to Regulation S

During 2004, we granted 100,000 options exercisable to acquire common shares to a consultant.  These options were priced above the fair market value on the date of grant with an exercise price of $0.56 per share. The options were subject to vesting conditions based upon continued performance of services, pursuant to which one-third of the granted options vested on the date of grant, and one-third of the granted options would prospectively vest on each of the first and second anniversaries of the date of grant, respectively.  The Option grant expires on June 24, 2009.

On January 26, 2004, we issued 100,000 shares to an accredited investor at $0.25 per share for gross proceeds of $25,000.  These securities were issued to a non-U.S. person outside the United States.

On February 11, 2004, we issued 66,666 shares upon a Stock Option Award being exercised at a price of $0.05 per share for gross proceeds of $3,333.30.  These securities were issued to a non-U.S. person outside the United States.

On March 4, 2004, Big Sky issued 681,475 common shares to Ibriz in connection with an Asset Purchase Agreement that we entered into with Ibriz.  The amount of common stock issued was determined using the average closing price of our common stock for the five days prior to February 27, 2004, which resulted in a share price of $0.61 per share.  These securities were issued to a non-U.S. entity outside the United States.

On January 12, 2004, Big Sky completed the acquisition of 100% of the issued and outstanding share capital of BSEK.  Big Sky issued 8,000,000 common shares at a deemed price of $0.286 per share, being the trading price of Big Sky’s shares at the date of announcing the transaction, for total consideration including transaction costs of $2,288,000 as described in Note 5.

On April 12, 2004, Big Sky issued 299,716 common shares to Canaccord Capital (Europe) Limited for total proceeds of $74,929 in connection with the exercise of a warrant issued on April 3, 2002.  The warrant was for a total of 299,716 common shares with an exercise price of $0.25.

On May 7, 2004, Big Sky closed on the first tranche of a private placement and issued 13,483,750 shares for gross proceeds of $6,741,875. The costs associated with the private placement includes a finders fee equal to 6% of the gross proceeds received by Big Sky and warrants to be issued to the finders that equal 6% of the shares issued under the private placement. The total share issuance costs for this tranche were $373,537.

On July 6, 2004, an additional 2,616,250 shares of Big Sky’s common stock was issued at $0.50 per share, totaling $1,308,125.  The private placements were expressly subject to BSEA closing on the acquisition of Vector.  Costs associated with this private placement included a finders fee equal to 6% of the gross proceeds received by Big Sky and warrants to be issued to the finders that equal 6% of the shares issued under the private placement. The total share issuance costs were $97,193.

On September 20, 2004 Big Sky closed on the third tranche of a private placement and issued 2,440,000 shares for gross proceeds of $1,220,000.  The costs associated with this private placement included a finders fee equal to 6% of the gross proceeds received by Big Sky and warrants to be issued to the finders that equal 6% of the shares issued under the private placement. The total share issuance costs for this tranche were $208,070.

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On November 15, 2004 Big Sky issued 35,000 shares on the exercise of stock options for total proceeds of $1,750.

On November 17, 2004 Big Sky closed on the fourth tranche of a private placement and issued 5,800,000 shares for gross proceeds of $2,900,000. The costs associated with this private placement include a finders fee equal to 6% of the gross proceeds received by Big Sky and warrants to be issued to the finders that equal 6% of the shares issued under the private placement. The total share issuance costs for this tranche were $437,241.

On November 10, 2004 Big Sky entered into an agreement to issue 3,500,000 common shares in exchange for the 25% minority interests in BSEA at a deemed price of $0.73 per share, which represents the closing market price for Big Sky’s Common Shares on November 10, 2004 for total proceeds of $2,555,000.  Big Sky applies the fair value method in accounting for warrants issued as a finder fee. The fair value is measured using a Black-Scholes valuation model and is netted as a cost of share issuance.

On November 19, 2004, Big Sky issued 5,800,000 shares of our common stock at $0.50 per share for proceeds of $4,250,000.  Following is a list of the subscribers of this offering under Regulation D.

Aran Asset Management S.A.

SPGP- Société Priveé Gestion de Patrimonie

SPGP - Société Priveé Gestion de Patrimonie

In February and March, 2005, Big Sky issued 27,250,000 shares subsequent to a private placement for gross proceeds of $13,625,000.  The costs associated with this private placement include fees equal to 6% of the gross proceeds received by Big Sky and warrants issued to the finders that equal 6% of the shares issued under this private placement.  The total warrants issued for this private placement equaled 1,611,000.

In March 2005, Big Sky issued 1,750,000 shares to four option holders who exercised options previously granted, at an exercise price of $0.05 per common share for proceeds of $87,500.

In April, 2005, Big Sky issued 150,000 shares to an option holder who exercised options previously granted and fully vested at an exercise price of $0.05 per common share for proceeds of $7,500.

Each of the foregoing issuances of securities was exempt from registration due to the exemption found in Regulation S promulgated by the Securities and Exchange Commission under the Securities Act of 1933. These sales were offshore transactions since all of the offerees were not in the United States and the purchasers were outside the United States at the time of the purchase. Moreover, there were no directed selling efforts of any kind made in the Untied States neither by us nor by any affiliate or any person acting on our behalf in connection with any of these offerings. All offering materials and documents used in connection with the offers and sales of the securities included statements to the effect that the securities have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States or to U.S. persons unless the securities are registered under the Act or an exemption therefrom is available and t hat hedging transactions involving those securities may not be conducted unless in compliance with the Act. Each purchaser under Regulation S certified that it is not a U.S. person and is not acquiring the securities for the account or benefit of any U.S. person and agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption there from and we are required to refuse to register any transfer that does not comply with such requirements.

Issuances Pursuant to Regulation D

The following described issuances were conducted pursuant to Regulation D promulgated by the SEC under the Securities Act of 1933 (“Regulation D”).

On December 1, 2003, we issued 3,000,000 shares of our common stock at $0.25 per share for proceeds of $750,000.  Following is a list of the subscribers of this offering under Regulation D:

US Global Investors, China Region Opportunity Fund

US Global Investors, Global Resources Fund

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On May 13, 2004, we issued 8,000,000 shares of our common stock at $0.50 per share for proceeds of $4,000,000.  Following is a list of the subscribers of this offering under Regulation D:

L-R Global Fund Ltd.

L-R Global Partners LP

US Global Investors – World Precious Minerals

JP Morgan Chase Bank – Cudd & Co.

Between February 25, 2005 and March 31, 2005, we issued  27,250,000 shares of our common stock at $0.50 for proceeds of $13,625,000.00.  The following is a list of the subscribers to this offering under Regulation D.

Egger & Co. Acct S98720

Credit Suisse First Boston LLC

Perinvest Special Situations Fund

Societe Privee de Gestion de Patrimonie (SPGP)

Jeffrey R. Costello – 477486

Domenic Gualtieri

Shagwell SA

Kiril Surikov

Lombard Odier Darier Hentsch & Cie

Royal Trust Corporation of Canada as custodian for ARC Energy Fund 4

Roytor & Co – US Global Investors

GMP Securities Ltd

Edward S. Kaufman

AS Capital Partners LLC

Kazimir Russia Master Fund LP

Maxim Topper

Mark  A. Partington

Haywood Securities, in Trust, for Berwick Capital Ltd.

Oxford Management Ltd.

Barclay St James Capital Group

Mark and Nadia Crandall

Pangea Advisors Limited.

Each of the foregoing issuances of securities were exempt from registration pursuant to Rule 506 of Regulation D. Neither we nor any person acting on our behalf offered or sold these securities by any form of general solicitation or general advertising. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom. Each purchaser represented to us that he was purchasing the securities for his own account and not for the account of any other persons. Each purchaser was provided with written disclosure that the securities have not been registered under the Securities Act of 1933 and therefore cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom.

EXHIBITS

EXHIBIT INDEX

Except for contracts made in the ordinary course of business, the following are the material contracts that have been entered into by Big Sky:

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Exhibit No.	Description
3.1 (1)	Certificate of Amendment to Articles of Incorporation of China Broadband Corp. filed with the Secretary of State of Nevada on December 29, 2003
3.2 (1)	Amended and Restated By-Laws of Big Sky, dated December 3, 2004.
5.1	Opinion of Counsel re: Legality - filed herewith
10.1(2)	Share Exchange Agreement, dated October 27, 2003, between China Broadband Corp., Big Sky Energy Kazakhstan Ltd. and its shareholders.
10.2 (3)	Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and Richard Lam
10.3 (3)	Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and Daming Yang
10.4 (3)	Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and M.H. Financial Management Ltd.
10.5 (3)	Consulting Agreement dated January 1, 2004, between China Energy Ventures Corp. and Wei Yang
10.6 (4)	Share Purchase Agreement dated October 7, 2003 between Big Sky Energy Kazakhstan Ltd. and Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. – English Translation
10.7 (4)	Frame Agreement of Jointly Cooperation dated November 6, 2003 between Big Sky Energy Kazakhstan Ltd. and Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. – English Translation
10.8 (4)	Escrow Agreement dated January 30, 2004 between Big Sky Energy Kazakhstan Ltd., Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. and W. Scott Lawler
10.9 (5)	Asset Purchase Agreement dated February 27, 2004 between IbrizOil Inc. and China Energy Ventures Corp.
10.10 (6)	Contract for exploration and production of hydrocarbons at Dauletaly Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan
10.11 (6)	Contract for exploration and production of hydrocarbons at Karatal Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan
10.12 (6)	Contract for exploration and production of hydrocarbons at Morskoe Field dated February 17, 2003 between KoZhaN LLP and the Ministry of Energy and Mineral Resources of Kazakhstan
10.13 (7)	Audit Committee Charter, amended November 12, 2003
10.14 (8)	Sale and Purchase Agreement between Big Sky Energy Atyrau Ltd., Batys Petroleum LLP and Glushich Victor Petrovich dated April 10, 2004
10.15 (8)	Amendment Agreement No. 1 to the Sale and Purchase Agreement Dated April 10, 2004 between Big Sky Energy Atyrau Ltd., Batys Petroleum LLP and Glushich Victor Petrovich dated April 12, 2004
10.16 ()	Agreement for Assignment of the Creditor’s Rights between Vector Energy West LLP, Lorgate Management Inc. and Big Sky Energy Atyrau Ltd. dated April 10, 2004
10.19 (11)	Share Purchase Agreement dated December 9, 2004, by and between Big Sky Energy Corporation and Big Sky Energy Canada Ltd.
10.20 (10)	Consulting Agreement dated December 1, 2004, between Big Sky Energy Corporation and M.H. Financial Management Ltd.
10.21 (10)	Consulting Agreement dated June 30, 2004, between Big Sky Energy Corporation and Daming Yang.
10.22 (10)	Consulting Agreement dated December 1, 2004, between Big Sky Energy Corporation and Precise Details, Inc.
10.23 (10)	Consulting Agreement dated October  1, 2004, between Big Sky Energy Corporation and Suntree Ltd.
10.24 (12)	Consulting Agreement dated January 19, 2005, between Big Sky Energy Corporation and A.S. Sehsuvaroglu, together with amendment.

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10.25 (9)	Terms of Business Agreement dated 24 February, 2005 and executed on behalf of the Company, 7 March 2005,  between Big Sky Energy Corporation and Matrix-Regent/Matrix-Securities Limited, trading as Matrix Corporate Finance
10.26 (11)	2000 Stock Award Plan, as amended by the shareholders, December 3, 2004
10.28	Consent of W. Scott Lawler, Attorney and Counselor at Law (See Exhibit 5.1)
10.29	Consent of Deloitte & Touche LLP - filed herewith
10.30	Consent of TOO Deloitte & Touche  - filed herewith
10.31	Master contract - Vector Energy West LLP and Sun Drilling - filed herewith
10.32	Power of Attorney for William Duncan - English translation - filed herewith
10.33	Master contract - KoZhaN LLP and Sun Drilling - filed herewith
(1)	Previously filed on Form 10-QSB on May 21, 2004
(2)	Previously filed on Form 8-K on October 31, 2003.
(3)	Previously filed on Form SB-2 on February 19, 2004
(4)	Previously filed on Form 10-KSB on March 30, 2004.
(5)	Previously filed on Form 8-K on May 18, 2004
(6)	Previously filed on Form 10-QSB on May 21, 2004
(7)	Previously filed on Form SB-2 on July 28, 2004.
(8)	Previously filed on Form 8-K on December 14, 2004
(9)	Previously reported on Form 8-K on March 9, 2005 - exhibit not attached to such filing
(10)	Previously filed on Form 8-K on March 10, 2005
(11)	Previously filed on Form 14C on October 27, 2004
(12)	Previously filed on Form 8-K on February 3, 2005

UNDERTAKINGS

Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, we hereby undertake to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred to that section.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to our Articles of Incorporation or provisions of the Nevada Business Corporations Act, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question, whether or not such indemnification by us is against public policy as expressed i n the Securities Act and will be governed by the final adjudication of such issue.

We hereby undertake to:

(1)	File, during any period in which we offer or sell securities, a post-effective amendment to this registration statement to:
	(a)	Include any prospectus required by section 10(a)(3) of the Securities Act;
	(b)	Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement.  Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and

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	(c)	Include any additional or changed material information on the plan of distribution.
(2)	For determining liability under the Securities Act treat each post-effective amendment as a new registration statement of the securities offered and the offering of the securities at that time to be the initial bona fide offering.
(3)	File a post effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

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SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing on Form SB-2 and authorizes this registration statement to be signed on its behalf by the undersigned on May 10, 2005.

	BIG SKY ENERGY CORPORATION
By:	/s/ Matthew Heysel Name: Matthew Heysel Title: Chief Executive Officer (Principal Executive Officer)
By:	/s/ Bruce H Gaston Name: Bruce H. Gaston Title: Chief Financial Officer (Principal Accounting Officer)

In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated:

Signature	Title	Date
/s/ Matthew Heysel		May 12, 2005
Matthew Heysel /s/ Daming Yang	Chief Executive Officer and Director (Principal Executive Officer)	May 12, 2005
Daming Yang /s/ Thomas Milne	Director	May 12, 2005
Thomas Milne /s/ Bruce Gaston	Director	May 12, 2005
Bruce Gaston /s/ Philip Pardo	Chief Financial Officer and Director (Principal Accounting Officer)	May 12, 2005
Philip Pardo /s/ Barry Swersky	Director	May 12, 2005
Barry Swersky	Vice-President – New Development and Director

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/s/ Al Sehsuvaroglu		May 12, 2005
SA. (Al)  Sehsuvaroglu /s/ Nurlan Balgimbayev	President and Director
Nurlan U. Balgimbayev	Director	May 12, 2005

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Index to Financial Statements
BIG SKY ENERGY CORPORATION (as at December 31, 2004)	PAGE
Report of Independent Registered Chartered Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS
BIG SKY ENERGY KAZAKHSTAN LTD. (Successor) and KOZHAN LLP (Predecessor)
Report of Independent Registered Chartered Accountants – Big Sky Energy Kazakhstan Ltd.
Independent Auditors’ Report – KoZhaN LLP
Consolidated Statements of Operations for the period from August 11, 2003 (date of inception of the Successor) to December 31, 2003, the period from January 1, 2003 to August 11, 2003, the year ended December 31, 2002, the period from April 28, 2001 (date of inception of the Predecessor) to December 31, 2001, and the cumulative period from April 28, 2001 to December 31, 2003
Consolidated Balance Sheets as at December 31, 2003 and 2002
Consolidated Statements of Partners’ Deficit/Shareholders’ Equity for the period from April 28, 2001 to December 31, 2003
Consolidated Statements of Cash Flows for the period from August 11, 2003 (date of inception of the Successor) to December 31, 2003, the period from January 1, 2003 to August 11, 2003, the year ended December 31, 2002, the period from April 28, 2001 (date of inception of the Predecessor) to December 31, 2001, and the cumulative period from April 28, 2001 to December 31, 2003
Notes to Consolidated Financial Statements
VECTOR ENERGY WEST LLP (as at December 31, 2003)
Independent Auditors’ Report
Statements of Loss
Balance Sheets
Statements of Changes in Parnters’ Deficit
Statements of Cash Flow
Notes to the Financial Statements
VECTOR ENERGY WEST LLP (as at March 31, 2004) (unaudited)
Interim Statements of Loss
Balance Sheets
Interim Statements of Changes in Partners’ Deficit
Interim Statements of Cash Flows
Notes to the Interim Financial Statements

47

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Stockholders of

Big Sky Energy Corp. (formerly China Energy Ventures Corp.):

We have audited the consolidated balance sheets of Big Sky Energy Corp. and subsidiaries (a development stage enterprise) (“the Corporation”) as of December 31, 2004 and 2003 and the related consolidated statements of operations and deficit, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004 and for the period from February 1, 2000 (date of incorporation) to December 31, 2004.  These financial statements are the responsibility of the Corporation’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Corporation  is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Big Sky Energy Corp. and subsidiaries as of December 31, 2004 and 2003 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 and for the period from February 1, 2000 (date of incorporation) to December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that Big Sky will continue as a going concern.  The Corporation is a development stage enterprise engaged in oil and gas exploration in the Republic of Kazakhstan.  As discussed in Note 2 to the financial statements, the Corporation’s operating losses since inception raise substantial doubt about its ability to continue as a going concern.  Management’s plans concerning these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Calgary, Alberta, Canada

March 18, 2005  (except as to the fifth paragraph of Note 25 which is as of March 29, 2005.)

48

Big Sky Energy Corporation  (formerly China Energy Ventures Corp.)
(a Development Stage Enterprise)
Consolidated Balance Sheets
(Expressed in United States Dollars)
			December 31, 2004	December 31, 2003
ASSETS
CURRENT
	Cash and cash equivalents		$                    983,734	$                 1,068,451
	Restricted cash		63,040	30,000
	Advances to related parties		21,351	1,154,941
	Interest and other receivables		142,865	87,158
	Prepaid expenses		484,983	163,017
			1,695,973	2,503,567
LONG-TERM
	Long-term advances		320,885	-
	Advances to related parties		24,439	-
	Property and equipment (Note 6)		384,077	287,139
	Oil and gas properties (Note 5, 7)		22,158,082	-
	TOTAL ASSETS		24,583,455	2,790,706
LIABILITIES
CURRENT
	Obligations for social sphere development (Note 11)		1,401,000	-
	Obligations for professional training of personnel (Note 12)		289,200	-
	Obligations for acquisition of the right for geological information use (Note 13)		758,265	-
	Accounts payable and accrued liabilities (Note 8)		761,158	262,313
	Short-term interest free loan from ABT LTD (Note 9)		166,000	-
	Due to related parties (Note 19)		25,590	-
			3,401,213	262,313
LONG-TERM
	Obligations for social sphere development (Note11)		1,255,325	-
	Obligations for professional training of personnel    (Note 12)		304,641	-
	Obligations for historical cost reimbursement (Note 20)		981,674	-
	Asset retirement obligation (Note 21)		435,868	-
	Deferred income tax liability (Note 22)		4,806,906	-
TOTAL LIABILITIES			11,185,627	262,313
CONTINUING OPERATIONS (NOTE 2)
COMMITMENTS AND CONTINGENCIES (NOTE 24)
STOCKHOLDERS' EQUITY
	Common stock (Note 15)		126,538	89,516
		$0.001 par value, shares authorized: 150,000,000;
		shares issued and outstanding: 68,119,460 (December
		31, 2003 – 31,096,603)
	Additional paid in capital		43,484,352	26,840,474
	Deferred compensation		(27,926)	(1,008,510)
	Deficit accumulated during development stage		(30,185,135)	(23,393,087)
			13,397,829	2,528,393
			$               24,583,455	$                 2,790,706

49

Big Sky Energy Corporation (formerly China Energy Ventures Corp.)
(a Development Stage Enterprise)
Consolidated Statements of Operations and Deficit
(Expressed in United States Dollars)
							Cumulative Period From
							Date of
							Incorporation
			Year Ended December 31				Feb 1, 2000 to
			2004	2003	2002		Dec 31, 2004
General and administrative
	Expenses (including non-cash
	Compensation of $758,264 (2003-
	$1,541,174, 2002-$489,654)		(6,217,720)	(3,038,170)	(2,004,663)		(16,482,519)
Depreciation and amortization			(126,507)	(170,433)	(213,162)		(3,529,887)
Accretion			(247,388)				(247,388)
			(6,591,615)	(3,208,603)	(2,217,825)		(20,259.794)
Foreign exchange gain (loss)			(226,938)	-	-		(226,938)
Interest income			2,301	14,235	2,501		415,613
Loss from continuing operations			(6,816,252)	(3,194,368)	(2,215,324)		(20,071,119)
DISCONTINUED OPERATIONS (Note 4)
Impairment of assets (note 10)			-	-	(400,000)		(8,628,623)
Loss in Big Sky Network Canada Ltd			-	-	-		(181,471)
Loss in Shekou Joint Venture (Note 10)			-	-	(123,504)		(609,607)
Loss in Chengdu Joint Venture (Note 10)			-	-	-		(1,141,793)
Gain on sale of Shekou Joint Venture  (Note 10)			-	-	125,798		125,798
Gain on sale of Big Sky Network Canada			179,935	-	-		179,935
Income (loss) on discontinued operation			(155,731)	64,606	21,550		141,745
Income (loss) from discontinued operations			24,204	64,606	(376,156)		(10,114,016)
NET LOSS			(6,792,048)	(3,129,762)	(2,591,480)		(30,185,135)
DEFICIT, BEGINNING OF PERIOD			(23,393,087)	(20,263,325)	(17,671,845)		-
DEFICIT, END OF PERIOD		$	(30,185,135)	(23,393,087)	(20,263,325)	$	(30,185,135)
LOSS PER SHARE
	Basic and diluted loss from continuing
	operations	$	(0.132)	(0.136)	(0.102)
	Basic and diluted on discontinued
	operations	$	0.001	0.003	(0.017)
	Basic and diluted – net loss	$	(0.131)	(0.133)	(0.119)
SHARES USED IN COMPUTATION
	Basic and diluted		51,585,004	23,536,537	21,774,775

The accompanying notes are an integral part of this consolidated financial statement.

50

51

51

51

51

Big Sky Energy Corporation (formerly China Energy Ventures Corp.) (a Development Stage Enterprise) Consolidated Statements of Stockholders’ Equity (Expressed in United States Dollars)
				Additional			Total
		Common Stock		Paid-in	Deferred	Accumulated	Stockholders’
		Shares	Amount	Capital	Compensation	Deficit	Equity
			$	$	$	$	$
Balance,		1,509,850	59,971	-	-	-	59,971
	February 1, 2000
Issue of common stock
	for the outstanding shares
	of China Broadband
	(BVI) Corp.	13,500,000	13,500	696,529	-	-	710,029
Stock issued pursuant to
	private placement agreements at $0.20
	per share	500,000	500	98,835	-	-	99,335
Stock issued pursuant to
	private placement agreements at $1.00
	per share	1,530,000	1,530	1,518,289	-	-	1,519,819
Stock issued pursuant to private placement agreement at $7.50 per share
		1,301,667	1,302	9,696,236	-	-	9,697,538
Acquisition of the shares
	of Big Sky Network
	Canada Ltd.	1,133,000	1,133	8,496,367	-	-	8,497,500
Issuance of warrants		-	-	44,472	-	-	44,472
Non-cash compensation		-	-	15,235	-	-	15,235
Deferred compensation		-	-	65,381	(65,381)	-	-
Amortization of deferred
	compensation	-	-	-	7,386	-	7,386
Net loss		-	-	-	-	(3,597,180)	(3,597,180)
Balance,
	December 31, 2000	19,474,517	77,936	20,631,344	(57,995)	(3,597,180)	17,054,105
Deferred compensation		-	-	1,030,708	(1,030,708)	-	-
Issuance of warrants		-	-	277,775	-	-	277,775
Amortization of deferred
	compensation	-	-	-	369,037	-	369,037

51

Net loss		-	-	-	-	(14,074,665)	(14,074,665)
Balance,
	December 31, 2001	19,474,517	77,936	21,939,827	(719,666)	(17,671,845)	3,626,252
Amortization of deferred
	compensation (Note 16)	-	-	-	326,191	-	326,191
Deferred compensation		-	-	139,289	(139,289)	-	-
Alternative
	Compensation Plan
	(Note 18)	-	-	163,463	-	-	163,463
Issuance of common
	stock to settle legal
	fees	42,124	-	21,062	-	-	21,062
Stock issued pursuant to
	private placement
	agreements at $0.25
	per share	2,997,160	2,997	644,364	-	-	647,361
Net loss		-	-	-	-	(2,591,480)	(2,591,480)
Balance,
	December 31, 2002	22,513,801	80,933	22,908,005	(532,764)	(20,263,325)	2,192,849
Amortization of deferred
	compensation (Note 16)	-	-	-	1,541,174	-	1,541,174
Deferred compensation		-	-	2,016,920	(2,016,920)	-	-
Alternative
	Compensation Plan
	(Note 18)	682,802	683	(683)	-	-	-
Stock issued pursuant to
	private placement
	agreements at $0.25
	per share	7,900,000	7,900	1,916,232	-	-	1,924,132
Net loss		-	-	-	-	(3,129,762)	(3,129,762)
Balance,
	December 31, 2003	31,096,603	89,516	26,840,474	(1,008,510)	(23,393,087)	2,528,393
Amortization of deferred
	compensation (Note 16)	-	-	-	758,264	-	758,264
Deferred compensation		-	-	(46,500)	46,500	-	-

52

Stock issued pursuant to
	private placement
	agreements at $0.25
	per share	100,000	100	24,900	-	-	25,000
Stock issued pursuant to
	private placement
	agreement at $0.50	24,340,000	24,340	11,515,168	-	-	11,539,508
Stock issued pursuant to
	purchase of BSEK	8,000,000	8,000	2,280,000	-	-	2,288,000
Stock issued pursuant to
	acquisition of BSEK
	royalty interest	681,475	681	415,019	-	-	415,700
Stock issued pursuant to
	purchase of BSEA
	minority interests	3,500,000	3,500	2,551,500	-	-	2,555,000
Options exercised		101,666	102	4,982	-	-	5,084
Options cancelled		-	-	(175,820)	175,820	-	-
Warrants exercised		299,716	299	74,629	-	-	74,928
Net loss		-	-	-	-	(6,792,048)	(6,792,048)
Balance,
	December 31, 2004	68,119,460	126,538	43,484,352	(27,926)	(30,185,135)	13,397,829

The accompanying notes are an integral part of this consolidated financial statement

53

Big Sky Energy Corporation (formerly China Energy Ventures Corp.)
(a Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
								Cumulative
								Period From
								Date of
								Incorporation
				Year ended December 31				February 1, 2000 to
				2004	2003	2002		December 31, 2004
CASH FLOWS RELATED TO
THE FOLLOWING ACTIVITIES
OPERATIONS
Loss from Continuing Operations			$	(6,816,252)	(3,194,368)	(2,215,324)	$	(20,071,119)
Income from Discontinued Operations				24,204	64,606	(376,156)		(10,114,016)
Adjustment for:
	Extinguishment of Debt				-	-		(1,422,225)
	Depreciation and amortization			126,507	170,433	213,162		3,529,887
	Accretion			247,388	-	-		247,388
	Unrealized Foreign Exchange Gain			70,831	-	-		70,831
	Loss From Big Sky Network Canada			155,731				155,731
	Impairment of assets			-	-	400,000		8,628,623
	Loss in Big Sky Network
		Canada Ltd.		-	-	-		181,471
	Loss in Shekou joint
		venture (Note 10)		-	-	123,504		609,607
	Loss in Chengdu joint
		venture (Note 10)		--	-	-		1,141,793
	Gain on Sale of Big Sky Network Canada			(179,935)				(179,935)
	Gain on Sale of Shekou
		joint venture		-	-	(125,798)		(125,798)
	Non-cash stock
		compensation (Notes 16)		758,264	1,541,174	489,654		3,225,221
	Issuance of Common Shares
		for settlement of legal fees			-	21,062		21,062
Changes in operating assets and liabilities-
	net of the effect of acquisitions
	Restricted cash			(33,040)	-	-		(63,040)
	Interest and other receivable			(54,229)	(6,219)	37,703		(147,328)
	Prepaid expenses			(316,292)	(150,465)	156,722		(479,309)
	Accounts payable and
		accrued liabilities		266,773	116,421	(159,614)		(166,797)
				(5,750,050)	(1,458,418)	(1,435,085)		(14,957,953)

54

FINANCING
	Issue of common stock for cash (Note 15)				12,275,166	1,975,000	749,290		26,891,959
	Stock issuance costs (Note15)				(630,646)	(8,785)	(101,929)		(817,171)
Repayment of advances for share subscriptions					(250,000)	-	-		(250,000)
Repayment of Debt					(570,000)	-	-		(570,000)
Proceeds from ABT Ltd.					166,000	-	-		166,000
					10,990,520	1,966,215	647,361		25,420,788
INVESTING
	Fixed asset additions				(346,194)	(1,319)	(172,599)		(1,048,890)
	Capital Expenditure-oil & gas properties				(303,203)	-	-		(303,203)
	Advances Paid				(320,885)	-	-		(320,885)
	Proceeds from the sale of the
			Shekou joint venture (net of costs)		-	22,800	2,006,400		2,029,200
	Investment in Chengdu joint venture				-	-	-		(1,935,590)
	Acquisition of Big Sky Network
			Canada Ltd. (net of cash acquired)			-	-		(2,395,828)
		Acquisition of Vector Energy West LLP			(4,506,502)	-	-		(4,506,502)
		Acquisition of BSEK (net of cash acquired)			339,353	-	-		339,353
		Advances to related company			(187,756)	(1,149,000)	-		(1,336,756)
					(5,325,187)	(1,127,519)	1,833,801		(9,479,101)
NET DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS					(84,717)	(619,722)	1,046,077		983,734
CASH AND CASH EQUIVALENTS,
	BEGINNING OF PERIOD				1,068,451	1,688,173	642,096		-
CASH AND CASH EQUIVALENTS,
	END OF PERIOD			$	983,734	1,068,451	1,688,173	$	983,734
SUPPLEMENTAL CASH FLOW
	INFORMATION:
	Cash paid for income taxes			$	-	-	-
	Cash paid for interest			$	-	-	-

The accompanying notes are an integral part of this consolidated financial statement.

55

Big Sky Energy Corporation (formerly China Energy Ventures Corp.)

1

(a Development Stage Enterprise)

Period From Date of Incorporation,

February 1, 2000 to December 31, 2004

Notes to the Consolidated Financial Statements

(Expressed in United States Dollars)

1.

INCORPORATION AND BACKGROUND

a)

Incorporation and background

Big Sky Energy Corp. (the "Corporation") was incorporated in Nevada in February 1993 under the name "Institute for Counseling, Inc." On April 27, 2000, Institute for Counseling, Inc. changed its name to China Broadband Corp. on December 29, 2003, China Broadband Corp. changed its name to China Energy Ventures Corp. and on December 3, 2004 China Energy Ventures Corp. changed it’s name to Big Sky Energy Corporation. The Corporation is a development stage enterprise that is pursuing the acquisition of oil and gas exploration and production assets.

On April 14, 2000, the Corporation, a public shell company, acquired China Broadband (BVI) Corp. ("CBB - BVI") through a reverse acquisition, which was accounted for as a recapitalization. As a result of the application of the accounting principles governing recapitalization, CBB - BVI (incorporated on February 1, 2000) is treated as the acquiring or continuing entity for financial accounting purposes.  The consolidated financial statements are deemed to be a continuation of CBB - BVI's historical financial statements.

b)

Investment in Big Sky Network Canada Ltd.

CBB - BVI acquired Big Sky Network Ltd. ("BSN") on February 1, 2000.  Between February 22 and April 25, 2000 BSN issued 10,000,000 shares to a third party for cash so that the Corporation only held 50% of the issued share capital of BSN.  The Corporation purchased the other 50% on September 29, 2000.  BSN owned a 50% interest in the joint venture, Shenzhen China Merchants Big Sky Network Ltd. ("Shekou JV"), which provided Internet access to residential and business customers through the cable television infrastructure. On September 13, 2002, the Corporation sold its 50% interest in the Shekou JV.

On July 8, 2000, BSN acquired a 50% interest in a 20-year joint venture, Sichuan Huayu Big Sky Network Ltd. ("Chengdu JV"), which provides Internet access to residential and business customers through the cable television infrastructure in the Sichuan Province, the PRC. BSN agreed to contribute a maximum of $5,500,000 to the Chengdu JV in cash or equipment and is entitled to receive 65% of the profits earned between 2001 and 2007, 50% of the profits earned between 2008 and 2013 and 35% of the profits earned between 2014 and 2020. As at December 31, 2003, the Corporation has contributed $1,935,590 to this joint venture.  The Chengdu JV has incurred losses since inception. In 2002, the Corporation ceased making capital contributions to the Chengdu JV because of the partners’ lack of performance of its commitments under the joint venture agreement. The Corporation is pursuing remedies from its joint venture p artner to recover its investment.  (See Note 4 – Discontinued Operations)

c)

Chengdu Big Sky Network Technology Services Ltd.

The Corporation established a wholly owned subsidiary to provide high speed Internet access in the sector of Chengdu, Sichuan Province designated as a development zone for technology based companies. Chengdu Big Sky Network Technology Services Ltd. provides its own Internet fibre link, principally to commercial subscribers and government offices with secondary emphasis placed on residential customers. On December 9, 2004 the Corporation sold its interest in Big Sky Network Canada Ltd. See Note 4 – Discontinued Operations.

a)

Investment in Oil and Gas properties

Late in 2003, the Corporation began investing in oil and gas assets in addition to its Internet service business in China, a transition which concluded December 9, 2004, by selling Big Sky Network Canada Ltd., which held all of the Corporation’s Chinese investments, to become an oil and gas exploration and production company. This began with the acquisition of KoZhaN LLP, described below, and continued with the acquisition of Vector Energy West LLP also described below.  By acquiring such companies the Corporation gained a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan located close to infrastructure and transportation.

56

On January 12, 2004, the Corporation completed the acquisition of 100% of the issued and outstanding share capital of Big Sky Energy Kazakhstan Ltd (“BSEK”) thereby acquiring a 90% interest in KoZhaN LLP, a Kazakhstan Limited Liability Partnership (“KoZhaN”) and on May 11, 2004, the Corporation completed the acquisition of 100% of the outstanding share capital of Vector Energy West LLP, a Kazakhstan Limited Liability Partnership, (“Vector”) through its 75% owned subsidiary, Big Sky Energy Atyrau Ltd. (“BSEA”) and on December 10, 2004 completed the acquisition of the remaining 25% of BSEA.  See note 5 “Business Combination”.  

The Corporation through KoZhaN and Vector entered into Subsurface Use Contracts with the Government of the Republic of Kazakhstan (the “Government”) to explore for and produce hydrocarbons in the Morskoe, Karatal and Dauletaly blocks and the Atyrau and Liman-2 blocks, respectively, all located in the Atyrau region of western Kazakhstan (the “Subsurface Use Contracts”).

As a result of these acquisitions, the nature of operations for the Corporation has changed.  The Corporation intends to direct the majority of future capital investment towards oil and gas exploration within the acquired properties. At present the Corporation is in the exploration phase with regards to its oil and gas properties. This phase is expected to last until the Corporation finds economically profitable oil reserves.

On October 12, 2004 KoZhaN signed a farm out Agreement which transfers 45% of the subsurface rights of the Morskoe license to ABT Limited LLP (ABT).  This transfer of rights is subject to the approval by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan. ABT, in turn, will pay for the cost of lease access and lease construction (Construction Works) and pay up to $650,000 towards the cost of drilling, completion and testing of Morskoe #10 well (Drilling Works).  KoZhaN will contribute $150,000 to the Drilling Works.  Both companies will equally share future costs associated with the development of the Morskoe license.

Meeting the Corporation’s future financing requirements for all other projects will be dependent on the success of the Morskoe well and any follow up wells, with resulting cash flow from operations, its ability to develop further oil and gas joint venture partnerships on favorable terms, its ability to access equity capital markets and, after achieving or acquiring sustainable production, credit facilities from institutional lenders. The Corporation will maintain its exploration and development activities at sustainable levels. While there can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve the Corporation’s objective, or result in commercial success, management believes that it has a well developed network of institutional investors who understand the risk of investing in exploration companies. The Corporation cannot assure you that it will be able to obtai n sufficient capital, develop joint venture partnerships or achieve or acquire sustainable production to satisfy all of its obligations or that its operating subsidiaries will be commercially successful. (See Note 25)

Should the Corporation be unable to meet its obligation under the Subsurface Use Contracts due to a lack of capital, the Competent Body has the right to terminate the contracts after giving the Corporation 90 day’s written notice.

1.

CONTINUING OPERATIONS

These consolidated financial statements have been prepared on a going concern basis. The Corporation has acquired an oil and gas business and must make certain capital expenditures during the course of the next year and future years (see Note 24). The Corporation's ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Corporation be unable to continue as a going concern.

During 2004, the Corporation utilized cash for management and corporate administrative activities of approximately $200,000 per month. In 2005, corporate and administrative costs will be higher due to increased business activity in Kazakhstan. Taking into account prepaid lease rentals for office space, monthly expenditures for corporate and administrative costs are estimated at $400,000 per month. Management anticipates that the Corporation currently has sufficient working capital to fund this level of operations through December 2006. Current cash resources are not anticipated to be sufficient to fund the next phase of the Corporation’s development, including its expansion in the oil and gas business, and it will consider seeking additional private equity or debt financing. There can be no assurances that any such funds will be available,

57

and if funds are raised, that they will be sufficient to achieve the Corporation’s objective, or result in commercial success. The Corporation cannot assure you that it will be able to obtain sufficient capital to satisfy all of its obligations or that its operating subsidiaries will be commercially successful. In February 2005, we raised an additional $13.7 million of common equity from institutional investors and accredited private investors (see Note 25).

The ability of the Corporation to survive will depend on its ability to finance, acquire, explore for and produce oil and natural gas on a profitable basis.

The Corporation's operations may also be adversely affected by significant political, economic and social uncertainties in Kazakhstan and in other countries in which it may acquire oil and gas operations. Kazakhstan has emerged from the former Soviet Union with a viable, independent economy and is open to foreign investment. Kazakhstan is rich in a variety of minerals and raw materials. The economy is evolving from centrally planned towards a free market. Government policies favoring foreign investment may change, commodity prices may decline and political disruptions may occur in the region. These factors may impact the Corporation’s ability to conduct its business, the results of its operations and its financial condition and its right to pay dividends.  

3.

ACCOUNTING POLICIES

Basis of Presentation

These consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, BSEK and BSEA.

The equity method of accounting is used for companies in which the Corporation has significant influence, which generally means common stock ownership of at least 20% and not more than 50%. The Corporation used the equity method to account for its joint venture investments in the Shekou JV (which was sold in 2002) and the Chengdu JV (sold in 2004). BSN was accounted for as a majority-controlled subsidiary until April 25, 2000. For the period April 26, 2000 to September 28, 2000, while the Corporation owned 50% of BSN, BSN was accounted for using the equity method.  For the period since September 29, 2000, BSN has been accounted for as a wholly owned subsidiary and all material inter-company accounts and transactions have been eliminated. On December 9, 2004 BSN was sold.

Cash and cash equivalents

The Corporation considers all highly liquid debt instruments with maturities at the date of purchase of three months or less to be cash equivalents.  

Restricted cash

The amount of $63,040 is maintained on deposit to secure corporate credit card balances and as a deposit on oil and gas operations (2003 - $30,000).

Property and equipment

Property and equipment are stated at cost. Depreciation is computed using the declining balance method as follows:

Furniture and fixtures	20%
Computer hardware	30%

Amortization of leasehold improvements and assets recorded under capital lease agreements are computed using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets, currently over 5 years.

