UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

_________________________







FORM 10-QSB



|[X]  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | OR                                                                                                                                                                     
|[  ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ______________________.



Commission file number 000-28345



China Energy Ventures Corp.

(Exact name of small business issuer as specified in its charter)



|NEVADA                                                                                            |  | 72-1381282                          
|------------------------------------------------------------------------------------------------- |  | ------------------------------------
|(Jurisdiction of incorporation)                                                                   |  | (I.R.S. Employer Identification No.)
|                                                                                                  |  |                                     
|Unit 1003, W2, Oriental Plaza, #1 East Chang An Avenue, Dong Chen District, Beijing, China 100738
|(Address of principal place of business or intended principal place of business)                 



86-10-6499-1255 (Issuers telephone number)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



Check whether the issuer:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  Ö    No



The number of outstanding common shares, with $0.001 par value, of the registrant at June 30, 2004 was 53,728,210 and 56,344,460 on August 23, 2004.



Transitional Small Business Disclosure Format (check one): Yes      No  Ö

#



China Energy Ventures Corp.



INDEX TO THE FORM 10-QSB

For the quarterly period ended June 30, 2004



|        |                       |                                                                                       | PAGE
|------- | --------------------- | ------------------------------------------------------------------------------------- | ----
|        |                       |                                                                                       |     
|PART I  | FINANCIAL INFORMATION | 3                                                                                    
|        | ITEM 1.               | FINANCIAL STATEMENTS (unaudited)                                                      | 3   
|        |                       | Condensed Consolidated Balance Sheets                                                 | 3   
|        |                       | Condensed Consolidated Statements of Operations and Deficit                           | 4   
|        |                       | Condensed Consolidated Statements of Stockholders Equity                             | 5   
|        |                       | Condensed Consolidated Statements of Cash Flows                                       | 8   
|        |                       | Notes to the Condensed Consolidated Financial Statements                              | 10  
|        | ITEM 2.               | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 25  
|        | ITEM 3.               | CONTROLS AND PROCEDURES                                                               | 33  
|Part II | OTHER INFORMATION     | 34                                                                                   
|        | ITEM 1.               | LEGAL PROCEEDINGS                                                                     | 34  
|        | ITEM 2.               | CHANGES IN SECURITIES AND USE OF PROCEEDS                                             | 34  
|        | ITEM 3.               | DEFAULTS UPON SENIOR SECURITIES                                                       | 35  
|        | ITEM 4.               | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   | 35  
|        | ITEM 5.               | OTHER INFORMATION                                                                     | 35  
|        | ITEM 6.               | EXHIBITS AND REPORTS ON FORM 8-K                                                      | 35  
|        |                       | SIGNATURES                                                                            | 39  



2



PART I



ITEM 1.  FINANCIAL STATEMENTS



|CHINA ENERGY VENTURES CORP.                       |                                                                                  
|------------------------------------------------- | ---------------------------------------------------------------------------------
|(a Development Stage Enterprise)                  |                                                                                  
|Condensed Consolidated Balance Sheets (unaudited) |                                                                                  
|(Expressed in United States Dollars)              |                                                                                  
|                                                  |                                                                                  
|                                                  |                                                                                  
|ASSETS                                            |                                                                                  
|CURRENT                                           |                                                                                  
|                                                  | Cash and cash equivalents                                                        
|                                                  | Restricted cash                                                                  
|                                                  | Advances to related parties                                                      
|                                                  | Interest and other receivables                                                   
|                                                  | Prepaid expenses                                                                 
|                                                  |                                                                                  
|CAPITAL ASSETS                                    |                                                                                  
|                                                  | Property and equipment (Note 6)                                                  
|                                                  | Oil and gas properties (Note 5, 7)                                               
|                                                  |                                                                                  
|LIABILITIES                                       |                                                                                  
|CURRENT                                           |                                                                                  
|                                                  | Obligations for social sphere development (Note 8)                               
|                                                  | Obligations for professional training of personnel (Note 9)                      
|                                                  | Obligations for acquisition of the right for geological information use (Note 10)
|                                                  | Accounts payable and accrued liabilities                                         
|                                                  | Due to related parties (Note 11)                                                 
|                                                  |                                                                                  
|LONG-TERM                                         |                                                                                  
|                                                  | Obligations for social sphere development (Note 8)                               
|                                                  | Obligations for professional training of personnel    (Note 9)                   
|                                                  | Obligations for historical cost reimbursement (Note 12)                          
|                                                  | Asset retirement obligation (Note 13)                                            
|                                                  | Deferred income tax liability (Note 14)                                          
|                                                  | 9,699,663                                                                        
|                                                  |                                                                                  
|COMMITMENTS AND CONTINGENCIES (NOTE 16)           |                                                                                  
|                                                  |                                                                                  
|STOCKHOLDERS' EQUITY                              |                                                                                  
|                                                  | Common stock (Note 17)                                                           
|                                                  |                                                                                  
|                                                  |                                                                                  
|                                                  |                                                                                  
|                                                  | Additional paid in capital                                                       
|                                                  | Deferred compensation                                                            
|                                                  | Deficit accumulated during development stage                                     
|                                                  |                                                                                  
|                                                  |                                                                                  

The accompanying notes are an integral part of these condensed consolidated financial statements.



3





|CHINA ENERGY VENTURES CORP.                                          
|---------------------------------------------------------------------
|(a Development Stage Enterprise)                                     
|Condensed Consolidated Statements of Operations & Deficit (unaudited)
|Expressed in United States Dollars                                   
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|REVENUE                                                              
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|GENERAL AND ADMINISTRATIVE EXPENSES                                  
|                                                                     
|AMORTIZATION                                                         
|ACCRETION                                                            
|IMPAIRMENT OF ASSETS                                                 
|                                                                     
|                                                                     
|LOSS IN BIG SKY NETWORK CANADA LTD.                                  
|LOSS IN SHEKOU JOINT VENTURE                                         
|LOSS IN CHENGDU JOINT VENTURE (Note 4)                               
|GAIN ON SALE OF SHEKOU                                               
|FOREIGN EXCHANGE GAIN (LOSS)                                         
|INTEREST INCOME                                                      
|                                                                     
|NET LOSS                                                             
|                                                                     
|DEFICIT, BEGINNING OF PERIOD                                         
|                                                                     
|DEFICIT, END OF PERIOD                                               
|                                                                     
|LOSS PER SHARE                                                       
|                                                                     
|                                                                     
|SHARES USED IN COMPUTATION                                           
|                                                                     



