10KSB/A 1 form10ksba1final.htm FORM 10-KSB AMENDMENT 1 FORM 10-KSB AMENDMENT NO.1


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

-------------------------


FORM 10-KSB/A

AMENDMENT No. 1



[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2004



[ ]  TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________


Commission file number: 0-28345


Big Sky Energy Corporation,

 (Exact name of small business issuer in its charter)

NEVADA

(State or other jurisdiction of incorporation or organization)

 

72-1381282

(I.R.S. Employer Identification No.)

Suite 750, 440 – 2nd Avenue SW

Calgary, Alberta, Canada

(Address of principal executive offices)

 


T2P 5E9

(Zip Code)

Issuer's telephone number:1(403) 234-8282

Securities Registered Under Section 12(b) of the Exchange Act:

None

Securities Registered Under Section 12(g) of the Exchange Act:

Common Stock, $0.001 par value

(Title of class)


Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Corporation was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X|   No |_|


Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of Corporation's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |_|


Revenue for the most recent fiscal year: $nil


Aggregate market value of voting and non-voting common stock held by non-affiliates of the Corporation using the average of the bid and asked price of the common stock, as of March 31, 2005: $1.12


Number of shares outstanding of each of the Corporation's classes of common stock, as of December 31, 2004: 68,119,460 shares of common stock, par value US$0.001 per share.


DOCUMENTS INCORPORATED BY REFERENCE: None








PART I


ITEM 1.

DESCRIPTION OF BUSINESS.


We are a development stage enterprise, 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 General Meeting of Shareholders held in Calgary, Alberta December 3, 2004, shareholders approved changing the corporate name to Big Sky Energy Corporation, to reflect the changed nature of the business of the Corporation. 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 the “Corporation” 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 the Corporation 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 obligations until December 31, 2006. Furthermore, we expect to acquire at least one oil-producing asset in 2005, using equity and debt to ensure sustainable operations in the future.


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 – 2nd 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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On July 8, 2000, Big Sky Network Ltd. 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 Network Canada Ltd, (“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 Canada 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 and it was our belief that it was the right time to diversify into the oil and natural gas industry.  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, the Corporation 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 Share Exchange 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, (“KoZhaN”), 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 a further name change to Big Sky Energy Corporation.


On May 10, 2004, Big Sky Energy Atyrau Ltd., at that time a 75% owned subsidiary of Big Sky, (“BSEA”), purchased 100% of Vector Energy West LLP, a Kazakhstan limited liability partnership, (“Vector”), for $4,430,000.  This purchase price 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.  







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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 the Kazakh regulatory authorities the work commitments not completed in 2004 have to be completed in 2005.


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


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

(the “Big Sky”)

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 Big Sky 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.


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, the Corporation 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 share-





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holders 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 the Corporation; 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 the Corporation 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 the Corporation, 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 the Corporation 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 the Corporation, 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, the Corporation 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 the Corporation.  The value of the royalty held in Ibriz 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 the Corporation 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 the Corporation, as well as, 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.


-

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.

-

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.





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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 equal 7 barrels.


Big Sky Energy Atyrau Ltd.

Big Sky Energy Atyrau Ltd. was incorporated on April 8, 2004 in Alberta, Canada.  Initially, we 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 the Corporation.

Vector Energy West

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


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





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-

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


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 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 the Corporation 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.




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Vector and KoZhaN engage local staff as required to manage their business.  We anticipate that Big Sky 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.


ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS


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 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 diversified our operations to oil and natural gas exploration and production, an area in which our management has been successful in past endeavors, although we do not know if Big Sky 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 commence oil and gas exploration.  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 shareholders’ interests.





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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., China, 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.


Risks Related to Our Oil and Gas Operations


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.


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.





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Vector and KoZhaN 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 and 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.


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 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.

 





10





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 shareholders 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 securities 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 March 31, 2005 was $1.12.  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 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.





11




ITEM 2.

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 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 estimated 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.





12





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 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.


ITEM 3.

LEGAL PROCEEDINGS.


To our knowledge, neither Big Sky nor any of our officers or directors is a party to any material legal proceeding or litigation and such persons know of no material legal proceeding or contemplated or threatened litigation and 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 directors 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.  None of our officers or directors has been involved in any capacity in any bankruptcy petition.  


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.


ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.


On March 9, 2004, we solicited votes from selected shareholders of record to approve an increase in our authorized share capital from 50,000,000 to 150,000,000, par value $0.001 per share.  We received an affirmative vote of 20,354,379 or 51% of our issued and outstanding shares (39,944,744 shares).


On December 3, 2004 at our Annual General Meeting of Shareholders, shareholders voted in favor of increasing the number of options authorized for issuance under the Corporation’s 2000 Stock Award Plan from 8,000,000 to 15,000,000. The Shareholders also approved a name change from China Energy Ventures Corp. to Big Sky Energy Corporation. The Shareholders also voted in favor of amending the By-laws of the Corporation to require a minimum number of board members to be three and a maximum number to be eleven.


PART II


ITEM 5.

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 National Association of Securities Dealers Over-the-Counter Bulletin Board (“NASD-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





13






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 NASD-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 April 7, 2005 we had approximately 260 shareholders of record and 97,438, 660 common shares issued and outstanding.


EQUITY COMPENSATION PLAN INFORMATION


As of December 31, 2004:

Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (1)(4)

Big Sky Energy Corporation 2000 Stock Option Plan (2)

6,175,000

$0.08

8,723,334

Alternative Compensation Plan (3)

1,317,198

$0.08

0

    

(1)

Excluding securities reflected under “Number of securities to be issued upon exercise of outstanding options, warrants and rights”.

(2)

Approved by our shareholders on June 29, 2001.

(3)

Adopted by the board of directors on March 22, 2002 and approved by our shareholders on June 14, 2002.  

(4)

Approved by our shareholders on December 3, 2004 to a maximum of 15,000,000 options.


RECENT SALES OF UNREGISTERED SECURITIES


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.


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, the Corporation 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.





14





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 April 12, 2004, the Corporation 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, 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. The total share issuance costs for this tranche were $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 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 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 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.


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 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 the Corporation 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 the Corporation’s Common Shares on November 10, 2004 for total proceeds of $2,555,000.


The Corporation 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.


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


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 that no 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.






15





REPURCHASES OF EQUITY SECURTIES


We have no plans, programs or arrangements in regards to repurchases of our common stock.