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Oil and gas properties

The Corporation follows the successful efforts method of accounting for its oil and gas operations, whereby expenditures for property acquisitions and all development costs (including development dry holes) and support equipment and facilities are capitalized. The costs of unsuccessful exploratory wells are charged to expense at the time the wells or other exploration activities are determined to be non-productive. Production costs, overheads and all exploration costs other than exploratory drilling are expensed as incurred. Costs incurred for acquisition of rights to explore and develop the Corporation’s oilfields, including but not limited to payment for geological information, payment to participate in tender, signature bonuses, obligations on social sphere development, are capitalized and classified as a right to subsurface use. Payroll and related costs incurred during the acquisition and exploration phases and directly related t o oil and gas operations are capitalized as part of oil and gas properties.

Impairment of oil and gas properties

The Corporation reviews its long-lived assets, including oil and gas properties, for possible impairment by comparing the carrying values with the undiscounted future net before-tax cash flows. Asset impairment may occur if a field discovers lower than anticipated reserves, write downs of proved reserves based on field performance, significant changes in commodity prices, significant decreases in the market value of an asset, and significant change in the extent or manner of use or physical change in an asset. Impaired assets will be written down to their estimated fair values, generally their discounted future net before-tax cash flows. For proved oil and gas properties, the Corporation performs the impairment test on an individual field basis. Unproved properties are reviewed periodically to determine if there has been impairment of the carrying value with any such impairment charged to expense in the current period.

Borrowing costs

Interest costs related to financing the acquisition of the subsurface use rights, conducting exploration activities and financing major oil and gas development projects are capitalized as part of related assets until the projects are evaluated, or until the projects are substantially complete and ready for their intended use if the projects are evaluated as successful.

Goodwill and other intangible assets

The Corporation prospectively adopted SFAS No. 142 effective January 1, 2002. SFAS No. 142 eliminates the requirement to amortize goodwill and indefinite-lived intangible assets, extends the allowable useful lives of certain intangible assets, and requires recognition for goodwill and intangible assets and impairment testing, which must be performed at least annually.

Long-lived assets

The carrying value of long-lived assets, which includes goodwill, is evaluated whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when the estimated undiscounted future cash flow expected to result from the use and disposition of the asset, is less than the carrying value of the asset. (See Note 10)

Income taxes

 Income taxes are accounted for under the liability method in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes”.  Tax on the income or loss for the period comprises current tax and any change in deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, and any adjustment of tax payable for previous years.

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Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is realized.

The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income in the reporting periods in which the originating expenditure becomes deductible. In assessing the recoverability of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. In making this assessment, management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies.

Foreign currency translation

In accordance with the Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" the financial statements of two subsidiaries of the Corporation, KoZhaN LLP, a Kazakhstan limited liability partnership (“KoZhaN”) and Vector Energy West LLP, a Kazakhstan limited liability partnership, have been translated into United States Dollars (“US Dollars”) from Kazakhstan TengeTenge (“TengeTenge”). KoZhaN and Vector maintain their accounting records in TengeTenge. A majority of KoZhaN’s and Vector’s capitalized costs, expenses, liabilities, loans and cash flows are denominated in US Dollars. Accordingly, KoZhaN and Vector have determined that the US Dollars is its functional currency.

KoZhaN’s and Vector’s long-lived assets and equity are translated using historic exchange rates. Gains and losses arising from these translations are reported in the consolidated statement of operations.

The Kazakhstan Tenge is not a fully convertible currency outside of the Republic of Kazakhstan. The translation of Tenge denominated assets and liabilities into US Dollars for the purpose of these financial statements does not indicate that the Corporation could realize or settle in US Dollars the reported values of the assets and liabilities. Likewise, it does not indicate that the Corporation could return or distribute the reported US Dollars values of capital and retained earnings to the partners.

Employee Benefits

Pension Payments - The Corporation pays into an employee accumulated pension fund an amount equivalent to 10% of employees’ salaries for employees of its Kazakhstani operations. These amounts are expensed when they are incurred.

Social tax - The Corporation makes payments of mandatory social tax in the amount of 21% of employee salaries for employees of their Kazakhstani operations. These costs are recorded in the period when they are incurred and capitalized as part of oil and gas properties or included with general and administrative expenses in the consolidated statement of operations.

Stock-based compensation

The Corporation applies the intrinsic value method allowed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") in accounting for its stock option plans. Under APB 25, compensation expense resulting from awards under variable plans is measured at each reporting period as the difference between the quoted market price and the exercise price; the cost is recognized over the period the employee performs related services.

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The following table illustrates the effect on net loss and loss per share if the Corporation had applied the fair value recognition provisions of Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

		Year Ended December 31,
		2004	2003	2002
		$	$	$
Net loss, as reported		(6,792,048)	(3,129,762)	(2,591,480)
Add: Stock-based employee compensation
	expense included in reported net loss,
	net of related tax effects	697,946	1,187,055	-
Deduct: Total stock-based employee
	compensation expense determined under fair
	value-based method for all awards, net of
	related tax effects	26,735	94,078	278,432
Pro-forma net loss		(6,120,837)	(2,036,785)	(2,869,912)
Net loss per share:
	Basic and diluted – as reported	(0.131)	(0.133)	(0.119)
	Basic and diluted – pro forma	(0.119)	(0.087)	(0.132)

The fair value of stock options used in computing the pro forma net loss and basic loss per common share was estimated at grant date, determined by the Black-Scholes option pricing model with the following assumptions:

	2004	2003	2002
Dividend yield	0%	0%	0%
Expected volatility	190%	140%	100%
Risk free interest rate	3.93%	3.60%	3.18%
Expected option life	5 years	5 years	3 years

Net loss per share

Basic loss per share ("EPS") excludes dilution and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (warrants to purchase common stock and common stock options) were exercised or converted into common stock, using the treasury stock method.  Potential common shares in the diluted EPS computation are excluded in net loss periods, as their effect would be anti-dilutive. In 2004, 7,267,315 options and warrants were excluded in the calculation of net loss per share. In  2003, 7,659,716 options and warrants and in 2002, 7,810,506 options and warrants were excluded from the diluted EPS calculation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates could include the allowance for potentially uncollectible accounts receivable and a valuation allowance for deferred tax assets. Actual results could differ from those estimates.

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Impact of Recent and Pending Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (“FASB”) revised FIN No. 46, “Consolidation of Variable Interest Entities”, which clarifies the application of Accounting Research Bulletin No. 51 “Consolidated Financial Statements” to those entities (defined as VIEs) in which either the equity at risk is not sufficient to permit that entity to finance its activities without additional subordinated financial support from other parties, or equity investors lack voting control, an obligation to absorb expected losses or the right to receive expected residual returns. FIN No. 46(R) requires consolidation by a business of VIEs in which it is the primary beneficiary. The primary beneficiary is defined as the party that has exposure to the majority of the expected losses and/or expected residual returns of the VIE. The Corporation does not have an interest in any VIE, and therefore th ere is no impact on the Company's financial position, results of operations or cash flows from adoption.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, that will require compensation costs related to share-based payment transactions to be recognized in financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be re-measured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. The standard replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. It is effective for small business issuers for the first interim or annual reporting period beginning after December 15, 2005, meaning that the Corporation will apply the guidance to all employee awards of share-b ased payment granted, modified or settled in the first quarter of 2006. The Corporation is reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

In June 2004, the FASB issued an exposure draft of a proposed statement, “Fair Value Measurements” to provide guidance on how to measure the fair value of financial and non-financial assets and liabilities when required by other authoritative accounting pronouncements. The proposed statement attempts to address concerns about the ability to develop reliable estimates of fair value and inconsistencies in fair value guidance provided by current U.S. GAAP, by creating a framework that clarifies the fair value objective and its application in GAAP. In addition, the proposal expands disclosures required about the use of fair value to re-measure assets and liabilities. The standard would be effective for financial statements issued for fiscal years beginning after June 15, 2005. The Corporation is reviewing The Exposure Draft to determine the potential impact, if any, on its consolidated financial statements.

In November 2004, the EITF ratified Issue No. 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations”. The EITF reached a consensus that classification of a disposed of or held-for-sale component as a discontinued operation is only appropriate if the ongoing entity (i) expects to have no continuing “direct” cash flows, and (ii) does not retain or expect to retain an interest, contract or other arrangement sufficient to enable it to exert significant influence over the disposed component’s operating and financial policies after the disposal transaction. Application of this consensus did not have a material impact on the Corporation’s consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges, and to require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted. The Corporation does not believe there will be a material impact on it’s financial position, results of operations or cash flow from operations.

In December 2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion 29, Accounting for Non-monetary Transactions. This amendment eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. Under Statement 153, if a non-monetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. This statement is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005. The Corporation is reviewing the guidance to determine the potential impact, if any, on its consolidated financial statements.

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DISCONTINUED OPERATIONS

Big Sky Network Canada Ltd., a wholly owned subsidiary of the Corporation, was sold in December of 2004 for a net gain of $179,935. Big Sky Network Canada Ltd. held all of the Corporation’s investments in China.

5.

BUSINESS COMBINATION

Big Sky Energy Kazakhstan Ltd.

On January 12, 2004, the Corporation completed the acquisition of 100% of the issued and outstanding share capital of BSEK.  The Corporation issued 8,000,000 common shares at a deemed price of $0.286 per share, being the trading price of the Corporation’s shares at the date of announcing the transaction, for total consideration including transaction costs of $2,288,000. Among the sellers of the BSEK shares, was a company which held 80% of those shares and which was wholly-owned by Kai Yang, the brother of the Corporation’s President, and of which Matthew Heysel, the Chairman and Chief Executive Officer of the Corporation, and Daming Yang, President of the Corporation, were directors and senior officers of BSEK at the time.  BSEK holds a 90% interest in KoZhaN, which holds the rights to explore for and produce oil and natural gas from three properties in the Republic of Kazakhstan.  The acquired net assets of BSEK a nd consideration given were as follows:

Oil and gas properties	$	6,341,710
Other capital assets		3,424
Current assets, including cash of $339,353		342,431
Loan receivable from BSEK		(1,154,941)
Other current liabilities		(968,753)
Non-current liabilities		(2,275,871)
Net assets acquired	$	2,288,000
Consideration, 8,000,000 common shares issued	$	2,288,000

The oil and gas properties consist of subsurface use rights to previously-discovered proved non-producing oil reserves.

At December 31, 2003, the Corporation had advanced $1,154,941, including accrued interest of $5,941, to BSEK.  This amount is reflected on the consolidated balance sheet as an advance to related parties. At December 31, 2004, the loan balance was $4,185,500 including $95,602 of accrued interest and is eliminated in these consolidated financial statements. The amount is unsecured, bears interest at the rate of 5% per annum and is repayable on demand.  

Results of operations of BSEK have been included in the consolidated statement of operations of the Corporation from the period January 12, 2004 to December 31, 2004.

On January 30, 2004, BSEK entered into a subscription and escrow agreement with a third-party to issue common shares from treasury to this third-party.  The shares were being held in escrow pending receipt of the full amount of the subscription proceeds totaling $2,300,000.  On June 28, 2004, the subscription agreement was cancelled and the $250,000 deposit, which had been received in the third quarter of 2003, was refunded.  

Royalty Interest

On March 4, 2004, the Corporation issued 681,475 common shares to IbrizOil Inc. (“Ibriz”), an Alberta corporation, as consideration for the purchase of a royalty interest in the net revenues of BSEK at a cost of $415,700. These shares were valued at $415,700 based on an average closing price of $0.61 from February 20 – 26, 2004. The purchase price was determined based on the results of the valuation report performed by an independent, third party petroleum engineering company. The royalty interest amounts to 5% of BSEK’s net share of the earnings of its 90%-held subsidiary company, KoZhaN. At the time of this transaction, Mr. Van Doorne, who is a director and the Chief Executive Officer of Ibriz, was also our Executive Vice President and the Managing Director of BSEK.  The acquisition of the royalty interest has been accounted for as an increase in oil and gas property.

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During 2004 $511,612 (2003 – Nil) of BSEK’s expenses were paid by the Corporation.

Vector Energy West LLP

On May 11, 2004, the Corporation, through its 75% owned subsidiary, BSEA, completed the acquisition of 100% of the issued and outstanding charter capital of Vector (a Kazakhstan limited liability partnership). BSEA was incorporated under the laws of Alberta on April 8, 2004 with the Corporation subscribing to 75% of the total shares issued on incorporation. On May 11, 2004, BSEA borrowed $5,000,000 from the Corporation. The funds were paid as follows; $4,506,611 to acquire 100% of the issued and outstanding charter capital of Vector and $570,000 to purchase Vector’s loan from a third party.  At December 31, 2004 the loan balance was $6,434,789 including $177,016 of accrued interest and is eliminated in these consolidated financial statements. The amount is unsecured, bears interest at the rate of 5% per annum and is repayable on demand.   The acquired net assets of Vector and consideration given would be as follows:

Oil and gas properties	$	11,112,756
Current assets, including cash of $109		5,123
Loan payable		(548,076)
Other current liabilities		(1,308,250)
Non-current liabilities		(4,754,942)
Net assets acquired	$	4,506,611
Consideration, paid in cash	$	4,506,611

The oil and gas properties include previously discovered proved non-producing oil reserves as well as subsurface use rights over the remainder of the acreage.

As of the acquisition date, May 11, 2004, Vector had a loan outstanding to third parties of $548,076.  In connection with the purchase of Vector, BSEA was required to purchase the loan and settle it for cash of $570,000 representing a premium of $21,924. This premium has been expensed.

Big Sky Energy Atyrau Ltd.

On November 10, 2004 the Corporation purchased the 25% minority interest in BSEA. The Corporation issued 3,500,000 common shares at a deemed price of $0.73 per share, being the trading price of the Corporation’s shares at the date the transaction was announced, for total consideration of $2,550,000. BSEA holds 100% of the charter capital of Vector, a Kazakhstan limited liability partnership. On November 10, 2004, BSEA had an accumulated net deficiency in the fair value of net assets of $2,798,167 of which $699,542 relates to the Minority interest of BSEA. The purchase price of $2,550,000 and a related deferred income tax liability of $894,250 has been ascribed to oil and gas properties.

During 2004,    $2,051,977 (2003 – Nil) of BSEA’s expenses were paid by the Corporation.

Pro-forma disclosure

SFAS 141 requires disclosure on a pro-forma basis as though the business combination had occurred at the beginning of the period.  

For the year ended December 31, 2004 and December 31, 2003, the Corporation has determined the following pro-forma information for the BSEK and BSEA business combination:

December 31, 2004 (unaudited)	As reported	Adjustments	Pro-forma
Revenue	$ -	$ -	$ -
Net loss	$ (6,792,048)	$ (80,000)	$ (6,872,048)
Loss per share	$ (0.131)	$-	$ (0.133)

December 31, 2003 (unaudited)	As reported	Adjustments	Pro-forma
Revenue	$ -	$ -	$ -
Net loss	$ (3,129,762)	$ (154,000)	(3,283,762)
Loss per share	$ (0.133)	$ -	$ (0.140)

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6.

PROPERTY AND EQUIPMENT

Property and equipment consist of:

	December 31 2004	December 31, 2003
	$	$
Furniture and fixtures	325,297	163,361
Computer hardware and software	46,382	480,300
Leasehold improvements	178,041	59,036
	549,720	702,697
Accumulated amortization	(165,643)	(415,558)
	384,077	287,139

1.

OIL AND GAS PROPERTIES

Oil and gas properties are comprised of the following:

	December 31, 2004	December 31, 2003
	$	$
Subsurface use rights and expenses	21,742,382	-
Royalty interest	415,700	-
Oil and gas properties	22,158,082	-

On October 12, 2004 KoZhaN signed a Farmout Agreement, which transfers 45% of the subsurface rights of the Morskoe license to ABT. This transfer of these rights is subject to the approval by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan. ABT, in turn, will pay for the cost of lease access and lease construction (Construction Works) and pay up to $650,000 towards the cost of drilling, completion and testing of Morskoe #10 well (Drilling Works).  KoZhaN will contribute $150,000 to the Drilling Works.  Both companies will equally share future costs associated with the development of the Morskoe license.

The payable to ABT for Construction Works of $798,915 and the advance for Drilling Works of an interest free loan of  $500,000 was settled as a result of entering into the above agreement. The amounts paid by ABT have been recorded as oil and gas properties.  It should be noted that this farm out agreement is success based and should no production result from the Morskoe license, the Corporation has no obligation to repay ABT its cost of the Construction and Drilling Works.

8.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The following amounts are included in accounts payable and accrued liabilities:

	December 31 2004	December 31, 2003
	$	$
Trade accounts payable	413,271	74,609
Professional fees	98,802	137,583
Office lease	80,323	46,936
Withholding taxes	114,363	-
Other	54,399	3,185
	761,158	262,313

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9.

SHORT-TERM INTEREST FREE LOAN FROM ABT LTD

As at December 31, 2004 the short-term interest free loans due to ABT balance is as follows:

		December 31, 2004
Short-term interest free loan for drilling works	$	166,000

On October 12, 2004 KoZhaN signed a farm out Agreement, which transfers 45% of the subsurface rights of the Morskoe license to ABT. This transfer of these rights is subject to the approval by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan. ABT, in turn, will pay for the cost of lease access and lease construction (Construction Works). These funds represent the balance of the funds received from ABT, which have not been spent on the oil and gas properties.

10.

IMPAIRMENT OF LONG-LIVED ASSETS

As part of the review of the December 31, 2001 financial results, management performed an assessment of the carrying value of the long-lived assets recorded as a result of the 2000 acquisition of BSN and from its direct investments in the Shekou and Chengdu JVs.

Economic trends had negatively impacted technology-companies’ market valuations and management's outlook on expected future growth rates for the Internet industry and BSN’s businesses in particular. Based on the review, management concluded that the decline in valuations and expected growth rates within the Internet industry was more than a temporary condition. Consequently, management performed impairment analysis in accordance with its policy as disclosed in Note 3, and as a result, recorded a $7,549,111 write-down of intangible assets and $679,512 write-down of the investment in the Chengdu JV at December 31, 2001, representing the amount by which the carrying values of these assets exceeded their fair values.

Asset	Write Down at December 31, 2001
	$
Investment in Chengdu JV	679,512
Intangible Assets
Intellectual property	198,010
Shekou JV	1,911,939
Chengdu JV	3,823,875
Goodwill	1,615,287
	7,549,111
Total Write Down	8,228,623

The remaining balance of Intellectual property of $400,000 at December 31, 2001 was written off at December 31, 2002 as the Corporation had sold its interest in the Shekou JV, discontinued its active participation in the Chengdu JV and discontinued pursuing new Internet joint venture opportunities with cable television stations.

On September 13, 2002, BSN sold its 50% interest in Shekou JV for $2,280,000.  Net proceeds, after agent's fees and professional fees, were approximately $2,029,200.  At the time of the sale, the Corporation's investment in Shekou JV, net of its equity share of losses incurred by the joint venture to the date of sale, was approximately $1,903,402, resulting in a gain of $125,798.

On December 9, 2004, the Corporation sold its remaining assets in China. (See Note 4)

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11.

OBLIGATIONS FOR SOCIAL SPHERE DEVELOPMENT

In accordance with the Subsurface Use Contracts, the Corporation is committed to contribute to social sphere development of Astana and Atyrau cities in the total amount of $3,030,000 for all oilfields during the exploration phase.  All Subsurface Use Contracts establish the exploration phase as 6 years from 2003 to 2009, and the production phase as 25 years from 2009 to 2034. During the year ended, December 31, 2004, the Corporation had not made any payments. These payments are due over the period from 2003 to 2008.  Management believes that the Corporation will meet this obligation within the exploration phase and payment delay will not terminate or deteriorate terms of the Subsurface Use Contracts.

Payment of these obligations is to be made according to a payment schedule agreed to between the Corporation and the Government. The non-current portion of these obligations is discounted at 15% being the estimated credit-adjusted risk free discount rate, giving a total discounted obligation of $2,492,368. The accretion expense for the year ended December 31, 2004 was $193,243 (2003- $Nil).

12.

OBLIGATIONS FOR PROFESSIONAL TRAINING OF PERSONNEL

		December 31, 2004		December 31, 2003
Within one year	$	289,200	$	N/A
In the second to the fifth inclusive		389,800		N/A
Total obligations		679,000		N/A
Less: discount on obligations on professional training of personnel		(85,159)		N/A
Present value of obligations on professional training of personnel		593,841		N/A
Amount due for settlement within one year		289,200		N/A
Amount due for settlement after one year		304,641		N/A
Total	$	593,841	$	N/a

Management believes that obligations on professional training of personnel should be recognized for future professional training costs as prescribed by the Subsurface Use Contracts. In accordance with the Subsurface Use Contracts, the Corporation is obliged to finance professional training of Kazakhstani personnel recruited for the Subsurface Use Contract’s operations at the rate of not less than 1% of the total amount of minimal investments. Under the Subsurface Use Contracts, the total amount of minimal investments was established at $53,900,000 during their exploration phase.

These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate.  The accretion expense for the year ended December 31, 2004 was $30,041 (2003 - $Nil) was expensed.

13.

OBLIGATIONS FOR ACQUISITION OF THE RIGHT FOR THE GEOLOGICAL INFORMATION USE

In accordance with the Agreements on acquisition of the right on the geological information use # 710 and # 711 dated January 21, 2002, the Corporation is obliged to pay an additional amount for the right of geological information use if KoZhaN attracts foreign investors.

On May 11, 2004, BSEA acquired 100% of the shares in Vector’s charter fund. Accordingly, Vector recognized additional obligations on acquisition of the right on the geological information use as at December 31, 2004 in the amount of $758,265.

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14.

SIGNATURE BONUSES AND PENALTY PAYABLE

In accordance with the Subsurface Use Contracts there was an obligation to pay signature bonuses in total of $1,000,000 for acquiring the subsurface use rights for all three fields. These bonuses were due for payment within 30 days after signing the Subsurface Use Contracts.

As at December 31, 2003, $1,000,000 had been paid to the Governments as a signature bonus for Morskoe, Karatal and Dauletaly oilfields. Penalties accrued on delaying the payment of the signature bonuses for those oilfields as at December 31, 2003 amounted to $98,904. These penalties were paid as at December 31, 2004.

15.

COMMON STOCK             

The Corporation has issued the following shares in a series of private placement agreements:

i.	On April 14, 2000 the Corporation issued 500,000 common shares at $0.20 per share for total proceeds of $100,000;
ii.	On May 12, 2000 the Corporation issued 1,530,000 common shares at $1.00 per share for total proceeds of $1,530,000;
iii.	On May 12, 2000 the Corporation issued 1,301,667 common shares at $7.50 per share for total proceeds of $9,762,503;
iv.	On April 3, 2002, the Corporation issued 2,997,160 common shares at $0.25 per share for total proceeds of $749,290;
v.	On August 26, 2003, 682,802 common shares were issued pursuant to the Alternative Compensation Plan.  Proceeds of the issue were recorded in 2002; and
vi.	In the fourth quarter of 2003, the Corporation issued 7,900,000 common shares at $0.25 per share for total proceeds of $1,975,000.

On January 12, 2004, the Corporation completed the acquisition of 100% of the issued and outstanding share capital of BSEK.  The Corporation issued 8,000,000 common shares at a deemed price of $0.286 per share, being the trading price of the Corporation’s shares at the date of announcing the transaction, for total consideration including transaction costs of $2,288,000 as described in Note 5.

On January 26, 2004, the Corporation issued 100,000 restricted common shares in connection with a private placement conducted in late 2003 for proceeds to $25,000.  

On February 11, 2004 we issued 66,666 shares for proceeds of $3,333 on the exercise of non-employee options. As part of the exercise agreement, the remaining 33,334 unvested options outstanding to the option holder were cancelled and returned to the stock option plan.

On March 4, 2004, we issued 681,475 common shares to Ibriz in connection with an Asset Purchase Agreement that we entered into with Ibriz. The amount of common stock issued was determined using the average closing price of our common stock for the five days prior to February 27, 2004, which resulted in a share price of $0.61 per shares.

On March 9, 2004, the Corporation solicited votes from selected stockholders of record and received an affirmative vote of 51% to approve an increase in the number of the Corporation’s authorized shares of common stock from 50,000,000 to 150,000,000, par value $0.001 per share.  On April 20, 2004, the Nevada Secretary of State processed the Corporation’s Certificate of Amendment to adjust the Corporation’s authorized share capital to 150,000,000.

On April 3, 2004, Canaccord Capital (Europe) Limited exercised a warrant for 299,716 shares for proceeds of $74,928.

On April 12, 2004, the Corporation issued 299,716 common shares to Canaccord Capital (Europe) Limited for total proceeds of $74,928 in connection with a warrant issued on April 3, 2002.  The warrant was for a total of 299,716 common shares with an exercise price of $0.25.

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On May 7, 2004, the Corporation closed on the first tranche of a private placement and issued 13,483,750 shares for gross proceeds of $6,741,875. The costs associated with the private placement includes a finders fee equal to 6% of the gross proceeds received by the Corporation and warrants to be issued to the finders that equal 6% of the shares issued under the private placement with an exercise price of $0.50. The total share issuance costs for this tranche are $373,537.

On July 6, 2004, an additional 2,616,250 shares of the Corporation’s common stock was issued at $0.50 per share, totaling $1,308,125.  The private placements were expressly subject to BSEA closing on the acquisition of Vector.  Costs associated with this private placement included a finders fee equal to 6% of the gross proceeds received by the Corporation and warrants with an exercise price of $0.50, issued to the finders that equal 6% of the shares issued under the private placement. The total share issuance costs for this tranche were $97,193.

On September 20, 2004 the Corporation closed on the third tranche of a private placement and issued 2,440,000 shares for gross proceeds of $1,220,000.  The costs associated with this private placement included a finders fee equal to 6% of the gross proceeds received by the Corporation and warrants with an exercise price of $0.50, issued to the finders that equal 6% of the shares issued under the private placement. The total share issuance costs for this tranche were $208,070.

On November 15, 2004 the Corporation issued 35,000 shares on the exercise of stock options for total proceeds of $1,750.

On November 17, 2004 the Corporation closed on the fourth tranche of a private placement and issued 5,800,000 shares for gross proceeds of $2,900,000. The costs associated with this private placement include a finders fee equal to 6% of the gross proceeds received by the Corporation and warrants with an exercise price of $0.50, issued to the finders that equal 6% of the shares issued under the private placement. The total share issue costs for this tranche were $437,241.

On November 10, 2004 the Corporation issued 3,500,000 common shares in exchange for the 25% minority interests in BSEA at a deemed price of $0.73 per share, which represents the trading price on November 10, 2004 for total proceeds of $2,555,000.

16.

STOCK OPTION PLAN

(a)

Stock Option Plan

The Board of Directors of the Corporation adopted the 2000 Stock Option Plan (the "Plan") during April 2000.  Shareholders approved the Plan on June 29, 2001. On December 3, 2004 the shareholders approved an increase in the common shares reserved for the option plan to 15,000,000. Under the Plan, the Corporation had reserved 15, 000,000 (2003-8,000,000) common shares for issuance under options granted to eligible persons. As at December 31, 2004, 6,175,000 had been granted and 8,723,334 remained available for granting.

Under the Plan, options to purchase common shares may be granted to employees, directors and certain consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 110% of fair market value for incentive stock options where the employee who, at the time of grant, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Corporation. These stock options expire three to five years from the date of grant and may be fully exercisable immediately, or may be exercisable according to a schedule or conditions specified by the Board of Directors.

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(b)

Option Activity

Option activity under the Plan is as follows:

	2004	2003	2002
	Number of	Number of	Number of
	Options	Options	Shares
Opening Balance - January 1	7,310,000	6,810,000	6,618,333
Granted	100,000	1,100,000	8,610,000
Expired	(200,000)	-	-
Exercised	(101,666)	-	-
Cancelled	(933,334)	(600,000)	(8,418,333)
	6,175,000	7,310,000	6,810,000
Closing Balance, December 31	6,175,000	7,310,000	6,810,000
Options available for granting	8,723,334	690,000	1,190,000
Options exercised	101,666	-	-
Option Plan Total	15,000,000	8,000,000	8,000,000

 (c)

Additional information regarding options outstanding as of December 31, 2004 is as follows:

Options Outstanding and Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$1.00	125,000	0.5	$1.00
$0.15	300,000	3.9	$0.15
$0.05	5,650,000	3.1	$0.05
$0.50	100,000	4.7	$0.50
	6,175,000	3.0	$0.08

(d)

As discussed in Note 3, the Corporation accounts for its stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees” and its related interpretations. APB No. 25 does not require any amount to be recorded as a compensation expense for stock options that are issued at market price or above and are exercised, cancelled or allowed to expire under the original terms of the issue.  Where the original terms of the option award are amended, as in an adjustment to the exercise price, the intrinsic value method requires that these stock options be subjected to variable plan accounting. The amount of $Nil (2003 - $1,987,501) was determined to be the increase in the intrinsic value of these amended stock options for 2004 and was recorded as Deferred Compensation.   The Corporation amortized $69 7,946 (2003 - $1,187,055) as stock compensation expense over the course of 2004, leaving a balance of $Nil (2003 - $800,446)in respect of Deferred Compensation related to employees, on the balance sheet at December 31, 2004.

(e)

The Corporation accounts for stock based awards to non-employees in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". SFAS 123 requires that stock option grants to non-employees be accounted for at fair value on the date of the grant, determined by the Black Scholes option-pricing model.  This fair value is then amortized over the service life of the stock option.  In 2004, compensation expense of $60,318 (2003 - $354,119, 2002 - $489,645) was recognized in the consolidated financial statements and the amount of $27,926 (2003 - $208,064) was included in Deferred Compensation on the consolidated balance sheet at December 31, 2004 for non-employee stock option grants.

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17.

WARRANTS

The Corporation has previously issued the following warrants.  Each warrant can be exchanged for 1 common share at the exercise price noted.

Date of	Number of	Exercise	Expiry
Grant	Warrants	Price	Date
April 2000	50,000	$1.00	April, 2005
May 2004	69,000	$0.50	May 2007
July 2004	491,315	$0.50	January 2006
September 2004	134,000	$0.50	January 2006
November 2004	348,000	$0.50	January 2006

50,000 warrants were granted to a consultant in 2000. The fair value of these warrants was $351 and was expensed in 2000.  299,716 warrants were granted at a price of $0.25 per share were expensed during 2004. 1,042,715 warrants were granted at a price of $0.50 per share under the terms of an agency agreement in connection with a private placement.

18.

ALTERNATIVE COMPENSATION PLAN

On March 22, 2002 our Board of Directors approved the Alternative Compensation Plan to provide opportunities for officers, directors, employees and contractors to receive all or a portion of their compensation in the form of common shares instead of cash. The Alternative Compensation Plan was approved at our Annual Shareholders’ Meeting held on June 14, 2002. The Plan allowed for maximum compensation of 2,000,000 shares.  This maximum was reached in the third quarter of 2002 and an expense in the amount of $163,463, relating to the future issuance of 2,000,000 common shares, was accrued under the Alternative Compensation Plan in 2002.  Shares are issued upon request of the beneficiaries and no further compensation cost is recorded at that time.  During 2004, no shares were issued under the Alternative Compensation Plan, leaving a balance of 1,317,198 shares still to be issued at December 31, 2004.

19.

RELATED PARTY TRANSACTION

On December 31, 2004, the Corporation owed $90,093to Matthew Heysel, our Chairman and Chief Executive Officer arising from having personally paid for travel expenditures while traveling on the business of the Corporation. The balance at December 31, 2004 was paid to Mr. Heysel in early 2005.  Prepaid expenses on the balance sheet at December 31, 2003 include $23,214 that was paid to Mr. Heysel in December 2003 as a prepayment of his regular compensation for the months of January and February 2004.

On December 31, 2004 the Corporation owed $10,000 to Glenn Van Doorne, our former executive Vice President, for a consulting service contract. The balance was paid on January 2005.

The Corporation has been unable to establish a bank account in Beijing.  Each month, the Corporation transfers funds to Kai Yang, the brother of our President and a consultant to BSN, who is resident in Beijing, to cover the costs of maintaining an office in Beijing.  During 2004, the Corporation advanced $385,689 to Kai Yang and he disbursed the full amount for salaries, office rental, professional fees, travel, and other office administration expenses of the Corporation (2003 - $420,000).  Kai Yang retained no part of these funds.

Big Sky Energy Canada Ltd.

At the time of the acquisition of BSEK, Matthew Heysel and Daming Yang were directors and officers of Big Sky Energy Canada Ltd. and the Corporation and Mr. Kai Yang held all the outstanding shares of Big Sky Energy Canada Ltd.  As at December 31, 2004, Matthew Heysel and Daming Yang were no longer directors nor officers of Big Sky Energy Canada Ltd. On March 10, 2004, Daming Yang’s brother, Wei Yang, was appointed to the board and was given full voting and dispositive control over all shares held by Big Sky Energy Canada Ltd. The loan arose from

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costs totaling $300,000 that were incurred by Big Sky Energy Canada Ltd. in connection with completing BSEK’s acquisition of KoZhaN, and a payment of $50,000 to Bolat Mukashev, the President of KoZhaN, as a reimbursement of costs incurred by the President prior to the signing the purchase agreement on August 11, 2003. The amount of $350,000 was treated as consideration in the allocation of the purchase price of the assets and liabilities of KoZhaN. The loan is unsecured, bears no interest and is repayable on demand. A balance of $21,351 was outstanding at December 31, 2004.

During the year ended December 31, 2004, the Corporation advanced to Big Sky Energy Canada Ltd. $39,905 net of advances from Big Sky Energy Canada Ltd. towards the balance outstanding.

The Corporation sold the shares in Big Sky Network Canada Ltd. to Big Sky Energy Canada for proceeds of $175,793.

Big Sky Holdings Ltd.

Matthew Heysel controls Big Sky Holdings Ltd.  The loan to the Corporation arose from a cash transfer to BSEK to cover expenses incurred by BSEK.  The loan is unsecured, bears no interest and is repayable on demand. A balance of $25,590 was outstanding at December 31, 2004.

 KoZhaN LLP

KoZhaN is a 90% owned subsidiary of BSEK; the Corporation owns 100% of BSEK.  The loan was made to the President of KoZhaN during 2004.  During the year ended December 31, 2004 various other advances were made to other related parties of KoZhaN.  These loans are unsecured, bear no interest and are repayable on demand. A balance of $24,439 was outstanding at December 31, 2004.

Vector Energy West LLP

Vector Energy West LLP is the wholly-owned subsidiary of BSEA.  The loan was made to a director prior to acquisition of Vector, which was acquired when BSEA purchased Vector on May 11, 2004.  Upon the acquisition of Vector, the director stepped down from the board of directors and remains as an employee of Vector.  In addition, several other advances were made to related parties of Vector.  These loans are unsecured, bear no interest and are repayable on demand.

20.

OBLIGATIONS FOR HISTORICAL COSTS REIMBURSEMENT

The Corporation through its purchase of Vector is unavoidably obliged to reimburse $7,784,034, which represents historical costs incurred by the Republic of Kazakhstan for the Liman-2 oilfield pursuant to the terms of the Subsurface Use Contract # 1076 dated December 28, 2002 and the Agreement on acquisition of the right on the geological information use # 711 dated January 21, 2002. Payment of these obligations should be made according to a payment schedule agreed between Vector and the Government. These payments are due from 2012 to 2027 and should be paid quarterly in equal installments.

These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate, giving a present value of obligation of $973,682 as at December 31, 2004.  The accretion expense for the year ended December 31, 2004 was $21,819 (2003 - $Nil).

21.

ASSET RETIREMENT OBLIGATION

Management determined that an asset retirement obligation should be recognized for future abandonment costs of 93 wells drilled at Morskoe, Liman -2 and Atyrau  fields  before the Corporation signed the Subsurface Use Contracts, but which, in management’s opinion were not properly abandoned. Management believes that this obligation is likely to be settled at the end of the exploration phase.

As at December 31, 2004, undiscounted future cash flows that will be required to satisfy the Corporation’s liability by 2009 and 2028 for the Liman-2 field is $930,000. After application of a 15% credit-adjusted risk free discount rate, the present value of the Corporation’s liability at December 31, 2004 is $435,868 (As at January 12, 2004 - $19,872).  During the year ended December 31, 2004, the Corporation recorded an accretion expense of $2,284 (2003 - $Nil).

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22.

INCOME TAXES

The Corporation did not provide any current or deferred U.S. federal or foreign income tax provision or benefit because it has experienced operating losses since inception. The Corporation is not liable for any state taxes.

	2004		2003		2002
Loss before income taxes	$	6,792,048	$	3,129,762	$	2,591,480
Composite statutory income tax rate		35.0%		35.0%		35.0%
Expected income tax recovery	$	(2,377,000)	$	(1,095,417)	$	(907,018)
Tax benefit not recognized		2,377,000		1,095,417		907,018
Income tax expense (recovery)	$	-	$	-	$	-

Deferred taxation reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for statutory tax purposes in the respective countries.

The deferred income tax liability is comprised of the following:

	December 31, 2004	December 31,   2003
	$	$
Temporary differences
Oil and gas property values	13,734,017	-
Total temporary differences	13,734,017	-
		-
Statutory tax rate	35%	35%
Total	4,806,906	-
Current portion	-	-
Non-current portion	4,806,906	-
Total	4,806,906

At December 31, 2004, the Corporation had a net operating loss of approximately $15,650,000 (2003 - $15,500,000) for U.S. federal purposes. Utilization of the net operating loss, which expires on various dates starting in 2007, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended.  Due to the uncertainty of utilizing these net operating losses, the Corporation has made a valuation allowance of an amount equal to the related deferred tax asset.

	December 31, 2004	December 31 2003	December 31, 2002
	$	$	$
Net operating loss carry forward balance	15,650,000	15,500,000	14,200,000
Composite statutory tax rate	35.0%	35.0%	35.0%
Deferred tax asset	5,477,800	5,425,000	4,970,000
Valuation allowance	(5,477,800)	(5,425,000)	(4,970,000)
	-	-	-

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23.

FAIR VALUE OF FINANCIAL INSTRUMENTS

As at December 31, 2004 the fair value, the related method of determining fair value and carrying value of the Corporation’s financial instruments were as follows: the fair value of current assets and current liabilities approximates their carrying amounts due to the short-term maturity of these instruments. The Corporation is exposed to market, credit and currency risks arises in the normal course of the Corporation’s business. Derivative financial instruments are not used to reduce exposure to the above risks.

Concentration of credit risk – Financial instruments that potentially expose the Corporation to concentrations of credit risk consist primarily of cash and cash equivalent. Management of the Corporation believes the likelihood of incurring material losses due to concentration of credit risk is remote.

Interest rate risk – The Corporation’s potential interest rate risk is minimal and management considers the risk insignificant.

Foreign currency risk – The Corporation undertakes transactions denominated in foreign currencies. Accordingly, these activities may result in foreign currency exposure. The Corporation does not hedge it’s foreign currency risk.

24.

COMMITMENTS AND CONTINGENCIES

In 2004, the Corporation recorded expenses for rental payments under operating leases, net of amounts recovered from sub-lessees, totaling (2004 - $121,348; 2003 - $129,965; 2002 - $42,902). Minimum lease payments under operating leases for the years ending December 31 are as follows:

	$
2005	174,900
2006	125,650
2007	48,250
	348,800

The Corporation is subject to potential litigation in the normal course of operations.  There are no claims currently pending that management considers would materially affect the Corporation’s financial position or results of operations.

Operating environment – The Corporation’s principal business activities are within the Republic of Kazakhstan. Laws and regulations affecting businesses operating in the Republic of Kazakhstan are subject to rapid changes and KoZhaN’s assets and operations could be at risk due to negative changes in the political and business environment.