4





|CHINA ENERGY VENTURES CORP.
(a Development Stage Enterprise)
Condensed Consolidated Statements of Stockholders Equity (unaudited)
(Expressed in United States Dollars)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|Balance,                                                                                                                                                               
|                                                                                                                                                                       
|                                                                                                                                                                       
|Issue of common stock                                                                                                                                                  
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|Stock issued pursuant to                                                                                                                                               
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|Stock issued pursuant to                                                                                                                                               
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|Stock issued pursuant to                                                                                                                                               
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|Acquisition of the shares                                                                                                                                              
|                                                                                                                                                                       
|                                                                                                                                                                       
|                                                                                                                                                                       
|Issuance of warrants                                                                                                                                                   
|                                                                                                                                                                       
|Non-cash compensation                                                                                                                                                  
|                                                                                                                                                                       
|Deferred compensation                                                                                                                                                  
|                                                                                                                                                                       
|Amortization of deferred                                                                                                                                               
|                                                                                                                                                                       
|                                                                                                                                                                       
|Net loss                                                                                                                                                               
|                                                                                                                                                                       
|Balance,                                                                                                                                                               
|                                                                                                                                                                       
|                                                                                                                                                                       
|Deferred compensation                                                                                                                                                  
|                                                                                                                                                                       
|Issuance of warrants                                                                                                                                                   

|Amortization of deferred |                       |            |           |             |              |             
|------------------------ | --------------------- | ---------- | --------- | ----------- | ------------ | ------------
|                         | compensation          | -          | -         | -           | 369,037      | -           
|                         |                       |            |           |             |              |             
|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)
|                         |                       |            |           |             |              |             
|Amortization of deferred |                       |            |           |             |              |             
|                         | compensation          | -          | -         | -           | 326,191      | -           
|                         |                       |            |           |             |              |             
|Deferred compensation    | -                     | -          | 139,289   | (139,289)   | -            | -           
|                         |                       |            |           |             |              |             
|Alternative              |                       |            |           |             |              |             
|                         | Compensation Plan     | -          | -         | 163,463     | -            | -           
|                         |                       |            |           |             |              |             
|                         |                       |            |           |             |              |             
|Issuance of common       |                       |            |           |             |              |             
|                         | stock to settle legal |            |           |             |              |             
|                         | fees                  | 42,124     | -         | 21,062      | -            | -           
|                         |                       |            |           |             |              |             
|Stock issued pursuant to |                       |            |           |             |              |             
|                         | private placement     |            |           |             |              |             
|                         | agreements at $0.25   |            |           |             |              |             
|                         | per share             | 2,997,160  | 2,997     | 644,364     | -            | -           
|                         |                       |            |           |             |              |             
|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)
|                         |                       |            |           |             |              |             
|Amortization of deferred |                       |            |           |             |              |             
|                         | compensation          | -          | -         | -           | 1,541,174    | -           
|                         |                       |            |           |             |              |             
|Deferred compensation    | -                     | -          | 2,016,920 | (2,016,920) | -            | -           
|                         |                       |            |           |             |              |             
|Alternative              |                       |            |           |             |              |             
|                         | Compensation Plan     | 682,802    | 683       | (683)       | -            | -           
|                         |                       |            |           |             |              |             
|Stock issued pursuant to |                       |            |           |             |              |             
|                         | private placement     |            |           |             |              |             
|                         | agreements at $0.25   |            |           |             |              |             
|                         | per share             | 7,900,000  | 7,900     | 1,916,232   | -            | -           
|                         |                       |            |           |             |              |             
|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)
|                         |                       |            |           |             |              |             
|Amortization of deferred |                       |            |           |             |              |             
|                         | compensation          | -          | -         | -           | 14,179       | -           
|                         |                       |            |           |             |              |             
|Deferred compensation    |                       |            |           |             |              |             
|                         | expense (recovery)    | -          | -         | (636,000)   | 636,000      | -           
|                         |                       |            |           |             |              |             
|Stock issued pursuant to |                       |            |           |             |              |             
|                         | private placement     |            |           |             |              |             
|                         | agreements at $0.25   |            |           |             |              |             
|                         | per share             | 100,000    | 100       | 24,900      | -            | -           

5 to 6



|                         |                     |            |         |            |             |              |           
|------------------------ | ------------------- | ---------- | ------- | ---------- | ----------- | ------------ | ----------
|Stock issued pursuant to |                     |            |         |            |             |             
|                         | private placement   |            |         |            |             |              |           
|                         | agreements at $0.50 |            |         |            |             |              |           
|                         | per share           | 13,483,750 | 13,484  | 6,547,751  | -           | -            | 6,561,235 
|                         |                     |            |         |            |             |             
|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   
|                         |                     |            |         |            |             |             
|Options exercised        | 66,666              | 67         | 3,267   | -          | -           | 3,334       
|                         |                     |            |         |            |             |             
|Warrants exercised       | 299,716             | 299        | 74,629  | -          | -           | 74,928      
|                         |                     |            |         |            |             |             
|Net loss                 | -                   | -          | -       | -          | (1,744,314) | (1,744,314) 
|Balance,                 |                     |            |         |            |             |             
|                         | June 30, 2004       | 53,728,210 | 112,147 | 35,550,040 | (358,331)   | (25,137,401) | 10,166,455



The accompanying notes are an integral part of these condensed consolidated financial statements.



7





|CHINA ENERGY VENTURES CORP.                                                   
|------------------------------------------------------------------------------
|(a Development Stage Enterprise)                                              
|Condensed Consolidated Statements of Cash Flows (unaudited)                   
|Expressed in United States Dollars                                            
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|CASH FLOWS RELATED TO THE                                                     
|                                                                              
|                                                                              
|OPERATIONS                                                                    
|Net loss                                                                      
|Adjustment for:                                                               
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Changes in operating assets and liabilities, net of the effect of acquisitions
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|FINANCING                                                                     
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|INVESTING                                                                     
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                              

|                                | Acquisition of Vector Energy West LLP, net of cash acquired |   | (4,506,502) | --        |   | (4,506,502) | --        |   | (4,506,502)
|------------------------------- | ----------------------------------------------------------- | - | ----------- | --------- | - | ----------- | --------- | - | -----------
|                                |                                                             |   | (5,034,962) | --        |   | (4,824,352) | (1,134)   |   | (8,978,266)
|                                |                                                             |   |             |           |   |             |           |   |            
|NET DECREASE (INCREASE) IN CASH |                                                             |   |             |           |   |             |           |  
|                                | AND CASH EQUIVALANTS                                        | $ | 151,853     | 134,486   | $ | (404,345)   | (580,861) | $ | 664,106    
|                                |                                                             |   |             |           |   |             |           |   |            
|CASH AND CASH EQUIVALENTS,      |                                                             |   |             |           |   |             |           |  
|                                | BEGINNING OF PERIOD                                         |   | 512,253     | 1,002,826 |   | 1,068,451   | 1,718,173 |   | --         
|                                |                                                             |   |             |           |   |             |           |   |            
|CASH AND CASH EQUIVALENTS,      |                                                             |   |             |           |   |             |           |  
|                                | END OF PERIOD                                               | $ | 664,106     | 1,137,312 | $ | 664,106     | 1,137,312 | $ | 664,106    
|                                |                                                             |   |             |           |   |             |           |   |            



The accompanying notes are an integral part of these condensed consolidated financial statements.