ITEM 6.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR 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 report.  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

 


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, 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 from selling Big Sky Network Canada Ltd., to become an oil and gas exploration and production company. We acquired KoZhaN and Vector Energy West.  By acquiring these companies the Corporation gained a significant acreage position in the prolific pre-Caspian basin of western Kazakhstan, located close to infrastructure and transportation.   


In the fourth quarter, the Corporation 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, the Corporation 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 the Corporation in Kazakhstan. In addition to building a base in Kazakhstan, the Corporation is trying to secure additional licenses in other countries, using the diverse expertise of its officers and consultants.





16





The Corporation raised over US$12 million of new common equity in 2004. While access to the capital markets is always subjective, the current levels of energy prices support investor interest in financing new projects. The Corporation 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.  The Corporation raised an additional $13.7 million in equity capital in February 2005.


RESULTS OF OPERATIONS


Revenues


For 2004 and 2003, the Corporation 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


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 the Corporations 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 the Corporation’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.  The Corporation 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 operations 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 the Corporation 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)





17





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


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


In the fourth quarter of 2004, the Corporation 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 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.


We are also intent on farming out selected high risk and high cost exploration targets.  Initially, the Corporation 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 energy companies.


 We believe that these activities will lead to a sustainable platform on which to build the Corporation. In addition to building a base in Kazakhstan, the Corporation is trying to secure additional licenses in other countries, using the diverse expertise of its officers and consultants.


 The Corporation raised over US$12 million of new common equity in 2004. While access to the capital markets is always subjective, the current levels of energy prices support investor interest in financing new projects. The Corporation 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.    

During the first quarter of 2004, we successfully completed the acquisition of BSEK and its subsidiary, KoZhaN, and in the second quarter of 2004, we successfully completed the acquisition of Vector. These were important initial steps in our efforts to redirect our operations toward exploration and exploitation of oil and gas.  See Note 5 in our Financial Statements.

 

We expect this new direction to bring increased value as the management team has extensive expertise and experience in the oil and gas business.





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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 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 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 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, the Corporation utilized cash for management and corporate administrative activities of approximately $200,000 per month. Management anticipates that the Corporation currently has sufficient working capital to fund this minimum level of operations through December 2006. However, the Corporation 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 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 in Europe, Russia, USA and Canada


The ability of the Corporation 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





19





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 proceeds 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 Energy 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 the Corporations 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. The Corporation 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 subsurface 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, which is still pending.  ABT, in turn, paid for the cost of lease access and lease construction in the amount of $798,915 (“Construction Works”) and paid $500,000 towards the cost of drilling, completion and testing of Morskoe #10 well (“Drilling Works”).  KoZhaN similarly 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 Drilling Works 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.


  

 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






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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.


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 and sold form the Atyrau and Liman 2 licences.


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.





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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.


OFF-BALANCE SHEET ARRANGEMENTS


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


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. The Corporation does not have an interest in any VIE, and therefore there is no impact on the Company's financial position, 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. The Corporation is reviewing The Exposure Draft to determine the potential impact, if any, on its 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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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 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-based 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.


CRITICAL ACCOUNTING POLICIES


Oil and Gas Properties


The Corporation follows the successful efforts method of accounting for its oil and gas operations.  All property acquisition costs (which include geological and geophysical costs as defined under paragraph 18 of FAS 19) are initially capitalized to property, plant and equipment as unproved property costs.  Once proved reserves are discovered, the acquisition costs are reclassified to proved property acquisition costs.  Exploration drilling costs are capitalized pending evaluation as to whether sufficient quantities of reserves have been found to justify commercial production.  If commercial quantities of reserves are not found, exploration drilling costs are expensed.  All exploratory wells that discover potentially commercial quantities of reserves in areas requiring major capital expenditures before the commencement of production and where commercial viability requires the drilling of additional exploratory wells, remain capitalized as long as the drilling of additional exploratory wells is under way or firmly planned.  All other exploration costs, including geological and geophysical and annual lease rentals are expensed to earnings as incurred.  All development costs are capitalized as proved property costs.  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


The Corporation 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 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. We assessed our oil and gas properties for impairment at the end of 2004 and found no impairments were required based on our assumptions.




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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.


ITEM 7.

FINANCIAL STATEMENTS.


The information required by this item is included in pages F-1 through F-32 attached hereto. The index to the consolidated financial statements can be found on page F-1.


ITEM 8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.


Not Applicable.


ITEM 8A.

CONTROLS AND PROCEDURES.


We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.   





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As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports the Corporation files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required.


.Changes in Internal Controls


There were no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation above during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.


PART III


ITEM 9.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.


We employ our executive officers as consultants under the terms of individual consulting agreements.  See “Employment and Consulting Agreements”.  The following table sets forth information, as of March 31, 2005, regarding our directors, executive officers and key employees:


Name

Age

Position

Since

Nurlan Utebovich Balgimbayev

57

Director

March 31, 2005

Bruce Gaston

40

Director

December 3, 2004

Matthew Heysel

49

Chairman of the Board, Chief Executive Officer & Director

April 14, 2000

Thomas Milne

58

Director and Chief Financial Officer

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

Glenn Van Doorne

51

Executive Vice President

February 26, 2004

Daming Yang

47

Director

April 14, 2000


Nurlan Utebovich Balgimbayev


Mr. Nurlan 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 company, Kazmunaigas (October 1999-February 2002). He graduated in 1973 from the Kazakh Polytechnic Institute with a degree of Mining Geologist. Mr. Balgimbayev began his career as an engineer in 1973, initially with Mangyshlak Oil and Gas and continuing as Chief Engineer with Zhaik Oil. From 1981 to 1986, he was Chief Engineer of Aktubinsk oil and Gas followed by five years of senior management responsibilities in the Ministry of Oil and Gas Industry of the USSR, in Moscow. Mr. Balgimbayev attended the University of Massachusetts, Executive Program until 1993 when he joined Chevron Corporation as a Senior Consultant until he became Minister of Oil and Gas in 1994.

Mr. Balgimbayev served as a director of Nelson Resources Limited (2002-2004) and is a director of Herson Oil Refinery System (Ukraine). He is also a Member of the Kazakhstan Board for the Stable Development of the Republic of Kazakhstan. He was honored with the Kazakhstan National Medal “Barys” for his service to the republic of Kazakhstan.