Taxation – The taxation system in the Republic of Kazakhstan is constantly changing and subject to inconsistent application, interpretation and enforcement. There have been many new tax and foreign currency laws and related regulations introduced in recent years, which are not always clearly written and whose interpretation and application is subject to the opinions of the local tax authorities. Non-compliance with Kazakhstan laws and regulations can potentially lead to the imposition of penalties and fines, the amounts of which can be significant.

Environmental matters – The Corporation believes it is currently in compliance with all existing Kazakhstan environmental laws and regulations. However, Kazakhstan environmental laws and regulations may change in the future. The Corporation is unable to predict the timing or extent to which these environmental laws and regulations may change. Such change, if it occurs, may require KoZhaN to modernize technology to meet more stringent standards.

Financial Commitments and Contingencies – KoZhaN

The Corporation, through its interest in KoZhaN, has the following commitments and contingencies.  As these commitments and contingencies are subject to the commencement of commercial production and the Corporation can not determine at this time when it will commence commercial oil and gas production operations, the likelihood of payment of the following commitments and contingencies is currently indeterminable. Consequently no amounts have been recorded as provisions in these financial statements for the following commitments and contingencies:

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a)	Commitment to repay historical costs of the Government – In accordance with the Subsurface Use Contracts the Corporation is obliged to reimburse to the Government for historical costs incurred during preparation of certain geological information on the Morskoe, Karatal and Dauletaly oilfields.  The total amount reimbursable is $3,756,422. Of this amount, $116,178 was paid in 2002-2003. The remaining amount of $3,640,244 is expected to be settled by equal quarterly installments during 20 years after the Corporation enters into the production phase on these oilfields. If commercial production does not commence no further payments become due in this respect.
b)	Commitments to contribute to social development of Astana and Atyrau – In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest an equivalent of $850,000 during the production phase for the development of the social sector of Atyrau and Astana cities in the Republic of Kazakhstan.
c)	Commitment to develop local personnel– In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest not less than 1% of total investments for professional development of the local personnel involved in works under the Subsurface Use Contracts
d)	Liquidation fund – In accordance with the Subsurface Use Contracts, the Corporation is obliged to establish a liquidation fund to finance the adequate disposal of the Corporation’s oil and gas operations in the amount of 1% of operating costs.  The Corporation is also obliged to apply for approval of this fund with the Government under the contracts, including budget of disposal costs, no later than 2 years before the end of the exploration phase and start of the production phase. Although the Corporation has not yet carried out major exploration activities to date, the Corporation has recorded an asset retirement obligation for certain wells in these financial statements. Upon achieving an agreement with the Government, this asset retirement obligation may be considered as part of the contractually required liquidation fund.
	-	Upon awarding of a new tender for subsurface use rights, KoZhaN shall pay a $0.05 bonus based on total oilfield reserves as defined in the State Balance of Reserves (Oil) of Kazakhstan as of January 1, 2000, equivalent to proven recoverable reserves.
e)	Contingencies related to purchase of geological information from the Government – In accordance with the Purchase Agreements concluded with the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan on July 10, 2002, the Corporation may incur a penalty for delaying payment for the geological information purchases from the Government relating to the Morskoe, Karatal and Dauletaly oilfields at a rate of 10% per annum. Payments for the geological information purchase for the Karatal and Dauletaly oilfields were made by the Corporation with a significant delay. Management believes that the obligation for the penalty is not probable and thus no provision has been recognized in the financial statements for this amount.
f)	Commitment to make payments based on production – Arising from BSEK’s acquisition of KoZhaN interest, the Corporation is committed to make the following payments to the non-controlling partners of KoZhaN, as a group, upon achieving the following production milestones, where production is calculated after deducting the government’s share of production, if any, and where one tonne equals seven barrels of oil:
	-	$100,000 after the receipt by KoZhaN of payment in full for two sales of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN.  Each sale shall not be less than 4,000 tonnes of oil;
	-	$300,000 after the receipt by KoZhaN of payment in full for a cumulative production of 40,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;

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	-	$400,000 after the receipt by KoZhaN of payment in full for a cumulative production of 150,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;
	-	$500,000 after the receipt by KoZhaN of payment in full for a cumulative production of 250,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by KoZhaN;
		-	$0.35 per barrel if the price of oil is equal to or less than $14.00;
		-	$0.75 per barrel if the price of oil is greater than $14.00 and less than or equal to $18.00;
		-	$1.00 per barrel if the price of oil is greater than $18.00 and less than or equal to $22.00; or
		-	$1.50 per barrel if the price of oil is greater than $22.00
g)	Investment commitments – In accordance with the Subsurface Use Contracts KoZhaN is obliged to invest a minimum of $69,000,000 over the period covered by the Subsurface Use Contracts. An amount of $14,000,000 should be invested during the exploration phase. All three Subsurface Use Contracts establish the exploration phase as 6 years from 2003 to 2009, and the production phase as 25 years from 2009 to 2034.  The governments’ objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the license holder, including drilling new wells and seismic activity. The government will measure the degree to which the Corporation has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The government measures the performance of the Corporation towards meeting its work commi tment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure.
h)	Commercial discovery bonus – In accordance with the Subsurface Use Contracts, the Corporation is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of proved reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan.  As at December 31, 2004, a commercial discovery has not been made as so no accrual for any bonus has been made in these financial statements.
i)	Commitments related to transfer of 45% share in Morskoe oil field – On October 12, 2004 KoZhaN signed Agreement which states that ABT became the owner of 45% of any crude oil, gas and any other mineral resources (including mineral resources produced during the exploration and probation exploitation periods) and have right to dispose such mineral resources at its own discretion. However this agreement is subject to approval of the Ministry of Energy and Mineral Resources of Republic of Kazakhstan. In addition, KoZhaN assumed obligation to provide financing of Drilling Works of $150,000 and 50% of all other costs, not specified as Construction Works and Drilling Works.

Other Contingencies

a) Non-compliance with the Subsurface Use Contracts – The Government has the right to suspend these contracts or even cancel them if the Corporation is in material breach of obligations and commitments under the Subsurface Use Contracts.
In accordance with the Subsurface Use Contracts signed on February 17, 2003 the Corporation was obliged to commence exploration activities within 60 days after signing the Contracts. However, as at December 31, 2004, the Corporation had not started exploration activities on the Karatal and Dauletaly oilfields. In the case of failure to remedy such violations, these Subsurface Use Contracts can be terminated by the Government, which may affect recoverability of capitalized costs of approximately $1.2 million related to Dauletaly and Karatal oilfields. The Corporation expects to conduct new exploration activities in the two license areas in 2005, and may farmout portions of these licenses to third parties in 2005, in order to fulfill its obligations under the Subsurface Use Contracts.

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b) Commitment to sell produced oil in Kazakhstan – In accordance with the Subsurface Use Contracts, the Corporation is obliged to sell 100% of oil produced during the exploration stage, and 20% of oil produced during the production stage, to oil refineries located in Kazakhstan.

Financial Commitments and Contingencies – Vector Energy West

The Corporation, through its interest in Vector, has the following commitments and contingencies.  As these commitments and contingencies are subject to the commencement of commercial production and the Corporation can not determine at this time when it will commence commercial oil and gas production operations, the likelihood of payment of the following commitments and contingencies is currently indeterminable. Consequently, no amounts have been recorded as provisions in these financial statements for the following commitments and contingencies:

a)	Non-compliance with the Subsurface Use Contracts – The Government has the right to suspend or cancel these Subsurface Use Contracts if KoZhaN is in material breach of the obligations and commitments under the Subsurface Use Contracts. In accordance with the letter # 14-04-38 27 dated May 26, 2004 the Corporation was notified by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan (the “Competent Body”) that the Corporation had failed to comply with the terms of the Contract # 1076 dated December 28, 2002 on exploration of hydrocarbons in the Liman-2 oilfield, in the following way:
	-	To carry out the Minimal Work Program during the exploration phase;
	-	To submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation;
	-	To provide professional training to the personnel employed for the Subsurface Use Contract’s operations;
	-	To contribute funds to the Atyrau region for social programs and programs on infrastructure development;
	-	To submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body;
	-	To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and
	-	To establish and make contributions to the Liquidation Fund.

In accordance with the letter # 14-04-38 28 dated May 26, 2004 the Corporation was notified by the Competent Body that the Corporation had failed to comply with the terms of the Contract # 1077 dated December 28, 2002 on exploration of hydrocarbons in the Atyrau oilfield, in the following way:
-	To carry out the Minimal Work Program during the exploration phase;
-	To submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation;
-	To provide professional training to the personnel employed for the Subsurface Use Contract’s operations;
-	To contribute funds to the Atyrau region for social programs and programs on infrastructure development;
-	To submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body;
-	To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and

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	-	To establish and make contributions to the Liquidation Fund.
	Accordingly, under both Notices the Corporation was required by July 31, 2004 to remedy these deficiencies and to submit all required documents as confirmation of fulfillment of its obligations and actions taken to remedy these deficiencies and to report on corrective and preventive actions undertaken against any further breach of contractual obligations. As at February 12, 2005, Management has remedied the following violations of the Subsurface Use Contracts:
	-	On November 16, 2004 the Corporation has submitted and approved with Competent Body and annual work program for 2004 and annual work program for 2005.
	-	The Corporation provided in September 2004 Petroleum Management training for its Vice President and;
	-	The Corporation opened a special account with HSBC bank in Kazakhstan where it deposited an amount of $33, 040 to finance the liquidation of the consequences of its oil and gas operations( See Note 7).
	As at February 12, 2005, Management has remedied the following violations of the Subsurface Use Contracts:
	1.	To carry out the Minimal Work Program during the exploration phase;
	2.	Contribute funds to Atyrau region for social programs and programs for infrastructure development;
	3.	Develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body. The Corporation has appointed AIG as its Insurance Underwriter but as at the date of these financial statements the Business, Property and Liability Risk Insurance Program has not yet been submitted to the Competent Body;
b)	Investment commitments – In accordance with the Subsurface Use Contracts, the Corporation is obliged to invest a minimum of $53,900,000 over the period covered by the Subsurface Use Contracts. The Subsurface Use Contract # 1076 dated December 28, 2002 establishes the exploration phase as 6 years from 2003 to 2008. The Subsurface Use Contract # 1077 dated December 28, 2002 establishes the exploration phase as 5 years from 2003 to 2007 and the production phase as 20 years from 2008 to 2028.  The governments’ objective in setting minimum work commitments is to ensure certain types of exploratory work is carried out by the licence holder, including drilling new wells and seismic activity. The government will measure the degree to which the Corporation has met its commitments in terms of work completed. The government estimates the work commitment in terms of expected spending amounts. The g overnment measures the performance of the Corporation towards meeting its work commitment by evaluating the actual work performed in comparison with the agreed requirements. Actual spending is not a performance measure.

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c)

Commitment to reimburse historical costs of the Government – In accordance with the Subsurface Use Contract, the Corporation is obliged to reimburse to the Government for historical costs incurred at the expense of the Government on the Atyrau oilfield. The total amount reimbursable is $22,507,380. From this amount, $112,537 was paid to the Government in 2003. The remaining amount of $22,394,843 is expected to be settled according to a payment schedule to be agreed between the Corporation and the Government not later than 120 days after approval of the hydrocarbon reserves. However, in the event that no approval of the hydrocarbon reserves is received, there will be no liability upon the Corporation in respect of the remaining amount of $22,394,843. No approval of the hydrocarbon reserves has been applied for or received as at December 31, 2004 and December 31, 2003 and so no provision in respect of the re maining amount has been made in these financial statements.

d)

Commercial discovery bonus – In accordance with the Subsurface Use Contracts, the Corporation is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of approved recoverable reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan. However, in the event that no approval of the hydrocarbon reserves is received, there will be no liability upon the Corporation in respect of the commercial discovery bonus. No approval of the hydrocarbon reserves has been applied for or received as at December 31, 2004 and December 31, 2003 and so no provision in respect of the commercial discovery bonus has been made in these financial statements.

1.

SUBSEQUENT EVENTS

In February 2005, the Corporation raised additional common equity in a series of private placement transactions, which raised $13,625,000. The Corporation issued 27, 250,000 common shares at a price of $0.50 per share.

The Corporation paid a finders fee of 6% in cash and warrants equal to 6% of the common shares issued. Finders fees of $817,140 were paid and 1,634,280 Warrants to purchase additional 1,634,280 common shares at $0.50 per share were issued.

On March 7, 2005, the Corporation entered into a contract with Matrix-Regent and Matrix-Regent Securities Limited, carrying on business as Matrix Corporate Finance) for the provision of corporate financial advice and services as a financial adviser to the Corporation. The terms of the agreement provide that if the Corporation is admitted to the Alternative Investment Market of the London Stock Exchange, the Corporation will appoint Matrix Corporate Finance as its Nominating Advisor (“NOMAD”)

On March 9, 2005, the Corporation awarded 8,050,000 stock options to officers, directors and consultants under the terms of the Corporation’s 2000 Stock Award Plan. The options have an exercise price of $0.50 per share and an expiry date of March 8, 2008. The options vest in four annual increments beginning March 9, 2006.  In addition, the Corporation granted stock awards to the Chief Executive Officer and the Chief Financial Officer of 500,000 and 250,000 shares respectively, for prior period service with reduced compensation.

In March 2005 the Corporation issued 1,750,000 common shares to four option holders who exercised their options   under the Corporation’s 2000 Stock Award Plan. The Corporation realized proceeds of $ 87,500.

On March 29, 2005, the Corporation appointed Mr. Nurlan U. Balgimbayev to its Board of Directors. Mr. Balgimbayev will receive options to purchase 5,000,000 common shares of the Corporation under the 2000 Stock Award Plan. Options for 1,000,000 have been issued to Mr. Balgimbayev in accordance with the terms of the Plan and the remaining 4,000,000 options will be issued, subject to shareholder approval at the next Annual Meeting of Shareholders.

In March 2005, the Corporation paid $80,000 to a company affiliated with Mr. Bruce Gaston, a director since December 3, 2004, for introductions to potential investors. Certain of these potential investors subsequently participated in the private placement of $13.7 million raised by the Corporation in February 2005.

79

26.

SUPPLEMENTAL QUARTERLY FINANCIAL DATA (Unaudited)

Interim Quarter Ended	December 31, 2004	September 30, 2004	June 30, 2004	March 31, 2004
	$	$	$	$
Loss from continuing operations	(3,197,888)	(1,899,381)	(924,040)	(794,943)
Income (loss) from Discontinued Operations	47,102	2,433	(13,315)	(12,016)
Net loss	(3,150,786)	(1,896,948)	(937,355)	(806,959)
Loss per share	(0.06)	(0.03)	(0.02)	(0.02)
Interim Quarter Ended	December 31, 2003	September 30, 2003	June 30, 2003	March 31, 2003
	$	$	$	$
Loss from continuing operations	(1,692,883)	(549,926)	(506,093)	(380,860)
Income (Loss) from Discontinued Operations
	37,055	8,622	13,226	5,703
Net loss	(1,692,883)	(549,926)	(506,093)	(380,860)
Loss per share	(0.06)	(0.02)	(0.02)	(0.02)

80

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders of Big Sky Energy Kazakhstan Ltd.:

We have audited the accompanying consolidated balance sheet of Big Sky Energy Kazakhstan Ltd. (a development stage enterprise) (the “Successor”) as of December 31, 2003, and the related consolidated statements of operations, changes in partners’ deficit/shareholders’ equity, and cash flows for the period from August 11, 2003 (date of inception of the Successor) to December 31, 2003, and for the period from April 28, 2001 (date of inception of the Predecessor) to December 31, 2003.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.  The Predecessor’s financial statements as of December 31, 2002, and for the period from January 1, 2003 to August 11, 2003, for the year ended December 31, 2002, the period from April 28, 2001 (date of inception of the Predecessor) to December 31, 2001, and the per iod from April 28, 2001 (date of inception of the Predecessor) to August 11, 2003 (not separately presented herein) were audited by other auditors whose report, dated December 23, 2003, expressed an unqualified opinion on those statements.  The financial statements for the period April 28, 2001 (date of inception of the Predecessor) to August 11, 2003 (not separately presented herein) reflects a net loss of $93,713.  The other auditors’ report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such prior period, is based solely on the report of such other auditors.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit and the report of the other auditors provides a reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Big Sky Energy Kazakhstan Ltd. as of December 31, 2003 and the results of its operations and its cash flows for the period from August 11, 2003 (date of inception of the Successor) to December 31, 2003, and for the period from April 28, 2001 (date of inception of the Predecessor) to December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

The Company is in the development stage as of December 31, 2003.  As discussed in Note 2 to the financial statements, successful completion of the Company’s development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its development activities, obtaining regulatory approval, and achieving a level of sales adequate to support the Company’s cost structure.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is a development stage enterprise engaged in acquisition, exploration and development of oil and gas properties. As discussed in Note 2 to the financial statements, the deficiency in working capital as at December 31, 2003 and the Company’s operating losses since inception raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

April 20, 2004, except as to Note 19, which is as of July 1, 2004.

Calgary, Alberta, Canada

81

INDEPENDENT AUDITORS’ REPORT

To the Partners of KoZhaN LLP:

We have audited the accompanying balance sheets of KoZhaN LLP (a development stage enterprise) (the “Partnership” or Predecessor”) as of December 31, 2002, and the related statements of loss, changes in partners’ deficit, and cash flows for the period from January 1, 2003 to August 11, 2003, for the year ended December 31, 2002, for the period from April 28, 2001 (date of inception) to December 31, 2001, and for the period from April 28, 2001 (date of inception) to August 11, 2003 (not separately presented herein).  These financial statements are the responsibility of the Partnership’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of KoZhaN LLP as of December 31, 2002 and the results of its operations and its cash flows for the period from January 1, 2003 to August 11, 2003, for the year ended December 31, 2002, the period from April 28, 2001 (date of inception) to December 31, 2001, and for the period from April 28, 2001 (date of inception ) to August 11, 2003 (not separately presented herein) in conformity with accounting principles generally accepted in the United States of America.

The Partnership is in the development stage as of December 31, 2002.  As discussed in Note 2 to the financial statements, successful completion of the Partnership’s development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its development activities, obtaining regulatory approval, and achieving a level of sales adequate to support the Partnership’s cost structure.

/s/ Deloitte & Touche

TOO Deloitte & Touche

December 23, 2003

Almaty, Kazakhstan

82

BIG SKY ENERGY KAZAKHSTAN LTD (Successor)

KOZHAN LLP (Predecessor)

(a Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

(in US Dollars)

												Cumulative
				Period from						Period from		Period from
				August 11, 2003		Period from		Year		April 28, 2001		April 28, 2001
				(Inception date)		January 1, 2003		Ended		(Inception date)		(Inception date
				to December		to August 11,		December		to December		of Predecessor)
				31, 2003		2003		31, 2002		31, 2001		to December
		Note		(Successor)		(Predecessor)		(Predecessor)		(Predecessor)		31, 2003
EXPENSES
	General and administrative expenses	5	$	110,866	$	63,599	$	5,705	$	292	$	180,462
OPERATING LOSS				110,866		63,599		5,705		292		180,462
OTHER INCOME
	Foreign exchange gain/(loss), net			10,644		(226)		3,583		6		14,007
LOSS BEFORE TAXATION				(100,222)		(63,825)		(2,122)		(286)		(166,455)
INCOME TAX (EXPENSE)/RECOVERY		6		27,480		(27,480)		--		--		--
NET LOSS			$	(72,742)	$	(91,305)	$	(2,122)	$	(286)	$	(166,455)

See accompanying notes to the financial statements.

83

BIG SKY ENERGY KAZAKHSTAN LTD (Successor)

KOZHAN LLP (Predecessor)

(a Development Stage Enterprise)

CONSOLIDATED BALANCE SHEETS

(in US Dollars)

					As at		As at
					December 31,		December 31,
					2003		2002
			Note		(Successor)		(Predecessor)
ASSETS
CURRENT ASSETS:
	Cash			$	339,353	$	4,116
	Receivable from the partners				1,514		--
	Employee and other receivables				1,564		3,611
		Total current assets			342,431		7,727
NON-CURRENT ASSETS
	Oil and gas properties		7		2,811,572		133,353
	Other fixed assets				3,424		--
	Intangible assets, net				579		482
		Total non-current assets			2,815,575		133,835
TOTAL ASSETS				$	3,158,006	$	141,562
LIABILITIES AND PARTNERS’ DEFICIT/
	SHAREHOLDERS’ DEFICIT
CURRENT LIABILITIES
	Obligations for social sphere
		development	8	$	458,000	$	--
	Share subscriptions received in advance		19		250,000		--
	Signature bonuses and penalty payable		9		98,904		--
	Related party payables		14		357,565		--
	Due to China Energy Ventures		16		1,154,941		--
	Other payables and accruals		10		54,284		41,577
		Total current liabilities			2,373,694		41,577
NON-CURRENT LIABILITIES
	Loans to related parties		11		--		97,000
	Interest payable to related parties		11		--		4,861

84

	Obligation on social sphere development			8		693,760		--
	Asset retirement obligation			15		26,817		--
	Deferred tax liability			6		136,476		--
		Total non-current liabilities				857,053		101,861
COMMITMENTS AND CONTINGENCIES				18
PARTNERS’ DEFICIT/SHAREHOLDERS’ EQUITY
	Paid charter capital			12		--		532
	Common stock
	No par value, shares authorized:
	Unlimited number of Class “A”
	Unlimited number of Class “B” without voting rights;
	Shares issued and outstanding:
			10,000,000 Class “A” shares	13		1		--
	Deficit accumulated during development stage					(72,742)		(2,408)
	Total partners’ deficit/shareholders’ equity					(72,741)		(1,876)
TOTAL LIABILITIES AND PARTNERS’ DEFICIT/
	SHAREHOLDERS’ EQUITY				$	3,158,006	$	141,562

See accompanying notes to the financial statements.

85

BIG SKY ENERGY KAZAKHSTAN LTD (Successor)

KOZHAN LLP (Predecessor)

(a Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT/SHAREHOLDERS’ EQUITY

(in US Dollars)

PERIOD FROM APRIL 28, 2001 (Inception date of Predecessor) TO AUGUST 11, 2003

		Authorized		Unpaid		Deficit accumulated		Total
		charter		charter		during development		Partners’
		capital		capital		stage		deficit
Balances at April 28, 2001	$	532	$	(532)	$	--	$	--
Net loss for the period		--		--		(286)		(286)
Balances at December 31, 2001	$	532	$	(532)	$	(286)	$	(286)
Contribution to the charter capital		--		532		--		532
Net loss for the period		--		--		(2,122)		(2,122)
Balances at December 31, 2002	$	532	$	--	$	(2,408)	$	(1,876)
Increase in authorized charter capital		153		(153)		--		--
Net loss for the period		--		--		(91,305)		(91,305)
Balances at August 11, 2003	$	685	$	(153)	$	(93,713)	$	(93,181)
PERIOD FROM AUGUST 11, 2003 (Inception date of Successor) TO DECEMBER 31, 2003
				Issued		Deficit accumulated		Total
				share		during development		Shareholders’
				capital		stage		equity
Balances at August 11, 2003			$	1	$	--	$	1
Net loss for the period				--		(72,742)		(72,742)
Balances at December 31, 2003			$	1	$	(72,742)	$	(72,741)

See accompanying notes to the financial statements.

86

BIG SKY ENERGY KAZAKHSTAN LTD (Successor)

KOZHAN LLP (Predecessor)

(a Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in US Dollars)

			Period from		Period from		Year		Period from		Cumulative Period
			August 11, 2003		January 1, 2003		Ended		April 28, 2001		from April 28, 2001
			(Inception date) to		to August 11,		December		(Inception date) to		(Inception date
			December 31, 2003		2003		31, 2002		December 31, 2003		of Predecessor)
			(Successor)		(Predecessor)		(Predecessor)		(Predecessor)		to December 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period		$	(72,742)	$	(91,305)	$	(2,122)	$	(286)	$	(166,455)
Adjustments for:
	Penalty accrued on signature bonuses		40,685		58,219		--		--		98,904
	Foreign exchange (gain)/loss, net		(15,751)		(2,772)		(3,944)		286		(22,181)
	Deferred income tax expense/(recovery)		(27,480)		27,480		--		--		--
Changes in operating assets and liabilities
	(Increase)/decrease in receivables		(554)		1,087		(3,611)		--		(3,078)
	(Decrease)/increase in payables		57,861		1,449		(3,745)		--		55,565
	Net cash used in operating activities		(17,981)		(5,842)		(13,422)		--		(37,245)
CASH FLOWS FROM INVESTING ACTIVITIES
	Purchase of oil and gas properties		(1,058,983)		(40,662)		(79,512)		--		(1,179,157)
	Purchase of other fixed assets		(2,942)		--		--		--		(2,942)
	Cash acquired on the purchase of net assets of
	KoZhaN LLP		12,790		--		--		--		12,790
	Purchase of intangible assets		(97)		--		(482)		--		(579)
	Net cash provided by (used in) investing activities		(1,049,232)		(40,662)		(79,994)		--		(1,169,888)
CASH FLOWS FROM FINANCING ACTIVITIES
	Proceeds from loans		1,149,000		55,178		97,000		--		1,301,178
	Advances from related parties		7,565		--		--		--		7,565
	Advances for share subscription		250,000		--		--		--		250,000
	Contributions to charter capital		1		--		532		--		533
	Net cash provided by financing activities		1,406,566		55,178		97,532		--		1,559,276
INCREASE/(DECREASE) IN CASH			339,353		8,674		4,116		--		352,143
CASH AT BEGINNING OF PERIOD			--		4,116		--		--		--
CASH AT END OF PERIOD		$	339,353	$	12,790	$	4,116	$	--	$	352,143

See accompanying notes to the financial statements.

87

BIG SKY ENERGY KAZAKHSTAN LTD (Successor)

KOZHAN LLP (Predecessor)

(a Development Stage Enterprise)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in US Dollars)

1.

DESCRIPTION OF BUSINESS

Big Sky Energy Kazakhstan Ltd., referred to herein as BSEK or the Successor, was incorporated under the Business Corporations Act Alberta on July 29, 2003 for the purpose of acquiring oil and gas operations in the Republic of Kazakhstan.  BSEK commenced operations when it acquired a 90% partnership interest in KoZhaN LLP on August 11, 2003.

KoZhaN LLP, referred to herein as the Partnership or the Predecessor, was initially registered as a limited liability partnership under the laws of the Republic of Kazakhstan on April 28, 2001. The main activities of the Partnership are the acquisition of oil and gas properties and their exploration and development in the Atyrau region, Republic of Kazakhstan. On February 17, 2003, the Partnership entered into Subsurface Use Contracts with the Government of the Republic of Kazakhstan (the “Government”) to explore and produce hydrocarbons in the Morskoye, Karatal and Dauletali oilfields in Atyrau region, Republic of Kazakhstan (the “Subsurface Use Contracts”). From that date and up to December 31, 2003, no major exploration activities had been carried out.  On September 24, 2003, the Partnership was re-registered to present the new ownership status.  As at December 31, 2003 and 2002 the Partnership employed 1 e mployee.

Legal Name	KoZhaN LLP
Legal Address	1/1 Dzandosov Str., 480008, Almaty, Republic of Kazakhstan
Legal Registration Number	39658-1910- TOO (ИУ)
Ownership status	Private

2.

BASIS OF PRESENTATION

The accompanying consolidated financial statements for the period from August 11, 2003 to December 31, 2003 and as at December 31, 2003 reflect the activities of BSEK and its subsidiary, the Partnership, from the date of BSEK’s acquisition of its 90% partnership interest in the Partnership (collectively, the “Company”).  The financial statements for the period from April 28, 2001 to December 31, 2001 and for the year ended December 31, 2002 and as at December 31, 2002 and the period January 1, 2003 to August 11, 2003 are for the Partnership, BSEK’s predecessor enterprise.

The accompanying financial statements have been prepared in conformity with the accounting principles generally accepted in the United States of America (“US GAAP”). BSEK maintains accounting records and prepares its financial statements in United States Dollars.  The Partnership maintains accounting records and prepares its financial statements in Kazakhstani tenge in accordance with the requirements of Kazakhstani accounting and tax legislation. The accompanying financial statements of the Partnership differ from the financial statements prepared for statutory purposes in Kazakhstan in that they reflect certain adjustments, not recorded in the accounting books of the Partnership, which are appropriate to present the financial position, results of operations and cash flows in accordance with US GAAP.

Use of estimates – The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of assets and contingent liabilities as at the date of the financial statements and the reported amounts of revenues and expenses of the reporting period then ended. Actual results could differ from those estimates.

88

Development stage enterprise – The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern and there is no indication that the Company intends to or has to be liquidated or significantly decrease its activity in the near future. The ability of the Company to pay its debts when they are due depends on the continued financial support from its shareholders and partners.

At present, the Company’s oil and gas operations are in acquisition and exploration phase, and therefore, the Company is in a development stage. These phases are expected to last until the Company finds economically profitable oil reserves. Until such reserves are found and proven and necessary regulatory approvals are obtained, uncertainty exists as to whether the long-lived assets of the Company are recoverable.

These consolidated financial statements have been prepared on a going concern basis. The Corporation has significant obligations related to exploration on its oil and gas properties (see notes 8, 18). The Corporation's ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Corporation be unable to continue as a going concern.

During 2003, the Company utilized cash for management and corporate administrative activities of approximately $15,000 per month.  Management anticipates that the Company will be able to attain loans from its parent company, China Energy Ventures Corp. to fund this minimum level of operations through July 2005. However, the Company may require additional financing to continue as a going concern beyond July 2005. Current cash resources are not anticipated to be sufficient to fund the next phase of the Company’s development, and it will consider seeking additional private equity or debt financing.  There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve the Company’s objective, or result in commercial success. The Company cannot assure you that it will be able to obtain sufficient capital to satisfy all of its obligations or that its operating subs idiaries will be commercially successful.

The ability of the Company to survive will depend on its ability to finance, acquire, explore for and produce oil and natural gas on a profitable basis.

The Company’s operations may also be adversely affected by significant political, economic and social uncertainties in Kazakhstan and in other countries in which it may acquire oil and gas operations.  Although the government of the Kazakhstan has been pursuing economic reform policies, no assurance can be given that it will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances. There is also no guarantee that the pursuit of economic reforms will be consistent or effective.  These factors may impact the Company’s ability to conduct its business, the results of its operations and its financial condition and its right to pay dividends.  

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash – Cash includes cash on hand and in banks.

Accounts receivable – Accounts receivable are stated at their net realizable values after deducting provisions for uncollectible amounts. Such provisions reflect estimates based on evidence of collectibility.

Oil and gas properties – The Company follows the successful efforts method of accounting for its oil and gas operations, whereby expenditures for property acquisitions and all development costs (including development dry holes) and support equipment and facilities are capitalized. The costs of unsuccessful exploratory wells are charged to expense at the time the wells or other exploration activities are determined to be non-productive. Production costs, overheads and all exploration costs other than exploratory drilling are charged to expense as incurred.

Costs incurred for acquisition of rights to explore and develop the Morskoye, Karatal and Dauletali oilfields, including but not limited to payment for geological information, payment to participate in tender, signature bonuses, obligations for social sphere development, are capitalized and classified as a right to subsurface use.

89

Impairment of long-lived assets – The Company reviews its long lived assets, including oil and gas properties, after discovery of proved reserves and start of development phase, for possible impairment by comparing their carrying values with the undiscounted future net before-tax cash flows. Asset impairment may occur if a field discovers lower than anticipated reserves, there are write downs of proved reserves based on field performance, significant changes in commodity prices, significant decreases in the market value of an asset, and/or significant change in the extent or manner of use or physical change in an asset. Impaired assets are written down to their 4estimated fair values, generally their discounted future net before-tax cash flows. For proved oil and gas properties the Company performs the impairment test on an individual field basis. Unproved properties are reviewed periodically to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the current period.

Borrowing costs – The Statement of Financial Accounting Standards No. 34 “Capitalization of Interest Cost” provides guidelines for the capitalization of borrowing costs as part of the historical cost of acquiring assets.

Interest costs related to financing the acquisition of the subsurface use rights, conducting exploration activities and financing major oil and gas development projects are capitalized as part of related assets until the projects are evaluated, or until the projects are substantially complete and ready for their intended use if the projects are evaluated as successful. Capitalized interest cannot exceed gross interest expense.

Intangible assets – Computer software, and licenses used in the operations, are recorded at the cost of acquisition.

Amortization is calculated on a straight-line basis using the following estimated useful lives:

Software	3 years
Other intangible assets	7 years

Provisions – Provisions are recognized when the Company has a present obligation, as a result of a past event, to incur such costs and when a reliable estimate can be made of the amount of these costs.

Obligations for social sphere development - The Partnership has recognized obligations to contribute to social sphere development of the cities of Atyrau and Astana in the Republic of Kazakhstan pursuant to the terms of the Subsurface Use Contracts. The current portion of this obligation is recorded at the value specified in the Subsurface Use Contracts, which management believes approximates the fair value. The non-current portion is recorded at the net present value, using a 15% per annum discount rate. The obligation is capitalized as part of oil and gas properties (Note 7).

Borrowings – Interest bearing loans are recorded at the proceeds received, net of the direct issue costs. Interest costs are accounted for on an accrual basis and are included as accrued expenses to the extent that they are not settled in the period in which they arise.

Asset retirement obligations – In accordance with SFAS 143 “Accounting for Asset Retirement Obligations”, the company records the present value of obligations associated with the retirement of oil and gas properties in the period in which they are incurred. The liability is capitalized as part of the oil and gas properties. Subsequently, asset retirement cost is allocated to expense using a systematic and rational method over its useful life (Note 15).

Foreign currency translation – In accordance with the Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" the financial statements of the Partnership have been translated into United States Dollars (USD) from Kazakhstan tenge (tenge). The Partnership maintains its accounting records in tenge. A majority of the Partnership’s capitalized costs, expenses, liabilities, loans and cash flows are denominated in USD. Accordingly, the Partnership has determined that the USD is its functional currency.

Partnership long-lived assets and equity are translated using historic exchange rates. Partnership monetary assets and liabilities are translated using the exchange rate of 144.22 and 155.85 tenge/USD, as at December 31, 2003 and December 31, 2002 respectively.  Partnership expenses are translated at the weighted-average rate of, 150.00, 150.83, 154.36 and 149.50 tenge/USD for the period from August 11, 2003 to December 31, 2003, period from January 1, 2003 to August 11, 2003, year ended December 31, 2002, and the period from April 28, 2001 (inception date) to December 31, 2001, respectively.  Gains and losses arising from these translations are reported in the statement of operations.

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The Kazakhstani tenge is not a fully convertible currency outside of the Republic of Kazakhstan. The translation of tenge denominated assets and liabilities into USD for the purpose of these financial statements does not indicate that the Partnership could realize or settle in USD the reported values of the assets and liabilities. Likewise, it does not indicate that the Partnership could return or distribute the reported USD values of capital and retained earnings to the partners.

Income Taxes – Income taxes are accounted for under the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes”.  Tax on the income or loss for the period comprises current tax and any change in deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, and any adjustment of tax payable for previous years.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is realized.

The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income in the reporting periods in which the originating expenditure becomes deductible. In assessing the recoverability of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. In making this assessment, management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies.

Employee Benefits

Pension payments

The Partnership pays into an employee accumulated pension fund an amount equivalent to 10% of employees’ salaries. These amounts are expensed when they are incurred. Pension fund payments are withheld from employees’ salaries and included with general and administrative expenses in the statement of operations. As at December 31, 2003, the Partnership was not liable for any supplementary pensions, post-retirement health care, insurance benefits or retirement indemnities to its current or former employees.

Social tax

The Partnership makes payments of mandatory social tax in the amount of 21% of employee salaries. These costs are recorded in the period when they are incurred and capitalized as part of oil and gas properties or included with general and administrative expenses in the statement of operations.

Related parties – The following are considered to be related parties:

- BSEK and the Partnership’s shareholders, partners, directors and officers;

- Enterprises in which shareholders, partners, officers or directors of BSEK or the Partnership and their immediate families have control or significant influence.

4.

BUSINESS COMBINATION

On August 11, 2003, BSEK acquired a 90% partnership interest in KoZhaN LLP, which holds the licences to explore and develop for oil and gas in three fields in the Republic of Kazakhstan.  As consideration for the purchase, the Company agreed to make lump sum payments to the sellers of this interest based on the Partnership achieving specified levels of crude oil production from the oil and gas properties owned by the Partnership at the time, as well as to make quarterly production payments to the sellers (See note 18 (g)).  The Partnership has not yet commenced production operations and has not made any commercial sales of oil.  Consequently, the likelihood of the Company paying the lump sum payments and the quarterly production payments is currently indeterminable and no amount has been recorded in these financial statements in respect of these contingent payments.  If the Company is able to initiate production operations in the future, the likelihood of making the lump sum payments will be re-evaluated, and if management determines that payment is likely, the estimated total lump sum payment

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amount will be recorded as a cost of acquiring oil and gas properties and as a liability at that time.  The future payment of quarterly production payments, if any, will be recorded as royalty expenses as incurred, to be deducted in the determination of net income.

The acquisition has been accounted for using the purchase method and the results of operations of the Partnership are reflected in the financial statements from the date of acquisition.  Pursuant to the purchase agreement, BSEK assigned the following values to the assets and liabilities of the Partnership:

Oil and gas properties	$	2,988,737
Intangible assets		488
Current assets, including cash of $12,790		15,314
Current liabilities		(2,515,993)
Non-current liabilities		(138,546)
Net assets acquired	$	350,000
Consideration, recorded as a current liability	$	350,000

5.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expenses comprised the following:

						Cumulative
		Period from			Period from	Period from
		August 11, 2003	Period from	Year	April 28, 2001	April 28, 2001
		(Inception date)	January 1, 2003	Ended	(Inception date)	(Inception date
		to December	to August 11,	December 31,	to December	of Predecessor)
		31, 2003	2003	2002	31, 2001	to December
		(Successor)	(Predecessor)	(Predecessor)	(Predecessor)	31, 2003
Penalty on signature
	bonuses’ payment	$40,685	$58,219	$--	$--	$98,904
Business trips		14,097	2,517	2,682	--	19,296
Bank fees		1,393	940	1,629	--	3,962
Professional fees		54,183				54,183
Other expenses		508	1,923	1,394	292	4,117
Total		$110,866	$63,599	$5,705	$292	$180,462

6.

INCOME TAX EXPENSE

BSEK and the Partnership provide for taxes based on their statutory financial statements that are maintained in accordance with the statutory regulations of Canada and the Republic of Kazakhstan, respectively.  Permanent tax differences arise due to the fact that certain expenses are not deductible for corporate income tax purposes under the regulations of the respective countries (see reconciliation of tax rate below).

Deferred taxation reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for statutory tax purposes in the respective countries.

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Income tax expense in the statements of operations consist of:

						Cumulative
		Period from			Period from	Period from
		August 11, 2003	Period from	Year	April 28, 2001	April 28, 2001
		(Inception date)	January 1, 2003	Ended	(Inception date)	(Inception date
		to December	to August 11,	December 31,	to December	of Predecessor)
		31, 2003	2003	2002	31, 2001	to December
		(Successor)	(Predecessor)	(Predecessor)	(Predecessor)	31, 2003
Current tax expenses		$--	$--	$--	$--	$--
Deferred tax expense/
	(recovery)	(27,480)	27,480	--	--	--
Total		$(27,480)	$27,480	$--	$--	$--

The deferred tax liability comprised of the following:

			As at	As at
			December 31,	December 31,
			2003	2002
			(Successor)	(Predecessor)
Temporary differences
	Oil and gas property values		407,392	--
Total temporary differences			407,392	--
Other
	Impact of rate differences in offshore
		jurisdictions	(13,180)	--
			$394,212	$--
Statutory tax rate			34.62%	30%
Total			$136,476	$--
Current portion			$--	$--
Non-current portion			$136,476	--
Total			$136,476	$--

Below is a reconciliation of actual income tax and income tax at statutory tax rates:

			Period from				Cumulative
			August 11,			Period from	Period from
			2003	Period from	Year	April 28, 2001	April 28, 2001
			(Inception date)	January 1, 2003	Ended	(Inception date)	(Inception date
			to December	to August 11,	December 31	to December	of Predecessor)
			31, 2003	2003	2002	31, 2001	to December
			(Successor)	(Predecessor)	(Predecessor)	(Predecessor)	31, 2003
Net loss before
	taxation		($100,222)	($63,825)	($2,122)	($286)	($166,455)
Statutory tax rate			34.62%	30%	30%	30%
Income tax recovery at
	statutory rate		($34,697)	($19,148)	($637)	($86)	($54,568)
Permanent differences:
	Penalty on
		signature bonuses	14,085	17,337	--	--	31,422
	Loss carryforwards
		not recognized	25,618	--	--	--	25,618
	Other		(5,006)	1,811	637	86	(2,472)
Temporary differences			(27,480)	27,480	--	--	--
Total			($27,480)	$27,480	$--	$--	$--

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7.