8 to 9





|CHINA ENERGY VENTURES CORP.
(a Development Stage Enterprise)
Notes to the Condensed Consolidated Financial Statements (unaudited)
(Expressed in United States Dollars) | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 



1.

BASIS OF PRESENTATION



The condensed consolidated financial statements included herein have been prepared by China Energy Ventures Corp. (the Company) without audit in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the United States Securities and Exchange Commission.  These financial statements are condensed and do not include all disclosures required for annual financial statements and accordingly, these financial statements and the notes thereto should be read in conjunction with the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003.  Our consolidated financial statements for the year ended December 31, 2003 contained Note 2 on our need for additional financing and profitable operations to be able to continue as a going concern. 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.  Actual results could differ from those estimates.  In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, considered necessary to present fairly the Companys condensed financial position at June 30, 2004 and the condensed consolidated results of operations and cash flows for the three and six-month periods ended June 30, 2004 and 2003.



2.

NATURE OF OPERATIONS AND CONTINUING OPERATIONS



On January 12, 2004, the Company 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 Company 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).  See note 5 Business Combination.  As a result of these acquisitions, the nature of operations for the Company has changed.  The Company intends to direct the majority of future capital investment towards oil and gas exploration within the acquired properties. At present the Company is in the exploration phase with regards to its oil and gas properties. This phase is expected to last until the Company finds economically profitable oil reserves. The Company also intends to maintain its existing Internet operations in China.



The Company through Vector entered into Subsurface Use Contracts with the Government of the Republic of Kazakhstan (the Government) to explore for and produce hydrocarbons in the Atyrau and Liman-2 oilfields in the Atyrau region (the Subsurface Use Contracts).



These condensed consolidated financial statements have been prepared on a going concern basis. Subsequent to December 31, 2003, the Company acquired two oil and gas businesses and must make certain capital expenditures during the course of the next year. The Company'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 condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.



On a monthly basis, the Companys minimum operating costs are approximately $150,000.  The Company anticipates that it currently has sufficient working capital to fund its operations, without conducting a drilling program or acquisitions of other potential fields, through November 2004. The Company will consider seeking additional capital to fund future exploration and development programs or farming-out some of its interest in various 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. On August 2, 2004, the Company entered into a Letter of Intent with BT-Oil LLP, a Kazakhstan construction company.  This Letter of Intent contemplates that BT-Oil LLP will complete all road and lease construction and pay for the drilling of the first well on the Morskoe field in return for a 45% interest in the Companys Morskoe field.  The Company anticipates that the well will be spud by mid-September 2004 following the completion of lease construction.  Meeting the Companys future financing requirements will be dependent on its

10



ability to develop oil and gas joint venture partnerships on favourable terms, its ability to access equity capital markets and, after achieving or acquiring sustainable production, credit facilities from institutional lenders.  The Company intends to leverage its relationships with personnel at Chinese national oil companies to have them partner with the Company in these projects and to have them provide the initial funding to establish production at selected oil and gas fields in Kazakhstan. There can be no assurances that any such funds will be available, and if funds are raised, that they will be sufficient to achieve the Companys objective, or result in commercial success. The Company cannot assure you that it will be able to obtain sufficient capital, 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. Should the Company be unable to meet its obligations under the Subsurface Use Contracts due to a lack of capital, the Competent Body has the right to terminate the contracts after giving the Company 90 days written notice.



3.

ACCOUNTING POLICIES



Accounting policies as disclosed in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003 have not changed.



A)

The following additional accounting policies have been implemented with regards to the Companys oil and gas property assets.



Oil and gas properties



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



Costs incurred for acquisition of rights to explore and develop the Companys oilfields, including but not limited to payment for geological information, payment to participate in tender, signature bonuses, obligations on social sphere development, are capitalized and classified as a right to subsurface use. Payroll and related costs incurred during the acquisition and exploration phases and directly related to oil and gas operations are capitalized as part of oil and gas properties.



Impairment of long-lived assets - oil and gas properties



The Company 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 Company performs the impairment test on an individual field basis. Unproved properties are reviewed periodically to determine if there has been impairment of the carrying value with any such impairment charged to expense in the current period.



Borrowing costs



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.



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.



11



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 Company, 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 (USD) from Kazakhstan tenge (tenge). KoZhaN and Vector 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 USD. Accordingly, KoZhaN and Vector have determined that the USD 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 USD for the purpose of these financial statements does not indicate that the Company could realize or settle in USD the reported values of the assets and liabilities. Likewise, it does not indicate that the Company could return or distribute the reported USD values of capital and retained earnings to the partners.



Employee Benefits



Pension Payments - The Company 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. Pension fund payments are withheld from employees salaries and capitalized as part of oil and gas properties or included with general and administrative expenses in the consolidated statement of operations. As at June 30, 2004, the Company was not liable for any supplementary pensions, post-retirement health care, insurance benefits or retirement indemnities to its current or former employees.



Social tax -The Company 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.



B)

Stock based compensation



The Company 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 Company 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.

12





|                                       |                                                  | Three Months Ended
June 30, | Six Months Ended
June 30,
|-------------------------------------- | ------------------------------------------------ | --------------------------- | -------------------------
|                                       |                                                  | 2004                        | 2003                     
|                                       | $                                                | $                           | $                        
|Net loss, as reported                  | (937,355)                                        | (506,093)                   | (1,744,314)              
|Add: Stock-based employee compensation |                                                  |                             |                          
|                                       | recovery (expense) included in reported          |                             |                          
|                                       | net loss, net of related tax effects             | 195,011                     | 81,123                   
|Deduct: Total stock-based employee     |                                                  |                             |                          
|                                       | compensation recovery (expense) determined under |                             |                          
|                                       | fair value based method for all awards,          |                             |                          
|                                       | net of related tax effects                       | (5,209)                     | (14,020)                 
|                                       |                                                  |                             |                          
|Pro forma net loss                     | (747,553)                                        | (438,990)                   | (1,720,036)              
|                                       |                                                  |                             |                          
|Loss per share:                        |                                                  |                             |                          
|                                       | Basic and diluted  as reported                  | (0.02)                      | (0.02)                   
|                                       | Basic and diluted  pro forma                    | (0.02)                      | (0.02)                   



4.