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Bruce Hill Gaston – Director


Mr. Gaston is a financial control, risk management, capital markets, and corporate finance specialist with a significant background in the Eurasian oil and gas marketplace.  Mr. Gaston was previously a Senior Associate Director of Deutsche Morgan Grenfell based initially in London and then in Tokyo.  While in London with Deutsche Morgan Grenfell, Mr. Gaston was involved in risk management and advisory for the Russian and Eastern European sovereign debt trading and financial structuring.  Mr. Gaston has been a consultant with a boutique Eurasian corporate finance and risk management consultancy since late 1999 supporting clients including the Royal Bank of Scotland Asia and Barclays Capital.  Mr. Gaston has also served as a Director of Deloitte & Touche Central Asia through 2002 and was previously head of Russian Equities for Commerzbank AG in 1998 and 1999.  Mr. Gaston has also served with Credit Suisse Financial Products as an accountant and Bankers Trust as an Assistant Treasurer and started his financial career as a graduate on the trading floor of Chase Manhattan NA in 1987.  Mr. Gaston has been an advisor to Eastern European governments on privatization, Oil and Gas clients on Financial Control Process Engineering, and has considerable experience in Risk Management in global markets and within the Eastern European Emerging Markets sector.  Mr. Gaston’s educational achievements include a BA in July 1987 from the University of New Brunswick, followed by an MSc in Economics from the University of London in December 1990


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 the Corporation 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.  Previously, 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.  From April 1999 to November 2001, he was the President of New Energy West Corporation.  From 1987 to 1997, Mr. Heysel was with Sproule Associates Limited, an independent economic evaluator of oil and natural gas reserves.  During his tenure with Sproule, Mr. Heysel held the positions of Petroleum Engineer and Associate, Engineering Manager and Senior Associate and Manager – International Projects and Senior Associate.  Mr. Heysel also serves as a director of Gastar Exploration Ltd.  Mr. Heysel obtained an Honors Bachelor Degree in Science from the University of Western Ontario in 1979 and a Bachelor of Science-Chemical Engineering Degree from the University of Toronto in 1982.


Thomas Milne - Director and Chief Financial Officer


Mr. Milne has served on our Board of Directors and as Vice President of Finance and Chief Financial Officer since April 14, 2000.  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 located in Calgary, Alberta.  From 2000 to 2002, Mr. Milne was employed by the Corporation.  From 1985 through 1997, Mr. Milne was Vice President and Treasurer of NOVA Corporation, and director of NOVA Finance International.  He was the Vice President, Finance and Chief Financial Officer of Arakis Energy, from September 1997 to October 1998, an oil and gas company traded on NASDAQ.  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 working in Central Asia for nine years and is Vice Rector on Academic Affairs and Director of Business School of Kazakh British Technical University. Previously he held the post Associate Dean of the College of Continuing Education for the Kazakhstan Institute of Management, Economics and Strategic Research (KIMEP) were he taught courses in Small Business, Franchising, Public Administration and Finance. He has participated in numerous private consulting assignments in the areas of Strategic and Business Planning, Bank Financing, Valuation and is very active as a negotiator in the medium sized M&A field. As Director, Business Valuation for the Rice Group, Central Asia LLP, Mr. Pardo supervised assignments, which assess the value interest in ownership of a commercial, industrial or service organization involved in economic activity.  The valuations he performed were used for buying or selling businesses, buying insurance, resolving litigation issues, tax planning, allocating purchase prices among tangible and intangible assets.  Mr. Pardo has an MBA in finance and has worked for Deloitte & Touche as Tax Director as well as LeBoeuf, Lamb, Greene & MacRae.  Before coming to Central Asia he worked for the U.S. Department of Defense. He has had assignments in Canada, Belgium, Uzbekistan, Azerbaijan, Kazakhstan and the United States and is currently serving as Past President of The Rotary Club of Almaty. Mr. Pardo serves as an independent director and is Chairman of the Audit Committee and Chairman of the Nominating & Compensation Committee.





26







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


Mr. Sehsuvaroglu, a US citizen, received a Bachelor of Science – Nuclear Engineering in 1978 from Kansas State University and is a Registered Professional Engineer in Texas since 1990. Commencing his 20-year with Halliburton Energy Services in 1978, he had increasing levels of responsibility in engineering in Algeria, France, Netherlands, United States, United Kingdom and Kazakhstan. In 2000, he joined Brown & Root Energy Services in Kazakhstan as Country Director. In 2001, Mr. Sehsuvaroglu became Senior Vice-President of Operations with Nelson Resources, during which time; he led a team, which grew daily oil production from zero to 40,000 barrels per day in Kazakhstan.

As president of Big Sky Energy Corporation, Mr. Sehsuvaroglu will build a team focused on developing the Corporations extensive land holdings in Kazakhstan and expanding into adjacent countries in the region.

Mr. Sehsuvaroglu is fluent in written and spoken English, French and Turkish, with working knowledge of Spanish, Dutch and Russian.


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

Mr. Swersky is an experienced international attorney and consultant.  Mr. Swersky has extensive experience in organizing major cultural activities in several countries including the United States, Russia, Israel and Europe. Since 2000 he has consulted on technology investments in Israel together with the Meitav group. Meitav is one of Israel's leading fund managers. Since December 2000, he has been on the board and is currently Chairman of Netline Communications Technologies (NCT) a world leader in cellular telephone jamming.  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. Mr. Swersky's educational background includes Bachelor of Arts and Bachelor of Laws degrees from The University of Witwatersrand in South Africa. He was admitted as an Attorney in South Africa in March 1963 and as an Advocate to the Israel Bar in 1967. 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 prestigious Jaffee Center for Strategic Studies. In the past he acted as Country Advisor to Snam S.p.A. (part of the Italian Eni / Agip group) on the natural gas supply project from Egypt to Israel.


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


Mr. Ruslan Z. Tsarni, a U.S. citizen, has over 10 years of professional experience in oil and gas legislation and corporate law.   Previously, Mr. Tsarni served as Corporate Counsel of Nelson Resources Limited Group of companies, as well as Managing Director of several of its operating subsidiaries, responsible for all matters relating to corporate governance and placements and filing requirements under the securities regulations of Toronto Stock Exchange and AIM.  He worked with financial institutions and banks on raising funds for acquisition and development of the assets operated by Nelson’s subsidiaries, as well as managed legal and administrative matters for all such subsidiaries.  From 1999 to 2001, Mr. Tsarni worked as Head of Legal Affairs of Golden Eagle Partners LLC 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 1998 to 1999 Mr. Tsarni worked as Senior Associate with Salans Hertzfeld & Heilbronn providing legal advise to major multinational companies on different aspects of Kazakhstan legal issues on development of mineral resources, corporations, taxation, currency, customs, employment, banking, bankruptcy and trade marks.  From 1994 to 1996, Mr. Tsarni served as a consultant for Financial Markets International LLC and Arthur Andersen LLP contracted by USAID for projects aimed to develop securities markets in Central Asia, where he trained corporate governance and corporate finance principals to state and private companies.