OIL AND GAS PROPERTIES

Oil and gas properties comprised of the following:

	As at	As at
	December 31,	December 31,
	2003	2002
	(Successor)	(Predecessor)
Subsurface use rights	$1,632,995	$133,353
Obligations for social sphere development	1,151,760	--
Asset retirement obligation	26,817	--
	$2,811,572	$133,353

Interest accrued on loans payable has been recorded as a cost of oil and gas properties as follows: period from January 1, 2003 to August 11, 2003 - $15,758; year ended December 31, 2002 - $4,861; and period from April 28, 2001 (inception date) to December 31, 2001 – Nil.  Effective August 11, 2003, the lender assigned its interest in the loan to BSEK and thereafter the interest expense has been eliminated on consolidation.

8.

OBLIGATIONS FOR SOCIAL SPHERE DEVELOPMENT

In accordance with the Subsurface Use Contracts, the Partnership is committed to contribute to social sphere development of Astana and Atyrau cities in the total amount of $1,430,000 for all three oilfields during the exploration phase.  Throughout the period from April 28, 2001 to December 31, 2003, the Company had not made any payments. These payments are due from 2003 to 2008.

Payment of these obligations should be made according to a payment schedule agreed between the Partnership and the Government. The non-current portion of these obligations is discounted at 15% being the estimated credit-adjusted risk free discount rate, giving a non-current discounted obligation of $693,760 and a total discounted obligation of $1,151,760.

9.

SIGNATURE BONUSES AND PENALTY PAYABLE

The Partnership entered into the Subsurface Use Contracts on February 17, 2003.  In accordance with the Subsurface Use Contracts, the Partnership was committed to pay signature bonuses in the total amount of $1,000,000 for acquiring subsurface use rights for all three fields.

As at December 31, 2003, the Partnership had paid $1,000,000 to the Government as signature bonuses for the Morskoye, Karatal and Dauletali oilfields. Penalties accrued on delaying the payments of the signature bonuses for those oilfields as at December 31, 2003 amounted to $98,904.

10.

OTHER PAYABLES AND ACCRUALS

Other payables and accruals comprised of the following:

	As at	As at
	December 31,	December 31,
	2003	2002
	(Successor)	(Predecessor)
Salaries payable	$21,816	$915
Other payable	518	--
Payable for geological information purchased	--	40,662
Professional fees payable	31,950	--
Total	$54,284	$41,577

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11.

LOANS

The loans comprised of:

	As at	As at
	December 31,	December 31,
	2003	2002
	(Successor)	(Predecessor)
IbrizOil Inc.	$--	$97,000
	$--	$97,000

As a result of BSEK granting the over-riding royalty to IbrizOil Inc. (“IbrizOil”) (see note 18(f)), IbrizOil assigned its loan to the Partnership in the amount of $152,178, plus interest accrued of $20,619.  The maturity date of the loan is at the request of the lender, after the Partnership starts the production phase in the oilfields.  At December 31, 2003, the loan and accrued interest have been eliminated on consolidation.

The annual interest rate on the above loan is 17.65%.  Interest accrued on the IbrizOil loan amounted to $4,861 for the year ended December 31, 2002 and $15,758 for the period January 1, 2003 to August 11, 2003.  No payment of interest was made on this loan.

12.

CHARTER CAPITAL – KoZhaN LLP

As at December 31, 2002, charter capital comprised of the following:

		Participation	December 31,
		Share %	2002
Mukashev Bolat Raimkhanovich		20.0	$        106.40
Kaschapov Garifolla Sapayevich		20.0	106.40
Kaikenov Kadyr Karkabatovich		20.0	106.40
Asanova Turgan Nurtayevna		20.0	106.40
Faskhutdinov Ruslan Rakhimzhanovich		20.0	106.40
	Authorized charter capital	100.0	532.00
	Paid charter capital		$        532.00

Charter capital was contributed in cash by all partners on April 22, 2002.

13.

COMMON STOCK – BIG SKY ENERGY KAZAKHSTAN LTD.

Issued: Class A common shares

	Number	Stated
	of Shares	Capital
	(Successor)	(Successor)
Balance at August 11, 2003	10,000,000	$1
Balance at December 31, 2003	10,000,000	$1

No warrants or stock options to acquire shares have been issued and none are outstanding.

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14.

RELATED PARTY TRANSACTIONS

In consideration for BSEK being granted the right to negotiate to acquire the interest in the Partnership and in consideration for the assignment of the loan described below, BSEK granted an over-riding royalty interest in the net income of the Partnership to a company controlled by one of the shareholders of BSEK, IbrizOil (see note 18(f)).  In conjunction with this transaction, IbrizOil assigned a loan receivable from the Partnership to BSEK, in the amount of $152,178 plus interest accrued.

At December 31, 2003, the Company owed an amount of $350,000 to Big Sky Energy Canada Ltd., a company controlled by one of the shareholders of BSEK, arising from costs totaling $300,000 that were incurred by that company in connection with BSEK’s acquisition of the Partnership interest and in respect of a payment of $50,000 to the President of the Partnership as re-imbursement for costs incurred by him before August 11, 2003, in connection with the purchase by BSEK of the Partnership interest.  The amount of $350,000 has been treated as consideration in the allocation of the purchase price to the assets and liabilities of BSEK.

At December 31, 2003, the Company owed an amount of $7,565 to Big Sky Holdings Ltd., a company controlled by one of the shareholders of BSEK arising from costs that were paid on behalf of BSEK.

15.

ASSET RETIREMENT OBLIGATION

Management believes that an asset retirement obligation should be recognized for future abandonment costs of 4 wells drilled at Morskoye field before the Partnership signed the Subsurface Use Contracts, but which, in the management’s opinion were not properly abandoned. Management believes that this obligation is likely to be settled at the end of the exploration phase.

At December 31, 2003, undiscounted expected cash flows that will be required to satisfy the Partnership liability by 2009 is $40,000. After application of a 15% credit-adjusted risk free discount rate, the present value of the Company’s liability is at December 31, 2003 is $26,817.

16.

DUE TO CHINA ENERGY VENTURES CORP.

At December 31, 2003, the Corporation had borrowed $1,154,941, including accrued interest of $5,941, from China Energy Ventures Corp.  This amount is reflected on the balance sheet as due to China Energy Ventures.  The amount is unsecured, bears interest at the rate of 5% per annum and is repayable on or before June 1, 2004. Subsequent to December 31, 2003, China Energy Ventures Corp. extended the terms of repayment indefinitely (see note 19).

17.

FAIR VALUE OF FINANCIAL INSTRUMENTS

As at December 31, 2003 and 2002, the fair value, the related method of determining fair value and the carrying value of the Company’s financial instruments were as follows. The fair value of current assets and current liabilities approximate their carrying amounts due to the short-term maturity of these instruments. Exposure to market, credit and currency risks arise in the normal course of the Company’s business. Derivative financial instruments are not used to reduce exposure to above risks.

Concentration of credit risk – Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.   Management believes the likelihood of incurring material losses due to concentration of credit risk is remote.

Interest rate risk – The Company’s only potential interest rate risk related to the loans payable which are eliminated on consolidation after August 11, 2003.

Foreign currency risk – The Company undertakes transactions denominated in foreign currencies. Accordingly, these activities may result in foreign currency exposure. The Company does not hedge its foreign currency risk.

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18.

COMMITMENTS AND CONTINGENCIES

Financial Commitments and Contingencies

As the Company has not yet commenced production operations, the likelihood of payment of the following commitments and contingencies is currently indeterminable and no amounts have been recorded as provisions in these financial statements:

a)	Commitment to repay historical costs of the Government – In accordance with the Subsurface Use Contracts, the Company is obliged to reimburse to the Government its historical costs incurred during preparation of certain geological information on the Morskoye, Karatal and Dauletali oilfields. The total amount to be reimbursed is $3,756,422. Of this amount $116,178 was paid in 2003. The remaining amount is expected to be settled by equal quarterly installments during the 20 years after the Company starts the production phase on these oilfields.
b)	Commitments to contribute to social development of Astana and Atyrau – In accordance with the Subsurface Use Contracts, the Company is obliged to invest an equivalent of $850,000 during the production phase for the development of the social sector of Atyrau and Astana cities in the Republic of Kazakhstan.
c)	Commitment to develop local personnel– In accordance with the Subsurface Use Contracts, the Company is obliged to invest not less than 1% of total investments for professional development of the local personnel involved in works under the Subsurface Use Contracts.
d)	Liquidation fund – In accordance with the Subsurface Use Contracts, the Company is obliged to establish a liquidation fund to finance the liquidation of the consequences of its oil and gas operations in the amount of 1% of operating costs.  The Company is also obliged to provide the Government for approval the program on liquidation of consequences of its activities under the Contracts, including budget of liquidation costs, not later than 2 years before the end of the exploration phase and start of the production phase. Although the Company has not yet carried out major exploration activities to date, the Company has recorded an asset retirement obligation for certain wells in these financial statements (see note 15). Upon achieving an agreement with the Government, this provision for asset retirement may be considered as part of the contractually required liquidation fund.
e)	Contingencies related to purchase of geological information from the Government – In accordance with the Purchase Agreements concluded with the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan on July 10, 2002, the Company may incur a penalty for delaying payment for the geological information purchases from the Government relating to the Morskoye, Karatal and Dauletali oilfields at a rate of 10% per annum. Payments for the geological information purchase for the Karatal and Dauletali oilfields were made by the Company with a significant delay. Management believes that the obligation for the penalty is possible, but not probable, and thus amounts of $4,979 and $724 have not been recognized as provisions in these financial statements as at December 31, 2003 and 2002 respectively.
f)	Commitment to pay over-riding royalty – Arising from the acquisition of its interest in the Partnership, BSEK is committed to pay an over-riding royalty amounting to 4.5% of the Partnership’s revenue net of royalties, lifting and transportation costs, to a company controlled by Mr. Van Doorne, who is the Executive Vice President and managing director of the Company. On March 4, 2004 this royalty interest was acquired by the parent Company of BSEK (China Energy Ventures Corp.).
g)	Commitment to make payments based on production – Arising from BSEK’s acquisition of the partnership interest, the Company is committed to make the following payments to the non-controlling partners of the Partnership, as a group, upon achieving the following production milestones, where production is calculated after deducting the government’s share of production, if any, and where one tonne equals seven barrels of oil:

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	-	$100,000 after the receipt by the Partnership of payment in full for two sales of a commercial quantity of oil produced, saved, marketed and sold by the Partnership.  Each sale shall not be of less than 4,000 tonnes of oil;
	-	$300,000 after the receipt by the Partnership of payment in full for a cumulative production of 40,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by the Partnership;
	-	$400,000 after the receipt by the Partnership of payment in full for a cumulative production of 150,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by the Partnership;
	-	$500,000 after the receipt by the Partnership of payment in full for a cumulative production of 250,000 tonnes of a commercial quantity of oil produced, saved, marketed and sold by the Partnership;
	-	A quarterly payment per barrel of oil produced, saved, marketed and sold by the Partnership (“Production Payment”), such production shall be calculated after deducting the government’s share of production, if any. The Production Payment shall equal $0.35 per barrel if the price of oil is equal to or less than $14.00, $0.75 per barrel if the price of oil is greater than $14.00 and less than or equal to $18.00, $1.00 per barrel if the price of oil is greater than $18.00 and less than or equal to $22.00, or $1.50 per barrel if the price of oil is greater than $22.00.  The price of oil shall be determined as a quarterly average based on a calendar year and calculated based on the actual value of oil realized by sale net of transportation and tariff costs;
	-	Upon awarding of a new tender for subsoil use rights, the Partnership shall pay a $0.05 bonus of total oilfield reserves as defined in the State Balance of Reserves (Oil) of Kazakhstan as of January 1, 2000, equivalent to proven recoverable reserves.
h)	Investment commitments – In accordance with the Subsurface Use Contracts, the Company is obliged to invest a minimum of $69,000,000, of which the amount of $14,000,000 should be invested during the exploration phase. All three Subsurface Use Contracts establish the exploration phase as 6 years from 2003 to 2009, and the production phase as 25 years from 2009 to 2034.
i)	Commercial discovery bonus – In accordance with the Subsurface Use Contracts, the Company is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of approved recoverable reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan.

Other Contingencies

a)	Non-compliance with the Subsurface Use Contracts – The Government has the right to suspend these Contracts or cancel them if the Company is in material breach of obligations and commitments under the Contracts.
b)	Commitment to sell produced oil in Kazakhstan – In accordance with the Subsurface Use Contracts, the Company is obliged to sell 100% of oil produced during the exploration stage, and 20% of oil produced during the production stage, to oil refineries located in Kazakhstan.
c)	Operating environment – The Company’s principal business activities are within the Republic of Kazakhstan. Laws and regulations affecting businesses operating in the Republic of Kazakhstan are subject to rapid changes and the Company’s assets and operations could be at risk due to negative changes in the political and business environment.

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d)

Taxation – The taxation system in the Republic of Kazakhstan is constantly changing and subject to inconsistent application, interpretation and enforcement. There have been many new tax and foreign currency laws and related regulations introduced in recent years, which are not always clearly written and whose interpretation and application is subject to the opinions of the local tax inspectorate. Non-compliance with Kazakhstan laws and regulations can potentially lead to the imposition of penalties and fines, the amounts of which can be significant.

e)

Environmental matters – The Company believes it is currently in compliance with all existing Republic of Kazakhstan environmental laws and regulations. However, Kazakhstan environmental laws and regulations may change in the future. The Company is unable to predict the timing or extent to which these environmental laws and regulations may change. Such change, if it occurs, may require the Company to modernize technology to meet more stringent standards.

19.

SUBSEQUENT EVENTS

On October 7, 2003, BSEK entered into an agreement with the Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd., a wholly owned subsidiary of Sinopec (“Shengli”) that provides for the issue from BSEK’s treasury of 10,000,000 common shares (50% of the share capital after issuance) at a total subscription amount of $2,300,000.  This agreement was subsequently amended on November 6, 2003 to provide for the payment of the subscription amount over time.  In December 2003, Shengli made an advance payment of $250,000 against the subscription amount.  In February 2004, Shengli signed the subscription agreement for the purchase of 10,000,000 BSEK common shares and entered into an escrow agreement that provides for the 10,000,000 shares to be held in escrow by an agent of BSEK until the subscription amount has been fully paid to that agent.  If payment of $2,050,000 is not received by the escrow agent by th e later of March 1, 2004 or the date on which the Partnership spuds its first well in the Morskoye field, which is expected to occur in the third quarter of 2004, BSEK shall have the right to cancel the subscription agreement and to repay all subscription amounts received out of production net-revenue from the well or wells on the site at a rate of 50% of such net-revenue. As of July 1, 2004 the payment of $2,050,000 had not been received and as of July 1, 2004 the Partnership had not spud its first well. On July 1, 2004, a Severance Agreement was completed by BSEK and Shengli that terminated all of the various share purchase agreements between the two parties and BSEK repaid funds that had been received from Shengli.  

As of June 1, 2004, BSEK had not repaid the balance due to China Energy Ventures Corp. (see note 16).  At that time, the terms of repayment of the loan were extended indefinitely.

On October 27, 2003, the shareholders of BSEK entered into an agreement with China Energy Ventures Corp. (“China Energy”) to exchange 100% of the BSEK common shares held by them (excludes all the shares to be issued to Shengli) for shares of China Energy.  This transaction was completed on January 12, 2004 and BSEK became a wholly-owned subsidiary of China Energy.  Due to the Severance Agreement with Shengli as discussed above, BSEK expects to remain a wholly-owned subsidiary of China Energy.

20.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, FASB issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”).  FIN 46 provides criteria for identifying variable interest entities (“VIEs”) and further criteria for determining what entity, if any, should consolidate them.  In general, VIEs are entities that either do not have equity investors with voting rights or have equity investors that do not provide sufficient financial resources for the entity to support its activities.  In December 2003, the FASB issued FIN 46(R) to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements.  The provisions of FIN 46(R) are required to be adopted by the Company for the period ending December 31, 2004. The Company is currently reviewing the impact, if any that the adoption of this provision will have on its financial position, results of operations or cash flows.< /P>

In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104 “Revenue Recognition,” which supersedes SAB No. 101. The primary purpose of SAB No. 104 is to rescind accounting guidance contained in SAB No. 101 and the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” related to multiple element revenue arrangements. The changes noted in SAB No. 104 did not have a material impact on the company’s financial position, results of operations, or cash flows.

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INDEPENDENT AUDITORS' REPORT

To the Partners of Vector Energy West LLP (a development stage company):

We have audited the accompanying balance sheets of Vector Energy West LLP (the “Partnership”), a development stage company, as at December 31, 2003 and 2002, and the related statements of loss, changes in partners’ deficit and cash flows (the “financial statements”) for the years ended December 31, 2003 and 2002, and for the cumulative period from July 4, 2001 (inception date) to December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership as at December 31, 2003 and 2002, and the results of its operations and its cash flows for the years ended December 31, 2003 and 2002, and for the cumulative period from July 4, 2001 (inception date) to December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

The Partnership is in the exploration and development stage as at December 31, 2003. As further discussed in Note 2 to the financial statements, successful completion of the Partnership’s exploration and development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its exploration and development activities, obtaining necessary regulatory approvals and achieving a level of sales adequate to support the Partnership’s cost structure.

The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern.  The Partnership is a development stage company engaged in acquisition, exploration and development of oil and gas properties. As discussed in Note 16 to these financial statements, the Partnership is required by July 1, 2004 to remedy certain violations of major requirements of the Subsurface Use Contracts.  In the case of failure to remedy such violations, the Subsurface Use Contracts can be terminated by the Government, which raises doubt about the Partnership’s ability to continue as a going concern.  As further discussed in Note 17 to these financial statements, subsequent to December 31, 2003 the Partnership made some actions to remedy these violations.  These financial statements do not include any adjustments that might result from the outcome of these uncertainties.

/s/ Deloitte & Touche

TOO Deloitte & Touche

April 30, 2004 (except for Note 17, as to which the date is July 5, 2004)

Almaty, Kazakhstan

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VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF LOSS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002, AND FOR THE CUMULATIVE PERIOD FROM JULY 4, 2001 (INCEPTION DATE) TO DECEMBER 31, 2003

(expressed in United States Dollars)

	Notes		Year ended December 31, 2003		Year ended December 31, 2002		Cumulative period from July 4, 2001 (inception date) to December 31, 2003
EXPENSES:
General and administrative expenses	4	$	65,512	$	10,712	$	76,224
OPERATING LOSS			65,512		10,712		76,224
OTHER INCOME AND EXPENSES:
Foreign exchange loss/(gain), net			1,258		(152)		1,106
LOSS BEFORE TAXATION			66,770		10,560		77,330
INCOME TAX EXPENSE	3, 12		-		-		-
NET LOSS		$	66,770	$	10,560	$	77,330

The notes form an integral part of these financial statements.

101

VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

AS AT DECEMBER 31, 2003 AND 2002

(expressed in United States Dollars)

				Notes		2003		2002
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents				$	118	$	463
	Accounts receivable					125		-
	Advances paid					4,639		-
			Total current assets			4,882		463
NON-CURRENT ASSETS:
	Oil and gas properties			5		3,923,276		-
			Total non-current assets			3,923,276		-
TOTAL ASSETS						3,928,158		463
LIABILITIES AND PARTNERS’ DEFICIT
CURRENT LIABILITIES:
	Obligations for social programs and programs for
		infrastructure development – current portion		6		350,000		-
	Obligations on professional training of personnel –
		current portion		7		119,600		-
	Penalties payable			8		61,739		-
	Obligations on acquisition of the right on the geological
		information use		9		758,265		-
	Loan and interest payable			10		529,813		-
	Accounts payable to related party			14		15,318		10,514
	Other payments and accruals					893		-
			Total current liabilities			1,835,628		10,514
NON-CURRENT LIABILITIES:
	Obligations for social programs and programs for
		infrastructure development – non-current portion		6		913,480		-
	Obligations on professional training of personnel – non-
		current portion		7		307,722		-
	Obligations on historical costs reimbursement			11		948,149		-
			Total non-current liabilities			2,169,351		-
COMMITMENTS AND CONTINGENCIES				16
PARTNERS’ DEFICIT:
	Charter fund			13		509		509
	Deficit accumulated during the development stage					(77,330)		(10,560)
			Total partners’ deficit			(76,821)		(10,051)
TOTAL LIABILITIES AND PARTNERS’ DEFICIT						3,928,158		463

The notes form an integral part of these financial statements.

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VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT

FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002, AND FOR THE CUMULATIVE PERIOD FROM JULY 4, 2001 (INCEPTION DATE) TO DECEMBER 31, 2003

(expressed in United States Dollars)

		Charter		Deficit		Total
		fund		accumulated
				during the
				development
				stage
Balance at July 4, 2001 (inception date)	$	-	$	-	$	-
Balance at December 31, 2001	$	-	$	-	$	-
Contribution to the charter fund		509		-		509
Net loss		-		(10,560)		(10,560)
Balance at December 31, 2002	$	509	$	(10,560)	$	(10,051)
Net loss		-		(66,770)		(66,770)
Balance at December 31, 2003	$	509	$	(77,330)	$	(76,821)

The notes form an integral part of these financial statements.

103

VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOW

FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002, AND FOR THE CUMULATIVE PERIOD FROM JULY 4, 2001 (INCEPTION DATE) TO DECEMBER 31, 2003

(expressed in United States Dollars)

	Notes	Year ended December 31, 2003	Year ended December 31, 2002	Cumulative period from July 4, 2001 (inception date) to December 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $		$     (66,770)	$      (10,560)	$       (77,330)
Adjustments for:
Penalties accrued	8	61,739	-	61,739
Changes in operating assets and liabilities:
Increase in receivables		(125)	-	(125)
Increase in advances paid		(4,639)	-	(4,639)
Increase in accounts payable to related party		4,804	10,514	15,318
Increase in other payables and accruals		893	-	893
Net cash used in operating activities		(4,098)	(46)	(4,144)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties		(501,247)	-	(501,247)
Net cash used in investing activities		(501,247)	-	(501,247)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan	10	505,000	-	505,000
Contributions to the charter fund	13	-	509	509
Net cash received from financing activities		505,000	509	505,509
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(345)	463	118
CASH AND CASH EQUIVALENTS, at the beginning of the period		463	-	-
CASH AND CASH EQUIVALENTS, at the end of the period		118	463	118

Non-cash transactions: During the periods presented above, the Partnership had certain non-cash transactions, such as capitalization of obligations for social programs and programs for infrastructure development, obligations on professional training of personnel, interest on loans obtained and obligations on historical costs reimbursement in total amount of USD 3,422,029.

The notes form an integral part of these financial statements.

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VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002, AND FOR THE CUMULATIVE PERIOD FROM JULY 4, 2001 (INCEPTION DATE) TO DECEMBER 31, 2002

(expressed in United States Dollars unless noted otherwise)

1.

DESCRIPTION OF BUSINESS       

Vector Energy West LLP, a development stage company, (hereinafter referred to as the “Partnership”) was registered as a limited liability partnership under the laws of the Republic of Kazakhstan on July 4, 2001. The main activities of the Partnership are the acquisition, exploration and development of oil and gas properties in the Atyrau region, Republic of Kazakhstan.

On December 28, 2002, the Partnership entered into Subsurface Use Contracts with the Government of the Republic of Kazakhstan (the “Government”) to explore for and produce hydrocarbons in the Atyrau and Liman-2 oilfields in the Atyrau region (the “Subsurface Use Contracts”). From that date to  December 31, 2003, no major exploration activities have been carried out. In accordance with the Subsurface Use Contract # 1077 dated December 28, 2002 the Partnership received the right to perform exploration activities on the Atyrau oilfield during 6 years from 2003 to 2008. In accordance with the Subsurface Use Contract # 1076 dated December 28, 2002 the Partnership received the right to perform exploration activities on the Liman-2 oilfield during 5 years from 2003 to 2007 and to perform production activities during the subsequent 20 years.

As at December 31, 2003 and 2002 the Partnership employed 1 staff.

Legal Name	Vector Energy West LLP
Legal Address	11/13 Baiseitov str., office 1, Almaty, Republic of Kazakhstan
Legal Registration Number	40988-1910-TOO (ИУ)
Ownership status	Private

2.

BASIS OF PRESENTATION

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The Partnership maintains accounting records and prepares its financial statements in Kazakhstani tenge in accordance with the requirements of Kazakhstani accounting and tax legislation. The accompanying financial statements differ from the financial statements prepared for statutory purposes in the Republic of Kazakhstan in that they reflect certain adjustments, not recorded in the statutory books of the Partnership, which are appropriate to present the financial position, results of operations and cash flows in accordance with US GAAP.

Use of estimates – The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses of the reporting period then ended. Actual results could differ from those estimates.

Development stage company – The accompanying financial statements have been prepared based on the assumption that the Partnership will continue as a going concern and there is no indication that the Partnership intends to or has to be liquidated, or significantly decrease its activity in the near future. The ability of the Partnership to pay its debts when they are due depends on continued financial support from its partners.

At present, the Partnership’s oil and gas operations are in the acquisition and exploration phase, and therefore, the Partnership is in the development stage. This phase is expected to last until the Partnership finds economically profitable oil reserves. Until such reserves are found and proven and necessary regulatory approvals are obtained, uncertainty exists as to whether the long-lived assets of the Partnership are recoverable.

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As discussed in Note 16 to these financial statements, the Partnership is required by July 1, 2004 to remedy certain violations of major requirements of the Subsurface Use Contracts.  In the case of failure to remedy such violations, the Subsurface Use Contracts can be terminated by the Government, which raises doubt about the Partnership’s ability to continue as a going concern.  As further discussed in Note 17 to these financial statements, subsequent to December 31, 2003 the Partnership made some actions to remedy these violations. These financial statements do not include any adjustments that might result from the outcome of these uncertainties.

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and cash equivalents – Cash and cash equivalents include cash on hand and in banks.

Accounts receivable – Accounts receivable are stated at their net realizable values after deducting provisions for uncollectible amounts, if any. Such provisions reflect estimates based on evidence of collectibility.

Oil and gas properties – The Partnership follows the successful efforts method of accounting for its oil and gas operations, whereby expenditures for property acquisitions and all development costs (including development dry holes) and support equipment and facilities are capitalized. The costs of unsuccessful exploratory wells are charged to expense at the time the wells or other exploration activities are determined to be non-productive. Production costs, overheads and all exploration costs other than exploratory drilling are charged to expense as incurred.

Costs incurred for the acquisition of rights to explore and develop the Atyrau and Liman-2 oilfields, including but not limited to payment for the right on the geological information use, signature bonuses, obligations on professional training of personnel, obligations for social programs and programs for infrastructure development are capitalized and classified as a right on subsurface use.

Impairment of long-lived assets – The Partnership reviews its long-lived assets, including oil and gas properties, after the discovery of proved reserves and the start of the development phase for possible impairment by comparing their carrying values to the undiscounted future net before-tax cash flows. Asset impairment may  occur  if these undiscounted future net before-tax cash flows are lower than anticipated reserves, there are write downs of proved reserves based on field performance, significant changes in commodity prices, significant decreases in the market value of an asset, and/or significant change in the extent or manner of use or physical change in an asset. Impaired assets are written down to their estimated fair values, generally their discounted future net before-tax cash flows. For proved oil and gas properties, the Partnership performs the impairment test on an individual field basis. Unprove d properties are reviewed periodically to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the current period.

Obligations for social programs and programs for infrastructure development – The Partnership has recognized obligations to contribute funds to social programs and programs on infrastructure development in the Atyrau region, Republic of Kazakhstan pursuant to the terms of the Subsurface Use Contracts. These obligations are recorded at their present value, using a 15% per annum discount rate. The obligations are capitalized as part of the oil and gas properties (see Notes 5 and 6).

Asset retirement obligations – In accordance with the SFAS No. 143 “Accounting for Asset Retirement Obligations”, the Partnership is required to record the present value of obligations associated with the retirement of oil and gas properties in the period in which they are incurred. The liability should be capitalized as part of the oil and gas properties. Subsequently, asset retirement cost should be allocated to expense using a systematic and rational method over its useful life.

The Partnership adopted provisions of the SFAS No. 143 in 2002. However, as described in Note 16 it has not recorded asset retirement obligations in these financial statements.

Obligations on professional training of personnel – The Partnership has recognized obligations on professional training of its personnel pursuant to the terms of the Subsurface Use Contracts. These obligations are recorded at their present value, using a 15% per annum discount rate. The obligations are capitalized as part of the oil and gas properties (see Notes 5 and 7).

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Obligations on historical costs reimbursement – The Partnership is unavoidably obliged to reimburse USD 7,784,034, which represent historical costs incurred by the Republic of Kazakhstan for the Liman-2 oilfield pursuant to the terms of the Subsurface Use Contract # 1076 dated December 28, 2002 and the Agreement on acquisition of the right on the geological information use # 711 dated January 21, 2002. These obligations are recorded at their present value, using a 15% per annum discount rate. The obligations are capitalized as part of the oil and gas properties (see Notes 5 and 11).

Borrowing costs – Interest costs related to financing the acquisition of the subsurface use rights, conducting exploration activities and financing major oil and gas development projects are capitalized as part of the related assets until the projects are evaluated, or until the projects are substantially complete and ready for their intended use if the projects are evaluated as successful. Capitalized interest cannot exceed gross interest expense.

Provisions – Provisions are recognized when the Partnership has a present obligation as a result of a past event to incur such costs and when a reliable estimate can be made for the amount of these costs.

Borrowings – Interest bearing loans are recorded at the amounts of the proceeds received, net of the direct issue costs. Interest costs are accounted for on an accrual basis and included in accrued expenses to the extent that they are not settled in the period in which they arise.

Foreign currency translation – In accordance with the SFAS No. 52 “Foreign Currency Translation”, these financial statements have been translated into United States Dollars (“US Dollars”) from Kazakhstani tenge (“tenge”). The Partnership maintains its accounting records in tenge. The majority of the Partnership’s capitalized costs, expenses, liabilities, loans and cash flows are denominated in US Dollars. Accordingly, management believes that the US Dollar is the functional currency of the Partnership.

Long-lived assets and equity are translated using historic exchange rates. Monetary assets and liabilities are translated using the exchange rate of 144.22 and 155.60 tenge/US Dollar, as at December 31, 2003 and 2002, respectively. Expenses are translated at a weighted-average rate of 149.50 and 154.36 tenge/US Dollar for the year ended December 31, 2003 and 2002, respectively. Gains and losses arising from these translations are included in the statements of loss.

The Kazakhstani tenge is not a fully convertible currency outside of the Republic of Kazakhstan. The translation of tenge denominated assets and liabilities into US Dollars for the purpose of these financial statements does not indicate that the Partnership could realize or settle the reported values of the assets and liabilities in US Dollars. Likewise, it does not indicate that the Partnership could return or distribute the reported US Dollars values of charter fund and retained earnings to the partners.

Income taxes – Income taxes are accounted for under the asset and liability method in accordance with the SFAS No. 109 “Accounting for Income Taxes”. Tax on the income or loss for the year comprises current tax and any change in deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, and any adjustment of tax payable for previous years.

Deferred tax assets and liabilities are recognized as the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is realized.

The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income in the reporting periods in which the originating expenditure becomes deductible. In assessing the recoverability of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. In making this assessment, management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies.

The Partnership is a development stage company. Most of the expenditures made during the exploration and development stage are capitalized. In the current year, the Partnership does not have an income tax liability.

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Employee Benefits

Pension payments

The Partnership contributes to an employee accumulated pension fund an amount equivalent to 10% of employees’ salaries but not more than 37,500 tenge per month in 2003. Pension fund payments are withheld from employees’ salaries and included with general and administrative expenses in the statement of loss. As at December 31, 2003, the Partnership was not liable for any supplementary pensions, post-retirement health care, insurance benefits or retirement indemnities to its current or former employees.

Social tax

The Partnership makes mandatory social tax payment in the amount of 21% of employee’s salaries. These costs are recorded in the period when they are incurred and capitalized as part of oil and gas properties.

Related parties – The following are considered to be related parties of the Partnership:

§	Partnership’s partners, director and officer; and,
§	Enterprises in which partners, officers or directors of the Partnership and their immediate families have control or significant influence.

Impact of Recent and Pending Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45, “Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”). FIN No. 45 elaborates on the disclosures the Partnership must make about its obligations under certain guarantees that the Partnership has issued. It also requires the Partnership to recognize, at the inception of a guarantee, a liability for the fair value of the obligations the Partnership has undertaken in issuing the guarantee. The initial recognition and initial measurement provisions are to be applied only to guarantees issued or modified after December 31, 2002. The Partnership adopted provisions of FASB Interpretation No. 45 in 2003. Adoption of these provisions does not have a material impact on the Partnership’s financial position or results of operations. The disclosure requirements are effective for annual or interim periods ending after December 15, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN No. 46”).  FIN No. 46 provides criteria for identifying variable interest entities (“VIEs”) and further criteria for determining what entity, if any, should consolidate them.  In general, VIEs are entities that either do not have equity investors with voting rights or have equity investors that do not provide sufficient financial resources for the entity to support its activities.  In December 2003, the FASB issued FIN No. 46(R) to clarify some of the provisions of FIN No. 46 and to exempt certain entities from its requirements.  The Partnership must adopt and apply FIN No. 46(R) for reporting periods ending after December 15, 2004.  FIN No. 46(R) is not expected to have a material impact on the Partnership’s results of operations or financial position.

The following standards issued by the FASB do not impact the Partnership at this time:

§	SFAS No. 146 – “Accounting for Costs Associated with Exit or Disposal Activities”, effective for exit or disposal activities initiated after December 31, 2002;
§	SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, effective for financial statements issued after June 15, 2003;
§	SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Post Retirements Benefits – an amendment of SFAS No. 87, 88 and 106”, effective for financial statements issued after December 15, 2003; and
§	SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, effective for contracts entered into or modified after June 30, 2003.

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4.

GENERAL AND ADMINISTRATIVE EXPENSES

During the years ended December 31, 2003 and 2002, and the period from July 4, 2001 (inception date) to December 31, 2001, general and administrative expenses comprised the following:

		Year ended December 31, 2003		Year ended December 31, 2002	Cumulative period from July 4, 2001 (inception date) to December 31, 2003
Penalties accrued for delay of payment of the signature bonus and for the right on the geological information use (see Note 8)	$	61,739	$	-	61,739
Business trip expenses		689		5,206	5,895
Bank fees		87		-	87
Legal fees		-		4,123	4,123
Other expenses		2,997		1,383	4,380
Total	$	65,512	$	10,712	76,224

5.

OIL AND GAS PROPERTIES

As at December 31, 2003 and 2002, oil and gas properties comprised the following:

		2003		2002
Subsurface use rights	$	1,284,325	$	-
Obligations for social programs and programs for infrastructure development		1,263,480		-
Obligations on historical costs reimbursement		948,149		-
Obligations on professional training of personnel		427,322		-
Total	$	3,923,276	$	-

Interest capitalized in 2003 amounted to USD 24,813 (2002: NIL) (see Note 11).

6.

OBLIGATIONS FOR SOCIAL PROGRAMS AND PROGRAMS FOR INFRASTUCTURE DEVELOPMENT

		2003		2002
Within one year	$	350,000	$	-
In the second to the fifth inclusive		1,250,000		-
Total obligations		1,600,000		-
Less: discount on obligations for social programs and programs for infrastructure development		(336,520)		-
Present value of obligations for social programs and programs for infrastructure development		1,263,480		-
Amount due for settlement within one year		350,000		-
Amount due for settlement after one year		913,480		-
Total	$	1, 263, 480	$	-

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In accordance with the Subsurface Use Contracts the Partnership is unavoidably obliged to contribute funds to the social programs and programs on infrastructure development in the Atyrau region, Republic of Kazakhstan, in total amount of USD 1,000,000 for the Atyrau oilfield during the exploration phase and USD 600,000 for the Liman-2 oilfield during the exploration phase of the Subsurface Use Contracts. As at December 31, 2003, the Partnership had not made any payments for the social programs and programs on infrastructure development. These payments are due from 2003 to 2008 for the Atyrau oilfield and from 2003 to 2007 for the Liman-2 oilfield.

Payment of these obligations should be made according to a payment schedule agreed between the Partnership and the Government.  These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate.

7.

OBLIGATIONS ON PROFESSIONAL TRAINING OF PERSONNEL

		2003		2002
Within one year	$	119,600	$	-
In the second to the fifth inclusive		419,400		-
Total obligations		539,000		-
Less: discount on obligations on professional training of personnel		(111,678)		-
Present value of obligations on professional training of personnel		427,322		-
Amount due for settlement within one year		119,600		-
Amount due for settlement after one year		307,722		-
Total	$	427,322	$	-

Management believes that obligations on professional training of personnel should be recognized for future professional training costs as prescribed by the Subsurface Use Contracts. In accordance with the Subsurface Use Contracts the Partnership is obliged to finance professional training of Kazakhstani personnel recruited for the Subsurface Use Contracts’ operations at the rate of not less than 1% of the total amount of investments. Under the Subsurface Use Contracts the total amount of investments was established at USD 53,900,000 during their exploration phase.

These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate.

8.

PENALTIES PAYABLE

In accordance with the Subsurface Use Contracts the Partnership was obliged to pay signature bonuses in total amount of USD 350,000 for acquiring the subsurface use rights for two oilfields. These bonuses were due for payment within 30 days after signing the Subsurface Use Contracts.

As at December 31, 2003, the Partnership paid USD 349,594 to the Government as signature bonuses for the Atyrau and Liman-2 oilfields with significant delay. Penalties accrued on delaying the payment of the signature bonuses for those oilfields as at December 31, 2003 amounted to USD 35,570 (2002: NIL).

In accordance with the Subsurface Use Contracts and the Agreements on acquisition of the right on the geological information use # 710 and # 711 dated January 21, 2002 the Partnership was obliged to pay an amount of USD 151,653 for the right on the geological information use within the established schedule. The Partnership delayed payment of this amount. Penalties accrued on delaying the payment for the right on the geological information use as at December 31, 2003 amounted to USD 26,169 (2002: NIL).

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9.

OBLIGATIONS ON ACQUISITION OF THE RIGHT ON THE GEOLOGICAL INFORMATION USE

In accordance with the Agreements on acquisition of the right on the geological information use # 710 and # 711 dated January 21, 2002 the Partnership is obliged to pay an additional amount for the right on the geological information use in the case the Partnership attracts foreign investors.

As described in Note 17, on April 10, 2004 Big Sky Energy Atyrau Ltd. acquired 100% of the shares in the Partnership’s charter fund. Accordingly, the Partnership recognized additional obligations on acquisition of the right on the geological information use as at December 31, 2003 in the amount of USD 758,265 (2002: NIL).

10.