INVESTMENT IN JOINT VENTURE



Big Sky Network Canada Ltd., a wholly owned subsidiary of China Energy Ventures Corp., participates in the Chengdu joint venture.  The total investment in the Chengdu joint venture was written off in 2001.



The Chengdu joint venture is accounted for on an equity basis.  The loss in the Chengdu joint venture, $29,027 (2003 - $46,035) for the three months ended June 30, 2004 and $87,845 (2003 - $86,248) for the six months ended June 30, 2004, has not been recognized in the consolidated statement of operations as a result of the write down of the entire investment in the Chengdu joint venture in 2001.  The Company is under no obligation to fund losses of the joint venture.



5.

BUSINESS COMBINATION



Big Sky Energy Kazakhstan Ltd.



On January 12, 2004, the Company completed the acquisition of 100% of the issued and outstanding share capital of BSEK.  The Company issued 8,000,000 common shares at a deemed price of $0.286 per share, being the trading price of the Company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 Companys President, and of which Matthew Heysel, the Chairman and Chief Executive Officer of the Company, and Daming Yang, President of the Company, 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  



13



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



At December 31, 2003, the Company had advanced $1,154,941, including accrued interest of $5,941, to BSEK.  This amount is reflected on the condensed consolidated balance sheet as an advance to related parties. At June 30, 2004, the loan balance was $2,005,802 including $31,645 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 condensed consolidated statement of operations of the Company from the period January 12, 2004 to June 30, 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 are 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 Company issued 681,475 common shares to IbrizOil Inc. (Ibriz), an Alberta corporation, as consideration for the purchase of a royalty interest in the net revenues of BSEK at a cost of $415,700. These shares were valued at $415,700 based on an average closing price of $0.61 from February 20  26, 2004. The purchase price was determined based on the results of the valuation report performed by an independent, third party petroleum engineering company. The royalty interest amounts to 5% of BSEKs net share of the earnings of its 90%-held subsidiary company, KoZhaN. At the time of this transaction, Mr. Van Doorne, who is a director and the Chief Executive Officer of Ibriz, was also our Executive Vice President and the Managing Director of BSEK.  The acquisition of the royalty interest has been accounted for as an increase in oil and gas property.



Vector Energy West LLP



On May 11, 2004, the Company, 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 China Energy Ventures Corp. subscribing to 75% of the total shares issued on incorporation. On May 11, 2004, BSEA borrowed $5,000,000 from the Company. 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 June 30, 2004 the loan balance was $5,159,152 including $33,568 of accrued interest and is eliminated in these consolidated financial statements. The amount is unsecured, bears interest at the rate of 5% per annum and is repayable on demand.   The acquired net assets of Vector and consideration given would be as follows:





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



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



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



14



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.  There were no material transactions for the period from January 1, 2004 through January 12, 2004 in BSEK and there were no material transactions for the period from January 1, 2004 through May 11, 2004 in Vector, other than accretion expense of $75,665.





For the three months ended June 30, 2004 and June 30, 2003, the Company has determined the following pro-forma information for the BSEK and BSEA business combination:



|June 30, 2004  | As reported  | Adjustments | Pro-forma  
|-------------- | ------------ | ----------- | -----------
|Revenue        | $ 33,185     | $ -         | $ 33,185   
|Net loss       | $ (937,3559) | $ (25,000)  | $ (962,355)
|Loss per share | $ (0.02)     | $ -         | $ (0.02)   



|June 30, 2003  | As reported | Adjustments | Pro-forma  
|-------------- | ----------- | ----------- | -----------
|Revenue        | $ 48,530    | $ -         | $ 48,530   
|Net loss       | $ (506,093) | $ (30,000)  | $ (536,093)
|Loss per share | $ (0.02)    | $ -         | $ (0.02)   



For the six months ended June 30, 2004 and June 30, 2003, the Company has determined the following pro-forma information for the BSEK and BSEA business combination:



|June 30, 2004  | As reported   | Adjustments | Pro-forma    
|-------------- | ------------- | ----------- | -------------
|Revenue        | $ 64,548      | $ -         | $ 64,548     
|Net loss       | $ (1,744,314) | $ (80,000)  | $ (1,824,314)
|Loss per share | $ (0.04)      | $ -         | $ (0.04)     



|June 30, 2003  | As reported | Adjustments | Pro-forma  
|-------------- | ----------- | ----------- | -----------
|Revenue        | $ 93,734    | $ -         | $ 93,734   
|Net loss       | $ (886,953) | $ (45,000)  | $ (931,953)
|Loss per share | $ (0.04)    | $ -         | $ (0.04)   



6.

PROPERTY AND EQUIPMENT



Property and equipment consist of:

|                               | June 30, 2004 |  | December 31, 2003
|------------------------------ | ------------- |  | -----------------
|                               | $             |  | $                
|                               |               |  |                  
|Furniture and fixtures         | 205,953       |  | 163,361          
|Computer hardware and software | 485,183       |  | 479,824          
|Leasehold improvements         | 162,061       |  | 59,036           
|                               | 853,197       |  | 702, 221         
|Accumulated amortization       | (449,101)     |  | (415,082)        
|                               | 404,096       |  | 287,139          



7.

OIL AND GAS PROPERTIES



Oil and gas properties are comprised of the following:

|                       | June 30, 2004 |  | December 31, 2003
|---------------------- | ------------- |  | -----------------
|                       | $             |  | $                
|                       |               |  |                  
|Subsurface use rights  | 17,925,663    |  | -                
|Royalty interest       | 415,700       |  | -                
|Oil and gas properties | 18,341,363    |  | -                



15



8.

OBLIGATIONS FOR SOCIAL SPHERE DEVELOPMENT



In accordance with the Subsurface Use Contracts, the Company 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 six months ended, June 30, 2004, the Company had not made any payments. These payments are due over the period from 2003 to 2008.



Payment of these obligations are to be made according to a payment schedule agreed to between the Company 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 $2,418,131. The accretion expense for the three month period ended June 30, 2004 of $330  (2003- $Nil) and the six month period ended June 30, 2004 of $21,781 (2003 - $Nil) was capitalized as subsurface use rights.



9.