Glenn Van Doorne – Executive Vice President


Mr. Van Doorne has served as our Executive Vice President since February 26, 2004.  He was the Chief Executive Officer and a director of IbrizOil Inc., a private Alberta corporation since 1998 until March 2005.  From 1991 to 1998, Mr. Van Doorne was Vice President of Exploration and Development of Hurricane Hydrocarbons Ltd. (now known as Petrokazakhstan Inc.).  During his tenure with Hurricane Hydrocarbons, he was a member of the management team that secured Hurricane Hydrocarbon's Kazakhstan oil and gas assets.  Mr. Van Doorne obtained his Bachelor's Degree in Geological and Mineralogical Sciences from the Free University of Brussels (Belgium) in 1972 and his Master's Degree from the State University of Ghent (Belgium) in 1975.





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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., an importer of high-technology equipment to China where he was responsible for the day to day administration of the Corporation and managed a staff of six.  During his time with Tongli Energy, Mr. Yang was a member of the team that signed the first two oil and gas production sharing agreements between a Chinese and foreign entity in connection with the Liaohe and Dagang fields in China.  From 1989 to 1993, Mr. Yang was with Tri-City Survey Limited as a GIS Engineer.  Mr. Yang holds a Masters Degree in Aerial Photography and Remote Sensing from the Netherlands International Institute for Aerospace Survey and Earth Sciences.


None of our executive officers or directors have been involved in any bankruptcy proceedings within the last five years, 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.


Family Relationships


Mr. Wei Yang, a major shareholder in the Corporation. and Daming Yang’s brother, is part of the group which bought  our subsidiary Big Sky Network Canada Ltd. as of December 9, 2004.


Mr. Kai Yang, a major shareholder in the Corporation, is Daming Yang’s brother. Mr. Kai Yang is the sole shareholder of Big Sky Energy Canada Ltd., which owns 4,250,000 of our common shares.


Board and Committees


Our board members are elected annually by our shareholders and hold office until the next annual shareholders 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 (our two) independent directors, Messrs. Pardo and Gaston. Mr. Pardo chairs both committees.


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.


Compensation Committee Interlocks and Insider Participation


The Human Resources and Compensation Committee reviews and recommends to the board of directors the compensation and benefits of all our executive officers and establishes and reviews general policies relating to compensation and benefits of our employees.  None of our executive officers served as a director, executive officer or member of a compensation committee of another entity of which one of its executive officers served on our Human Resources and Compensation Committee.  Except as described in "Certain Relationships and Related Transactions", no interlocking relationships exist between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.





28






In the past, our board of directors has negotiated all executive salaries of our employees, including our Chief Executive Officer.  Directors do not participate in approving or authorizing their own salaries as executive officers.  Compensation for our Chief Executive Officer was determined by the Human Resources and Compensation Committee after considering his efforts in assisting in the development of our business strategy, the salaries of executives in similar positions, the development and implementation of our diversification into oil and gas, and our general financial condition.  Our board of directors believes that the use of direct stock awards is at times appropriate for employees, and in the future intends to use direct stock awards to reward outstanding service or to attract and retain individuals with exceptional talent and credentials.  The use of stock options and other awards is intended to strengthen the alignment of interests of executive officers and other key employees with those of our stockholders.


Section 16(a) Beneficial Ownership Reporting Compliance


Section 16(a) of the Securities and Exchange Act of 1934 requires any person who is our director or executive officer or who beneficially holds more than 10% of any class of our securities which have been registered with the Securities and Exchange Commission, to file reports of initial ownership and changes in ownership with the Securities and Exchange Commission. These persons are also required under the regulations of the Securities and Exchange Commission to furnish us with copies of all Section 16(a) reports they file.


To our knowledge, based solely on our review of the copies of the Section 16(a) reports furnished to us and a review of our shareholders of record for the fiscal year ended 2004, filing delinquencies were as follows:


Insider

Filing

Due Date

Filing Date

Reason for Deficiency

Matthew Heysel

Form 13G

01/10/04

04/12/04

Delay in completing transaction

Daming Yang

Form 13G

01/10/04

03/18/04

Delay in completing transaction

Wei Yang

Form 4

03/2/04

03/22/04

Traveling

L-R Offshore Managers LLC

Form 3

05/17/04

06/14/04

Difficulty in obtaining signatures

Matthew Heysel

Form 4

05/09/04

05/13/04

Traveling

Matthew Heysel

Form 4

10/01/04

10/12/04

Traveling

Matthew Heysel

Form 4

01/04/05

01/11/05

Traveling

A.S. Sehsuvaroglu

Form 3

03/19/05

04/01/05

Awaiting notarized signature on Form ID

 

In addition to the above noted delinquent filings, the following filings were delayed by the Corporation due to rescheduling of the Board meetings required to pass the necessary enacting resolutions.


Insider

Filing

Due Date

Filing Date

Reason for Deficiency

Barry Raymond Swersky

Form 3

12/13/04

03/10/05

Delayed by Corporation

Bruce Hill Gaston

Form 3

12/13/04

03/10/05

Delayed by Corporation

Philip Dean Pardo

Form 3

12/13/04

03/10/05

Delayed by Corporation


All other Section 16(a) filing requirements applicable to our directors, executive officers and holders of more than 10% of any class of our registered securities were, to the best of our knowledge, timely complied with.


Code of Business Conduct and Ethics


On March 29, 2004, our board of directors approved and adopted our Code of Business Conduct and Ethics, which applies to all our officers, directors, employees and consultants. The Code is available on our website at www.bigskycanada.com.   A copy of the Code is available free of charge upon written request made to the office of the Corporate Secretary by either facsimile at 403-265-8808 or by mail at Big Sky Energy Corporation, 750, 440-2 Avenue SW, Calgary, Alberta, T2P 5E9.


ITEM 10.

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 the Corporation 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

 

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

Glenn Van Doorne,

Executive Vice-President

 

2004

40,000

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 has indicated he will convert to our common stock under the terms of the Alternative Compensation Plan.  Under this plan, Mr. Heysel will receive 856,027 common shares upon conversion of his salary owing.  As of the date of this report, Mr. Heysel has not converted his salary owing.  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 the Corporation 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 the Corporation 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 the Corporation 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.  