LOAN AND INTEREST PAYABLE

As at December 31, 2003 and 2002, loan and interest payable comprised the following:

Secured		2003		2002
Lorgate Management Inc.	$	529,813	$	-
	$	529,813	$	-
Loan	$	505,000	$	-
Interest		24,813		-
Total	$	529,813	$	-

On June 23, 2003 the Partnership obtained a loan from Lorgate Management Inc. (“Lorgate”) in the amount of USD 505,000 at 10% interest rate per annum. The maturity date of the loan is July 11, 2004. As per the terms of the Loan Agreement the total amount of the loan was used to make payment of signature bonuses and to pay for the right on the geological information use for both oilfields. In the case the loan and interest payment is delayed for more than 3 working days, the entire amount of both loan and interest shall attract a penalty at the rate of 2% per annum for each banking day after delay.

During the year ended December 31, 2003 interest accrued by the Partnership on the outstanding loan amounted to USD 24,813 (002: NIL).  Interest should be repaid together with principal on July 11, 2004.

11.

OBLIGATIONS ON HISTORICAL COSTS REIMBURSEMENT

The Partnership is unavoidably obliged to reimburse USD 7,784,034, which represent historical costs incurred by the Republic of Kazakhstan for the Liman-2 oilfield pursuant to the terms of the Subsurface Use Contract # 1076  dated December 28, 2002 and  the Agreement on acquisition of the right on the geological information use # 711 dated January 21, 2002. Payment of these obligations should be made according to a payment schedule agreed between the Partnership and the Government. These payments are due from 2012 to 2027 and should be paid quarterly in equal installments.

These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate, giving a present value of obligation of USD 948,149 as at December 31, 2003 (2002: NIL).

12.

TAXATION

The Partnership provides for taxes based on its statutory financial statements that are maintained and prepared in tenge and in accordance with the statutory regulations of the Republic of Kazakhstan. The Partnership is subject to permanent tax differences due to the fact that certain expenses are not deductible for income tax purposes under Kazakhstan regulations.

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The Partnership is in the exploration and development stage and so currently has no income from its operations. Unrealized foreign exchange losses do not attract tax relief and so are of the nature of permanent differences.  Any other tax loss for 2003 may be available for offset against taxable profits arising in the following three years.  However, the tax base of the Partnership’s assets, liabilities and allowable losses will be determined only once the Partnership submits tax returns claiming allowances against taxable income.

Accordingly, until this time, no deferred tax assets or liabilities have been established. Also, temporary differences arising cannot be determined with any accuracy until this time and so an analysis of temporary differences arising cannot be provided.

13.

CHARTER FUND

As at December 31, 2003 and 2002, charter fund comprised the following:

	Participation		2003		2002
	share %
Batys Petroleum LLP	98.0	$	499	$	499
Glushich V.P.	2.0		10		10
Total	100.0	$	509	$	509

As described in Note 17, on April 10, 2004, Big Sky Energy Atyrau Ltd. acquired 100% of the shares in the Partnership’s charter fund.

14.

RELATED PARTIES TRANSACTIONS

Accounts payable - As at December 31, 2003 and 2002, accounts payable for business trips and other expenses to the president amounted to USD 15,318 and USD 10,514, respectively.

Directors’ remuneration – Compensation paid to the president for his service in a full time executive management position is made up of a salary of 72,000 tenge annually.

15.

FAIR VALUE OF FINANCIAL INSTRUMENTS

As at December 31, 2003 and 2002, the fair value, the related method of determining fair value and the carrying value of the Partnership’s financial instruments were as follows: the fair value of current assets and current liabilities approximates their carrying amounts due to the short-term maturity of these instruments. The Partnership is exposed to market, credit and currency risks arises in the normal course of the Partnership’s business. Derivative financial instruments are not used to reduce exposure to the above risks.

Concentration of credit risk – Financial instruments that potentially expose the Partnership to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Management believes the likelihood of incurring material losses due to concentration of credit risk is remote.

Interest rate risk – The Partnership’s only potential interest rate risk relates to the loan from Lorgate, which is at a fixed interest rate.

Foreign currency risk – The Partnership undertakes transactions denominated in foreign currencies. Accordingly, these activities may result in foreign currency exposure. The Partnership does not hedge its foreign currency risk.

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16.

COMMITMENTS AND CONTINGENCIES

Non-compliance with the Subsurface Use Contracts – The Government has the right to suspend or cancel these Subsurface Use Contracts if the Partnership is in material breach of the obligations and commitments under the Subsurface Use Contracts.

In accordance with the letter # 14-04-38 27 dated May 26, 2004 the Partnership has received notice from the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan (the “Competent Body”) that the Partnership failed to comply with the terms of the Contract # 1076 dated December 28, 2002 on exploration of hydrocarbons in the Liman-2 oilfield, namely:

§	To carry out the Minimal Work Program during the exploration phase;
§	To submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation;
§	To provide professional training to the personnel employed for the Subsurface Use Contract’s operations;
§	To contribute funds to Atyrau region for social programs and programs on infrastructure development;
§	To submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body;
§	To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and,
§	To establish and make contributions to the Liquidation Fund.

In accordance with the letter # 14-04-38 28 dated May 26, 2004 the Partnership has received notice from the Competent Body that the Partnership failed to comply with the terms of the Contract # 1077 dated December 28, 2002 on exploration of hydrocarbons in the Atyrau oilfield, namely:

§	To carry out the Minimal Work Program during the exploration phase;
§	To submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation;
§	To provide professional training to the personnel employed for the Subsurface Use Contract’s operations;
§	To contribute funds to Atyrau region for social programs and programs on infrastructure development;
§	To submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body;
§	To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and,
§	To establish and make contributions to the Liquidation Fund.

Accordingly, under both Notices the Partnership is required by July 1, 2004 to remedy these violations and to submit all required documents as confirmation of fulfillment of its obligations and actions taken to remedy these violations and to report on corrective and preventive actions undertaken against any further breach of contractual obligations. In the case of failure to remedy indicated violations, the Contracts # 1076 and # 1077 dated December 28, 2002 shall be terminated.

Investment commitments – In accordance with the Subsurface Use Contracts, the Partnership is obliged to invest a minimum of USD 53,900,000 over the period covered by the Subsurface Use Contracts. The Subsurface Use Contract # 1076 dated December 28, 2002 establishes the exploration phase as 6 years from 2003 to 2008. The Subsurface Use Contract # 1077 dated December 28, 2002 establishes the exploration phase as 5 years from 2003 to 2007 and the production phase as 20 years from 2008 to 2028.

Commitment to reimburse historical costs of the Government – In accordance with the Subsurface Use Contract the Partnership is obliged to reimburse to the Government for historical costs incurred at the expense of the Government on the Atyrau oilfield. The total amount reimbursable is USD 22,507,380. From this amount, USD 112,537 was paid to the Government in 2003. The remaining amount of USD 22,394,843 is expected to be settled according to payment schedule to be agreed between the Partnership and the Government not later than 120 days after approval of the hydrocarbon reserves.

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Commercial discovery bonus – In accordance with the Subsurface Use Contracts the Partnership is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of approved recoverable reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan.

Commitment to sell produced oil in the Republic of Kazakhstan – In accordance with the Subsurface Use Contracts and Decree # 1172 of the Government of Republic of Kazakhstan dated August 2, 2000 the Partnership is obliged to sell 100% of oil produced during the exploration phase, and 20% of oil produced during the production phase to oil refineries located in the Republic of Kazakhstan.

Commitment to create deposit account for liquidation fund payments – In accordance with the Subsurface Use Contracts the Partnership is obliged to establish a liquidation fund to finance the liquidation of the consequences of its oil and gas operations in the amount of 1% of total amount of investments during the period covered by the Subsurface Use Contracts, which shall be made to the special deposit account in any bank in the Republic of Kazakhstan. The Partnership is also obliged to obtain the Government approval of the program on liquidation of consequences of its operations under the Subsurface Use Contracts, including a budget of liquidation costs, not later than 360 days before the expiration of the Subsurface Use Contracts.

The Partnership is currently not able to estimate with certainty the extent or cost of the asset retirement program it will be required to undertake and according has made no provisions in these financial statement in respect of future asset retirement costs.  Had the Partnership accrued the liquidation fund according to the Subsurface Use Contracts, the undiscounted accrual at December 31, 2003 would have been approximately USD 539,000.

Insurance commitments – In accordance with the Subsurface Use Contracts the Partnership is obliged to develop the Business, Property and Liability Risk Insurance Program and submit it for approval to the Competent Body.

Operating environment – The Partnership’s principal business activities are within the Republic of Kazakhstan. Laws and regulations affecting businesses operating in the Republic of Kazakhstan are subject to rapid changes and the Partnership’s assets and operations could be at risk due to negative changes in the political and business environment.

Taxation – The taxation system in the Republic of Kazakhstan is constantly changing and subject to inconsistent application, interpretation and enforcement. There have been many new tax and foreign currency laws and related regulations introduced in recent years, which are not always clearly written and whose interpretation and application is subject to the opinions of the local tax authorities. Non-compliance with Kazakhstan laws and regulations can potentially lead to the imposition of penalties and fines, the amounts of which can be significant.

Environmental matters – The Partnership believes it is currently in compliance with all existing Kazakhstan environmental laws and regulations. However, Kazakhstan environmental laws and regulations may change in the future. The Partnership is unable to predict the timing or extent to which these environmental laws and regulations may change. Such change, if it occurs, may require the Partnership to modernize technology to meet more stringent standards.

17.

SUBSEQUENT EVENTS

Change in the Partnership’s ownership structure – On April 10, 2004 Big Sky Energy Atyrau Ltd., incorporated under the laws of province of Alberta, Canada acquired 100% of the shares in the Partnership’s charter fund.

Subsequent actions taken to remedy violations of the Subsurface Use Contracts (see Note 16) – The Partnership has held extended meeting with representatives of the Competent Body on July 2 to 5, 2004.  As a result it was agreed that before July 31, 2004 the Partnership will:

§ Submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation - on June 9, 2004 the Partnership’s Annual Work Program for 2004 has been  approved by the Competent Body for both oilfields. The Annual Work Program for 2005 will be determined in October 2004 and finalised with the Competent Body in November 2004;

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§	Provide professional training to the personnel employed for the Subsurface Use Contract’s operations - a budget of USD 10,000 has been allocated for this purpose;
§	Contribute funds to Atyrau region for social programs and programs for infrastructure development - it was agreed to defer this to the end of 2004;
§	Develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body - the Partnership has appointed AIG as its Insurance Underwriter.  The Partnership has made the Insurance Broker aware of the deadline;
§	Submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body - as no activities had been carried out prior to the transaction date, none were filed.  Subsequently, the Competent Body has been informed of Partnership’s activities and provided with a list of personnel assigned to the project and proof that an office has been set up; and
§	Establish and make contributions to the Liquidation Fund - this is expected to be completed on July 26, 2004.

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VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

INTERIM STATEMENTS OF LOSS (UNAUDITED)

FOR THE THREE MONTHS  ENDED MARCH 31, 2004 AND 2003 AND FOR THE CUMULATIVE PERIOD FROM JULY 4, 2001 (INCEPTION DATE) TO MARCH 31, 2004

(in US Dollars)

	Notes		Three months ended March 31, 2004		Three months ended March 31, 2003		Cumulative period from July 4, 2001 (inception date) to March 31, 2004
EXPENSES:
General and administrative expenses	4	$	765	$	1,257	$	76,989
OPERATING LOSS			765		1,257		76,989
OTHER EXPENSES:
Foreign exchange loss, net			435		1,033		1,541
Accretion expenses			52,190		-		52,190
LOSS BEFORE TAXATION			53,390		2,290		130,720
INCOME TAX EXPENSE	3, 12		-		-
NET LOSS		$	53,390	$	2,290	$	130,720

The notes form an integral part of these interim financial statements.

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VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS (UNAUDITED)

AS AT MARCH 31, 2004 AND DECEMBER 31, 2003

(in US Dollars)

	Notes		March 31, 2004		December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$                  108		$                 118
Accounts receivable			144		125
Advances paid			4,817		4,639
Total current assets			5,069		4,882
NON-CURRENT ASSETS:
Oil and gas properties	5		3,936,041		3,923,276
Total non-current assets			3,936,041		3,923,276
TOTAL ASSETS			3,941,110		3,928,158
LIABILITIES AND PARTNERS’ DEFICIT
CURRENT LIABILITIES:
Obligations for social programs and programs for infrastructure  development – current portion	6		350,000		350,000
Obligations on professional training of personnel – current portion	7		119,600		119,600
Penalties payable	8		61,739		61,739
Obligations on acquisition of the right of the geological information use	9		758,265		758,265
Loan and interest payable	10		542,578		529,813
Accounts payable to related party	14		15,318		15,318
Other payables and accruals			2,280		893
Total current liabilities			1,849,780		1,835,628
NON-CURRENT LIABILITIES:
Obligations for social programs and programs for infrastructure  development – non-current portion	6		945,961		913,480
Obligations on professional training of personnel – non-current portion	7		318,664		307,722
Obligations on historical costs reimbursement	11		956,916		948,149
Total non-current liabilities			2,221,541		2,169,351
COMMITMENTS AND CONTINGENCIES	16
PARTNERS’ DEFICIT:
Charter fund	13		509		509
Deficit accumulated during the development stage			(130,720)		(77,330)
Total partners’ deficit			(130,211)		(76,821)
TOTAL LIABILITIES AND PARTNERS’ DEFICIT		$	3,941,110	$	3,928,158

The notes form an integral part of these interim financial statements.

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VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

INTERIM STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND FOR THE CUMULATIVE PERIOD FROM JULY 4, 2001 (INCEPTION DATE) TO MARCH 31, 2004

(in US Dollars)

		Charter fund		Deficit accumulated during the development stage		Total
Balance at July 4, 2001 (inception date)	$	-	$	-	$	-
Balance at December 31, 2001	$	-	$	-	$	-
Contributions to the charter fund		509		-		509
Net loss		-		(10,560)		(10,560)
Balance at December 31, 2002	$	509	$	(10,560)	$	(10,051)
Net loss		-		(66,770)		(66,770)
Balance at December 31, 2003	$	509	$	(77,330)	$	(76,821)
Net loss		-		(53,390)		(53,390)
Balance at March 31, 2004	$	509	$	(130,720)	$	(130,211)

The notes form an integral part of these interim financial statements.

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VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 AND FOR THE CUMULATIVE PERIOD FROM JULY 4, 2001 (INCEPTION DATE) TO MARCH 31, 2004

(in US Dollars)

		Three months ended March 31, 2004		Three months ended March 31, 2003		Cumulative period from July 4, 2001 (inception date) to March 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(53,390)	$	(2,290)	$	(130,720)
Adjustments for:
Penalties accrued		-		-		61,739
Accretion expenses		52,190		-		52,190
Changes in operating assets and liabilities:
Increase in receivables		(19)		(33)		(144)
Increase in advances paid		(178)		-		(4,817)
Increase in accounts payable to related party		-		2,348		15,318
Increase in other payables and accruals		1,387		-		2,280
Net cash (used in)/from operating activities		(10)		25		(4,154)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties		-		-		(501,247)
Net cash used in investing activities		-		-		(501,247)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan		-		-		505,000
Contributions to the charter fund		-		-		509
Net cash received from financing activities		-		-		505,509
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS		(10)		25		108
CASH AND CASH EQUIVALENTS, beginning of the period		118		463		-
CASH AND CASH EQUIVALENTS, end of the period	$	108	$	488	$	108

Non-cash transactions. During the three months ended March 31, 2004, the Partnership had certain non-cash transactions, such as capitalization of interest on loans obtained on total amount of USD 12,765 (three months ended March 31, 2003: NIL). During the period from July 4, 2001 (inception date) to March 31, 2004 the Partnership had certain non-cash transactions, such as capitalization of obligations for social programs and programs for infrastructure development, obligations on professional training of personnel, interest on loans obtained and obligations on historical costs reimbursement in total amount of USD 3,434,794.

The notes form an integral part of these interim financial statements.

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VECTOR ENERGY WEST LLP (A DEVELOPMENT STAGE COMPANY)

NOTES TO THE INTERIM FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 AND FOR THE CUMULATIVE PERIOD FROM JULY 4, 2001 (INCEPTION DATE) TO MARCH 31, 2004

(in US Dollars unless noted otherwise)

1.

DESCRIPTION OF BUSINESS

Vector Energy West LLP, a development stage company, (hereinafter referred to as the “Partnership”) was registered as a limited liability partnership under the laws of the Republic of Kazakhstan on July 4, 2001. The main activities of the Partnership are the acquisition, exploration and development of oil and gas properties in the Atyrau region, Republic of Kazakhstan.

On December 28, 2002, the Partnership entered into Subsurface Use Contracts with the Government of the Republic of Kazakhstan (the “Government”) to explore for and produce hydrocarbons in the Atyrau and Liman-2 oilfields in the Atyrau region (the “Subsurface Use Contracts”). From that date to  December 31, 2003, no major exploration activities have been carried out. In accordance with the Subsurface Use Contract # 1077 dated December 28, 2002 the Partnership received the right to perform exploration activities on the Atyrau oilfield during 6 years from 2003 to 2008. In accordance with the Subsurface Use Contract # 1076 dated December 28, 2002 the Partnership received the right to perform exploration activities on the Liman-2 oilfield during 5 years from 2003 to 2007 and to perform production activities during the subsequent 20 years.

As at March 31, 2004 and December 31, 2003 the Partnership employed 1 staff.

Legal Name	Vector Energy West LLP
Legal Address	11/13 Baiseitov Str., office 1, Almaty, Republic of Kazakhstan
Legal Registration Number	40988-1910-TOO (ИУ)
Ownership status	Private

2.

BASIS OF PRESENTATION

The accompanying interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). The Partnership maintains accounting records and prepares its financial statements in Kazakhstani tenge in accordance with the requirements of Kazakhstani accounting and tax legislation. The accompanying financial statements differ from the financial statements prepared for statutory purposes in the Republic of Kazakhstan in that they reflect certain adjustments, not recorded in the statutory books of the Partnership, which are appropriate to present the financial position, results of operations and cash flows in accordance with US GAAP.

In the opinion of management, these interim financial statements reflect all adjustments, including normal recurring adjustments, considered necessary to present fairly the Partnership’s financial position at March 31, 2004 and the results of operations and cash flows for the three-month periods ended March 31, 2004 and 2003.

Use of estimates – The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses of the reporting period then ended. Actual results could differ from those estimates

Development stage company – The accompanying interim financial statements have been prepared based on the assumption that the Partnership will continue as a going concern and there is no indication that the Partnership intends to or has to be liquidated, or significantly decrease its activity in the near future. The ability of the Partnership to pay its debts when they are due depends on continued financial support from its partners.

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At present, the Partnership’s oil and gas operations are in the acquisition and exploration phase, and therefore, the Partnership is in the development stage. This phase is expected to last until the Partnership finds economically profitable oil reserves. Until such reserves are found and proven and necessary regulatory approvals are obtained, uncertainty exists as to whether the long-lived assets of the Partnership are recoverable.

As discussed in Note 16 to these interim financial statements, the Partnership is required by July 1, 2004 to remedy certain violations of major requirements of the Subsurface Use Contracts with the Government of the Republic of Kazakhstan.  In the case of failure to remedy such violations, the Subsurface Use Contracts can be terminated by the Government, which raises doubt about the Partnership’s ability to continue as a going concern.  As further discussed in Note 17 to these interim financial statements, subsequent to December 31, 2003 the Partnership made some actions to remedy these violations. These interim financial statements do not include any adjustments that might result from the outcome of these uncertainties.

3.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and cash equivalents – Cash and cash equivalents include cash on hand and in banks.

Accounts receivable – Accounts receivable are stated at their net realizable values after deducting provisions for uncollectible amounts, if any. Such provisions reflect estimates based on evidence of collectibility.

Oil and gas properties – The Partnership follows the successful efforts method of accounting for its oil and gas operations, whereby expenditures for property acquisitions and all development costs (including development dry holes) and support equipment and facilities are capitalized. The costs of unsuccessful exploratory wells are charged to expense at the time the wells or other exploration activities are determined to be non-productive. Production costs, overheads and all exploration costs other than exploratory drilling are charged to expense as incurred.

Costs incurred for the acquisition of rights to explore and develop the Atyrau and Liman-2 oilfields, including but not limited to payment for the right on the geological information use, signature bonuses, obligations on professional training of personnel, obligations for social programs and programs for infrastructure development are capitalized and classified as a right on subsurface use.

Impairment of long-lived assets – The Partnership reviews its long-lived assets, including oil and gas properties, after the discovery of proved reserves and the start of the development phase for possible impairment by comparing their carrying values to the undiscounted future net before-tax cash flows. Asset impairment may occur if these undiscounted future net before-tax cash flows are lower than anticipated reserves, there are write downs of proved reserves based on field performance, significant changes in commodity prices, significant decreases in the market value of an asset, and/or significant change in the extent or manner of use or physical change in an asset. Impaired assets are written down to their estimated fair values, generally their discounted future net before-tax cash flows. For proved oil and gas properties, the Partnership performs the impairment test on an individual field basis. Unproved properties are reviewed periodically to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the current period.

Obligations for social programs and programs for infrastructure development – The Partnership has recognized obligations to contribute funds to social programs and programs on infrastructure development in the Atyrau region, Republic of Kazakhstan pursuant to the terms of the Subsurface Use Contracts. These obligations are recorded at their present value, using a 15% per annum discount rate. The obligations are capitalized as part of the oil and gas properties (see Notes 5 and 6).

Asset retirement obligations – In accordance with the SFAS No. 143 “Accounting for Asset Retirement Obligations”, the Partnership is required to record the present value of obligations associated with the retirement of oil and gas properties in the period in which they are incurred. The liability should be capitalized as part of the oil and gas properties. Subsequently, asset retirement cost should be allocated to expense using a systematic and rational method over its useful life.

The Partnership adopted the provisions of the SFAS No. 143 in 2002. However, as described in Note 16, it has not recorded asset retirement obligations in these interim financial statements.

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Obligations on professional training of personnel – The Partnership has recognized obligations on professional training of its personnel pursuant to the terms of the Subsurface Use Contracts. These obligations are recorded at their present value, using a 15% per annum discount rate. The obligations are capitalized as part of the oil and gas properties (see Notes 5 and 7).

Obligations on historical costs reimbursement – The Partnership is unavoidably obliged to reimburse USD 7,784,034, which represent historical costs incurred by the Republic of Kazakhstan for the Liman-2 oilfield pursuant to the terms of the Subsurface Use Contract # 1076 dated December 28, 2002 and the Agreement on acquisition of the right on the geological information use # 711 dated January 21, 2002. These obligations are recorded at their present value, using a 15% per annum discount rate. The obligations are capitalized as part of the oil and gas properties (see Notes 5 and 11).

Borrowing costs – Interest costs related to financing the acquisition of the subsurface use rights, conducting exploration activities and financing major oil and gas development projects are capitalized as part of the related assets until the projects are evaluated, or until the projects are substantially complete and ready for their intended use if the projects are evaluated as successful. Capitalized interest cannot exceed gross interest expense.

Provisions – Provisions are recognized when the Partnership has a present obligation as a result of a past event to incur such costs and when a reliable estimate can be made for the amount of these costs.

Borrowings – Interest bearing loans are recorded at the amounts of the proceeds received, net of the direct issue costs. Interest costs are accounted for on an accrual basis and included in accrued expenses to the extent that they are not settled in the period in which they arise.

Foreign currency translation – In accordance with the SFAS No. 52 “Foreign Currency Translation”, these financial statements have been translated into United States Dollars (“US Dollars”) from Kazakhstani tenge (“tenge”). The Partnership maintains its accounting records in tenge. The majority of the Partnership’s capitalized costs, expenses, liabilities, loans and cash flows are denominated in US Dollars. Accordingly, management believes that the US Dollar is the functional currency of the Partnership.  

Long-lived assets and equity are translated using historic exchange rates. Monetary assets and liabilities are translated using the exchange rate of 138.88 and 144.22 tenge/US Dollar, as at March 31, 2004 and December 31, 2003, respectively. Expenses are translated at a weighted-average rate of 139.86 and 153.54 tenge/US Dollar for the periods ended March 31, 2004 and 2003, respectively. Gains and losses arising from these translations are included in the interim statements of loss.

The Kazakhstani tenge is not a fully convertible currency outside of the Republic of Kazakhstan. The translation of tenge denominated assets and liabilities into US Dollars for the purpose of these interim financial statements does not indicate that the Partnership could realize or settle the reported values of the assets and liabilities in US Dollars. Likewise, it does not indicate that the Partnership could return or distribute the reported US Dollars values of charter fund and retained earnings to the partners.

Income taxes – Income taxes are accounted for under the asset and liability method in accordance with the SFAS No. 109 “Accounting for Income Taxes”. Tax on the income or loss for the year comprises current tax and any change in deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, and any adjustment of tax payable for previous years.

Deferred tax assets and liabilities are recognized as the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is realized.

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The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income in the reporting periods in which the originating expenditure becomes deductible. In assessing the recoverability of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. In making this assessment, management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies.

The Partnership is a development stage company. Most of the expenditures made during the exploration and development stage are capitalized. In the current year, the Partnership does not have an income tax liability.

Employee benefits

Pension payments

The Partnership contributes to an employee accumulated pension fund an amount less from 10% of employees’ salaries or 37,500 tenge (USD 270). Pension fund payments are withheld from employees’ salaries and included with general and administrative expenses in the statement of loss. As at March 31, 2004, the Partnership was not liable for any supplementary pensions, post-retirement health care, insurance benefits or retirement indemnities to its current or former employees.

Related parties – The following are considered to be related parties of the Partnership:

§	Partnership’s partners, director and officer; and,
§	Enterprises in which partners, officers or directors of the Partnership and their immediate families have control or significant influence.

Impact of recent and pending accounting pronouncements

In November 2002, the FASB issued Interpretation No. 45, “Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”). FIN No. 45 elaborates on the disclosures the Partnership must make about its obligations under certain guarantees that the Partnership has issued. It also requires the Partnership to recognize, at the inception of a guarantee, a liability for the fair value of the obligations the Partnership has undertaken in issuing the guarantee. The initial recognition and initial measurement provisions are to be applied only to guarantees issued or modified after December 31, 2002. The Partnership adopted provisions of FASB Interpretation No. 45 in 2003. Adoption of FIN No.45 does not have a material impact on the Partnership’s financial position or results of operations. The disclosure requirements are effective for annual or inte rim periods ending after December 15, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN No. 46”).  FIN No. 46 provides criteria for identifying variable interest entities (“VIEs”) and further criteria for determining what entity, if any, should consolidate them.  In general, VIEs are entities that either do not have equity investors with voting rights or have equity investors that do not provide sufficient financial resources for the entity to support its activities.  In December 2003, the FASB issued FIN No. 46(R) to clarify some of the provisions of FIN No. 46 and to exempt certain entities from its requirements.  The Partnership must adopt and apply FIN No. 46(R) for reporting periods ending after December 15, 2004.  FIN No. 46(R) is not expected to have a material impact on the Partnership’s results of operations or financial position.

The following standards issued by the FASB do not impact the Partnership at this time:

§	SFAS No. 146 – “Accounting for Costs Associated with Exit or Disposal Activities”, effective for exit or disposal activities initiated after December 31, 2002;
§	SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, effective for financial statements issued after June 15, 2003;
§	SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Post Retirements Benefits – an amendment of SFAS No. 87, 88 and 106”, effective for financial statements issued after December 15, 2003; and
§	SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, effective for contracts entered into or modified after June 30, 2003.

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4.

GENERAL AND ADMINISTRATIVE EXPENSES

During the three months ended March 31, 2004 and 2003, general and administrative expenses comprised the following:

		3 months ended March 31, 2004		3 months ended March 31, 2003
Business trip expenses	$	452	$	546
Bank fees		1		16
Other expenses		312		695
Total	$	765	$	1,257

5.

OIL AND GAS PROPERTIES

As at March 31, 2004 and December 31, 2003, oil and gas properties comprised the following:

		As at March 31, 2004		December 31, 2003
Subsurface use rights	$	1,297,090	$	1,284,325
Obligations for social programs and programs for infrastructure development		1,263,480		1,263,480
Obligations on historical costs reimbursement		948,149		948,149
Obligations on professional training of personnel		427,322		427,322
Total	$	3,936,041	$	3,923,276

Interest capitalized during the three months ended March 31, 2004 amounted to USD 12,765 (three months ended March 31, 2003: nil) (see Note 10).

6.

OBLIGATIONS FOR SOCIAL PROGRAMS AND PROGRAMS FOR INFRASTRUCTURE

DEVELOPMENT

		March 31, 2004	December 31, 2003
Within one year	$	350,000	350,000
In the second to the fifth inclusive		1,250,000	1,250,000
Total obligations		1,600,000	1,600,000
Less: discount on obligations for social programs and programs for infrastructure development		(304,039)	(336,520)
Present value of obligations for social programs and programs for infrastructure development		1,295,961	1,263,480
Amount due for settlement within one year		350,000	350,000

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Amount due for settlement after one year		945,961		913,480
Total	$	1,295,961	$	1,263,480

In accordance with the Subsurface Use Contracts the Partnership is unavoidably obliged to contribute funds to the social programs and programs on infrastructure development in the Atyrau region, Republic of Kazakhstan, in total amount of USD 1,000,000 for the Atyrau oilfield during the exploration phase and USD 600,000 for the Liman-2 oilfield during the exploration phase of the Subsurface Use Contracts. As at March 31, 2004, the Partnership had not made any payments for the social programs and programs on infrastructure development. These payments are due from 2003 to 2008 for the Atyrau oilfield and from 2003 to 2007 for the Liman-2 oilfield.

Payment of these obligations should be made according to a payment schedule agreed between the Partnership and the Government.  These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate.

7.

OBLIGATIONS ON PROFESSIONAL TRAINING OF PERSONNEL

		March 31, 2004		December 31, 2003
Within one year	$	119,600		119,600
In the second to the fifth inclusive		419,400		419,400
Total obligations		539,000		539,000
Less: discount on obligations on professional training of personnel		(100,736)		(111,678)
Present value of obligations on professional training of personnel		438,264		427,322
Amount due for settlement within one year		119,600		119,600
Amount due for settlement after one year		318,664		307,722
Total	$	438,264	$	427,322

Management believes that obligations on professional training of personnel should be recognized for future professional training costs as prescribed by the Subsurface Use Contracts. In accordance with the Subsurface Use Contracts the Partnership is obliged to finance professional training of Kazakhstani personnel recruited for the Subsurface Use Contract’s operations at the rate of not less than 1% of the total amount of investments. Under the Subsurface Use Contracts the total amount of investments was established at USD 53,900,000 during their exploration phase.

These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate.

8.

PENALTIES PAYABLE

In accordance with the Subsurface Use Contracts the Partnership was obliged to pay signature bonuses in total amount of USD 350,000 for acquiring the subsurface use rights for two oilfields. These bonuses were due for payment within 30 days after signing the Subsurface Use Contracts.

As at March 31, 2004, the Partnership paid USD 349,594 to the Government as signature bonuses for the Atyrau and Liman-2 oilfields with significant delay. Penalties accrued on delaying the payment of the signature bonuses for those oilfields as at March 31, 2004 amounted to USD 35,570 (December 31, 2003: USD 35,570).

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In accordance with the Subsurface Use Contracts and the Agreements on acquisition of the right on the geological information use # 710 and # 711 dated January 21, 2002 the Partnership was obliged to pay an amount of USD 151,653 for the right on the geological information use within the established schedule. The Partnership delayed payment of this amount.  Penalties accrued on delaying the payment for the right on the geological information use as at March 31, 2004 amounted to USD 26,169 (December 31, 2003: USD 26,169).

9.

OBLIGATIONS ON ACQUISITION OF THE RIGHT ON THE GEOLOGICAL INFORMATION USE

In accordance with the Agreements on acquisition of the right on the geological information use # 710 and # 711 dated January 21, 2002 the Partnership is obliged to pay an additional amount for the right on the geological information use in the case the Partnership attracts foreign investors.

As described in Note 17, on April 10, 2004 Big Sky Energy Atyrau Ltd. acquired 100% of the shares in the Partnership’s charter fund. Accordingly, the Partnership recognized additional obligations on acquisition of the right on the geological information use as at March 31, 2004 in the amount of USD 758,265 (December 31, 2003: USD 758,265).

10.

LOAN AND INTEREST PAYABLE

Loan and interest payable comprised the following:

Secured		March 31, 2004		December 31, 2003
Lorgate Management Inc.	$	542,578	$	529,813
	$	542,578	$	529,813
Loan	$	505,000	$	505,000
Interest		37,578		24,813
Total	$	542,578	$	529,813

On June 23, 2003 the Partnership obtained a loan from Lorgate Management Inc. (“Lorgate”) in the amount of USD 505,000 at 10% interest rate per annum. The maturity date of the loan is July 11, 2004. As per the terms of the Loan Agreement the total amount of the loan was used to make payment of signature bonuses and to pay for the right on the geological information use for both oilfields. In the case the loan and interest payment is delayed for more than 3 working days, the entire amount of both loan and interest shall attract a penalty at the rate of 2% per annum for each banking day after delay.

During the three months ended March 31, 2004 interest accrued by the Partnership on the outstanding loan amounted to USD 12,765 (3 months ended March 31, 2003: NIL). Interest should be repaid together with principal on July 11, 2004.

11.

OBLIGATIONS ON HISTORICAL COSTS REIMBURSEMENT

The Partnership is unavoidably obliged to reimburse USD 7,784,034, which represent historical costs incurred by the Republic of Kazakhstan for the Liman-2 oilfield pursuant to the terms of the Subsurface Use Contract # 1076 dated December 28, 2002 and the Agreement on acquisition of the right on the geological information use # 711 dated January 21, 2002. Payment of these obligations should be made according to a payment schedule agreed between the Partnership and the Government. These payments are due from 2012 to 2027 and should be paid quarterly in equal installments.

These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate, giving a present value of obligation of USD 956,916 as at March 31, 2004 (December 31, 2003: USD 948,149).

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12.

TAXATION

The Partnership provides for taxes based on its statutory financial statements that are maintained and prepared in Kazakhstani tenge and in accordance with the statutory regulations of the Republic of Kazakhstan. The Partnership is subject to permanent tax differences due to the fact that certain expenses are not deductible for income tax purposes under Kazakhstan regulations.

The Partnership is in the exploration and development stage and so has no income from its operations. Unrealized foreign exchange losses do not attract tax relief and so are of the nature of permanent differences.  Any other tax loss for the three months period ended March 31, 2004 may be available for offset against taxable profits arising in the following three years.  However, the tax base of the Partnership’s assets, liabilities and allowable losses will be determined only once the Partnership submits tax returns claiming allowances against taxable income.

Accordingly, at this time, no deferred tax assets or liabilities have been established. Also, temporary differences arising cannot be determined with any accuracy at this time and so an analysis of temporary differences arising cannot be provided.

13.

CHARTER FUND

As at March 31, 2004 and December 31, 2003, charter fund comprised the following:

	Participation share %		March 31, 2004		December 31, 2003
Batys Petroleum LLP	98.0	$	499	$	499
Glushich V.P.	2.0		10		10
Charter fund	100.0	$	509	$	509

As described in Note 17, on April 10, 2004 Big Sky Energy Atyrau Ltd. acquired 100% of the shares in the Partnership’s charter fund.

14.

RELATED PARTIES TRANSACTIONS

Accounts payable – As at March 31, 2004 and December 31, 2003, accounts payable for business trips and other expenses to the president amounted to USD 15,318.

Directors’ remuneration – Compensation paid to the president for his service in a full time executive management position is made up of a salary of 72,000 tenge annually.

15.

FAIR VALUE OF FINANCIAL INSTRUMENTS

As at March 31, 2004 and December 31, 2003, the fair value, the related method of determining fair value and the carrying value of the Partnership’s financial instruments were as follows: the fair value of current assets and current liabilities approximates their carrying amounts due to the short-term maturity of these instruments. The Partnership is exposed to market, credit and currency risks arises in the normal course of the Partnership’s business. Derivative financial instruments are not used to reduce exposure to the above risks.

Concentration of credit risk – Financial instruments that potentially expose the Partnership to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Management believes the likelihood of incurring material losses due to concentration of credit risk is remote.

Interest rate risk – The Partnership’s only potential interest rate risk relates to the loan from Lorgate, which is at a fixed interest rate.

Foreign currency risk – The Partnership undertakes transactions denominated in foreign currencies. Accordingly, these activities may result in foreign currency exposure. The Partnership does not hedge its foreign currency risk.

127

16.

COMMITMENTS AND CONTINGENCIES

Non-compliance with the Subsurface Use Contracts – The Government has the right to suspend or cancel these Subsurface Use Contracts if the Partnership is in material breach of the obligations and commitments under the Subsurface Use Contracts.

In accordance with the letter # 14-04-38 27 dated May 26, 2004 the Partnership has received notice from the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan (the “Competent Body”) that the Partnership failed to comply with the terms of the Contract # 1076 dated December 28, 2002 on exploration of hydrocarbons in the Liman-2 oilfield, namely:

§	To carry out the Minimal Work Program during the exploration phase;
§	To submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation;
§	To provide professional training to the personnel employed for the Subsurface Use Contract’s operations;
§	To contribute funds to the Atyrau region for social programs and programs on infrastructure development;
§	To submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body;
§	To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and,
§	To establish and make contributions to the Liquidation Fund.

In accordance with the letter # 14-04-38 28 dated May 26, 2004 the Partnership has received notice from the Competent Body that the Partnership failed to comply with the terms of the Contract # 1077 dated December 28, 2002 on exploration of hydrocarbons in the Atyrau oilfield, namely:

§	To carry out the Minimal Work Program during the exploration phase;
§	To submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation;
§	To provide professional training to the personnel employed for the Subsurface Use Contract’s operations;
§	To contribute funds to the Atyrau region for social programs and programs on infrastructure development;
§	To submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body;
§	To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and,
§	To establish and make contributions to the Liquidation Fund.

Accordingly, under both Notices the Partnership is required by July 1, 2004 to remedy these violations and to submit all required documents as confirmation of fulfillment of its obligations and actions taken to remedy these violations and to report on corrective and preventive actions undertaken against any further breach of contractual obligations. In the case of failure to remedy indicated violations, the Contracts # 1076 and # 1077 dated December 28, 2002 shall be terminated.

Investment commitments – In accordance with the Subsurface Use Contracts, the Partnership is obliged to invest a minimum of USD 53,900,000 over the period covered by the Subsurface Use Contracts. The Subsurface Use Contract # 1076 dated December 28, 2002 establishes the exploration phase as 6 years from 2003 to 2008. The Subsurface Use Contract # 1077 dated December 28, 2002 establishes the exploration phase as 5 years from 2003 to 2007 and the production phase as 20 years from 2008 to 2028.

Commitment to reimburse historical costs of the Government – In accordance with the Subsurface Use Contract the Partnership is obliged to reimburse to the Government for historical costs incurred at the expense of the Government on the Atyrau oilfield. The total amount reimbursable is USD 22,507,380. From this amount, USD 112,537 was paid to the Government in 2003. The remaining amount of USD 22,394,843 is expected to be settled according to a payment schedule to be agreed between the Partnership and the Government not later than 120 days after approval of the hydrocarbon reserves.

128

Commercial discovery bonus – In accordance with the Subsurface Use Contracts the Partnership is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of approved recoverable reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan.

Commitment to sell produced oil in the Republic of Kazakhstan – In accordance with the Subsurface Use Contracts and Decree # 1172 of the Government of Republic of Kazakhstan dated August 2, 2000 the Partnership is obliged to sell 100% of oil produced during the exploration phase, and 20% of oil produced during the production phase to oil refineries located in the Republic of Kazakhstan.