OBLIGATIONS FOR PROFESSIONAL TRAINING OF PERSONNEL



Management believes that obligations on professional training of personnel should be recognized for future professional training costs as prescribed by the Subsurface Use Contracts. In accordance with the Subsurface Use Contracts, the Partnership is obliged to finance professional training of Kazakhstani personnel recruited for the Subsurface Use Contracts operations at the rate of not less than 1% of the total amount of investments. Under the Subsurface Use Contracts the total amount of investments was established at $53,900,000 during their exploration phase.   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 $449,595 (As at May 12, 2004 - $2,393,336 for the acquisition of Vector). The accretion expense for the three month and six month period ended June 30, 2004 of $6,994 (2003- $Nil).



10.

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 Company is obliged to pay an additional amount for the right of geological information use if the Partnership 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 June 30, 2004 in the amount of $758,265.



11.

RELATED PARTY TRANSACTIONS



On the acquisition of BSEK and Vector, the Company acquired balances payable to related parties. The balances payable to related parties as at June 30, 2004 are:



|                                | Acquired on BSEK acquisition | Acquired on Vector acquisition | Advances
(repayments)
during the quarter | Balance
June 30, 2004
|------------------------------- | ---------------------------- | ------------------------------ | ---------------------------------------- | ---------------------
|                                |                              |                                |                                          |                      
|Big Sky Energy Canada Ltd.      | $350,000                     | $-                             | $  (1,034)                               | $348,966             
|Big Sky Holdings Ltd.           | 7,565                        | -                              | -                                        | 7,565                
|KoZhan LLP other related party  | -                            | -                              | (21,734)                                 | (21,734)             
|Vector Energy West LLP employee | -                            | 15,694                         | 139                                      | 15,833               
|Total                           | $357,565                     | $15,694                        | $  (22,629)                              | $350,630             



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 Company and Mr. Kai Yang held all the outstanding shares of Big Sky Energy Canada Ltd.  As at June 30, 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 costs totaling $300,000 that were incurred by Big Sky Energy Canada Ltd. in connection with completing BSEKs acquisition of

16



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.



During the period ended June 30, 2004, the Company advanced Big Sky Energy Canada Ltd. $1,034 net   towards the balance outstanding.



Big Sky Holdings Ltd.



Big Sky Holdings Ltd. is controlled by Matthew Heysel.  The loan arose from a cash transfer to BSEK in October of 2003 to cover expenses incurred by BSEK.  The loan is unsecured, bears no interest and is repayable on demand.



Vector Energy West LLP



Vector Energy West LLP is the wholly-owned subsidiary of BSEA, which the Company owns75% of.  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.  The loan is unsecured, bears no interest and is repayable on demand.



12.

OBLIGATIONS FOR HISTORICAL COSTS REIMBURSEMENT



The Company 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 the Partnership and the Government. These payments are due from 2012 to 2027 and should be paid quarterly in equal installments.



These obligations are discounted at 15%, being the estimated credit-adjusted risk free discount rate, giving a present value of obligation of $965,763 as at June 30, 2004.  The accretion expense for the three month and six month period ended June 30, 2004 of $4,964 (2003- $Nil) was capitalized as subsurface use rights.



13.

ASSET RETIREMENT OBLIGATION



Management determined that an asset retirement obligation should be recognized for future abandonment costs of four wells drilled at Morskoe field before the Company 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 June 30, 2004, undiscounted future cash flows that will be required to satisfy the Companys liability by 2009 is $40,000. After application of a 15% credit-adjusted risk free discount rate, the present value of the Companys liability at June 30, 2004 is $20,576 (As at January 12, 2004 - $19,872).  During the three month period ended June 30, 2004, the Company recorded an accretion expense of $Nil (2003 - $Nil) and $704 (2003 - $Nil) for the six month period ended June 30, 2004.



14.

INCOME TAX



The Company provides for taxes based on its statutory financial statements that are maintained in accordance with the statutory regulations of U.S., Canada, China and the Republic of Kazakhstan, respectively.



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.



17



The deferred income tax liability is comprised of the following:

|                            | June 30, 2004 |  | December 31, 2003
|--------------------------- | ------------- |  | -----------------
|                            | $             |  | $                
|                            |               |  |                  
|Temporary differences       |               |  |                  
|Oil and gas property values | 11,179,017    |  | -                
|Total temporary differences | 11,179,017    |  | -                
|                            |               |  | -                
|Statutory tax rate          | 35%           |  | 35%              
|Total                       | 3,912,656     |  | -                



|Current portion     | -         |  | -
|------------------- | --------- |  | -
|Non-current portion | 3,912,656 |  | -
|Total               | 3,912,656 |  | -



15.

STOCK OPTION PLAN



Under the 2000 Stock Option Plan which was approved by the shareholders of the Company on June 29, 2001 (the Plan), the Company has reserved 8,000,000 common shares for issuance under options granted to eligible persons.  As at June 30, 2004, 6,710,000 are outstanding with 1,223,334 available for granting.



Under the Plan, options to purchase common stock may be granted to employees, directors, officers 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 Company.  These 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 Nominating and Compensation Committee.



Option activity under the Plan is as follows:

|                                    |  | 2004     
|----------------------------------- |  | ---------
|                                    |  | Number of
|                                    |  | Options  
|                                    |  |          
|Opening Balance  December 31, 2003 |  | 7,310,000
|                                    |  |          
|Granted                             |  | 100,000  
|Expired                             |  | -        
|Exercised                           |  | (66,666) 
|Cancelled                           |  | (633,334)
|                                    |  |          
|Closing Balance, June 30, 2004      |  | 6,710,000
|                                    |  |          
|Options available for grant         |  | 1,223,334
|                                    |  |          
|Options exercised                   |  | 66,666   
|                                    |  |          
|Option Plan Total (stock reserved)  |  | 8,000,000



Additional information regarding options outstanding and exercisable as of June 30, 2004 is as follows:



18





|Options Outstanding and Exercisable
|-----------------------------------
|Exercise Price                     
|                                   
|$1.00                              
|$0.82                              
|$0.15                              
|$0.05                              
|$0.56                              
|                                   



For the three months ended June 30, 2004, $17,470 of compensation expense has been recognized (2003 - $171,646) in the consolidated financial statements for non-employee stock option grants.  For the six months ended June 30, 2004, $57,087 compensation expense has been recognized (2003 - $258,049).  For the three months ended $195,011 (2003  $81,123 of compensation awards) has been recognized for stock-based employee compensation reduction (awards) under the intrinsic value method.   For the six months ended $42,908 (2003  $81,123 of compensation awards) has been recognized for stock-based employee compensation reduction (awards) under the intrinsic value method.



16.