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Option Grants


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






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, the Corporation issued the following additional stock options and common shares to Officers and Directors:


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

 
     


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, the Corporation 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, the Corporation issued the following options:




31





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 the Corporation could issue under the 2000 Stock Award Plan was increased from 8,000,000 to 15,000,000. A grant of 5,000,000 options to Mr. Balgimbayev would exceed the maximum number of options available. Therefore, the Corporation issued 1,000,000 options to Mr. Balgimbayev on March 29, 2005, with a further 4,000,000 options to be issued when Shareholders have approved an amendment to the Plan.


Option Exercises


The following table sets forth details of each exercise of stock options as of December 31, 2004 by any of the Named Executive Officers, and the December 31, 2004 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 December 31, 2004.

Aggregated Options Exercised


Name

Securities Acquired on

Exercise (#)

Aggregate Value Realized ($)

Unexercised Options

as of December 31, 2004

Exercisable (2)/

Unexercisable

Value of Unexercised in the Money-Options at December 31, 2004

Exercisable/

Unexercisable (1)

Matthew Heysel (3)

Nil

Nil

0 (exercisable)

0 (unexercisable)

 $0 (exercisable)

 $0 (unexercisable)

Daming Yang

Nil

Nil

2,100,000 (exercisable)

0 (unexercisable)

$ 1,344,000(exercisable)

$ 0 (unexercisable)

Thomas Milne

Nil

Nil

600,000 (exercisable)

0 (unexercisable)

$ 384,000 (exercisable)

$ 0(unexercisable)

Richard Lam

Nil

Nil

250,000 (exercisable)

0 (unexercisable)

$ 160,000(exercisable)

$ 0 (unexercisable)

     

(1)

Based on closing price of $0.69 on December 31, 2004.

(2)

Includes Options to purchase common shares within 60 days after December 31, 2004.

(3)

Mr. Heysel did not exercise any options during 2002 and surrendered all his outstanding options to the Corporation on July 23, 2002 for cancellation.


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 the Corporation. 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 the Corporation. The Corporation made this change in recognition that qualified independent directors are a valuable, scarce resource to the Corporation. 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.





32






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 $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 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 $60,000 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 the Corporation.  This amount is to be paid within 10 days of the transaction.  A takeover of the Corporation is defined as:


 

any change in the holding, either direct or indirect, of shares of the Corporation, 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 the Corporation, 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 the Corporation, and


-

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


Daming Yang Consulting Agreement:  Daming Yang provided the Corporation 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-compete 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. has had no contract and received no compensation. As of 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,


Barry Raymond Swersky Consulting Agreement:  Mr. Swersky provides consulting services to the Corporation through his company, Suntree Ltd.  The Corporation 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 Consulting Agreement:  Mr. Sehsuvaroglu commenced providing services as President of the Corporation 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 the Corporation.   By resolution of the Board of Directors dated March 29, 2005, the number of stock options was increased to 4,000,000.


Glenn Van Doorne Consulting Agreement:  Mr. Van Doorne served as Executive Vice President of the Corporation under a consulting agreement entered into as of August 1, 2004, terminating January 31, 2005.  Mr. Van Doorne’s compensation was in the amount of $10,000 per month.  Mr. Van Doorne’s contract expired January 31, 2005. As at March _, 2005 the terms of a new contract have not been finalized.





33






Ruslan Z Tsarni Consulting Agreement:  Mr. Tsarni provides service to the Corporation 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 the Corporation under the terms of the Corporations Stock Option Plan.


ITEM 11.

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 March 31, 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 April 7, 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 opposite their names.






34





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

3,057,772 (1)

3.14%

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%





34





Glenn Van Doorne

310-505-8 Avenue SW

Calgary, Alberta

T2P 5E9

1,435,389

1.47%

Officers and Directors as a Group

10,099,913 (4)

10.36%

  


5% Shareholders

 


Societe Privee de Gestion de Patrimonie

17 Avenue Matignon

Paris 78008 France

6,760,000

6.94%

Wei Yang
Room 837, China Merchant Building
Shenzhen, Guong Dong, China 518067

6,653,750 (5)

6.82%(4)

ARC Energy Fund

C/o Royal Trust Corporation of Canada

200 Bay Street

Toronto, Ontario

M5J 2J5

8,000,000

8.21%

(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, 1,903,883 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 March 29, 2005 to acquire 600,000 shares of common stock.

(4)

 

Excludes an additional 8,000,000 options issued to directors and officers  in March 2005..

(5)

 

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 report on Form 10-KSB, there are no arrangements that may result in a change in control.


ITEM 12.

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 the Corporation.


2)

In March 2005, the Corporation 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 the Corporation in February 2005.





35






ITEM 13.

EXHIBITS AND REPORTS ON FORM 8-K.


EXHIBIT INDEX


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


Exhibit No.

Description

3.1 (1)

Certificate of Incorporation of the Company consisting of the Articles of Incorporation filed with the Secretary of the State of Nevada on February 9, 1993

3.2 (1)

By-Laws of the Company, dated November 9, 1993

3.3 (14)

Amended and Restated By-Laws of the Company, dated August 8, 2001

3.4 (25)

Certificate of Amendment to Articles of Incorporation of China Broadband Corp. filed with the Secretary of State of Nevada on December 29, 2003

3.5 (30)

Amended and Restated By-Laws of the Corporation, dated December 3, 2004.

5.1

Opinion of Counsel re: Legality

10.1(2)

Purchase Agreement for the Acquisition of China Broadband (BVI) Corp. among Institute For Counseling, Inc. and China Broadband (BVI) Corp.

10.2 (2)

Cooperative Joint Venture Contract For Shenzhen China Merchants Big Sky Network Ltd.

10.3 (4)

Common Stock Purchase Agreement dated September 29, 2000, among SoftNet Systems, Inc., China Broadband Corp. and Big Sky Network Canada Ltd.

10.4 (4)

Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China Broadband Corp., Big Sky Network Canada Ltd. and Matthew Heysel, for himself and as attorney-in-fact for Daming Yang, Kai Yang, Wei Yang, Jeff Xue, Donghe Xue, Lu Wang, Wallace Nesbitt and Western Capital Corp.

10.5 (4)

Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China Broadband Corp., Big Sky Network Canada Ltd., China Broadband (BVI) Corp., Matthew Heysel and Daming Yang.

10.6 (5)

Cooperative Joint Venture Contract For Sichuan Huayu Big Sky Network Ltd. dated July 8, 2000

10.7 (5)

Strategic Partnership Agreement Between Chengdu Huayu Information Industry Co., Ltd. and Big Sky Network Canada Ltd.