Commitment to create deposit account for liquidation fund payments – In accordance with the Subsurface Use Contracts the Partnership is obliged to establish a liquidation fund to finance the liquidation of the consequences of its oil and gas operations in the amount of 1% of total amount of investments during the period covered by the Subsurface Use Contracts, which shall be made to the special deposit account in any bank in the Republic of Kazakhstan. The Partnership is also obliged to obtain the Government approval of the program on liquidation of consequences of its operations under the Subsurface Use Contracts, including a budget of liquidation costs, not later than 360 days before the expiration of the Subsurface Use Contracts.

The Partnership is currently not able to estimate with certainty the extent or cost of the asset retirement program it will be required to undertake and accordingly has made no provision in these financial statements in respect of future asset retirement costs. Had the Partnership accrued a liquidation fund according to the Subsurface Use Contracts, the accrual at March 31, 2004 would have been approximately USD 539,000 (December 31, 2003 USD 539,000).

Insurance commitments – In accordance with the Subsurface Use Contracts, the Partnership is obliged to develop the Business, Property and Liability Risk Insurance Program and submit it for approval to the Competent Body.

Operating environment – The Partnership’s principal business activities are within the Republic of Kazakhstan. Laws and regulations affecting businesses operating in the Republic of Kazakhstan are subject to rapid changes and the Partnership’s assets and operations could be at risk due to negative changes in the political and business environment.

Taxation – The taxation system in the Republic of Kazakhstan is constantly changing and subject to inconsistent application, interpretation and enforcement. There have been many new tax and foreign currency laws and related regulations introduced in recent years, which are not always clearly written and whose interpretation and application is subject to the opinions of the local tax authorities. Non-compliance with Kazakhstan laws and regulations can potentially lead to the imposition of penalties and fines, the amounts of which can be significant.

Environmental matters – The Partnership believes it is currently in compliance with all existing Kazakhstan environmental laws and regulations. However, Kazakhstan environmental laws and regulations may change in the future. The Partnership is unable to predict the timing or extent to which these environmental laws and regulations may change. Such change, if it occurs, may require the Partnership to modernize technology to meet more stringent standards.

17.

SUBSEQUENT EVENTS

Change in the Partnership’s ownership structure – On April 10, 2004 Big Sky Energy Atyrau Ltd., incorporated under the laws of province of Alberta, Canada acquired 100% of the shares in the Partnership’s charter fund.

Subsequent actions taken to remedy violations of the Subsurface Use Contracts (see Note 16) – The Partnership has held extended meeting with representatives of the Competent Body on July 2 to 5, 2004.  As a result it was agreed that before July 31, 2004 the Partnership will:

129

§	Submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation - on June 9, 2004 the Partnership’s Annual Work Program for 2004 has been approved by the Competent Body for both oilfields. The Annual Work Program for 2005 will be determined in October 2004 and finalised with the Competent Body in November 2004;
§	Provide professional training to the personnel employed for the Subsurface Use Contract’s operations - a budget of USD 10,000 has been allocated for this purpose;
§	Contribute funds to Atyrau region for social programs and programs for infrastructure development - it was agreed to defer this to the end of 2004;
§	Develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body - the Partnership has appointed AIG as its Insurance Underwriter.  The Partnership has made the Insurance Broker aware of the deadline;
§	Submit quarterly reports on the Subsurface Use Contract’s activities to the Competent Body - as no activities had been carried out prior to the transaction date, none were filed.  Subsequently, the Competent Body has been informed of Partnership’s activities and provided with a list of personnel assigned to the project and proof that an office has been set up; and
§	Establish and make contributions to the Liquidation Fund - this is expected to be completed on July 26, 2004.

130

Big Sky Energy Corporation

Unaudited Pro Forma Condensed Consolidated Financial Statements

December 31, 2004

On January 12, 2004 the Big Sky Energy Corporation (the “Company”) completed the acquisition of 100% of the issued and outstanding share capital of Big Sky Energy Kazakhstan Ltd. (‘BSEK”).  On April 8, 2004 Big Sky Energy Atyrau Ltd. (“BSEA”) was incorporated with the Company  owning 75% of the issued and outstanding share capital.  On May 11, 2004, the Company, through (“BSEA”) completed the acquisition of 100% of the issued and outstanding share capital of Vector Energy West LLP (a Kazakhstan Limited Liability Partnership) (“Vector”).   On November 10, 2004, the Company acquired the 25% minority interest in BSEA.

The Unaudited Pro Forma Condensed Consolidated Statement  of Operations for the year ended December 31, 2004 is based on the historical consolidated financial statements of the Company and Vector.

The acquisitions have been accounted for using the purchase method of accounting.    The Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 2004  has been prepared assuming the acquisitions were completed on January 1, 2004.  The results of operations of BSEK for the period from January 1, 2004 to January 12, 2004 were not material.  A proforma balance sheet has not been presented as the acquisitions have been reflected in the Company’s consolidated balance sheet as at December 31, 2004.

The Unaudited Pro Forma Condensed Consolidated financial statements are presented for informational purposes only.  The Condensed Consolidated Statements of Operations do not purport to represent what Big Sky’s actual results of operations would have been had the acquisitions occurred as of such dates, or to project the Company’s results of operations for any period or date, nor does it give effect to any matters other than those described in the notes thereto.  The Unaudited Pro Forma Condensed Statements of Operations should be read in conjunction with the Company’s consolidated financial statements and notes thereto, and the historical consolidated financial statements of BSEK and Vector included elsewhere in this prospectus.

131

 Big Sky Energy Corporation.

Unaudited Pro Forma Condensed Consolidated Statement of Operations

Year Ended December 31, 2004

	Big Sky  Energy Corporation	Vector    Energy West  LLP	Pro-forma  Adjustments Vector	Pro forma  Consolidated Big Sky Energy Corporation
General and administrative	(6,217,720)	(983)		(6,218,703)
Depreciation and amortization	(126,507)	-		(126,507)
Accretion	(247,388)	(75,665)		(323,053)
	(6, 591,615)	(76,648)		(6,668,263)
Interest income	2,301	-		2,301
Foreign exchange gain	(226,938)	(1,211)		(228,149)
Loss from continuing operations	(6,816,252)	(77,859)		(6,894,111)
Loss per share
Basic and diluted from continuing operations	(0.132)			(0.118)
Weighted average shares outstanding	51,585,004		(1)      6,534,198	58,119,922

132

 Big Sky Energy Corporation.

Unaudited Pro Forma Condensed Consolidated Financial Statements

December 31, 2004

The pro forma adjustments to the condensed consolidated statement of operations for the year  ended December 31, 2004 has been recorded to reflect the acquisition of Vector Energy West LLP (“Vector”) and the 25% minority interest in Big Sky Energy Atyrau Ltd (“BSEA”) that were completed on May 11, 2004 and November 10, 2004, respectively.  The details of the acquisitions and the resulting pro forma adjustments are as follows:

Vector pro forma adjustments

1

No pro forma adjustments are required to the condensed consolidated statements of operations for the year ended December 2004 other than to include additional common shares in the pro forma loss per share computation related to cash raised via private placements of 10,000,000 shares of the Company at $0.50 per share prior to the acquisition of Vector and the 3,500,000 shares issued for the acquisition of the 25% minority interest in BSEA.

The 13,500,000 shares issued from treasury have been included as a pro-forma adjustment on the condensed consolidated statements of operations of the Company for the purposes of calculating the net loss per share as if the shares had been issued January 1, 2004. No other adjustments to the condensed consolidated statements of operations are required.

133

EX-5

LAWLER & ASSOCIATES

a professional law corporation

1530 - 9th Avenue, S.E.

Calgary, Alberta T2G 0T7

Telephone: 403-693-8000

 Facsimile: 403-272-3620

W. Scott Lawler, Esq.

Friday, May 13, 2005

The Board of Directors

Big Sky Energy Corporation

750, 440-2 Avenue SW

Calgary, Alberta T2P 5E9

Dear Board Members:

I have acted as counsel to Big Sky Energy Corporation, a Nevada corporation (the "Company"), in connection with the registration under the Securities Act of 1933 (the "Securities Act"), of 43,710,370 shares of the Company's common stock (the "Common Stock"), as described below.  A registration statement on Form SB-2 has been prepared by the Company to be filed with the Securities and Exchange Commission on or about May 13, 2005 (the "Registration Statement").  This opinion shall be filed with the Registration Statement.

The Registration Statement seeks the registration of the 41,271,865 shares of the Common Stock (the “Issued Shares”) and 2,438,505 shares of Common Stock underlying certain unexercised warrants (the “Warrant Shares”) (the Issued Shares and the Warrant Shares are collectively referred to herein as the "Registered Shares"). The Registered Shares are to be offered to the public by certain shareholders of the Company without the use of any underwriters.

In connection with rendering this opinion I have examined executed copies of the Registration Statement and all exhibits thereto. I have also examined and relied upon the original, or copies certified to my satisfaction, of (i) the Articles of Incorporation and the By-laws of the Company, (ii) minutes and records of the corporate proceedings of the Company with respect to the issuance of the Registered Shares and related matters, and (iii) such other agreements and instruments relating to the Company as I deemed necessary or appropriate for purposes of the opinion expressed herein.  In rendering such opinion, I have made such further investigation and inquiries relevant to the transactions contemplated by the Registration Statement as I have deemed necessary for the opinion expressed herein, and I have relied, to the ext ent I deemed reasonable, on certificates and certain other information provided to me by officers of the Company and public officials as to matters of fact of which the maker of such certificate or the person providing such other information had knowledge.

Furthermore, in rendering my opinion, I have assumed that the signatures on all documents examined by me are genuine, that all documents and corporate record books submitted to me as originals are accurate and complete, and that all documents submitted to me are true, correct and complete copies of the originals thereof.

Based upon the foregoing, I am of the opinion that the Registered Shares have each been duly authorized for issuance and sale. I am further of the opinion that and the Issued Shares are validly issued, fully paid and non-assessable and that the Warrant Shares, when properly exercised and upon the payment price therefore being paid to the Company, shall be validly issued, fully paid and non-assessable.

I hereby consent to the reference to my name in the Registration Statement and the filing of this opinion as an exhibit to the Registration Statement.

Sincerely,

/s/ W. Scott Lawler, Esq

W. Scott Lawler, Esq.

EX-10

CONSENT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

We consent to the use in this Registration Statement on Form SB-2 of our report dated March 18, 2005, except as to the fifth paragraph of Note 25, which is as of March 29, 2005 relating to the consolidated financial statements of Big Sky Energy Corporation (which report expresses an unqualified opinion and includes an explanatory paragraph referring to substantial doubt about Big Sky Energy Corporation’s ability to continue as a going concern) appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the use in this Registration Statement on Form SB-2 of our report dated April 20, 2004, except as to Note 19, which is as of July 1, 2004 relating to the consolidated financial statements of Big Sky Energy Kazakhstan Ltd. (which report expresses an unqualified opinion and includes explanatory paragraphs referring to Big Sky Energy Kazakhstan Ltd.’s ability to continue as a going concern and status as a development stage enterprise) appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the heading “Interest of Named Experts” in such Prospectus.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP

Independent Registered Chartered Accountants

Calgary, Alberta, Canada

May 11, 2005

EX-10

INDEPENDENT AUDITORS’ CONSENT

We consent to the use in this Registration Statement on Form SB-2 of our report dated December 23, 2003 relating to the financial statements of Kozhan LLP (which report expresses an unqualified opinion and includes an explanatory paragraph referring to Kozhan LLP’s status as a development stage enterprise) appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the use in this Registration Statement on Form SB-2 of our report dated April 30, 2004 except for Note 17, as to which the date is July 5, 2004 relating to the financial statements of Vector Energy West LLP (which report expresses an unqualified opinion and includes explanatory paragraphs referring to substantial doubt about Vector Energy West LLP’s ability to continue as a going concern and status as a development stage enterprise) appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the heading “Interest of Named Experts” in such Prospectus.

/s/ Deloitte & Touche

TOO Deloitte & Touche

Almaty, Kazakhstan

May 12, 2005

EX-10

LIMITED LIABILITY  ‘ENGLISH TRANSLATION OF RUSSIAN DOCUMENT”

PARTNERSHIP

SUN DRILLING

76, Maresyeva Street,

Actobe, 463000

Republic of Kazakhstan

Phone: 7 3132 563 507

7 3132 595 143

Fax:

7 3132 547 986

POWER OF ATTORNEY

Actobe City

                                       Eighteenth of April,

Two Thousand and Five

Limited Liability Partnership “Sun Drilling”, established and existing under the laws of Republic of Kazakhstan, located at the following address: Aktobe city, 76 Maresyeva Street, (“LLP”), represented by Mr. A. Sultan, Director, acting in accordance with the Charter,

Hereby is granting the Power of Attorney to Mr. William Dankan, born in 1956, citizen of Canada, passport No. BC 254502, issued on March 09, 2004

To execute the following actions:

1)

Represent interests of LLP “Sun Drilling” during any negotiations held with the Corporation BSE.

2)

In order to carry out a mandate stated in item 1, Mr. William Dankan has a right to sign, issue, submit or receive all kind of documents, make statements, to perform any and all acts which may be necessary in order to complete the aforesaid mandate.

The authority granted by this Power of Attorney shall not be transferred to any other persons.

This power of Attorney shall remain in full force and effect until the 1^st of June, 2005, unless LLP earlier revoke it in writing.

 Director

(signature)