COMMITMENTS AND CONTINGENCIES



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



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



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



Financial Commitments and Contingencies  KoZhaN LLP



The Company, 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 Company 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. See Notes 8, 9, 10 and 12 for obligations pertaining to the exploration phase.  Consequently no amounts have been recorded as provisions in these financial statements for the following commitments and contingencies:



|a) | Commitment to repay historical costs of the Government In accordance with the Subsurface Use Contracts, the Company is obliged to reimburse to the Government its historical costs incurred during preparation of certain geological information on the Morskoe, Karatal and Dauletaly oilfields. The balance remaining to be reimbursed is $3,640,244. The Company is only obliged to repay these costs if it enters into commercial production. As it is unknown whether the Company will enter the commercial production phase in Kazakhstan, no liability has been recorded.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19



|b) | Commitments to contribute to social development of Astana and Atyrau In accordance with the Subsurface Use Contracts, the Company is obliged to invest an equivalent of $850,000 during the production phase for the development of the social sector of Atyrau and Astana cities in the Republic of Kazakhstan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|c) | Commitment to develop local personnelIn accordance with the Subsurface Use Contracts, the Company is obliged to invest not less than 1% of total investments for professional development of the local personnel involved in works under the Subsurface Use Contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|d) | Liquidation fund  In accordance with the Subsurface Use Contracts, the Company is obliged to establish a liquidation fund to finance the adequate disposal of the Companys oil and gas operations in the amount of 1% of operating costs.  The Company 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 Company has not yet carried out major exploration activities to date, the Company has recorded an asset retirement obligation for certain wells in these financial statements (see note 13). Upon achieving an agreement with the Government, this asset retirement obligation may be considered as part of the contractually required liquidation fund.
|e) | Contingencies related to purchase of geological information from the Government In accordance with the Purchase Agreements concluded with the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan on July 10, 2002, the Company may incur a penalty for delaying payment for the geological information purchases from the Government relating to the 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 Company 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 the partnership interest, the Company is committed to make the following payments to the non-controlling partners of the Partnership, as a group, upon achieving the following production milestones, where production is calculated after deducting the governments share of production, if any, and where one tonne equals seven barrels of oil:                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

20



|   |                                                                                                                                                                                                                                                                                                                                                                                                             | -                                                                                                                                                                                                                                                                   | $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 sales, net of transportation and tariff costs.                                                                    
|   | -                                                                                                                                                                                                                                                                                                                                                                                                           | Upon awarding of a new tender for subsurface use rights, the Partnership 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.
|g) | Investment commitments In accordance with the Subsurface Use Contracts, the Company is obliged to invest a minimum of $69,000,000, of which the amount of $14,000,000 should be invested during the exploration phase.                                                                                                                                                                                    
|h) | Commercial discovery bonus In accordance with the Subsurface Use Contracts, the Company is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of 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.



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 Company is in material breach of obligations and commitments under the Subsurface Use Contracts.                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | Commitment to sell produced oil in Kazakhstan In accordance with the Subsurface Use Contracts, the Company is obliged to sell 100% of oil produced during the exploration stage, and 20% of oil produced during the production stage, to oil refineries located in Kazakhstan.



Financial Commitments and Contingencies  Vector Energy West LLP



The Company, 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 Company 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 the Partnership is in material breach of the obligations and commitments under the Subsurface Use Contracts.

In accordance with the letter # 14-04-38 27 dated May 26, 2004 the Partnership was notified by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan (the Competent Body) that the Partnership 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:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

21



|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | To develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body; and                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | To establish and make contributions to the Liquidation Fund.                                                                                                                                                                                                                                                                                                                  
|   | In accordance with the letter # 14-04-38 28 dated May 26, 2004 the Partnership was notified by the Competent Body that the Partnership 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                                                                                                                                                                                                                                               
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | To establish and make contributions to the Liquidation Fund.                                                                                                                                                                                                                                                                                                                  
|   | Accordingly, under both Notices the Partnership was required by July 1, 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.

The Partnership has held extended meetings with representatives of the Competent Body on July 2 to 5, 2004. As a result it was agreed that before July 31, 2004 the Partnership would:
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Submit the Annual Work Program to the Competent Body and report on the progress of the Minimal Work Program implementation. On June 9, 2004, the Partnerships Annual Work Program for 2004 was approved by the Competent Body for both oilfields. The Annual Work Program for 2005 will be determined in October 2004 and finalised with the Competent Body in November 2004;
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Provide professional training to the personnel employed for the Subsurface Use Contract's operations. A budget of $10,000 has been allocated for this purpose;                                                                                                                                                                                                                
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Contribute funds to Atyrau region for social programs and programs for infrastructure development. It was agreed to defer this to the end of 2004;                                                                                                                                                                                                                            
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Develop the Business, Property and Liability Risk Insurance Program and to submit it for approval to the Competent Body. The Partnership has appointed AIG as its Insurance Underwriter 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;                        
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | The Partnership also agreed to submit to the Competent Body quarterly reports on the activities in the license area; and                                                                                                                                                                                                                                                      
|   | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Establish and make contributions to the Liquidation Fund. As at the date of these financial statements, this has not yet been done.                                                                                                                                                                                                                                           
|   | As at August 9, 2004, the Management is continuing remediation of these deficiencies of the Subsurface Use Contracts. While some of these deficiencies have been cleared, the Company continues to work with the Competent Body on resolving the remaining deficiencies.                                                                                                                                                                                                                                                                                    
|b) | Investment commitments In accordance with the Subsurface Use Contracts, the Partnership 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.                                                

22



|c) | Commitment to reimburse historical costs of the Government In accordance with the Subsurface Use Contract, the Partnership is obliged to reimburse to the Government for historical costs incurred at the expense of the Government on the Atyrau oilfield. The total amount reimbursable is $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 Partnership 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 Partnership in respect of the remaining amount of $22,394,843. No approval of the hydrocarbon reserves has been applied for or received as at June 30, 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 Partnership is obliged to pay to the Government a commercial discovery bonus in the amount of 0.1% of the value of approved recoverable reserves using the market price of the hydrocarbons. This amount is due within 30 days after the hydrocarbon reserves are approved by the State Committee on Reserves of the Republic of Kazakhstan. However, in the event that no approval of the hydrocarbon reserves is received, there will be no liability upon the Partnership in respect of the commercial discovery bonus. No approval of the hydrocarbon reserves has been applied for or received as at June 30, 2004 and December 31, 2003 and so no provision in respect of the commercial discovery bonus has been made in these financial statements.                                                                                                                                                                
|e) | Commitment to sell produced oil in the Republic of Kazakhstan  In accordance with the Subsurface Use Contracts and Decree # 1172 of the Government of Republic of Kazakhstan dated August 2, 2000, the Partnership is obliged to sell 100% of oil produced during the exploration phase, and 20% of oil produced during the production phase to oil refineries located in the Republic of Kazakhstan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|f) | Commitment to create liquidation fund  In accordance with the Subsurface Use Contracts, the Partnership is obliged to establish a liquidation fund to finance the liquidation of the consequences of its oil and gas operations in the amount of 1% of total amount of investments during the period covered by the Subsurface Use Contracts, which shall be made to the special deposit account in any bank in the Republic of Kazakhstan. The Partnership is also obliged to obtain Government approval of the program on liquidation of consequences of its operations under the Subsurface Use Contracts, including a budget of liquidation costs, not later than 360 days before the expiration of the Subsurface Use Contracts.