10.8 (5)

Cooperative Joint Venture Contract For Deyang Guangshi Big Sky Ltd. dated November 25, 2000

10.9 (5)

Consulting Agreement between the Company and MH Financial Management for the services of Matthew Heysel

10.10 (5)

China Broadband Stock Option Plan

10.11 (5)

Form of Stock Option Agreement

10.12 (5)

Form of Restricted Stock Purchase Agreement

10.13 (5)

Letter Agreement dated July 25, 2000 by and between China Broadband Corp. and Canaccord International Ltd.

10.14 (5)

Joint Development Agreement of City-Wide-Area High Speed Broadband and Data Transmission Services Networks of China Between Big Sky Network Canada Ltd. and Jitong Network Communications Co. Ltd.

10.15 (5)

Consulting Agreement between the Company and Daming Yang

10.16 (5)

Consulting Agreement between the Company and Precise Details Inc. for the services of Thomas Milne

10.17 (8)

Agreement to the Establishment of Cooperation Joint Venture between Big Sky Network Canada Ltd. and Zhuhai Cable Television Station, dated May 27, 1999

10.18 (8)

Letter of Intent, dated March 1, 2000, between Big Sky Network Canada Ltd. and Dalian Metropolitan Area Network Center





36





10.19 (8)

Letter of Intent, dated November 8, 2000, between Big Sky Network Canada Ltd. and Hunan Provincial Television and Broadcast Media Co. Ltd.

10.20 (8)

Preliminary Agreement to Form a Contractual Joint Venture, dated March 8, 2001 between Big Sky Network Canada Ltd. and Changsha Guang Da Television

10.21 (6)

Purchase and Licence Agreement, dated September 28, 2000, between China Broadband Corp. and Nortel Networks Limited

10.22 (6)

Amendment, dated January 1, 2001, to the Purchase and Licence Agreement between China Broadband Corp. and Nortel Networks Limited

10.23 (8)

Consulting Agreement, dated December 22, 2000, between China Broadband Corp and Barry L. Mackie

10.24 (8)

Consulting Agreement, dated October 1, 2000, between China Broadband Corp and Richard Lam

10.25 (8)

Consulting Agreement, dated October 1, 2000, between China Broadband Corp and Ping Chang Yung

10.26 (8)

Consulting Agreement, dated October 1, 2000, between China Broadband Corp and YungPC AP

10.27 (7)

Common Stock Purchase Agreement dated September 29, 2000, among SoftNet Systems, Inc., China Broadband Corp. and Big Sky Network Canada Ltd.

10.28 (7)

Termination Agreement dated September 29, 2000, among SoftNet  Systems,  Inc., China Broadband Corp., Big Sky Network Canada Ltd. and Matthew  Heysel,  for himself and as attorney-in-fact  for Daming Yang, Kai Yang, Wei Yang, Jeff Xue, Donghe Xue, Lu Wang, Wallace Nesbitt and Western Capital Corp.

10.29 (7)

Termination Agreement dated September 29, 2000, among SoftNet Systems, Inc., China Broadband Corp., Big Sky Network Canada Ltd., China Broadband (BVI) Corp., Matthew Heysel and Daming Yang

10.30 (12)

Letter of Intent dated June 1, 2001 between Big Sky Network Canada Ltd. and Shanghai Min Hang Cable Television Center

10.31 (12)

Memorandum of Understanding dated June 18, 2001 between Big Sky Network Canada Ltd. and Beijing Gehua Cable TV Networks Co., Ltd.

10.32 (12)

Letter of Intent between Big Sky Network Canada Ltd. and Chong Qing Branch of Ji Tong Network Communications Co., Ltd.

10.33 (12)

Consulting Agreement dated April 1, 2001 between China Broadband Corp. and Precise Details Inc.

10.34 (12)

Consulting Agreement dated April 1, 2001 between China Broadband Corp. and M.H. Financial Management Ltd.

10.35 (12)

Consulting Agreement dated April 1, 2001 between China Broadband Corp. and Daming Yang

10.36 (12)

Indemnity Agreement dated June 29, 2001 between China Broadband Corp. and Matthew Heysel

10.37 (13)

Memorandum of Understanding between Big Sky Network Canada Ltd. and Fujian Provincial Radio and Television Network Co. Ltd. dated July 10, 2001

10.38 (14)

Note Cancellation Agreement between China Broadband Corp. and Canaccord International Ltd.

10.39 (15)

Consulting Agreement, dated July 1, 2001, between China Broadband Corp and Barry L. Mackie

10.40 (15)

Memorandum of Understanding between Chengdu Big Sky Network Technology Services Ltd. and Jitong Network Communications Co. dated October 15, 2001

10.41 (15)

Consulting Agreement, dated April 1, 2001 between China Broadband Corp. and Richard Lam

10.42 (17)

Joint Project Contract between the Chong Qing Branch of Jitong Network Communications Co. Ltd. and Chengdu Big Sky Network Technology Services Ltd. dated October 31, 2001

10.43 (17)

Alternative Compensation Plan

10.44 (17)

Fee Arrangement Agreement dated January 28, 2002, between China Broadband Corp. and Michael Morrison





37





10.45 (18)

Agency Agreement between China Broadband Corp. and Canaccord Capital (Europe) Limited dated March 13, 2002

10.46 (19)

Agreement of Cooperative Rights & Interests Assignment between Big Sky Network Canada Ltd. and Winsco International Limited dated September 13, 2002 – English Translation

10.47 (21)

Share Exchange Agreement, dated October 27, 2003, between China Broadband Corp., Big Sky Energy Kazakhstan Ltd. and its shareholders.

10.48 (22)

Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and Richard Lam

10.49 (22)

Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and Daming Yang

10.50 (22)

Consulting Agreement dated January 15, 2004, between China Energy Ventures Corp. and M.H. Financial Management Ltd.

10.51 (22)

Consulting Agreement dated January 1, 2004, between China Energy Ventures Corp. and Wei Yang

10.52 (22)

Share Purchase Agreement dated October 7, 2003 between Big Sky Energy Kazakhstan Ltd. and Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. – English Translation

10.53 (22)

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

10.54 (22)

Escrow Agreement dated January 30, 2004 between Big Sky Energy Kazakhstan Ltd., Shengli Oilfield Junwei Petroleum-Tech Development Co. Ltd. and W. Scott Lawler

10.55 (23)

Asset Purchase Agreement dated February 27, 2004 between IbrizOil Inc. and China Energy Ventures Corp.