A.Sultan

Affixed with a seal of Sun Drilling LLP

EX-10

SUN DRILLING COMPANY – VECTOR ENERGY WEST LLP TURNKEY DRILLING CONTRACT

Page # of 22

	MASTER DRILLING AGREEMENT TURNKEY OPERATIONS
	This Master Drilling Agreement No.  ______,  dated the 6th. day of May  2005, (the “Effective Date”) is made by and between: Vector Energy West LLP, hereinafter referred to as “Company”, represented by F. K. Shakirov, President, acting on the basis of the Charter, and Sun Drilling LLP, hereinafter referred to as “Contractor”, represented by William Duncan acting on basis of the power of attorney No. ____ issued on ___ __________ 2005
	WHEREAS Contractor and the Company may individually be referred to as a “Party” and collectively as “Parties;” and
	WHEREAS, Company desires to have onshore wells drilled, produced or worked over in the Atyrau oil block located in Atyrau Region  “Contract Area” of the Republic of Kazakhstan, as specified by Company, and to have performed or carried out all auxiliary operations and services as detailed in the Bid Sheet and Drilling Order hereto or as Company may require (hereinafter referred to as “Work”); and
	WHEREAS, by signing this Master Drilling Agreement, Contractor agrees that no promise of work is made by the Company, and
	WHEREAS, further to a tender based on the attached “Bid Sheet and Drilling Order” work was awarded to the Contractor, and
	WHEREAS the Parties agree that Company shall have the right to accelerate, decelerate, suspend, stop or terminate WORK, all as set out in this Agreement, as its prerogative in the prudent management of its business, and
	WHEREAS Contractor covenants that it has the resources and skills of suitable quality and quantity to perform the WORK hereunder and is willing and able to undertake the performance of the WORK in accordance with the Terms and Conditions hereinafter contained; and
	NOW THEREFORE, in consideration of the premises and the covenants and agreements herein, the Parties agree as follows:
	ARTICLE I INTERPRETATION
	1.1 Definitions
	In this Agreement, unless the context otherwise requires:
	(a) “Affiliated Company” means an entity owning fifty percent (50%) or more of the voting stock or similar equity interests of Company or Contractor, an entity in which Company or Contractor own fifty percent (50%) or more of its voting stock or similar equity interests, or an entity fifty percent (50%) or more of whose voting stock or similar equity interests is owned by the same entity that owns fifty percent (50%) or more of the voting stock or similar equity interests of Company or Contractor.
	(b) “Commencement Date” means the day and time within the nearest hour that drilling rig is rigged up and ready to commence operations on the first well in the Operating Area.
	(c) “Company’s Items” mean the equipment, material and services owned by Company or which are listed in Drilling Order that are to be provided at the expense of Company.
	(d) “Contractor’s Items” mean the Drilling Unit, equipment, material and services owned by Contractor or which are listed in Drilling Order that are to be provided at expense of Contractor.
	(e) “Contractor’s Personnel” means the personnel and subcontractors to be provided by Contractor from time to time to conduct operations hereunder as listed in Drilling Order.
	(f) “Company’s Personnel” means the personnel and other contractors to be provided by Company from time to time in connection with operations hereunder as listed in Drilling Order.
	(g) “Daywork basis” means Contractor shall furnish equipment, labor and perform services as herein provided, for a specified sum per day under the direction and supervision of Company.
	(h) “Operating Area” means the area specified in Drilling Order.
	(i) “Operating Base” means the place onshore designated by Company and specified in Drilling Order.
	(j) “Spudded” means the commencement of drilling the main well bore below the base of the cellar or circulating riser pipe which ever is deeper.
	(k) “The WORK” means the scope of activity defined in the "Bid Sheet and Drilling Order"
	1.2 Currency
	In this Agreement, all amounts and payments are expressed and will be executed in Kazakh Tenge.  Notwithstanding aforesaid, calculation of cost and rates of all services, materials and works have been made on basis of exchange rate of US Dollar to Kazakh Tenge set by the KASE at the date of signature of this Agreement, and thus at the time of respective payment the cost of all services, materials and works will be adjusted to the exchange rate of US Dollar to Kazakh Tenge set by the KASE at the date of such payment.
	1.3 Conflicts
	The Drilling Order’s attached hereto are incorporated herein by this reference.  If any provision of the Appendices conflicts with a provision in the body of this Agreement hereof, the body of this Agreement shall prevail.
	1.4 Contractor’s Status
	Contractor in performing its obligations hereunder shall be an independent contractor.  Company may instruct and direct Contractor as to the results to be obtained from Contractor’s employees.  None of Contractor’s employees are, nor shall be deemed to be, employees or agents of Company.
	.1 Governing Law, Resolution of Dispute, Arbitration (a) The Agreement shall be governed by and construed in all respects in accordance with the provisions of the laws of the Republic of Kazakhstan. (b) If, at any time, any difference or dispute arises between the Parties with respect to the meaning or effect of this Agreement or arising out of or in any way in connection with this Agreement or concerning the rights and obligations of a Party hereunder (including as to the existence, validity or termination of the Agreement), and the dispute or difference cannot be resolved amicably, then either Party shall by notice in writing submit the difference or dispute to a binding arbitration process to be conducted in accordance with the UNCITRAL Arbitration Rules, in force at that time, administered by the London Court of International Arbitration. (c) All of the Parties hereby agree to submit themselves to the jurisdiction of the arbitration tribunal and waive any right to immunity that they may otherwise have. No legal action or proceeding for enforcement of the arbitral award shall be taken by any Party before the completion of the arbitration process. (d) The arbitration, including the rendering of the award shall take place in London, England, and shall be in the English language with all hearings and conferences being interpreted into Russian. (e) The number of arbitrators shall be three (3) and each Party shall be entitled to appoint one (1) arbitrator to the three (3) member arbitration tribunal. (f) Unless the Parties agree upon a Chairman within thirty (30) days after the date on which a Party by notice in writing submits the dispute to settlement by arbitration as is provided for by Article, the President or Vice President (at the moment of application) of the London Court of International Arbitration shall appoint the Chairman arbitrator, who shall be a citizen of any country except the country where a Party is established. (g) The cost of arbitration, including attorney fees and costs, and the cost of remuneration of the arbitrators shall be borne in the manner determined by the arbitrators, as applicable. (h) The final decision of the majority of the arbitrators shall be issued in writing and shall be binding and final and shall be the sole and exclusive remedy regarding any claims, counterclaims, issues or accounting presented to the arbitrators.  Any judgment upon the award of the arbitrators may be entered in any court having jurisdiction thereof for execution. (i) The Parties agree that the final award upon the results of any court process or proceeding is final and can be executed in the compulsory order in any other country by means of a court.
	ARTICLE I TERM
	2.1 Effective Date
	The Parties shall be bound by this Agreement from the Effective Date.
	2.2 Duration
	This Agreement shall, be valid for a period of 2 years and will renew automatically for an additional two-year term unless one of the parties requests a change.
	2.3 Suspension and Termination
	The Company may from time to time by notice to the Contractor suspend the WORK for reasons of its own.  Company’s sole obligation during the period of suspension will be to pay Contractor per the applicable rates included in the Drilling Order.
	This Agreement shall terminate:
	(a) Immediately if the Drilling Unit becomes a loss on the date Contractor’s insurance surveyor determines a constructive or arranged total loss to have occurred;
	(b) in accordance with Paragraph 3.5(b);
	(c) in accordance with Paragraph 7.6; or
	(d) in accordance with Paragraph 8.a). During any suspension period all indemnities will be in full force and effect.
	2.4 Continuing Obligations
	The provisions of Article IX and Paragraphs 1.5, 2.4, 2.5, 8.0, 9.5, 9.6, 9.7, 10, 13.1, 13.4, and 13.9 shall survive the termination of this Agreement and the Parties shall continue to be bound thereby.
	2.5 Return of Company’s Item
	Upon termination of the WORK, Contractor shall return to Company at the last drilling location for the Drilling Unit under this Agreement, or at any other location as directed by Company at the Company’s sole cost, any of Company’s Items which are at the time in Contractor’s possession.  Company’s Items shall be returned by Contractor in the same condition in which they were received by Contractor, normal wear and tear excepted.
ARTICLE II CONTRACTOR’S PERSONNEL
3.1 Number, Selection, Hours of Labor and Remuneration
Except where herein otherwise provided, the number, selection, replacement, hours of labor and remuneration of Contractor’s Personnel shall be determined by the Contractor upon the requisites of the Work.  Such employees or subcontractors shall be the employees or subcontractors solely of Contractor.  Notwithstanding the foregoing, minimum manning shall be as specified in the Drilling Order, and the Contractor undertakes to provide personnel of international quality who have an appropriate technical background and experience to perform the Work and to provide Contractor’s Personnel who have certification as required by Kazakh laws.  Contractor’s Personnel shall be certified as required by Kazakh law and have work permits as so required by Kazakh law.  During duration of this Agreement, Contractor shall instruct all Contractor’s Personnel, especially in the area of safety rules and oilfield practice.
3.2 Contractor’s Representative
Contractor shall nominate one of Contractor’s Personnel in the operating area, as Contractor’s representative who shall be in charge of the remainder of Contractor’s Personnel and who shall have full authority to resolve all day-to-day matters that arise between Company and Contractor.  Contractor shall inform the Company in a written form, if such representative is replaced.  All matters that cannot be resolved by Contractor’s representative and Company’s representative will be resolved in accordance with Paragraph 1.5 of this Agreement.
3.3 Increase in Contractor’s Personnel
Company may require Contractor to increase the number of Contractor’s Personnel, subject to additional payment by the Company in accordance with the rates in the Drilling Order or as mutually agreed between the Parties.
3.4 Replacement of Contractor’s Personnel
Contractor will remove and replace at anytime any of Contractor’s Personnel within fourteen (14) days of receiving Company’s written request.  Company shall not be obliged to give reasons for any such request which shall not be made unreasonably.
ARTICLE III CONTRACTOR’S ITEMS
4.1 Obligation to Supply
Contractor shall provide Contractor’s Items and Personnel and perform the services to be performed by it in accordance with the Drilling Order.  Each of Contractor’s Items (including the Drilling Unit) shall be subject to inspection and approval of Company prior to such Items being placed into service.
4.2 Maintain Stocks
Contractor shall be responsible, at its cost, for maintaining adequate stock levels of Contractor’s Items and all spare parts as well as replenishing them as necessary to ensure efficient and safe Work.
4.3 Maintain and Repair Equipment
Contractor shall, subject to Paragraph 9.1, be responsible for the maintenance and repair of all Contractors’ Items (including the Drilling Unit) and shall provide all spare parts and materials required therefore.
4.4 Additional Items and Services
Contractor agrees and undertakes to provide additional equipment and services upon the requirement of Company.  Such additional equipment and services, not stated in the Appendices, shall be provided by the Contractor on at cost basis plus handling charges specified in Section II of the BDSO, if applicable.
ARTICLE IV CONTRACTOR’S GENERAL OBLIGATION
5.1 Contractor’s Standard of Performance
Contractor shall carry out all its operations under this Agreement on a Turnkey basis.  For purposes hereof the term “Turnkey basis” means Contractor shall furnish equipment, labor and perform services as herein provided, for a specified sum per well as per the program provided by Company and agreed by Contractor. Extra Works will be performed if required on a “Dayrate basis.”
5.2 Operation of Drilling Unit
Contractor shall be responsible for the operation of the Drilling Unit, including, supervising moving operations and positioning on drilling locations as required by Company.  Operations under this Agreement will be performed on a twenty-four (24) hour per day, seven (7) days a week basis.  Contractor covenants that the Drilling Unit (without modification, upgrade or enhancement) will operate efficiently and is physically capable of drilling wells to depths specified in this Agreement and complies fully with the technical documentation described in the Drilling Order.
5.3 Compliance with Company’s Instructions
Contractor shall comply with all instructions of Company consistent with the provisions of this Agreement, including, without limitation, drilling, well control and safety instructions.  Such instructions shall, if Contractor so requires and time permits, be confirmed in writing by the authorized representative of Company.  However, Company shall not issue any instructions which would be inconsistent with Contractor’s rules, policies or procedures pertaining to the safety of the Contractor’s Personnel, the Company’s Personnel, equipment or, the Drilling Unit, or require Contractor to exceed the capacity of the Drilling Unit.  During Turnkey operations Contractor shall have the right to direct its operations as it prefers, as long as they are in accordance with Company’s program and safe practices.
5.4 Adverse Weather
Contractor, in consultation with Company, shall decide when, in the face of impending adverse weather conditions, to institute precautionary measures in order to safeguard the well, the well equipment, the Drilling Unit and Contractor’s Personnel or Company’s Personnel to the fullest possible extent.  Contractor and Company shall each ensure that each respective senior representative will not act unreasonably in the exercise of their discretion under this Paragraph 5.4. For the purposes of this Agreement, adverse weather conditions shall not be considered a condition of Force Majeure.
5.5 Drilling Fluids and Casing Program
Contractor shall follow Company’s program with respect to the “Drilling Fluid and Casing Program” as may be specified by the Company.  Company shall provide Contractor with any such programs reasonably in advance of the spud date of each well to be drilled under this Agreement. Implementation of such programs is at Contractor’s discretion.
5.6 Difficulties During Drilling
In the event of any difficulty arising which precludes either drilling ahead under reasonably normal procedures or the performance of any other operations planned for a well, Contractor may suspend the work in progress and shall immediately notify the representative of Company both in writing and verbally of the difficulty, and during such period exert its best efforts to overcome the difficulty.
5.7 Well Control Equipment
Subject to Article IX, Contractor shall maintain its well control equipment listed in Drilling Order in good condition at all times and shall use its best efforts to prevent and control fires and blowouts and to protect the hole.
5.8 Inspection of Materials Furnished by Company
Contractor agrees to visually inspect all materials furnished by Company before using same and notify Company in writing of any apparent defects therein.  Contractor shall not be liable for any loss or damage resulting from the use of materials furnished by Company.
5.9 Cutting/Coring Program
If required, Contractor shall save and identify cuttings and cores according to Company’s instructions and place them in containers furnished by the Company.
5.10 Drilling Reports and Records
The Contractor shall maintain all statutory, regulatory and any other required records of its operations under the Agreement and shall at all times provide the Company with such data and information, including copies of any documents, as will permit the Company to comply with applicable statutory or other reporting obligations. Without prejudice to the generality of the foregoing, the Contractor shall keep and furnish to the Company a daily drilling report showing the relevant information in respect to hole sizes and depth for each hole section encountered in the Work and the formations penetrated, and shall prepare reports and records as requested including but not limited to a weekly BOP checklist, trip sheets and kick control sheets, and notify the Company immediately when any oil or gas-bearing formation is encountered and, if requested by the Company, save and prepare clean samples of formations drilled. & nbsp;The drilling report shall be made in the IADC-API Daily Drilling Report Form or other form acceptable to Company and the Contractor hereby agrees to comply in all respects with the Company’s reporting requirements. The Company shall at all times have complete access to all records and such other data as may be compiled by the Contractor relating to the Work.  All such data and records shall, upon request, be delivered by the Contractor to the Company and shall belong exclusively to the Company.
ARTICLE V COMPANY’S RIGHTS AND OBLIGATIONS
6.1 Equipment and Personnel
Company shall at its cost provide Company’s Items and Company’s Personnel and perform the services to be provided or performed by it according to the Drilling Order.  In addition to providing the initial supply of Company’s Items, Company shall be responsible, at its cost, for maintaining adequate stock levels and replenishing as necessary.  When, at Company’s request and with Contractor’s agreement, the Contractor furnishes or subcontracts for certain items which Company is required herein to provide, for purposes of this Agreement said items or services shall be deemed to be Company’s Items, and Company shall not be relieved of any of its liabilities in connection therewith.  For furnishing said items and services, Company shall reimburse Contractor its entire cost plus a handling charge as specified in the Drilling Order.
6.2 Not used
6.3 Company’s Employees
Company shall designate a drilling supervisor who will be present at the drill site to monitor the Turnkey operations and resolve day-to-day matters requiring decision by Company.  Company shall inform the Contractor in a written form, in case such representative is replaced.  Company’s drilling supervisor shall at all times have access to the Drilling Unit and may, among other things, observe tests, check and control the implementation of the mud program, examine cuttings and cores, inspect the Work or examine the records kept on the Drilling Unit by Contractor.
6.4 Drilling Site and Access
Company shall be responsible for providing access to the drilling location, as well as selecting, surveying, marking and clearing the drilling locations as may be reasonably required by Contractor for location approval.  Contractor shall obtain and provide all required certificates, Drilling Unit and expatriate personnel permits and licenses required for the drilling operations and Drilling Unit hereunder.  Company shall notify Contractor of any impediments or hazards to operations at each drilling location or at any access routes to the drilling locations of which it has actual knowledge.  Notwithstanding any other provision of this Agreement, should there be obstructions at or within the area of the drill site and these obstructions result in damage to any of Contractor’s Items, including the Drilling Unit, Company shall be responsible for and hold harmless and indemnify Contractor for all resulting direct damage, including the payment of the applicable Standby Rate during repairs, but Company shall receive credit for any physical damage insurance proceeds received by Contractor as a result of such damage.
6.5 Custom or Excise Duties, Taxes and Fees
a) Contractor, with Company’s assistance, shall be responsible for clearing customs of the drilling unit and for the importation by Contractor of subsequent items in the country in which the Operating Area is located.  Thereafter the Contractor will be responsible for the importation of any subsequent Contractor’s items into the operating area including but not limited to spare parts, consumables, auxiliary equipment and chemicals for operation of the drilling rig.
b) Notwithstanding any of the foregoing, Contractor shall pay all taxes that may be assessed by the Republic of Kazakhstan against Contractor as a result of the performance of this Agreement inclusive of the payroll taxes for its personnel as may arise in conducting Contractor’s business.
c) Rig moving equipment, personnel and other services required by the Contractor for customs clearance of the drilling unit, as well as registration in the Republic of Kazakhstan, obtaining required permits of any nature, permissions and licenses are for the Contractor’s account.
6.6 Take Over of Work
In the event any well drilled under this Agreement should blow out, catch fire or in any manner get out of control, Company may assume complete control and supervision of the Work of bringing the well under control, putting out the fire and take such other measures as Company deems appropriate.  If Contractor is insolvent, or is on the verge of becoming insolvent, Company may take over and continue the Work on the well to completion or abandonment.  In this context, Contractor will be deemed to be insolvent, or on the verge of becoming insolvent, if a reasonable basis exists for Company to believe that Contractor is unable, or with the passage of time alone will be unable, to pay its bills or discharge its financial obligations as they come due. If at any time in Company’s opinion, Contractor is failing to conduct its operations under this Agreement in a diligent, prudent, skillful and workmanlik e manner and in all respects in strict accordance with all applicable laws and with accepted good oil field practices, standards, methods and such failure continues for a period of ten (10) days (or in the event such failure results in a significant safety hazard, if such failure continues for 96 hours) after written notice from Company to Contractor, Company may take over and continue the Work on the well to completion or abandonment.  In the event Company takes over the Work pursuant to this Paragraph 6.6, Company shall have full use of Contractor’s Drilling Unit and other equipment, facilities, material, supplies and personnel at the well location, which Contractor shall continue to insure in accordance with this Agreement, and Contractor shall continue to be paid the applicable day rates provided for in this Agreement. During any such take over period the indemnities given by Contractor to Company under this Agreement shall be suspended, excluding the due indemnifications until such time and Co ntractor shall have no responsibility to Company under such circumstances.   When such take over period has ended, Company shall return the Drilling Unit and all of Contractor’s Items to Contractor in as good conditions as when the take over began, normal wear and tear excepted.
Notwithstanding the above, both Parties hereby recognize the right of the Government of the Republic of Kazakhstan to assume control of the well in the event of an emergency situation.
6.7 Company’s Well Program
Company shall provide Contractor with a well drilling program or programs for the Turnkey operations, which shall include, but not be limited to hole sizes, casing program, mud control program and Company’s deviation policy.  Company may modify these programs while drilling is in progress using a Variation Order (VO) Form that would identify the changes in Work and costs.  The VO shall be signed by both parties before the Work is performed.
ARTICLE I RATES OF PAYMENT
7.1 Payment
Company shall pay to Contractor during the term of this Agreement the amounts due on a well basis for the Turnkey services and on a monthly basis for any Extra Works or, in the event that the duration of a well is less than 1 month, following each well. Extra Works shall be calculated to the nearest half hour according to the rates of payment herein set forth in accordance with Article VIII for dayrate works and as specified in the Drilling Order.  No other payment shall be due from Company unless specifically provided for in this Agreement, or agreed to in writing by the Parties.
7.2 Mobilization/Demobilization Fee
(a) Company shall pay Contractor for the shipment of the Drilling Unit to the initial drilling location the Mobilization Fee specified in the Drilling Order (the “Mobilization Fee”) at the Commencement Date.  This fee covers cost of moving drilling unit and mobilizing personnel from its current location to the Operating Area, including the period until the Commencement Date as defined in Section 1.1(a).
(b) Company shall pay Contractor a Demobilization Fee as specified in the Drilling Order to cover all Contractor’s costs of demobilizing the Drilling Unit. Company shall have no further demobilization obligations other than the payment of the Demobilization Fee.
7.3    Turnkey Operations
The Turnkey Operations and Extra Works will become payable as specified in the Drilling Order and Article VIII of this Contract. Also additional services will be payable in accordance with Paragraph 7.10 of this Agreement and proper Variation Order for such services.
7.4     Operating Rate
Except when some other rate provided in the Drilling Order applies, in particular during Turnkey operations, the Operating Rate will be payable during the term of this Agreement.  However the Company shall not continue to pay the Operating Rate in the case that the Republic of Kazakhstan Technical Inspection Board shuts the Drilling Unit for safety or similar reasons.  Also additional services will be payable in accordance with Paragraph 7.10 of this Agreement and proper side agreement for such services.
7.5  Standby Rate With Crews
Except during Turnkey operations, the Standby Rate with Crews specified in the Drilling Order will be payable as follows:
(a) during any period of delay when Contractor is unable to perform its obligations under this Agreement because of adverse weather conditions or as a direct result of an act, instructions or omission of Company including, without limitation, the failure of any of Company’s Items, or the failure of Company to issue instructions, provide Company Items or furnish services;
(b) during any period when operations are being conducted herein under to re-drill or repair any well drilled hereunder which is lost or damaged as a result of Company’s sole negligence; and
(c) during any period when operations are suspended or are being conducted due to difficulties encountered as provided for in Paragraph 5.6.
(d) during any period after the Commencement Date that the Drilling Unit is undergoing periodic inspections required for the maintenance of any Certification or Classification Certificates.  If the delay is of such length that the drilling crew is demobilized, the Standby Rate Without Crew provided in Paragraph 7.9 shall apply from such date of demobilization.
(e) during any period when Company has no immediate work and Contractor agrees at Companies request not to demobilize the Drilling Unit, but only until the date the drilling crew has been demobilized.
(f) other times as may be specifically provided in this Agreement.
7.6   Rate During Repair
Except during Turnkey operations, the Repair Rate specified in the Drilling Order will be payable during the first twenty-four (24) hours per month during which operations are suspended to permit necessary replacement, inspection, repair of maintenance of Contractor’s Items. Routine maintenance such as lubrication, packing of swivels, changing of pump parts, slipping lines, drill string and certification inspections, shall not be considered as maintenance for purposes of this Paragraph.  Contractor will use due diligence in effecting such repairs, replacements or maintenance in a good and workmanlike manner and will use its best efforts to familiarize itself with the location of rental replacements for Contractor’s Items.
7.7   Force Majeure Rate
The Force Majeure Rates specified in the Drilling Order will be payable during any period in which operations are not being carried on because of Force Majeure as defined in Paragraph 13.3, including periods required to repair damage caused by a Force Majeure event.  However, should an event of Force Majeure continue in existence for a period of thirty (30) days, then no day rate shall be payable for the period after such thirty (30) days and either Contractor or Company shall have the right to terminate this Agreement at any time thereafter by providing written notice to the other party.
7.8    Moving Rate
Contractor shall be paid a Moving Lump Sum amounts as per the Drilling Order for the move of the Drilling Unit from Aktau to Atyrau fields. Moving amounts for each move of the Drilling Unit from one well to another are included in the Turnkey prices, as per the Drilling Order.
7.9    Standby Rate Without Crews
Except during Turnkey operations, the Standby Rate Without Crews shall be the rate so stated in the Drilling Order.  The Standby Rate Without Crews will be payable when:
(a) during any period after the Commencement Date that the Drilling Unit is undergoing periodic inspections required for the maintenance of any Certification or Classification Certificates, but only from the date the drilling crew has been demobilized;
(b) during any period when operations are suspended to repair the Drilling Unit or other Contractor’s Items due to blow out, fire, cratering, shifting or punch through at a drilling location, obstacles or obstructions or the consequences thereof, but only from the date the drilling crew has been demobilized.
(c)   during any period when Company has no immediate work and Contractor agrees at Companies request not to demobilize the Drilling Unit, but only from the date the drilling crew has been demobilized. (d) during other periods as specified in the Agreement.
7.10 Additional Equipment, Services and Tools Rental Rates
(a) As specified in Section IV, Contractor shall provide fishing tools that are included in the Daily Rates.
(b) Any other additional services will be provided by Contractor under requirement of Company.  The daily rate for additional services will be provided according to the proper side agreements for such services.
ARTICLE VIII PAYMENTS
a) Invoice Currency and Payment
Contractor shall prepare invoices for each Turnkey well covering the Services performed in accordance with the Rates contained in this Agreement.  Company will make payment to Contractor of 20% of total invoice amount for a completed well, VAT charged to the total amount of invoice, and any amounts under Variation Order 30 days after receipt of an uncontested invoice in currency as specified in  Article 1.2 hereof.  The remaining 80% of the invoice amount will    be paid within 365 days after receipt of such invoice at the terms specified in the Convertible Debenture, dated 19 April 2005, issued by Big Sky Energy Corporation, a parent company of the Company, as security for fulfillment by the Company of its payment obligations hereunder.  Contractor shall have the right, upon ten (10) days prior written notice, to terminate this Agreement if Company refuse s to pay undisputed amounts due and owing to Contractor.  Such termination by Contractor shall not change Company’s obligation to pay contractor any amounts of money already due, as well as the appropriate demobilization fee under this Agreement.
Contractor shall bill Company at the end of each well, for all daily charges and other charges earned by Contractor for such well.  Billings for daily charges will reflect details of the time spent (calculated to the nearest half hour) and the rate charged for that time.  Billings for other charges will be accompanied by invoices and other documentation supporting costs incurred for Company.
Company shall make such payment to the Bank and the account number shown in the Drilling Order hereto and on the invoice.  All payments shall be made according to Article 1.2 hereof.  In case of payment delay Company shall pay interest at the rate of one-half percent (0.5%) per day to a maximum of 5% of the value of the unpaid value and such interest charges shall continue until the amount including such interest is paid in full.
In the event of disagreements regarding invoice or incorrect completion of invoice which are not in compliance with the requirements of current tax legislation, the invoice shall be returned without payment until disagreement is resolved or invoice is completed correctly.
Company shall immediately inform Contractor of any questions or differences, and Company and Contractor shall take reasonable steps to settle the dispute.
After satisfactorily resolving the disputed part of the invoice, Contractor shall re-invoice Company the mutually agreed upon and formerly disputed amount.
All invoices must be forwarded to the following address to ensure prompt payment:
Vector Energy West LLP Dostyk Prospect, Bld. 132, Office 3, Almaty 50051 Republic of Kazakhstan Tel.: 7.3272.628.394 Fax:  7.3272.628.399
Company is not responsible for and shall not pay a penalty to Contractor in the event of failure to pay on time due to incorrect completion of invoices.
b) Bank Fees
All expenses and commissions payable to the Contractor’s Bank in connection with fulfilling of this Agreement shall be paid by Contractor while those expenses to the Company's Bank shall be paid by Company.
c) Tax
All Contractor's prices are exclusive of any taxes, value added tax (VAT), excise, sales or use taxes, or taxes of a similar nature which may lawfully be imposed in performing this Agreement.  The amount of any such taxes for which Contractor may be legally liable (including VAT, etc.) shall be added to the payment required to be made and shall be paid by Company pursuant to the terms of Contractor's invoice.  In the event Company fails to pay such taxes (including VAT) Company shall indemnify Contractor from and against any fines, penalties, or late payment interest imposed by the Government of Territory. Company's obligation to pay or indemnify Contractor for such taxes (including VAT) shall apply regardless of any tax exemption (including VAT) c laimed by Company for its foreign investors.  However, for the avoidance of doubt, the Company shall not be responsible for any profit taxes levied on the income of Contractor or its employees.  Company shall not be obligated to reimburse Contractor for any taxes, duties or other charges imposed upon either the household goods or personal effects of Contractor personnel provided under this Agreement.  Contractor shall pay any tax or assessment levied on the income earned by Contractor's employees.
In case of any changes in or to the application or interpretation of the fiscal system of the Republic of Kazakhstan, or any political subdivision thereof, after the date the Agreement signing and where the said change has an economic impact on the Contractor, its employees, its Subcontractors, regardless of tier and the employees of its subcontractors, Company and Contractor shall meet in good faith so that Contractor, its employees, its Subcontractors regardless of tier, and the employees of its subcontractors, does not lose or benefit as a result thereof.
d) Form of Invoice
Contractor shall attach a completed Work Acceptance Act (WAA) signed by Company.  The WAA must contain the appropriate Company charge code.  Contractor shall indicate on the invoice the number of this Agreement and Tax Registration Number, series and number of VAT Registration Certificate, if it is a taxpayer, pursuant to the current tax legislation of the Republic of Kazakhstan.
i) All the invoices shall be numbered clearly, each with an individual number, for the purpose of identification and references to them.
ii) Each invoice shall be dated, and the date on the invoice shall precede the date of receipt of the invoice by Company.
iii) Each invoice shall have reference to the number of this Agreement.
e) Right to Audit
Contractor and its subcontractors shall maintain true and complete records in connection with the Services and all transactions related thereto and shall retain all such records for at least twenty-four (24) months after the end of the calendar year in which the Services are performed. In the event costs are to be reimbursed under this Agreement, Company may from time to time and at any time during the foregoing period of record retention make an audit of all records of Contractor and its subcontractors.
f) Over Payment by Company
Company shall have the right to offset any amount owed Company by Contractor against any payment or payments owed Contractor by Company.  In the event of any overpayment by Company to Contractor under this Agreement, upon notice from Company, Contractor shall refund the overpayment to Company by interbank wire transfer to such bank account as Company may specify to Contractor in writing, or if directed by Company, issue to Company a credit memo with respect to money owed to Company by Contractor.  In addition to any other right or remedy of Company provided anywhere in this Agreement or any Exhibit to this Agreement, company shall have the right at all times, and from time to time, to deduct any or all money owed Company by Contractor under this Agreement from any money owed Contractor by Company under this Agreement or any other agreement between Company and Contractor.  The issuing of such credit memo or the failure of Company to request a refund of the overpayment or the issuing of a credit memo or the failure of Company to make any such deduction shall not in any way prejudice or diminish Company’s claim with respect to such money due Company nor shall any deduction by Company of less that the amount owed Company at the time the deduction is made, constitute an accord and satisfaction or a release of claim or waiver of entitlement with respect to the entire amount of money owed to Company by Contractor.
g) Contractor Holdback
Contractor represents that it shall pay its subcontractors in a timely manner and in accordance with contracts between them for work performed.  In the event Company receives a bona fide complaint from any of Contractor’s sub-contractors to the effect that Contractor has not paid in a timely manner, except for cause attributable to sub-contractors non-performance, then Company reserves the right to withhold 20% (twenty percent) of all disbursements payable to Contractor under this Agreement in lieu of WORK performed by subcontractors of Contractor.  At such time Contractor provides documentation in the form of a declaration, signed by both the Contractor and the subcontractor, evidencing the payment in full of sub-contractors inv oices, Company will pay the 20% holdback within seven (7) calendar days.  Contractor shall make written representation that all of his sub-contractors are paid prior to HKM making final demobilization payments.
h) Contractor Responsibility
Contractor shall be responsible at Contractor’s expense for payment of salaries, wages, other remuneration or benefits (including taxes related thereto), engagement and employment of its personnel, transportation, accommodation and subsistence, and generally all matters concerning Contractor’s personnel, unless otherwise specifically provided for in this Agreement.
Contractor shall be responsible at its own expense for all medical services for its personnel, including med-evac, foreign hospitalization, and repatriation, and routine and emergency coverage. In the event of emergency evacuation attended by Company (which shall include Company’s subcontractor), Company reserves the right to recover the cost of such care by set-off against Contractor invoices.  Contractor shall, upon Company request, provide evidence that it has insurance of the type and in the amounts sufficient, in Company’s opinion, to cover Contractor’s responsibility as set out in this paragraph. Contractor and Company shall co-operate to develop a policy of handling any incidents, the objective of which shall be to provide medical care as quickly as possible in the most cost efficient manner.
ARTICLE IX LIABILITY
9.1    Equipment or Property
Except as specifically provided herein to the contrary, each Party hereto shall at all times be responsible for and hold harmless and indemnify the other Party from and against damage to or loss of its own and its subcontractor’s equipment or property. Except to the extent that the proceeds from Contractor’s insurance as made available to Contractor do not compensate Contractor therefore, Company shall be responsible for and shall hold harmless and indemnify Contractor for loss or destruction of or damage to Contractor’s drill pipe, drill collars, subs, reamers, bumper subs, stabilizers and other in-hole equipment when such equipment is being used in the hole below the rotary table, normal wear excepted.  Abnormal wear and/or damage for which Company shall be responsible hereunder shall include, but not be limited to, wear and/or damage resulting from the presence of H2S or other corrosive elements in the hole including those introduced into the drilling fluid, excessive wear caused by sand cutting, damage resulting from excessive or uncontrolled pressure such as those encountered during testing, blow-out, or in a well out of control, excessive deviation of the hole from vertical, dog-leg severity, fishing, cementing or testing operations, and from any unusual drilling practices employed at Company’s request.  Company’s responsibility for such abnormal wear and/or damage as referred to herein shall include abnormal wear and/or damage to Contractor’s choke hoses and manifolds, blowout prevention and other appurtenant equipment.  Company shall pay the cost of repairing damaged equipment if repairable.  In the case of equipment lost, destroyed or damaged beyond repair, Company shall reimburse Contractor an amount equal to the then current replacement cost of such equipment delivered to the Drilling Unit.
9.2    The Hole
In the event a hole is lost or damaged from causes other than the gross negligence of Contractor, Company shall be responsible for and hold harmless and indemnify Contractor from such damage to or loss of the hole, including all down hole property therein.
9.3    Contractor’s Personnel
Contractor shall be responsible for and hold harmless and indemnify Company from and against all claims, demands and causes of action of every kind and character arising in connection herewith in favor of Contractor’s employees, or Contractor’s subcontractors or their employees, or Contractor’s invitees, on account of bodily injury, death or damage to property.
9.4     Company’s Personnel
Company shall be responsible for and hold harmless and indemnify Contractor from and against all claims, demands, and causes of action of every kind and character arising in connection herewith in favor of Company’s employees, or Company’s other contractors (excluding Contractor hereunder) or their employees, or Company’s invitees, on account of bodily injury, death or damage to property.
9.5 Health and Safety and Environmental Protection
(a) The Contractor shall comply with all relevant and existing legislation of the Republic of Kazakhstan and that of Company (attached hereto as Exhibit “A” Health, Safety and Environment), relating to health, noise, fire, safety and environmental protection and take adequate and effective precautions therefore throughout the performance of the Work in order to protect the Work, the Contractors personnel, the general public, all other persons, the project property and the property of third parties and to avoid or reduce to a minimum any inconvenience to the public.  In the event of conflict between the HSE Legislation of the Republic of Kazakhstan and that of Company, the most severe thereof shall apply.
(b) The Contractor shall draw up all necessary health, fire, safety and environmental protection policies and procedures issued or required by the relevant and competent authorities and shall issue and ensure that the Contractor’s personnel are notified of and comply with all applicable policies, procedures, rules, regulations and precautions issued by the relevant and competent authorities and the Contractor.
(c) The Contractor shall ensure that their Safety Policy complies with existing Legislation in the Republic of Kazakhstan and conforms with the Company’s current statement of policy on Health, Safety and Environment as set out in Exhibit “A” and that its other policies and procedures referred to in Clause (b) are compatible with the Company’s other current policies and procedures applicable to any part of the Work of which the Contractor has been notified (copies of which are available upon request). If there is any conflict the Contractor shall submit the differences for resolution by the Company prior to the commencement of such part of the Work.
(d) The Contractor shall, upon request by the Company, submit to the Company a copy of all the Contractor’s policies, procedures and other matters concerning health, fire, safety and environmental protection in so far as they relate to the Work. Without prejudice to the Contractor’s obligations under Clause (c) hereof the Company reserves the right, at any time and from time to time to reasonably require amendments to the same.
(e) The Contractor shall allow the Company access to the site, the resources and records, when requested, to enable the Company to satisfy itself that the requirements of this Clause 9.5 have been or are being met, including but not limited to:
(i) ensure that the Contractor is carrying out its responsibilities under its Safety Policy and existing legislation  of the Republic of Kazakhstan;
(ii) ensure that the Contractor’s Safety Policy complies with Clause (c); and
(iii) record if required, independent investigations into any incident relating to the Agreement.
(f) The Contractor shall supply or shall ensure the supply to the Contractor’s personnel of adequate safety equipment and clothing which shall include but not be limited to safety helmets, safety (steel-capped) footwear, ear defenders, goggles, all of which clothing shall be to the Kazakh Standards. The Contractor shall be deemed to have included in the Agreement Price for the cost and expense for the provision, maintenance and, where necessary, the replacement of all safety equipment and clothing, and at Contractor’s option identification tags which provide emergency medical contact numbers and other critical information.
(g) The Contractor shall ensure that the Contractor’s personnel are:
(i) medically, physically and mentally fit to carry out the duties required of them;
(ii) sufficiently competent, qualified and experienced and trained.
(h) All costs and expenses associated therewith shall be deemed to have been included in the Agreement Price, including the costs of all medical services at the work site.
(i) The Contractor shall provide at each location of the site where the WORK is to be performed suitable first-aid and medical facilities in compliance with existing legislation of the Republic of Kazakhstan and the Agreement.
(j)  The Contractor shall use the best practicable means to prevent noxious or offensive emissions (including noise) or pollutants while in the course of executing the WORK and shall monitor and render harmless and inoffensive such emissions that cannot be prevented.
(k) The Contractor shall carry out such tests and examinations of Contractor supplied materials as may be necessary to ensure the health and safety of anyone who is or is likely to come into contact with or otherwise be affected by the use of such items.
(l) The Contractor shall ensure that no alcohol, drugs or medicines which impair a person’s mobility or performance is present at the site (save where necessary for the purpose of compliance with Clause 9.5 (i) and then only for that purpose) or consumed by any of the Contractor’s personnel while engaged in the performance of the WORK.
(m) The Contractor shall not treat, keep or dispose of any waste produced by the Contractor as a result of the Work in a manner likely to cause harm to the health and safety of any person or harm to the environment and shall comply with existing legislation of the Republic of Kazakhstan.
The Company’s personnel shall comply with the HSE requirements of the Republic of Kazakhstan
9.6 Pollution and Contamination
Notwithstanding anything to the contrary contained herein, the responsibility for pollution or contamination shall be as follows:
(a) Contractor shall be responsible for and hold harmless and indemnify Company for control and removal of pollution or contamination which originates above the surface of the ground, including, without limitation, from spills of fuels, lubricants, motor oils, water base drilling fluid and attendant cuttings, pipe dope, paints, solvents, ballast, bilge and garbage in Contractor’s possession and control.
(b) Company shall be responsible for and hold harmless and indemnify Contractor against all claims, demands, and causes of action of every kind and character (including control and removal of the pollutant involved) arising directly from all pollution or contamination, other than that described in Paragraph 9.6 (a), which may occur from any other reason than the negligence of Contractor or as a result of operations hereunder, including, but not limited to, that which may result from fire, blow-out, cratering, seepage or any other uncontrolled flow of oil, gas, water or other substance, as well as the use or disposition of lost circulation and fish recovery materials and fluids, oil emulsion, oil base or chemically treated drilling fluids other than water base drilling fluid.
(c) In the event a third party commits an act or omission which results in pollution or contamination for which either the Contractor or Company for whom such Party is performing work is held to be legally liable, the responsibility therefore shall be considered, as between the Contractor and Company, to be the same as if the Party for whom the work was performed had performed the same and all of the obligations and limitations set forth in Paragraphs 9.6 (a) and (b), shall be specifically applied.
9.7    Debris Removal and Cost of Control
Company shall be responsible for and hold harmless and indemnify Contractor for the cost of removal of debris including the Drilling Unit, Contractor shall also be responsible for and hold harmless and indemnify Company for the cost of regaining control of any wild well to the limit of its insurance coverage, unless caused by negligence of the Contractor, in which case the Contractor is fully responsible.
9.8    Underground Damage
Company shall be responsible for and hold harmless and indemnify Contractor for any and all claims resulting from operations under this Agreement on account of injury to, destruction of, or loss or impairment of production or any property right in or to oil, gas or other mineral substance or water, if at the time of the act or omission causing such injury, destruction, loss or impairment, said substance had not been reduced to physical possession above the earth’s surface, and for any loss or damage to any formation, strata, or reservoir beneath the earth’s surface.
9.9    Consequential Damages
Neither Party shall be liable to the other for, and each Party shall hold harmless and indemnify the other against, real, indirect or consequential damages resulting from or arising out of this Agreement, including without limitation, loss of profits, loss of use or business interruptions, however same may be caused; provided however, the forgoing limitations shall not apply to any Party that breaches this Agreement due to gross negligence.
9.10 Indemnity Obligation
(a) The Parties intend and agree that the phrase “be responsible for and hold harmless and indemnify” in Paragraphs 6.5 and this Article IX mean that the indemnifying Party shall indemnify, hold harmless and defend (including payment of reasonable attorney’s fees and costs of litigation) the indemnified Party from and against any and all claims, demands, causes of action, damages, judgments and awards of any kind or character, without limit and without regard to the cause or causes thereof, including pre-existing conditions, whether such conditions be patent or latent, breach of warranty (express or implied), strict liability, or the negligence of any person or persons, including that of the indemnified Party, whether such negligence be sole, joint or concurrent, active or passive.
(b) The indemnifying Party’s obligations contained in this Agreement shall also extend to the indemnified Party and its Affiliated Companies and the officers, directors, employees, agents, owners, shareholders and insurers of each and to actions in rem or in personam.
(c) The terms and provisions of Paragraphs 6.5 and this Article IX shall have no application to claims or causes of action asserted against Company or Contractor by reason of any agreement of indemnity with a person or entity not a party hereto.
ARTICLE X INSURANCE
(a) Contractor shall at its own cost and expense, effect and maintain the following insurance in respect of its liabilities pursuant to this Agreement as follows with waivers of subrogation in favour of Company:
(i) Employer’s Liability insurance subject to Law of the Republic of Kazakhstan “On Safety at Work” dated 22 January 1993.  The Employer’s Liability insurance shall have a limit of one million US Dollars ($1,000,000 USD) per occurrence; and
(ii) Comprehensive General Liability insurance with contractual liability, products and completed operations and broad form property damage coverage included, providing for a combination single limit of two million ($ 2,000,000) USD for personal injury, death or property damage resulting from each occurrence and covering all of Contractor’s operations under this Contract.  The aforesaid insurance shall cover, but not be limited to loss or damage to the Contractor’s Equipment and Personnel.
(iii) Umbrella Liability insurance coverage in excess of the primary coverage with the limit of no less than four million ($4,000,000) US dollars per occurrence including all areas involved in operations under this contract (including Blow out and pollution control).
(b) Before commencing the WORK, Contractor shall provide Company with certificates or other documentary evidence of the insurance, which is satisfactory to Company from an insurance company, which is satisfactory to Company. Insurance certificates provided to Company must state policy coverage, policy limits, policy deductibles, evidence that waivers of subrogation are in place and named indemnities. Upon request, Contractor shall provide copies of insurance policies required pursuant to this Agreement.
(c) Contractor shall be solely responsible for ensuring that its sub-contractors are adequately insured to provide services under this Agreement and additionally provide that both Company and Contractor are included as additional insured’s.
ARTICLE XI SUBLETTING AND ASSIGMENT
11.1   Subcontracts
Company may employ other contractors to perform any of the operations or services to be provided or performed by it. Contractor may employ other contractors to perform any of the operations or services to be provided or performed by it with the prior written consent of Company.  Use of subcontractors by Contractor shall not relieve Contractor from any liability or obligation under this Agreement.
11.2   Assignment
Neither Party may assign this Agreement to anyone without the prior written consent of the other Party, and prompt written notice of any such intent to assign shall be given to the other Party. In the event of such assignment, the assigning Party shall remain liable to the other Party as a guarantor of the performance by the assignee of the terms of this Agreement.  If any assignment by Company is made that increases Contractors’ financial burden, except for any assignment by Contractor, Contractors’ compensation shall be adjusted to give effect to any increase in Contractors’ operating costs or taxes.
ARTICLE XII NOTICES
(a) All notices to Parties regarding this Agreement shall be presented in writing, as set out in and sent at legal addresses for services of the parties.
(b) Any party may change its legal address, giving written notice to the other party 5 days after the change.
(c) Notices may be hand delivered personally, sent by fax or by registered mail. Notices under this Agreement shall be considered to be received on the date on actual receipt by the receiving party. Notices sent by electronic mail shall not be recognized. Notices with regards to this Agreement shall be deemed to be delivered upon receipt of receiving Party.
ARTICLE XIII GENERAL
13.1 CONFIDENTIALITY AND PUBLICITY
Confidential Information
Contractor agrees and acknowledges that while providing WORK, Contractor has access to and obtains confidential information owned by Company, therefore Contractor agrees:
a) not to use such information for Contractor's benefit or any third party's benefit, not to get compensation by direct or indirect payments from any third party for use of this information;
b) to keep all information related to WORK and results from WORK strictly confidential;
c) not to circulate, not to divulge and not to provide access to any information related to WORK or results from WORK to any individuals, unless Company considers these individuals' access to such information necessary for providing WORK by Contractor;
d) to take all reasonable precautions required to prevent divulgence of such information by Contractor's personnel, officials, directors, employees and agents to any other individuals except for those who is authorized to have access to such information according to the provisions of this Article. Contractor shall bear the responsibility for violation of the provisions of this Article by any member of the personnel, official, director, employee or agent;
e) In the event of violation of any of sub-clauses from a) to d) inclusive of this Article XIII, Contractor shall bear responsibility according to the legislation of the Republic of Kazakhstan.
Publicity
The Contractor shall not publish or permit to be published any pictorial, written, oral or other information relating to the Agreement, the Work, the performance thereof or the activities of the Company without the Company’s written consent.  Such consent shall be given (if at all) separately in relation to each specific Contractor’s application therefor and shall apply only to that application.  The accuracy of any information released by the Contractor and not supplied directly by the Company is the absolute responsibility of the Contractor.
13.2   Attorney’s Fees
If this Agreement is placed in the hands of attorney for collection of any sums due hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or arbitration proceedings, then the winning Party shall be entitled to recover reasonable attorney’s fees and costs.
13.3   Force Majeure
Except as otherwise provided in this Paragraph 13.4, each Party to this Agreement shall be excused from complying with the terms of this Agreement, except for the payment of monies when due and the honoring of indemnities, if and for so long as such compliance is hindered or prevented by changes to any general or local Statute, Ordinance, Decree, or other Law or any regulation or by-law of any local or other duly constituted authority or the introduction of any such Statute, Ordinance, Decree, Law, regulation or by-law or reversal of a previously issued regulation, by-law or permit or other form of government restraint which shall render services undeliverable, and the following riots, strikes, wars (declared or undeclared), insurrection, rebellions, terrorist acts, civil disturbances, dispositions or order or injunctions of any governmental authority, whether such authority be actual or assumed, acts of God, inability to obtain equipment, supplies or fuel, or by any act or cause (other than financial distress or inability to pay debts when due) which is reasonably beyond the control of such Party, such cause being herein sometimes called “Force Majeure.”  In the event that either Party hereto is rendered unable, wholly or in part, by any of these causes to carry out its obligations under this Agreement, such Party shall give notice and details of Force Majeure in writing to the other Party as promptly as possible after occurrence.  In such cases, the obligations of the Party giving notice shall be suspended during the continuance of any inability so caused except that Company shall be obliged to pay to Contractor the Force Majeure Rate provided for in Paragraph 7.6.
13.4   Compliance with Laws
Each Party hereto agrees that all conventions, treaties, laws, statutes, rules, regulations and ordinances, of any foreign, federal, state or local government or quasi-governmental authority which are now or may become applicable to that Party’s operations covered by or arising out of the performance of this Agreement will apply.  In the event any provision of this Agreement is inconsistent with or contrary to any applicable treaty law, rule, regulation or ordinance, said provision shall be modified to the extent required to comply with said treaty law, rule, regulation or ordinance upon mutual signing of the Parties, and as so modified said provision and this Agreement shall continue is full force and effect.  If any act or omission by Contractor in response to Company’s explicit instruction violates such law, Company shall indemnify Contractor for any consequences thereof.  In no even t however, will either Contractor or Company be requested or required to violate any treaty law, rule, regulation or ordinance of their respective countries of incorporation or organization.
13.5   Waivers
It is fully understood and agreed that none of the requirements of this Agreement shall be considered as waived by either Party unless the same is done by writing, and then only by the persons executing this Agreement, or other duly authorized agent or representative of the Party.
13.6   Entire Agreement
This Agreement supersedes and replaces any oral or written communications heretofore made between the Parties relating to the subject matter hereof.
13.7   Inurement
This Agreement shall inure to the benefit of and be binding upon the successors and assignees of the Company and Contractor.
13.8 Labor Practices/Health and Safety Guidelines
Contractor shall not take any actions to prevent its employees from lawfully exercising their right of association and their right to organize and bargain collectively.  Contractor shall not  interfere with or coerce any of its employees on the basis of trade union activities or membership.  Contractor shall not take any action on the basis of such activities or membership which may result in the termination, suspension, demotion, or transfer of said employee. Contractor shall perform all Work in accordance with occupational health and safety standards that meet or exceed the World Bank Environment, Health and Safety Guidelines for Onshore Oil and Gas Development, dated May 12, 1994 (“World Bank Guidelines”). Contractor shall allow its employees to avoid or remove themselves from dangerous work situations without jeopardy to continued employment. Contractor shall observe applicab le laws relating to a minimum age for employment of children, acceptable conditions of work with respect to minimum wages, hours of work, and occupational health and safety, and not to use forced labor.
13.9 Environmental Compliance
Contractor represents and covenants that the Work shall be performed in compliance, in all material respects, with the more stringent of the regulations of the Republic of Kazakhstan or the World Bank Guidelines.
13.10 Valuation of Contractor’s Equipment
The Contractor’s Drilling Unit and equipment valuation is as included in the Drilling Order to this Agreement.
13.11 Illegal Drugs, Alcohol and Firearms Policy
a) No illegal drugs, controlled substances, intoxicating beverages, firearms, weapons, or hazardous substances or articles are allowed on Company’s premises or workplace or on lands that are contiguous thereto, controlled or operated by Company.
b) No person under the influence of drugs, controlled substances or intoxicating beverages will be allowed on Company property or on lands contiguous thereto, controlled or operated by Company.
c) Non compliance with any of the specific terms and conditions of this Article will result in violators being permanently barred from all Company facilities.  This is a no tolerance policy.
d) Without prior announcement, and at any time, Company may carry out reasonable searches of individuals and their personal effects when entering Company premises, while on Company premises, engaged in Company business, or operating Company equipment.  Entry onto Company premises constitutes consent to search of the person and his/her personal effects, including, without limitation, packages, briefcases, purses, lunch boxes and vehicles, or any office locker, closet or desk.  Refusal to cooperate shall be cause for not allowing that individual on Company premises.
.1 SEVERABILITY
If any part of the Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, the remainder of the Agreement shall not be affected and every part of the Agreement shall be severable and separately valid and enforceable.
13.13 TIME IS OF THE ESSENCE
The Contractor acknowledges that the timely performance of the Work is an integral and essential part of this Agreement and that time is of the essence.
13.14 AMENDMENT OF THIS AGREEMENT
No alterations, modifications and amendments to this Agreement shall be effective unless they are drawn up in writing and signed by both Parties. No relationships between Parties may be interpreted and construed as relationships changing the conditions of this Agreement.
13.15 Counterparts; Language This Agreement shall be signed in two (2) original copies, with each having the same legal effect. In the event of any conflict or difference in meaning between the English and Russian versions of this Agreement, the English version shall prevail.
IN WITNESS THEREOF THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DAY AND YEAR FIRST ABOVE WRITTEN.
___________________________________
BY: TITLE:
WITNESS: _______________________________________ _______________________________________
CONTRACTOR BY: TITLE:
WITNESS:

SUN DRILLING COMPANY – VECTOR ENERGY WEST LLP TURNKEY DRILLING CONTRACT

Page # of 22

EX-10

	MASTER DRILLING AGREEMENT TURNKEY OPERATIONS
	This Master Drilling Agreement No.  ______,  dated the  5th day of May 2005, (the “Effective Date”) is made by and between: Kozhan LLP, hereinafter referred to as “Company”, represented by F. K. Shakirov, President, acting on the basis of the Charter, and Sun Drilling LLP, hereinafter referred to as “Contractor”, represented by William Duncan acting on basis of the power of attorney No. ____ issued on ___ __________ 2005
	WHEREAS Contractor and the Company may individually be referred to as a “Party” and collectively as “Parties;” and
	WHEREAS, Company desires to have onshore wells drilled, produced or worked over in the Morskoye oil block…located in Atyrau Region  “Contract Area” of the Republic of Kazakhstan, as specified by Company, and to have performed or carried out all auxiliary operations and services as detailed in the Bid Sheet and Drilling Order hereto or as Company may require (hereinafter referred to as “Work”); and
	WHEREAS, by signing this Master Drilling Agreement, Contractor agrees that no promise of work is made by the Company, and
	WHEREAS, further to a tender based on the attached “Bid Sheet and Drilling Order” work was awarded to the Contractor, and
	WHEREAS the Parties agree that Company shall have the right to accelerate, decelerate, suspend, stop or terminate WORK, all as set out in this Agreement, as its prerogative in the prudent management of its business, and
	WHEREAS Contractor covenants that it has the resources and skills of suitable quality and quantity to perform the WORK hereunder and is willing and able to undertake the performance of the WORK in accordance with the Terms and Conditions hereinafter contained; and
	NOW THEREFORE, in consideration of the premises and the covenants and agreements herein, the Parties agree as follows:
ARTICLE I INTERPRETATION
1.1 Definitions
In this Agreement, unless the context otherwise requires:
(a) “Affiliated Company” means an entity owning fifty percent (50%) or more of the voting stock or similar equity interests of Company or Contractor, an entity in which Company or Contractor own fifty percent (50%) or more of its voting stock or similar equity interests, or an entity fifty percent (50%) or more of whose voting stock or similar equity interests is owned by the same entity that owns fifty percent (50%) or more of the voting stock or similar equity interests of Company or Contractor.
(b) “Commencement Date” means the day and time within the nearest hour that drilling rig is rigged up and ready to commence operations on the first well in the Operating Area.
(c) “Company’s Items” mean the equipment, material and services owned by Company or which are listed in Drilling Order that are to be provided at the expense of Company.
(d) “Contractor’s Items” mean the Drilling Unit, equipment, material and services owned by Contractor or which are listed in Drilling Order that are to be provided at expense of Contractor.
(e) “Contractor’s Personnel” means the personnel and subcontractors to be provided by Contractor from time to time to conduct operations hereunder as listed in Drilling Order.
(f) “Company’s Personnel” means the personnel and other contractors to be provided by Company from time to time in connection with operations hereunder as listed in Drilling Order.
(g) “Daywork basis” means Contractor shall furnish equipment, labor and perform services as herein provided, for a specified sum per day under the direction and supervision of Company.
(h) “Operating Area” means the area specified in Drilling Order.
(i) “Operating Base” means the place onshore designated by Company and specified in Drilling Order.
(j) “Spudded” means the commencement of drilling the main well bore below the base of the cellar or circulating riser pipe which ever is deeper.
(k) “The WORK” means the scope of activity defined in the "Bid Sheet and Drilling Order"
1.2 Currency
In this Agreement, all amounts and payments are expressed and will be executed in Kazakh Tenge.  Notwithstanding aforesaid, calculation of cost and rates of all services, materials and works have been made on basis of exchange rate of US Dollar to Kazakh Tenge set by the KASE at the date of signature of this Agreement, and thus at the time of respective payment the cost of all services, materials and works will be adjusted to the exchange rate of US Dollar to Kazakh Tenge set by the KASE at the date of such payment.
1.3 Conflicts
The Drilling Order’s attached hereto are incorporated herein by this reference.  If any provision of the Appendices conflicts with a provision in the body of this Agreement hereof, the body of this Agreement shall prevail.
1.4 Contractor’s Status
Contractor in performing its obligations hereunder shall be an independent contractor.  Company may instruct and direct Contractor as to the results to be obtained from Contractor’s employees.  None of Contractor’s employees are, nor shall be deemed to be, employees or agents of Company.
.1 Governing Law, Resolution of Dispute, Arbitration (a) The Agreement shall be governed by and construed in all respects in accordance with the provisions of the laws of the Republic of Kazakhstan. (b) If, at any time, any difference or dispute arises between the Parties with respect to the meaning or effect of this Agreement or arising out of or in any way in connection with this Agreement or concerning the rights and obligations of a Party hereunder (including as to the existence, validity or termination of the Agreement), and the dispute or difference cannot be resolved amicably, then either Party shall by notice in writing submit the difference or dispute to a binding arbitration process to be conducted in accordance with the UNCITRAL Arbitration Rules, in force at that time, administered by the London Court of International Arbitration. (c) All of the Parties hereby agree to submit themselves to the jurisdiction of the arbitration tribunal and waive any right to immunity that they may otherwise have. No legal action or proceeding for enforcement of the arbitral award shall be taken by any Party before the completion of the arbitration process. (d) The arbitration, including the rendering of the award shall take place in London, England, and shall be in the English language with all hearings and conferences being interpreted into Russian. (e) The number of arbitrators shall be three (3) and each Party shall be entitled to appoint one (1) arbitrator to the three (3) member arbitration tribunal. (f) Unless the Parties agree upon a Chairman within thirty (30) days after the date on which a Party by notice in writing submits the dispute to settlement by arbitration as is provided for by Article, the President or Vice President (at the moment of application) of the London Court of International Arbitration shall appoint the Chairman arbitrator, who shall be a citizen of any country except the country where a Party is established. (g) The cost of arbitration, including attorney fees and costs, and the cost of remuneration of the arbitrators shall be borne in the manner determined by the arbitrators, as applicable. (h) The final decision of the majority of the arbitrators shall be issued in writing and shall be binding and final and shall be the sole and exclusive remedy regarding any claims, counterclaims, issues or accounting presented to the arbitrators.  Any judgment upon the award of the arbitrators may be entered in any court having jurisdiction thereof for execution. (i) The Parties agree that the final award upon the results of any court process or proceeding is final and can be executed in the compulsory order in any other country by means of a court.
ARTICLE I TERM
2.1 Effective Date
The Parties shall be bound by this Agreement from the Effective Date.
2.2 Duration
This Agreement shall, be valid for a period of 2 years and will renew automatically for an additional two-year term unless one of the parties requests a change.
2.3 Suspension and Termination
The Company may from time to time by notice to the Contractor suspend the WORK for reasons of its own.  Company’s sole obligation during the period of suspension will be to pay Contractor per the applicable rates included in the Drilling Order.
This Agreement shall terminate:
(a) Immediately if the Drilling Unit becomes a loss on the date Contractor’s insurance surveyor determines a constructive or arranged total loss to have occurred;
(b) in accordance with Paragraph 3.5(b);
(c) in accordance with Paragraph 7.6; or
(d) in accordance with Paragraph 8.a). During any suspension period all indemnities will be in full force and effect.
2.4 Continuing Obligations
The provisions of Article IX and Paragraphs 1.5, 2.4, 2.5, 8.0, 9.5, 9.6, 9.7, 10, 13.1, 13.4, and 13.9 shall survive the termination of this Agreement and the Parties shall continue to be bound thereby.
2.5 Return of Company’s Item
Upon termination of the WORK, Contractor shall return to Company at the last drilling location for the Drilling Unit under this Agreement, or at any other location as directed by Company at the Company’s sole cost, any of Company’s Items which are at the time in Contractor’s possession.  Company’s Items shall be returned by Contractor in the same condition in which they were received by Contractor, normal wear and tear excepted.
ARTICLE II CONTRACTOR’S PERSONNEL
3.1 Number, Selection, Hours of Labor and Remuneration
Except where herein otherwise provided, the number, selection, replacement, hours of labor and remuneration of Contractor’s Personnel shall be determined by the Contractor upon the requisites of the Work.  Such employees or subcontractors shall be the employees or subcontractors solely of Contractor.  Notwithstanding the foregoing, minimum manning shall be as specified in the Drilling Order, and the Contractor undertakes to provide personnel of international quality who have an appropriate technical background and experience to perform the Work and to provide Contractor’s Personnel who have certification as required by Kazakh laws.  Contractor’s Personnel shall be certified as required by Kazakh law and have work permits as so required by Kazakh law.  During duration of this Agreement, Contractor shall instruct all Contractor’s Personnel, especially in the area of safety rules and oilfield practice.
3.2 Contractor’s Representative
Contractor shall nominate one of Contractor’s Personnel in the operating area, as Contractor’s representative who shall be in charge of the remainder of Contractor’s Personnel and who shall have full authority to resolve all day-to-day matters that arise between Company and Contractor.  Contractor shall inform the Company in a written form, if such representative is replaced.  All matters that cannot be resolved by Contractor’s representative and Company’s representative will be resolved in accordance with Paragraph 1.5 of this Agreement.
3.3 Increase in Contractor’s Personnel
Company may require Contractor to increase the number of Contractor’s Personnel, subject to additional payment by the Company in accordance with the rates in the Drilling Order or as mutually agreed between the Parties.
3.4 Replacement of Contractor’s Personnel
Contractor will remove and replace at anytime any of Contractor’s Personnel within fourteen (14) days of receiving Company’s written request.  Company shall not be obliged to give reasons for any such request which shall not be made unreasonably.
ARTICLE III CONTRACTOR’S ITEMS
4.1 Obligation to Supply
Contractor shall provide Contractor’s Items and Personnel and perform the services to be performed by it in accordance with the Drilling Order.  Each of Contractor’s Items (including the Drilling Unit) shall be subject to inspection and approval of Company prior to such Items being placed into service.
4.2 Maintain Stocks
Contractor shall be responsible, at its cost, for maintaining adequate stock levels of Contractor’s Items and all spare parts as well as replenishing them as necessary to ensure efficient and safe Work.
4.3 Maintain and Repair Equipment
Contractor shall, subject to Paragraph 9.1, be responsible for the maintenance and repair of all Contractors’ Items (including the Drilling Unit) and shall provide all spare parts and materials required therefore.
4.4 Additional Items and Services
Contractor agrees and undertakes to provide additional equipment and services upon the requirement of Company.  Such additional equipment and services, not stated in the Appendices, shall be provided by the Contractor on at cost basis plus handling charges specified in Section II of the BDSO, if applicable.
ARTICLE IV CONTRACTOR’S GENERAL OBLIGATION
5.1 Contractor’s Standard of Performance
Contractor shall carry out all its operations under this Agreement on a Turnkey basis.  For purposes hereof the term “Turnkey basis” means Contractor shall furnish equipment, labor and perform services as herein provided, for a specified sum per well as per the program provided by Company and agreed by Contractor. Extra Works will be performed if required on a “Dayrate basis.”
5.2 Operation of Drilling Unit
Contractor shall be responsible for the operation of the Drilling Unit, including, supervising moving operations and positioning on drilling locations as required by Company.  Operations under this Agreement will be performed on a twenty-four (24) hour per day, seven (7) days a week basis.  Contractor covenants that the Drilling Unit (without modification, upgrade or enhancement) will operate efficiently and is physically capable of drilling wells to depths specified in this Agreement and complies fully with the technical documentation described in the Drilling Order.
5.3 Compliance with Company’s Instructions
Contractor shall comply with all instructions of Company consistent with the provisions of this Agreement, including, without limitation, drilling, well control and safety instructions.  Such instructions shall, if Contractor so requires and time permits, be confirmed in writing by the authorized representative of Company.  However, Company shall not issue any instructions which would be inconsistent with Contractor’s rules, policies or procedures pertaining to the safety of the Contractor’s Personnel, the Company’s Personnel, equipment or, the Drilling Unit, or require Contractor to exceed the capacity of the Drilling Unit.  During Turnkey operations Contractor shall have the right to direct its operations as it prefers, as long as they are in accordance with Company’s program and safe practices.
5.4 Adverse Weather
Contractor, in consultation with Company, shall decide when, in the face of impending adverse weather conditions, to institute precautionary measures in order to safeguard the well, the well equipment, the Drilling Unit and Contractor’s Personnel or Company’s Personnel to the fullest possible extent.  Contractor and Company shall each ensure that each respective senior representative will not act unreasonably in the exercise of their discretion under this Paragraph 5.4. For the purposes of this Agreement, adverse weather conditions shall not be considered a condition of Force Majeure.
5.5 Drilling Fluids and Casing Program
Contractor shall follow Company’s program with respect to the “Drilling Fluid and Casing Program” as may be specified by the Company.  Company shall provide Contractor with any such programs reasonably in advance of the spud date of each well to be drilled under this Agreement. Implementation of such programs is at Contractor’s discretion.
5.6 Difficulties During Drilling
In the event of any difficulty arising which precludes either drilling ahead under reasonably normal procedures or the performance of any other operations planned for a well, Contractor may suspend the work in progress and shall immediately notify the representative of Company both in writing and verbally of the difficulty, and during such period exert its best efforts to overcome the difficulty.
5.7 Well Control Equipment
Subject to Article IX, Contractor shall maintain its well control equipment listed in Drilling Order in good condition at all times and shall use its best efforts to prevent and control fires and blowouts and to protect the hole.
5.8 Inspection of Materials Furnished by Company
Contractor agrees to visually inspect all materials furnished by Company before using same and notify Company in writing of any apparent defects therein.  Contractor shall not be liable for any loss or damage resulting from the use of materials furnished by Company.
5.9 Cutting/Coring Program
If required, Contractor shall save and identify cuttings and cores according to Company’s instructions and place them in containers furnished by the Company.
5.10 Drilling Reports and Records
The Contractor shall maintain all statutory, regulatory and any other required records of its operations under the Agreement and shall at all times provide the Company with such data and information, including copies of any documents, as will permit the Company to comply with applicable statutory or other reporting obligations. Without prejudice to the generality of the foregoing, the Contractor shall keep and furnish to the Company a daily drilling report showing the relevant information in respect to hole sizes and depth for each hole section encountered in the Work and the formations penetrated, and shall prepare reports and records as requested including but not limited to a weekly BOP checklist, trip sheets and kick control sheets, and notify the Company immediately when any oil or gas-bearing formation is encountered and, if requested by the Company, save and prepare clean samples of formations drilled. & nbsp;The drilling report shall be made in the IADC-API Daily Drilling Report Form or other form acceptable to Company and the Contractor hereby agrees to comply in all respects with the Company’s reporting requirements. The Company shall at all times have complete access to all records and such other data as may be compiled by the Contractor relating to the Work.  All such data and records shall, upon request, be delivered by the Contractor to the Company and shall belong exclusively to the Company.
ARTICLE V COMPANY’S RIGHTS AND OBLIGATIONS
6.1 Equipment and Personnel
Company shall at its cost provide Company’s Items and Company’s Personnel and perform the services to be provided or performed by it according to the Drilling Order.  In addition to providing the initial supply of Company’s Items, Company shall be responsible, at its cost, for maintaining adequate stock levels and replenishing as necessary.  When, at Company’s request and with Contractor’s agreement, the Contractor furnishes or subcontracts for certain items which Company is required herein to provide, for purposes of this Agreement said items or services shall be deemed to be Company’s Items, and Company shall not be relieved of any of its liabilities in connection therewith.  For furnishing said items and services, Company shall reimburse Contractor its entire cost plus a handling charge as specified in the Drilling Order.
6.2 Not used
6.3 Company’s Employees
Company shall designate a drilling supervisor who will be present at the drill site to monitor the Turnkey operations and resolve day-to-day matters requiring decision by Company.  Company shall inform the Contractor in a written form, in case such representative is replaced.  Company’s drilling supervisor shall at all times have access to the Drilling Unit and may, among other things, observe tests, check and control the implementation of the mud program, examine cuttings and cores, inspect the Work or examine the records kept on the Drilling Unit by Contractor.
6.4 Drilling Site and Access
Company shall be responsible for providing access to the drilling location, as well as selecting, surveying, marking and clearing the drilling locations as may be reasonably required by Contractor for location approval.  Contractor shall obtain and provide all required certificates, Drilling Unit and expatriate personnel permits and licenses required for the drilling operations and Drilling Unit hereunder.  Company shall notify Contractor of any impediments or hazards to operations at each drilling location or at any access routes to the drilling locations of which it has actual knowledge.  Notwithstanding any other provision of this Agreement, should there be obstructions at or within the area of the drill site and these obstructions result in damage to any of Contractor’s Items, including the Drilling Unit, Company shall be responsible for and hold harmless and indemnify Contractor for all resulting direct damage, including the payment of the applicable Standby Rate during repairs, but Company shall receive credit for any physical damage insurance proceeds received by Contractor as a result of such damage.
6.5 Custom or Excise Duties, Taxes and Fees
a) Contractor, with Company’s assistance, shall be responsible for clearing customs of the drilling unit and for the importation by Contractor of subsequent items in the country in which the Operating Area is located.  Thereafter the Contractor will be responsible for the importation of any subsequent Contractor’s items into the operating area including but not limited to spare parts, consumables, auxiliary equipment and chemicals for operation of the drilling rig.
b) Notwithstanding any of the foregoing, Contractor shall pay all taxes that may be assessed by the Republic of Kazakhstan against Contractor as a result of the performance of this Agreement inclusive of the payroll taxes for its personnel as may arise in conducting Contractor’s business.
c) Rig moving equipment, personnel and other services required by the Contractor for customs clearance of the drilling unit, as well as registration in the Republic of Kazakhstan, obtaining required permits of any nature, permissions and licenses are for the Contractor’s account.
6.6 Take Over of Work
In the event any well drilled under this Agreement should blow out, catch fire or in any manner get out of control, Company may assume complete control and supervision of the Work of bringing the well under control, putting out the fire and take such other measures as Company deems appropriate.  If Contractor is insolvent, or is on the verge of becoming insolvent, Company may take over and continue the Work on the well to completion or abandonment.  In this context, Contractor will be deemed to be insolvent, or on the verge of becoming insolvent, if a reasonable basis exists for Company to believe that Contractor is unable, or with the passage of time alone will be unable, to pay its bills or discharge its financial obligations as they come due. If at any time in Company’s opinion, Contractor is failing to conduct its operations under this Agreement in a diligent, prudent, skillful and workmanlik e manner and in all respects in strict accordance with all applicable laws and with accepted good oil field practices, standards, methods and such failure continues for a period of ten (10) days (or in the event such failure results in a significant safety hazard, if such failure continues for 96 hours) after written notice from Company to Contractor, Company may take over and continue the Work on the well to completion or abandonment.  In the event Company takes over the Work pursuant to this Paragraph 6.6, Company shall have full use of Contractor’s Drilling Unit and other equipment, facilities, material, supplies and personnel at the well location, which Contractor shall continue to insure in accordance with this Agreement, and Contractor shall continue to be paid the applicable day rates provided for in this Agreement. During any such take over period the indemnities given by Contractor to Company under this Agreement shall be suspended, excluding the due indemnifications until such time and Co ntractor shall have no responsibility to Company under such circumstances.   When such take over period has ended, Company shall return the Drilling Unit and all of Contractor’s Items to Contractor in as good conditions as when the take over began, normal wear and tear excepted.
Notwithstanding the above, both Parties hereby recognize the right of the Government of the Republic of Kazakhstan to assume control of the well in the event of an emergency situation.
6.7 Company’s Well Program
Company shall provide Contractor with a well drilling program or programs for the Turnkey operations, which shall include, but not be limited to hole sizes, casing program, mud control program and Company’s deviation policy.  Company may modify these programs while drilling is in progress using a Variation Order (VO) Form that would identify the changes in Work and costs.  The VO shall be signed by both parties before the Work is performed.
ARTICLE I RATES OF PAYMENT
7.1 Payment
Company shall pay to Contractor during the term of this Agreement the amounts due on a well basis for the Turnkey services and on a monthly basis for any Extra Works or, in the event that the duration of a well is less than 1 month, following each well. Extra Works shall be calculated to the nearest half hour according to the rates of payment herein set forth in accordance with Article VIII for dayrate works and as specified in the Drilling Order.  No other payment shall be due from Company unless specifically provided for in this Agreement, or agreed to in writing by the Parties.
7.2 Mobilization/Demobilization Fee
(a) Company shall pay Contractor for the shipment of the Drilling Unit to the initial drilling location the Mobilization Fee specified in the Drilling Order (the “Mobilization Fee”) at the Commencement Date.  This fee covers cost of moving drilling unit and mobilizing personnel from its current location to the Operating Area, including the period until the Commencement Date as defined in Section 1.1(a).
(b) Company shall pay Contractor a Demobilization Fee as specified in the Drilling Order to cover all Contractor’s costs of demobilizing the Drilling Unit. Company  shall have no further demobilization obligations other than the payment of the Demobilization Fee.
7.3    Turnkey Operations
The Turnkey Operations and Extra Works will become payable as specified in the Drilling Order and Article VIII of this Contract. Also additional services will be payable in accordance with Paragraph 7.10 of this Agreement and proper Variation Order for such services.
7.4     Operating Rate
Except when some other rate provided in the Drilling Order applies, in particular during Turnkey operations, the Operating Rate will be payable during the term of this Agreement.  However the Company shall not continue to pay the Operating Rate in the case that the Republic of Kazakhstan Technical Inspection Board shuts the Drilling Unit for safety or similar reasons.  Also additional services will be payable in accordance with Paragraph 7.10 of this Agreement and proper side agreement for such services.
7.5  Standby Rate With Crews
Except during Turnkey operations, the Standby Rate With Crews specified in the Drilling Order will be payable as follows:
(a) during any period of delay when Contractor is unable to perform its obligations under this Agreement because of adverse weather conditions or as a direct result of an act, instructions or omission of Company including, without limitation, the failure of any of Company’s Items, or the failure of Company to issue instructions, provide Company Items or furnish services;
(b) during any period when operations are being conducted herein under to re-drill or repair any well drilled hereunder which is lost or damaged as a result of Company’s sole negligence; and
(c) during any period when operations are suspended or are being conducted due to difficulties encountered as provided for in Paragraph 5.6.
(d) during any period after the Commencement Date that the Drilling Unit is undergoing periodic inspections required for the maintenance of any Certification or Classification Certificates.  If the delay is of such length that the drilling crew is demobilized, the Standby Rate Without Crew provided in Paragraph 7.9 shall apply from such date of demobilization.
(e) during any period when Company has no immediate work and Contractor agrees at Companies request not to demobilize the Drilling Unit, but only until the date the drilling crew has been demobilized.
(f) other times as may be specifically provided in this Agreement.
7.6   Rate During Repair
Except during Turnkey operations, the Repair Rate specified in the Drilling Order will be payable during the first twenty-four (24) hours per month during which operations are suspended to permit necessary replacement, inspection, repair of maintenance of Contractor’s Items. Routine maintenance such as lubrication, packing of swivels, changing of pump parts, slipping lines, drill string and certification inspections, shall not be considered as maintenance for purposes of this Paragraph.  Contractor will use due diligence in effecting such repairs, replacements or maintenance in a good and workmanlike manner and will use its best efforts to familiarize itself with the location of rental replacements for Contractor’s Items.
7.7   Force Majeure Rate
The Force Majeure Rates specified in the Drilling Order will be payable during any period in which operations are not being carried on because of Force Majeure as defined in Paragraph 13.3, including periods required to repair damage caused by a Force Majeure event.  However, should an event of Force Majeure continue in existence for a period of thirty (30) days, then no day rate shall be payable for the period after such thirty (30) days and either Contractor or Company shall have the right to terminate this Agreement at any time thereafter by providing written notice to the other party.
7.8    Moving Rate
Contractor shall be paid a Moving Lump Sum amounts as per the Drilling Order for the move of the Drilling Unit from Aktau to Atyrau fields. Moving amounts for each move of the Drilling Unit from one well to another are included in the Turnkey prices, as per the Drilling Order.
7.9    Standby Rate Without Crews
Except during Turnkey operations, the Standby Rate Without Crews shall be the rate so stated in the Drilling Order.  The Standby Rate Without Crews will be payable when:
(a) during any period after the Commencement Date that the Drilling Unit is undergoing periodic inspections required for the maintenance of any Certification or Classification Certificates, but only from the date the drilling crew has been demobilized;
(b) during any period when operations are suspended to repair the Drilling Unit or other Contractor’s Items due to blow out, fire, cratering, shifting or punch through at a drilling location, obstacles or obstructions or the consequences thereof, but only from the date the drilling crew has been demobilized.
(c)   during any period when Company has no immediate work and Contractor agrees at Companies request not to demobilize the Drilling Unit, but only from the date the drilling crew has been demobilized. (d) during other periods as specified in the Agreement.
7.10 Additional Equipment, Services and Tools Rental Rates
(a) As specified in Section IV, Contractor shall provide fishing tools that are included in the Daily Rates.
(b) Any other additional services will be provided by Contractor under requirement of Company.  The daily rate for additional services will be provided according to the proper side agreements for such services.
ARTICLE VIII PAYMENTS
a) Invoice Currency and Payment
Contractor shall prepare invoices for each Turnkey well covering the Services performed in accordance with the Rates contained in this Agreement.  Company will make payment to Contractor of 20% of total invoice amount for a completed well, VAT charged to the total amount of invoice, and any amounts under Variation Order 30 days after receipt of an uncontested invoice in currency as specified in  Article 1.2 hereof.  The remaining 80% of the invoice amount will    be paid within 365 days after receipt of such invoice at the terms specified in the Convertible Debenture, dated 19 April 2005, issued by Big Sky Energy Corporation, a parent company of the Company, as security for fulfillment by the Company of its payment obligations hereunder.  Contractor shall have the right, upon ten (10) days prior written notice, to terminate this Agreement if Company refuse s to pay undisputed amounts due and owing to Contractor.  Such termination by Contractor shall not change Company’s obligation to pay contractor any amounts of money already due, as well as the appropriate demobilization fee under this Agreement.
Contractor shall bill Company at the end of each well, for all daily charges and other charges earned by Contractor for such well.  Billings for daily charges will reflect details of the time spent (calculated to the nearest half hour) and the rate charged for that time.  Billings for other charges will be accompanied by invoices and other documentation supporting costs incurred for Company.
Company shall make such payment to the Bank and the account number shown in the Drilling Order hereto and on the invoice.  All payments shall be made according to Article 1.2 hereof.  In case of payment delay Company shall pay interest at the rate of one-half percent (0.5%) per day to a maximum of 5% of the value of the unpaid value and such interest charges shall continue until the amount including such interest is paid in full.
In the event of disagreements regarding invoice or incorrect completion of invoice which are not in compliance with the requirements of current tax legislation, the invoice shall be returned without payment until disagreement is resolved or invoice is completed correctly.
Company shall immediately inform Contractor of any questions or differences, and Company and Contractor shall take reasonable steps to settle the dispute.
After satisfactorily resolving the disputed part of the invoice, Contractor shall re-invoice Company the mutually agreed upon and formerly disputed amount.
All invoices must be forwarded to the following address to ensure prompt payment:
Kozhan LLP Dostyk Prospect, Bld. 132, Office 3, Almaty 50051 Republic of Kazakhstan Tel.: +7 (3272) 628 398 Fax:  + 7(3272) 628 399
Company is not responsible for and shall not pay a penalty to Contractor in the event of failure to pay on time due to incorrect completion of invoices.
b) Bank Fees
All expenses and commissions payable to the Contractor’s Bank in connection with fulfilling of this Agreement shall be paid by Contractor while those expenses to the Company's Bank shall be paid by Company.
c) Tax
All Contractor's prices are exclusive of any taxes, value added tax (VAT), excise, sales or use taxes, or taxes of a similar nature which may lawfully be imposed in performing this Agreement.  The amount of any such taxes for which Contractor may be legally liable (including VAT, etc.) shall be added to the payment required to be made and shall be paid by Company pursuant to the terms of Contractor's invoice.  In the event Company fails to pay such taxes (including VAT) Company shall indemnify Contractor from and against any fines, penalties, or late payment interest imposed by the Government of Territory. Company's obligation to pay or indemnify Contractor for such taxes (including VAT) shall apply regardless of any tax exemption (including VAT) claimed by Company for its foreign investors.  However, for the avoida nce of doubt, the Company shall not be responsible for any profit taxes levied on the income of Contractor or its employees.  Company shall not be obligated to reimburse Contractor for any taxes, duties or other charges imposed upon either the household goods or personal effects of Contractor personnel provided under this Agreement.  Contractor shall pay any tax or assessment levied on the income earned by Contractor's employees.
In case of any changes in or to the application or interpretation of the fiscal system of the Republic of Kazakhstan, or any political subdivision thereof, after the date the Agreement signing and where the said change has an economic impact on the Contractor, its employees, its Subcontractors, regardless of tier and the employees of its subcontractors, Company and Contractor shall meet in good faith so that Contractor, its employees, its Subcontractors regardless of tier, and the employees of its subcontractors, does not lose or benefit as a result thereof.
d) Form of Invoice
Contractor shall attach a completed Work Acceptance Act (WAA) signed by Company.  The WAA must contain the appropriate Company charge code.  Contractor shall indicate on the invoice the number of this Agreement and Tax Registration Number, series and number of VAT Registration Certificate, if it is a taxpayer, pursuant to the current tax legislation of the Republic of Kazakhstan.
i) All the invoices shall be numbered clearly, each with an individual number, for the purpose of identification and references to them.
ii) Each invoice shall be dated, and the date on the invoice shall precede the date of receipt of the invoice by Company.
iii) Each invoice shall have reference to the number of this Agreement.
e) Right to Audit
Contractor and its subcontractors shall maintain true and complete records in connection with the Services and all transactions related thereto and shall retain all such records for at least twenty-four (24) months after the end of the calendar year in which the Services are performed. In the event costs are to be reimbursed under this Agreement, Company may from time to time and at any time during the foregoing period of record retention make an audit of all records of Contractor and its subcontractors.
f) Over Payment by Company
Company shall have the right to offset any amount owed Company by Contractor against any payment or payments owed Contractor by Company.  In the event of any overpayment by Company to Contractor under this Agreement, upon notice from Company, Contractor shall refund the overpayment to Company by interbank wire transfer to such bank account as Company may specify to Contractor in writing, or if directed by Company, issue to Company a credit memo with respect to money owed to Company by Contractor.  In addition to any other right or remedy of Company provided anywhere in this Agreement or any Exhibit to this Agreement, company shall have the right at all times, and from time to time, to deduct any or all money owed Company by Contractor under this Agreement from any money owed Contractor by Company under this Agreement or any other agreement between Company and Contractor.  The issuing of such credit memo or the failure of Company to request a refund of the overpayment or the issuing of a credit memo or the failure of Company to make any such deduction shall not in any way prejudice or diminish Company’s claim with respect to such money due Company nor shall any deduction by Company of less that the amount owed Company at the time the deduction is made, constitute an accord and satisfaction or a release of claim or waiver of entitlement with respect to the entire amount of money owed to Company by Contractor.
g) Contractor Holdback
Contractor represents that it shall pay its subcontractors in a timely manner and in accordance with contracts between them for work performed.  In the event Company receives a bona fide complaint from any of Contractor’s sub-contractors to the effect that Contractor has not paid in a timely manner, except for cause attributable to sub-contractors non-performance, then Company reserves the right to withhold 20% (twenty percent) of all disbursements payable to Contractor under this Agreement in lieu of WORK performed by subcontractors of Contractor.  At such time Contractor provides documentation in the form of a declaration, signed by both the Contractor and the subcontractor, evidencing the payment in full of sub-contractors invoices, Company will pay the 20% holdback within seven (7) calendar days. & nbsp;Contractor shall make written representation that all of his sub-contractors are paid prior to HKM making final demobilization payments.
h) Contractor Responsibility
Contractor shall be responsible at Contractor’s expense for payment of salaries, wages, other remuneration or benefits (including taxes related thereto), engagement and employment of its personnel, transportation, accommodation and subsistence, and generally all matters concerning Contractor’s personnel, unless otherwise specifically provided for in this Agreement.
Contractor shall be responsible at its own expense for all medical services for its personnel, including med-evac, foreign hospitalization, and repatriation, and routine and emergency coverage. In the event of emergency evacuation attended by Company (which shall include Company’s subcontractor), Company reserves the right to recover the cost of such care by set-off against Contractor invoices.  Contractor shall, upon Company request, provide evidence that it has insurance of the type and in the amounts sufficient, in Company’s opinion, to cover Contractor’s responsibility as set out in this paragraph. Contractor and Company shall co-operate to develop a policy of handling any incidents, the objective of which shall be to provide medical care as quickly as possible in the most cost efficient manner.
ARTICLE IX LIABILITY
9.1    Equipment or Property
Except as specifically provided herein to the contrary, each Party hereto shall at all times be responsible for and hold harmless and indemnify the other Party from and against damage to or loss of its own and its subcontractor’s equipment or property. Except to the extent that the proceeds from Contractor’s insurance as made available to Contractor do not compensate Contractor therefore, Company shall be responsible for and shall hold harmless and indemnify Contractor for loss or destruction of or damage to Contractor’s drill pipe, drill collars, subs, reamers, bumper subs, stabilizers and other in-hole equipment when such equipment is being used in the hole below the rotary table, normal wear excepted.  Abnormal wear and/or damage for which Company shall be responsible hereunder shall include, but not be limited to, wear and/or damage resulting from the presence of H2S or other corrosive elements in the hole including those introduced into the drilling fluid, excessive wear caused by sand cutting, damage resulting from excessive or uncontrolled pressure such as those encountered during testing, blow-out, or in a well out of control, excessive deviation of the hole from vertical, dog-leg severity, fishing, cementing or testing operations, and from any unusual drilling practices employed at Company’s request.  Company’s responsibility for such abnormal wear and/or damage as referred to herein shall include abnormal wear and/or damage to Contractor’s choke hoses and manifolds, blowout prevention and other appurtenant equipment.  Company shall pay the cost of repairing damaged equipment if repairable.  In the case of equipment lost, destroyed or damaged beyond repair, Company shall reimburse Contractor an amount equal to the then current replacement cost of such equipment delivered to the Drilling Unit.
9.2    The Hole
In the event a hole is lost or damaged from causes other than the gross negligence of Contractor, Company shall be responsible for and hold harmless and indemnify Contractor from such damage to or loss of the hole, including all down hole property therein.
9.3    Contractor’s Personnel
Contractor shall be responsible for and hold harmless and indemnify Company from and against all claims, demands and causes of action of every kind and character arising in connection herewith in favor of Contractor’s employees, or Contractor’s subcontractors or their employees, or Contractor’s invitees, on account of bodily injury, death or damage to property.
9.4     Company’s Personnel
Company shall be responsible for and hold harmless and indemnify Contractor from and against all claims, demands, and causes of action of every kind and character arising in connection herewith in favor of Company’s employees, or Company’s other contractors (excluding Contractor hereunder) or their employees, or Company’s invitees, on account of bodily injury, death or damage to property.
9.5 Health and Safety and Environmental Protection
(a) The Contractor shall comply with all relevant and existing legislation of the Republic of Kazakhstan and that of Company (attached hereto as Exhibit “A” Health, Safety and Environment), relating to health, noise, fire, safety and environmental protection and take adequate and effective precautions therefore throughout the performance of the Work in order to protect the Work, the Contractors personnel, the general public, all other persons, the project property and the property of third parties and to avoid or reduce to a minimum any inconvenience to the public.  In the event of conflict between the HSE Legislation of the Republic of Kazakhstan and that of Company, the most severe thereof shall apply.
(b) The Contractor shall draw up all necessary health, fire, safety and environmental protection policies and procedures issued or required by the relevant and competent authorities and shall issue and ensure that the Contractor’s personnel are notified of and comply with all applicable policies, procedures, rules, regulations and precautions issued by the relevant and competent authorities and the Contractor.
(c) The Contractor shall ensure that their Safety Policy complies with existing Legislation in the Republic of Kazakhstan and conforms with the Company’s current statement of policy on Health, Safety and Environment as set out in Exhibit “A” and that its other policies and procedures referred to in Clause (b) are compatible with the Company’s other current policies and procedures applicable to any part of the Work of which the Contractor has been notified (copies of which are available upon request). If there is any conflict the Contractor shall submit the differences for resolution by the Company prior to the commencement of such part of the Work.
(d) The Contractor shall, upon request by the Company, submit to the Company a copy of all the Contractor’s policies, procedures and other matters concerning health, fire, safety and environmental protection in so far as they relate to the Work. Without prejudice to the Contractor’s obligations under Clause (c) hereof the Company reserves the right, at any time and from time to time to reasonably require amendments to the same.
(e) The Contractor shall allow the Company access to the site, the resources and records, when requested, to enable the Company to satisfy itself that the requirements of this Clause 9.5 have been or are being met, including but not limited to:
(i) ensure that the Contractor is carrying out its responsibilities under its Safety Policy and existing legislation  of the Republic of Kazakhstan;
(ii) ensure that the Contractor’s Safety Policy complies with Clause (c); and
(iii) record if required, independent investigations into any incident relating to the Agreement.
(f) The Contractor shall supply or shall ensure the supply to the Contractor’s personnel of adequate safety equipment and clothing which shall include but not be limited to safety helmets, safety (steel-capped) footwear, ear defenders, goggles, all of which clothing shall be to the Kazakh Standards. The Contractor shall be deemed to have included in the Agreement Price for the cost and expense for the provision, maintenance and, where necessary, the replacement of all safety equipment and clothing, and at Contractor’s option identification tags which provide emergency medical contact numbers and other critical information.
(g) The Contractor shall ensure that the Contractor’s personnel are:
(i) medically, physically and mentally fit to carry out the duties required of them;
(ii) sufficiently competent, qualified and experienced and trained.
(h) All costs and expenses associated therewith shall be deemed to have been included in the Agreement Price, including the costs of all medical services at the work site.
(i) The Contractor shall provide at each location of the site where the WORK is to be performed suitable first-aid and medical facilities in compliance with existing legislation of the Republic of Kazakhstan and the Agreement.
(j)  The Contractor shall use the best practicable means to prevent noxious or offensive emissions (including noise) or pollutants while in the course of executing the WORK and shall monitor and render harmless and inoffensive such emissions that cannot be prevented.
(k) The Contractor shall carry out such tests and examinations of Contractor supplied materials as may be necessary to ensure the health and safety of anyone who is or is likely to come into contact with or otherwise be affected by the use of such items.
(l) The Contractor shall ensure that no alcohol, drugs or medicines which impair a person’s mobility or performance is present at the site (save where necessary for the purpose of compliance with Clause 9.5 (i) and then only for that purpose) or consumed by any of the Contractor’s personnel while engaged in the performance of the WORK.
(m) The Contractor shall not treat, keep or dispose of any waste produced by the Contractor as a result of the Work in a manner likely to cause harm to the health and safety of any person or harm to the environment and shall comply with existing legislation of the Republic of Kazakhstan.
The Company’s personnel shall comply with the HSE requirements of the Republic of Kazakhstan
9.6 Pollution and Contamination
Notwithstanding anything to the contrary contained herein, the responsibility for pollution or contamination shall be as follows:
(a) Contractor shall be responsible for and hold harmless and indemnify Company for control and removal of pollution or contamination which originates above the surface of the ground, including, without limitation, from spills of fuels, lubricants, motor oils, water base drilling fluid and attendant cuttings, pipe dope, paints, solvents, ballast, bilge and garbage in Contractor’s possession and control.
(b) Company shall be responsible for and hold harmless and indemnify Contractor against all claims, demands, and causes of action of every kind and character (including control and removal of the pollutant involved) arising directly from all pollution or contamination, other than that described in Paragraph 9.6 (a), which may occur from any other reason than the negligence of Contractor or as a result of operations hereunder, including, but not limited to, that which may result from fire, blow-out, cratering, seepage or any other uncontrolled flow of oil, gas, water or other substance, as well as the use or disposition of lost circulation and fish recovery materials and fluids, oil emulsion, oil base or chemically treated drilling fluids other than water base drilling fluid.
(c) In the event a third party commits an act or omission which results in pollution or contamination for which either the Contractor or Company for whom such Party is performing work is held to be legally liable, the responsibility therefore shall be considered, as between the Contractor and Company, to be the same as if the Party for whom the work was performed had performed the same and all of the obligations and limitations set forth in Paragraphs 9.6 (a) and (b), shall be specifically applied.
9.7    Debris Removal and Cost of Control
Company shall be responsible for and hold harmless and indemnify Contractor for the cost of removal of debris including the Drilling Unit, Contractor shall also be responsible for and hold harmless and indemnify Company for the cost of regaining control of any wild well to the limit of its insurance coverage, unless caused by negligence of the Contractor, in which case the Contractor is fully responsible.
9.8    Underground Damage
Company shall be responsible for and hold harmless and indemnify Contractor for any and all claims resulting from operations under this Agreement on account of injury to, destruction of, or loss or impairment of production or any property right in or to oil, gas or other mineral substance or water, if at the time of the act or omission causing such injury, destruction, loss or impairment, said substance had not been reduced to physical possession above the earth’s surface, and for any loss or damage to any formation, strata, or reservoir beneath the earth’s surface.
9.9    Consequential Damages
Neither Party shall be liable to the other for, and each Party shall hold harmless and indemnify the other against, real, indirect or consequential damages resulting from or arising out of this Agreement, including without limitation, loss of profits, loss of use or business interruptions, however same may be caused; provided however, the forgoing limitations shall not apply to any Party that breaches this Agreement due to gross negligence.
9.10 Indemnity Obligation
(a) The Parties intend and agree that the phrase “be responsible for and hold harmless and indemnify” in Paragraphs 6.5 and this Article IX mean that the indemnifying Party shall indemnify, hold harmless and defend (including payment of reasonable attorney’s fees and costs of litigation) the indemnified Party from and against any and all claims, demands, causes of action, damages, judgments and awards of any kind or character, without limit and without regard to the cause or causes thereof, including pre-existing conditions, whether such conditions be patent or latent, breach of warranty (express or implied), strict liability, or the negligence of any person or persons, including that of the indemnified Party, whether such negligence be sole, joint or concurrent, active or passive.
(b) The indemnifying Party’s obligations contained in this Agreement shall also extend to the indemnified Party and its Affiliated Companies and the officers, directors, employees, agents, owners, shareholders and insurers of each and to actions in rem or in personam.
(c) The terms and provisions of Paragraphs 6.5 and this Article IX shall have no application to claims or causes of action asserted against Company or Contractor by reason of any agreement of indemnity with a person or entity not a party hereto.
ARTICLE X INSURANCE
(a) Contractor shall at its own cost and expense, effect and maintain the following insurance in respect of its liabilities pursuant to this Agreement as follows with waivers of subrogation in favour of Company:
(i) Employer’s Liability insurance subject to Law of the Republic of Kazakhstan “On Safety at Work” dated 22 January 1993.  The Employer’s Liability insurance shall have a limit of one million US Dollars ($1,000,000 USD) per occurrence; and
(ii) Comprehensive General Liability insurance with contractual liability, products and completed operations and broad form property damage coverage included, providing for a combination single limit of two million ($ 2,000,000) USD for personal injury, death or property damage resulting from each occurrence and covering all of Contractor’s operations under this Contract.  The aforesaid insurance shall cover, but not be limited to loss or damage to the Contractor’s Equipment and Personnel.
(iii) Umbrella Liability insurance coverage in excess of the primary coverage with the limit of no less than four million ($4,000,000) US dollars per occurrence including all areas involved in operations under this contract (including Blow out and pollution control).
(b) Before commencing the WORK, Contractor shall provide Company with certificates or other documentary evidence of the insurance, which is satisfactory to Company from an insurance company, which is satisfactory to Company. Insurance certificates provided to Company must state policy coverage, policy limits, policy deductibles, evidence that waivers of subrogation are in place and named indemnities. Upon request, Contractor shall provide copies of insurance policies required pursuant to this Agreement.
(c) Contractor shall be solely responsible for ensuring that its sub-contractors are adequately insured to provide services under this Agreement and additionally provide that both Company and Contractor are included as additional insured’s.
ARTICLE XI SUBLETTING AND ASSIGMENT
11.1   Subcontracts
Company may employ other contractors to perform any of the operations or services to be provided or performed by it. Contractor may employ other contractors to perform any of the operations or services to be provided or performed by it with the prior written consent of Company.  Use of subcontractors by Contractor shall not relieve Contractor from any liability or obligation under this Agreement.
11.2   Assignment
Neither Party may assign this Agreement to anyone without the prior written consent of the other Party, and prompt written notice of any such intent to assign shall be given to the other Party. In the event of such assignment, the assigning Party shall remain liable to the other Party as a guarantor of the performance by the assignee of the terms of this Agreement.  If any assignment by Company is made that increases Contractors’ financial burden, except for any assignment by Contractor, Contractors’ compensation shall be adjusted to give effect to any increase in Contractors’ operating costs or taxes.
ARTICLE XII NOTICES
(a) All notices to Parties regarding this Agreement shall be presented in writing, as set out in and sent at legal addresses for services of the parties.
(b) Any party may change its legal address, giving written notice to the other party 5 days after the change.
(c) Notices may be hand delivered personally, sent by fax or by registered mail. Notices under this Agreement shall be considered to be received on the date on actual receipt by the receiving party. Notices sent by electronic mail shall not be recognized. Notices with regards to this Agreement shall be deemed to be delivered upon receipt of receiving Party.
ARTICLE XIII GENERAL
13.1 CONFIDENTIALITY AND PUBLICITY
Confidential Information
Contractor agrees and acknowledges that while providing WORK, Contractor has access to and obtains confidential information owned by Company, therefore Contractor agrees:
a) not to use such information for Contractor's benefit or any third party's benefit, not to get compensation by direct or indirect payments from any third party for use of this information;
b) to keep all information related to WORK and results from WORK strictly confidential;
c) not to circulate, not to divulge and not to provide access to any information related to WORK or results from WORK to any individuals, unless Company considers these individuals' access to such information necessary for providing WORK by Contractor;
d) to take all reasonable precautions required to prevent divulgence of such information by Contractor's personnel, officials, directors, employees and agents to any other individuals except for those who is authorized to have access to such information according to the provisions of this Article. Contractor shall bear the responsibility for violation of the provisions of this Article by any member of the personnel, official, director, employee or agent;
e) In the event of violation of any of sub-clauses from a) to d) inclusive of this Article XIII, Contractor shall bear responsibility according to the legislation of the Republic of Kazakhstan.
Publicity
The Contractor shall not publish or permit to be published any pictorial, written, oral or other information relating to the Agreement, the Work, the performance thereof or the activities of the Company without the Company’s written consent.  Such consent shall be given (if at all) separately in relation to each specific Contractor’s application therefor and shall apply only to that application.  The accuracy of any information released by the Contractor and not supplied directly by the Company is the absolute responsibility of the Contractor.
13.2   Attorney’s Fees
If this Agreement is placed in the hands of attorney for collection of any sums due hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or arbitration proceedings, then the winning Party shall be entitled to recover reasonable attorney’s fees and costs.
13.3   Force Majeure
Except as otherwise provided in this Paragraph 13.4, each Party to this Agreement shall be excused from complying with the terms of this Agreement, except for the payment of monies when due and the honoring of indemnities, if and for so long as such compliance is hindered or prevented by changes to any general or local Statute, Ordinance, Decree, or other Law or any regulation or by-law of any local or other duly constituted authority or the introduction of any such Statute, Ordinance, Decree, Law, regulation or by-law or reversal of a previously issued regulation, by-law or permit or other form of government restraint which shall render services undeliverable, and the following riots, strikes, wars (declared or undeclared), insurrection, rebellions, terrorist acts, civil disturbances, dispositions or order or injunctions of any governmental authority, whether such authority be actual or assumed, acts of God, inability to obtain equipment, supplies or fuel, or by any act or cause (other than financial distress or inability to pay debts when due) which is reasonably beyond the control of such Party, such cause being herein sometimes called “Force Majeure.”  In the event that either Party hereto is rendered unable, wholly or in part, by any of these causes to carry out its obligations under this Agreement, such Party shall give notice and details of Force Majeure in writing to the other Party as promptly as possible after occurrence.  In such cases, the obligations of the Party giving notice shall be suspended during the continuance of any inability so caused except that Company shall be obliged to pay to Contractor the Force Majeure Rate provided for in Paragraph 7.6.
13.4   Compliance with Laws
Each Party hereto agrees that all conventions, treaties, laws, statutes, rules, regulations and ordinances, of any foreign, federal, state or local government or quasi-governmental authority which are now or may become applicable to that Party’s operations covered by or arising out of the performance of this Agreement will apply.  In the event any provision of this Agreement is inconsistent with or contrary to any applicable treaty law, rule, regulation or ordinance, said provision shall be modified to the extent required to comply with said treaty law, rule, regulation or ordinance upon mutual signing of the Parties, and as so modified said provision and this Agreement shall continue is full force and effect.  If any act or omission by Contractor in response to Company’s explicit instruction violates such law, Company shall indemnify Contractor for any consequences thereof.  In no even t however, will either Contractor or Company be requested or required to violate any treaty law, rule, regulation or ordinance of their respective countries of incorporation or organization.
13.5   Waivers
It is fully understood and agreed that none of the requirements of this Agreement shall be considered as waived by either Party unless the same is done by writing, and then only by the persons executing this Agreement, or other duly authorized agent or representative of the Party.
13.6   Entire Agreement
This Agreement supersedes and replaces any oral or written communications heretofore made between the Parties relating to the subject matter hereof.
13.7   Inurement
This Agreement shall inure to the benefit of and be binding upon the successors and assignees of the Company and Contractor.
13.8 Labor Practices/Health and Safety Guidelines
Contractor shall not take any actions to prevent its employees from lawfully exercising their right of association and their right to organize and bargain collectively.  Contractor shall not  interfere with or coerce any of its employees on the basis of trade union activities or membership.  Contractor shall not take any action on the basis of such activities or membership which may result in the termination, suspension, demotion, or transfer of said employee. Contractor shall perform all Work in accordance with occupational health and safety standards that meet or exceed the World Bank Environment, Health and Safety Guidelines for Onshore Oil and Gas Development, dated May 12, 1994 (“World Bank Guidelines”). Contractor shall allow its employees to avoid or remove themselves from dangerous work situations without jeopardy to continued employment. Contractor shall observe applicab le laws relating to a minimum age for employment of children, acceptable conditions of work with respect to minimum wages, hours of work, and occupational health and safety, and not to use forced labor.
13.9 Environmental Compliance
Contractor represents and covenants that the Work shall be performed in compliance, in all material respects, with the more stringent of the regulations of the Republic of Kazakhstan or the World Bank Guidelines.
13.10 Valuation of Contractor’s Equipment
The Contractor’s Drilling Unit and equipment valuation is as included in the Drilling Order to this Agreement.
13.11 Illegal Drugs, Alcohol and Firearms Policy
a) No illegal drugs, controlled substances, intoxicating beverages, firearms, weapons, or hazardous substances or articles are allowed on Company’s premises or workplace or on lands that are contiguous thereto, controlled or operated by Company.
b) No person under the influence of drugs, controlled substances or intoxicating beverages will be allowed on Company property or on lands contiguous thereto, controlled or operated by Company.
c) Non compliance with any of the specific terms and conditions of this Article will result in violators being permanently barred from all Company facilities.  This is a no tolerance policy.
d) Without prior announcement, and at any time, Company may carry out reasonable searches of individuals and their personal effects when entering Company premises, while on Company premises, engaged in Company business, or operating Company equipment.  Entry onto Company premises constitutes consent to search of the person and his/her personal effects, including, without limitation, packages, briefcases, purses, lunch boxes and vehicles, or any office locker, closet or desk.  Refusal to cooperate shall be cause for not allowing that individual on Company premises.
.1 SEVERABILITY
If any part of the Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, the remainder of the Agreement shall not be affected and every part of the Agreement shall be severable and separately valid and enforceable.
13.13 TIME IS OF THE ESSENCE
The Contractor acknowledges that the timely performance of the Work is an integral and essential part of this Agreement and that time is of the essence.
13.14 AMENDMENT OF THIS AGREEMENT
No alterations, modifications and amendments to this Agreement shall be effective unless they are drawn up in writing and signed by both Parties. No relationships between Parties may be interpreted and construed as relationships changing the conditions of this Agreement.
13.15 Counterparts; Language This Agreement shall be signed in two (2) original copies, with each having the same legal effect. In the event of any conflict or difference in meaning between the English and Russian versions of this Agreement, the English version shall prevail.
IN WITNESS THEREOF THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DAY AND YEAR FIRST ABOVE WRITTEN.
__/s/ F.K Shakirov
BY: F.K Shakirov TITLE:  President, KoZhaN LLP
CONTRACTOR /s/ William I Duncan BY: William I Duncan TiTLE:  Business Development and Marketing Manager, Sun Drilling LLP

SUN DRILLING COMPANY – KOZHAN LLP TURNKEY DRILLING CONTRACT

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