Had the Partnership accrued a liquidation fund according to the Subsurface Use Contracts, the undiscounted provision as at June 30, 2004 would have been approximately $539,000 (December 31, 2003 - $Nil).                                                          
|g) | Insurance commitments  In accordance with the Subsurface Use Contracts, the Partnership is obliged to develop the Business, Property and Liability Risk Insurance Program and submit it for approval to the Competent Body.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



17.

STOCKHOLDERS EQUITY



On March 9, 2004, the Company solicited votes from selected stockholders of record and received an affirmative vote of 51% to approve an increase in the number of the Company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 Companys Certificate of Amendment to adjust the Companys authorized share capital to 150,000,000. [



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



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



23



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 April 3, 2004, Canaccord Capital (Europe) Limited exercised a warrant for 299,716 shares for proceeds of $74,929.



On April 12, 2004, the Company issued 299,716 common shares to Canaccord Capital (Europe) Limited for total proceeds of $74,929 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 Company closed on the first tranche of a private placement and issued 13,483,750 shares for gross proceeds of $6,741,875.  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 Company and warrants to be issued to the finders that equal 6% of the shares issued under the private placement totaling to $280,157 of share issuance costs.



18.

NEW ACCOUNTING PRONOUNCEMENTS



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



In March 2004, FASB issued an Exposure Draft Share-Based Payment.  This Exposure Draft proposes to revoke the alternative of accounting for employee stock based compensation under the intrinsic value method. As the Company is currently using the provision under SFAS 123 that allow the use of the intrinsic method of accounting for share-based payments, it is anticipated that the adoption of this Exposure Draft may have a material impact on the Companys results of operations or financial position. However, at this time the Exposure Draft has neither been accepted nor rejected by the FASB. If adopted the application of this policy is expected to be for fiscal years beginning after December 2004.



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



The Financial Accounting Standards Board ("FASB") is currently evaluating an issue involving the classification of mineral rights. In June 2001, FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets," which discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review of impairment. Intangible assets with a determinable useful life will continue to be amortized over that period. The amortization provisions apply to goodwill and intangible assets acquired after June 30, 2001. SFAS No. 141 and 142 clarify that more assets should be distinguished and classified between tangible and intangible. We believe the treatment of such mineral rights as tangible assets under the successful efforts cost method of accounting for oil and gas properties is appropriate. An issue has been raised regarding whether these mineral rights should be classified as tangible or intangible assets.  FASB has recently issued proposed FASB Staff Position ("FSP") No. 142-b, "Application of FASB Statement 142, Goodwill and Other Intangible Assets, to Oil- and Gas-Producing Entities," which supports our current accounting treatment of mineral rights. This FSP is expected to be finalized and issued later this year.



24



19.

SUBSEQUENT EVENTS



On July 7, 2004, the Company closed a private placement and issued 2,616,250 shares at $0.50 per share for gross proceeds of $1,308,125.  In connection with the private placement, the Company issued warrants exercisable to acquire 491,315 common shares at $0.50 per share partial payment of commissions. These warrants expire on January 6, 2006.



On August 2, 2004, KoZhaN completed a Letter of Intent with BT-Oil LLP, a Kazakhstan limited liability partnership.  Under the terms of the Letter of Intent, KoZhaN will provide to BT-Oil up to a 45% interest of its interest in the Morskoe field, the right to market the oil production, a payment of $150,000 to cover well costs and financing of 50% of the drilling works exceeding $700,000.  In return, BT-Oil will construct and maintain the bridge and road to Well #10, finance 100% of the drilling works costs up to $700,000 and finance 50% of drilling works costs exceeding $700,000.



On August 6, 2004, KoZhaN entered into a drilling contract with Precaspiburneft-Kazakhstan LLP under which Precaspiburneft-Kazakhstan will construct and drill one exploration well on the Morskoe field and shall have the option to construct and drill two additional wells.  The cost for the first well is estimated, in the contract, at approximately $627,391.



25



ITEM 2:  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS



FORWARD-LOOKING STATEMENTS



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



|- | Changes in general political, social, economic and business conditions in China and Kazakhstan;                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|- | Economic and political uncertainties affecting the capital markets;                                                                                                                                                                             
|- | Changes in technology and the Internet marketplace in China;                                                                                                                                                                                    
|- | The business of exploration, development, production and refining of oil and natural gas reserves, the levels of those reserves and the marketing of crude oil and refined products and the ability to increase the quality of refined products;
|- | Fluctuations in oil and gas and refined product prices;                                                                                                                                                                                         
|- | Our ability to manage our growth;                                                                                                                                                                                                               
|- | Changes in business strategy or development plans;                                                                                                                                                                                              
|- | Our future capital needs;                                                                                                                                                                                                                       
|- | Changes in, or failure to comply with, government regulations or changes in interpretation, application or enforcement of government regulations;                                                                                               
|- | Costs arising from environmental liability; and                                                                                                                                                                                                 
|- | Our ability to manage currency fluctuations.                                                                                                                                                                                                    



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



The following financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes to such consolidated financial statements included in this report.  We have derived the statements of operations data and the information as at June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 from unaudited condensed consolidated financial statements.