10.56 (23)

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

10.57 (23)

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

10.58 (23)

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

10.59 (23)

Audit Committee Charter, amended November 12, 2003

10.60 (24)

Sale and Purchase Agreement between Big Sky Energy Atyrau Ltd., Batys Petroleum LLP and Glushich Victor Petrovich dated April 10, 2004

10.61 (24)

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

10.62 (24)

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

10.63 (20)

Contract on prospecting of hydrocarbons at Atyrau Field dated December 28, 2002 between Vector Energy West LLP and the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan

10.64 (20)

Contract on prospecting and production of hydrocarbons at Liman-2 Field dated December 28, 2002 between Vector Energy West LLP and the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan

10.65(27)

Share Purchase Agreement dated December 9, 2004, by and between Big Sky Energy Corporation and Big Sky Energy Canada Ltd.

10.66(28)

Consulting Agreement dated December 1, 2004, between Big Sky Energy Corporation and M.H. Financial Management Ltd.

10.67(28)

Consulting Agreement dated June 30, 2004, between Big Sky Energy Corporation and Daming Yang.

10.68(28)

Consulting Agreement dated December 1, 2004, between Big Sky Energy Corporation and Precise Details, Inc.





38





10.69(28)

Consulting Agreement dated October 1, 2004, between Big Sky Energy Corporation and Suntree Ltd.

10.70(28)(31)

Consulting Agreement dated January 19, 2005, between Big Sky Energy Corporation and A.S. Sehsuvaroglu, together with amendment.

10.71(29)

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

10.73(28)

Consulting Agreement dated March 1, 2005, between Big Sky Energy Corporation and Ruslan Z.Tsarni.

10.74(30)

2000 Stock Award Plan, as amended by the shareholders, December 3, 2004

  

23.1 (26)

Consent of W. Scott Lawler, Attorney and Counselor at Law (See Exhibit 5.1)

23.2

Consent of Deloitte & Touche LLP – Big Sky Energy Corporation.

23.6 (26)

Consent of PetroGlobe (Canada) Ltd.

  

31.1

Section 302 Certification – Chief Executive Officer

31.2

Section 302 Certification – Chief Financial Officer

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer

32.2

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer

  

(1)

Previously filed on Form 10-SB on December 2, 1999.

(2)

Previously filed on Form 8-K filed on April 28, 2000.

(3)

Previously filed on Form 10-KSB on July 11, 2000.

(4)

Previously filed on Form 8-K filed on September 29, 2000.  

(5)

Previously filed on Form S-1 filed on December 6, 2000.

(6)

Previously filed on Form 10-QSB on March 15, 2001.

(7)

Previously filed on Form 8-K/A on December 12, 2000.

(8)

Previously filed on Form 10-KSB on March 28, 2001.

(9)

Previously filed on Form 8K on August 25, 2000.

(10)

Previously filed on Form 8K on September 26, 2000.

(11)

Previously filed on Form S-1, Amendment No. 1 on April 6, 2001.

(12)

Previously filed on Form S-1, Amendment No. 3 on July 2, 2001.

(13)

Previously filed on Form S-1, Amendment No. 4 on July 27, 2001.

(14)

Previously filed on Form S-1, Amendment No. 5 on August 10, 2001.

(15)

Previously filed on Form S-1, Amendment No. 7 on October 25, 2001.

(16)

Previously filed on Form 10-QSB on November 14, 2001.

(17)

Previously filed on Form 10-KSB on April 1, 2002.

(18)

Previously filed on Form S-1 on April 12, 2002.

(19)

Previously filed on Form 8-K/Amendment No. 1 on October 30 2002.

(20)

Previously filed on Form 10-KSB on April 16, 2003.

(21)

Previously filed on Form 8-K on October 31, 2003.

(22)

Previously filed on Form SB-2 on February 19, 2004.

(23)

Previously filed on Form 10-KSB on March 30, 2004.

(24)

Previously filed on Form 8-K on May 18, 2004.

(25)

Previously filed on Form 10-QSB on May 21, 2004.

(26)

Previously filed on Form SB-2 on July 28, 2004.

(27)

Previously filed on Form 8-K on December 14, 2004

(28)

Previously reported on Form 8-K on March 9, 2005 - exhibit not attached to such filing

(29)

Previously filed on Form 8-K on March 10, 2005

(30)

Previously filed on Form 14C on October 27, 2004

(31)

To be filed subsequently





39






ITEM 14.  

PRINCIPAL ACCOUNTANT FEES AND SERVICES.


Audit Fees


The aggregate fees billed for each of the last two fiscal years for professional services rendered by Deloitte & Touche LLP for the audit of our annual financial statements and review of financial statements included in our Form 10-QSB quarterly reports and services normally provided by Deloitte & Touche LLP in connection with statutory and regulatory filings or engagements were $262,073 for the fiscal year ended 2004 and $126,151for the fiscal year ended 2003.


Audit-Related Fees


There were no fees for other audit related services for the fiscal years ended 2004 and 2003.


Tax Fees


The aggregate fees billed for each of the last two fiscal years for professional services rendered by Deloitte & Touche LLP for tax compliance, tax advice, and tax planning was $9,485 for the fiscal year ended 2004 and $17,000 for the fiscal year ended 2003.  The fees charged for 2003 included assistance with the completion and filing of our Canadian income tax returns.


All Other Fees


There were no other aggregate fees billed in either of the last two fiscal years for products and services provided by Deloitte & Touche LLP, other than the services reported above.


Pre-approval Policy and Procedure


The following policy and procedure has been adopted and incorporated into our Audit Committee charter:


All services provided by the independent auditor whether they be audit related or non-audit related, shall be pre-approved in writing either a) prior to the commencement of the contemplated services, or b) after the commencement of the contemplated services but before the completion of such services.


The Chairman of the Audit Committee or the designated Financial Expert, should they also be, at the time of approval, an independent director, are empowered to approve the contemplated services to be provided by the independent auditor on behalf of the committee.  All approvals taken by the Chairman or Financial Expert must be disclosed to the committee as a whole either a) in writing or by e-mail at the time of the approval; or b) verbally at a subsequent committee meeting.


Since September 4, 2003, the date our Audit Committee members were appointed to the Committee, they have approved all services provided by Deloitte & Touche LLP.  Prior to this, services were not pre-approved.


Deloitte & Touche LLP has advised us that, in connection with the audit of our financial statements for the year ended December 31, 2004, only full-time, permanent employees of Deloitte & Touche LLP performed the audit work.




40





SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the Corporation caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 20, .2005



 

BIG SKY ENERGY CORPORATION

By:

/s/S. A, Sehsuvaroglu
Name:

S. A. Sehsuvaroglu
Title:

Chief Executive Officer (Principal Executive Officer)



In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Corporation and in the capacities and on the dates indicated.



Signature

Title

Date



/s/ Matthew Heysel





Matthew Heysel



/s/ Daming Yang

Director


August 20, 2005

Daming Yang



/s/ Thomas Milne

Director

August 20, 2005

Thomas Milne



/s/ Bruce Gaston

Director

August 20, 2005

Bruce Gaston



/s/ Philip Pardo

Chief Financial Officer and Director

(Principal Accounting Officer)

August 20, 2005

Philip Pardo



/s/ Barry Swersky

Director

August 20, 005

Barry Swersky



/s/ Nurlan Balgimbayev

Vice-President – New Development and Director

August 20, 2005

Nurlan U. Balgimbayev




/s/ Servet Harunoglu

Director

August 20, 2005

Servet Harunoglu

Director

August 20, 2005





41





INDEX TO FINANCIAL STATEMENTS





BIG SKY ENERGY CORPORATION  (as at December 31, 2004)

PAGE

  

Report of Independent Registered Chartered Accountants

F-1

Consolidated Balance Sheet

F2

Consolidated Statements of Operations

F-3

Consolidated Statement of Stockholders’ Equity

F-5

Consolidated Statements of Cash Flows

F-8

Notes to Consolidated Financial Statements

F-10






42








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) 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 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 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 the Corporation 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







F-1




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




F-2




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)

 

$                    -



F-3



       

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.



F-4




















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



F-5



 





 


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

-

-



F-6



  





 


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




F-7





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)



F-8



       

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.




F-9




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 partner 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 Corporations 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,



F-10



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.


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, which is still pending.


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 obtain 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



F-11



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. 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.


Oil and gas properties


We follow successful efforts accounting for our oil and gas business.  All property acquisition costs are initially capitalized to property, plant and equipment as unproved property costs.  Once proved reserves are discovered, the acquisition costs are reclassified to proved property acquisition costs.  Exploration drilling costs are capitalized pending evaluation as to whether sufficient quantities of reserves have been found to justify commercial production.  If commercial quantities of reserves are not found, exploration drilling costs are expensed.  All exploratory wells that



F-12



discover potentially commercial quantities of reserves in areas requiring major capital expenditures before the commencement of production and where commercial viability requires the drilling of additional exploratory wells, remain capitalized as long as the drilling of additional exploratory wells is under way or firmly planned.  All other exploration costs, including geological and geophysical and annual lease rentals are expensed to earnings as incurred.  All development costs are capitalized as proved property costs.


Expenditures related to exploratory wells in an area that requires major capital expenditures are carried as an asset, provided that i) there have been sufficient oil and gas reserves found to justify completion as a producing well if the required capital expenditure is made, and ii) drilling of additional exploratory wells is underway or firmly planned for the near future.


Depreciation, depletion and amortization on oil and gas assets are provided on the unit of production basis.  Land and lease costs relating to producing properties are depreciated and depleted over the remaining estimated proved reserves.  Development and exploration drilling and equipping costs are depleted over remaining proved developed reserves and proved property acquisition costs over remaining proved reserves.  Depletion is considered a cost of inventory when the oil and gas is produced.  When this inventory is sold, the depletion is charged to depreciation, depletion and amortization expense.


The Company annually assesses all existing capitalized exploratory well costs for impairment. Impairment reserve is created when either of two criteria is met:

a)

Well has not found a sufficient quantity of reserves to justify its completion as a producing well

b)

The Company is not making sufficient progress assessing the reserves and the economic and operating viability of the project”.


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)



F-13



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.


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.



F-14



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.

 

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.



F-15




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 there 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-based 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.



F-16




 

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 Corporations’ 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 and 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 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 Ibriz Oil 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 amounted  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 Executive Vice President and the Managing Director of BSEK.  This royalty interest has been eliminated by the acquisition of BSEK and accounted for as an increase in oil and gas property.



F-17



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 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)



F-18



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

6,208,911

 

-

Acquisitions costs

14,145,677

  

Royalty interest

415,700

 

-

Exploratory well drilling costs

1,387,794


 

Oil and gas properties

22,158,082


-


On October 12, 2004 KoZhaN signed a Farmout Agreement, the intent of which is to transfer 45% of the subsurface rights of the Morskoe license to ABT Ltd.. This transfer of 45% is subject to the approval by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan, which is still pending. Under the terms of this Farmout Agreement, ABT Ltd., agreed to 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 agreed to contribute $150,000 to the Drilling Works.  Both companies will equally share future costs associated with the development of the Morskoe license.


ABT Ltd. had incurred $798,915 worth of Construction Works.  The interest-free  loan of $500,000 to KoZhaN LLP for the Drilling Works of Well No. 10 had a remaining available balance to be spend on Drilling Works of $166,000 as of December 31, 2004.  Neither the Construction Works nor the loan advanced for Drilling Works are part of Big Sky’s oil and gas properties and are not reflected in Big Sky’s accounts.  As the ABT loan funds are spent on the well costs, the loan balance is reduced accordingly.  None of the Construction Works costs nor Drilling Works costs have been recorded as oil and gas property expenses by Big Sky as they relate strictly to ABT’s working interest in the properties.


It should be noted that this Farmout Agreement is success based and should no production result from the Morskoe license, the Corporation has no obligation to repay ABT its expenditures relating to the cost of the Construction Works  and/or Drilling Works.



F-19




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

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

  



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.



F-20




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)


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).

The social sphere costs are required contributions under the SubSurface Use Contracts that are designed to contribute to the development of the infrastructure of the cities of Atryau and Astana.


Big Sky has discounted the non-current portion of this liability on the basis of a financial instrument that is due in the future.  Big Sky believes that FAS 107 paragraph 28 supports the principle of discounting further obligations that do not have a stated rate of interest as the current value of such obligation is less than the future obligation.  Moreover, FAS 141, paragraph 37(g) refers to the present value of long-term debt and other claims payable to be determined at appropriate current interest rates.


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.



F-21




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.


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.



F-22





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.


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.



F-23



(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 $697,946 (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.



F-24



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 $90,093 to 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 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



F-25



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, Corporation.  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 Atrau  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).



F-26



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)

 

-

-


-



F-27



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 Corporations 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 its 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:




F-28



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;



F-29



 

-

$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 commitment 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, which is still pending. 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.



F-30



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



F-31



 

-

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 government 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.



F-32



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 remaining 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 Corporations 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 Corporations 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 General 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.



F-33



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)

        




F-34