26



SUMMARY FINANCIAL DATA



Statement of Operations Data:

|                                                             | THREE MONTH PERIOD ENDED JUNE 30, 2004 | THREE MONTH PERIOD ENDED
JUNE 30, 2003 | SIX MONTH PERIOD ENDED JUNE 30, 2004 | SIX MONTH PERIOD ENDED
JUNE 30, 2003 | PERIOD FROM FEBRUARY 1, 2000 TO
JUNE 30, 2004
|------------------------------------------------------------ | -------------------------------------- | -------------------------------------- | ------------------------------------ | ------------------------------------ | ---------------------------------------------
|Sales                                                        | $33,185                                | $48,530                                | $64,548                              | $93,734                              | $411,397                                     
|Net loss                                                     | $937,355                               | $506,093                               | $1,744,314                           | $886,953                             | $23,738,782                                  
|Basic and diluted (loss) per share                           | ($0.02)                                | ($0.02)                                | ($0.04)                              | ($0.04)                              | -                                            
|Basic and diluted weighted average common shares outstanding | 41,615,500                             | 22,513,801                             | 43,234,825                           | 22,513,801                           | -                                            



Balance Sheet Data:

|                           | June 30, 2004 | December 31, 2003
|-------------------------- | ------------- | -----------------
|Cash and cash equivalents  | $664,106      | $1,068,451       
|Working capital            | ($1,723,482)  | $2,241,254       
|Total assets               | $19,866,118   | $2,790,706       
|Total stockholders equity | $10,166,455   | $2,528,393       



NATURE OF OPERATIONS



On January 12, 2004, we completed the acquisition of a 90% interest in KoZhaN LLP through our 100% owned subsidiary BSEK.  On May 11, 2004, we, through our 75% owned subsidiary, BSEA, completed the acquisition of 100% of the issued and outstanding charter capital of Vector.  We intend to direct the majority of future capital investment to oil and gas exploration within the acquired properties.  We are also seeking other international oil and gas opportunities.  We also plan to maintain our existing Internet operations in China.



RESULTS OF OPERATIONS



Revenues



On a consolidated basis, we earned revenues of $33,185 for the three months ended June 30, 2004 (2003  $48,530) and $65,548 (2003 - $93,734) for the six months ended June 30, 2004.  The following discussion provides a breakdown of revenue within our corporate structure.



China Energy Ventures Corp.



For the three and months ended June 30, 2004 and 2003, China Energy Ventures Corp. did not earn revenues. We have added oil and gas properties through the acquisition of BSEK and Vector, however these properties are currently undeveloped and consequently did not provide revenue during the period.



China Energy Ventures Corp. earned revenues through its subsidiary Chengdu Big Sky Technology Services Ltd.



Chengdu Big Sky Technology Services Ltd.



Chengdu Big Sky Network Technology Services Ltd., a wholly owned subsidiary, referred to as Chengdu Technology Services, commenced operations in October 2001 and had 226 corporate subscribers and 121 residential subscribers connected at June 30, 2004  (166 corporate subscribers and 99 residential subscribers at June 30, 2003). Chengdu Technology Services recorded gross sales of $33,185 in the second quarter of 2004 and $48,530 in the second quarter of 2003.  For the six months ended June 30, 2004 gross sales of $64,548 (2003 - $93,734) were earned.  During the three and six month period we lost some larger subscribers while gaining smaller subscribers and were unable to reduce the amount of bandwidth we had purchased. Management is currently re-aligning the costs structure to meet the lower revenue base in these operations. If the operation becomes cash flow positive, we anticipate it will re-invest its after tax income, if any, in related business opportunities in China. We do not anticipate Chengdu Technology Services will pay any dividends in the foreseeable future.

27





Expenses



During the three months ended June 30, 2004 and 2003, we incurred operating expenses of $880,380 and $398,836 respectively.  The following table provides a breakdown of operating expenses by category.



General Operating Expenses

|                            | THREE MONTH PERIOD ENDED JUNE 30, 2004 | THREE MONTH PERIOD ENDED
JUNE 30, 2003 | SIX MONTH PERIOD ENDED JUNE 30, 2004 | SIX MONTH PERIOD ENDED
JUNE 30, 2003 | PERIOD FROM FEBRUARY 1, 2000 TO
JUNE 30, 2004
|--------------------------- | -------------------------------------- | -------------------------------------- | ------------------------------------ | ------------------------------------ | ---------------------------------------------
|Calgary Office Costs        | $398,915                               | $133,054                               | $584,634                             | $234,794                             | $3,960,739                                   
|Beijing Office Costs        | $162,115                               | $105,000                               | $317,347                             | $210,000                             | $2,542,996                                   
|Big Sky Technology Services | $18,198                                | $20,490                                | $42,849                              | $73,555                              | $314,493                                     
|Big Sky Energy Kazakhstan   | $296,725                               | $-                                     | $368,763                             | $-                                   | $368,763                                     
|Big Sky Energy Atyrau       | $26,322                                | $-                                     | $26,322                              | $-                                   | $26,322                                      
|Professional Services       | $28,606                                | $44,605                                | $103,744                             | $47,870                              | $2,068,210                                   
|Investor Relations          | $64,574                                | $5,664                                 | $126,607                             | $5,664                               | $1,296,696                                   
|Non Cash Compensation       | ($177,541)                             | $171,646                               | $14,179                              | $258,049                             | $2,481,137                                   
|Extinguishment of debt      | $-                                     | $-                                     | $-                                   | $-                                   | ($1,422,225)                                 
|Miscellaneous               | $-                                     | $-                                     | $-                                   | $-                                   | $212,114                                     
|TOTAL                       | $817,914                               | $480,459                               | $1,584,446                           | $829,932                             | $11,849,245                                  



Calgary office expense includes the costs of executive management and administrative consultants, rent, insurance, travel, and general office costs associated with maintaining a business office in North America.  For the three months and six months ended June 30, 2004, Calgary office costs have increased 67% and 60% over the same periods in 2003 due to additional consulting costs relating to the acquisition of Vector, BSEK and the concluding of a private placement.



Beijing office costs include the costs of maintaining business operations and our principal business office in China. In the three and six months ended June 30, 2004, Beijing office costs have increased 35% and 34% over the same periods in 2003. This reflects higher consultant fees in connection with negotiations with Chinese national oil companies regarding potential farm-out agreements.



Big Sky Energy Kazakhstan Ltd. expenses include the costs of ramping up and operating the KoZhaN office and work on the road to our first well in the Morskoe field. As our acquisition of BSEK and KoZhaN took place on January 12, 2004, the bulk of ramping up and work on building the road took place in the second quarter.  The operating expenses included such items as travel of our staff to set up the KoZhaN office in Almaty, consulting contracts in connection with the evaluating of seismic information and future drilling prospects, and legal advise on potential acquisitions and other general legal services.



Professional services include accounting, audit and legal advisory costs.  Professional costs have decreased in the second quarter, but increased overall in the first half of 2004 compared to the same periods in 2003.  The overall increase in professional services in the first half of 2004 was due to the compiling and filing of registration statements on Form SB-2 which were filed with the U.S. Securities and Exchange Commission.



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 (recovery) in the second quarter of 2004 was ($172,541) (2003  $90,023) and $14,179 (2003 - $176,426) for the first half. The second quarter and first half recovery reflects a recovery of previously deferred compensation expenses of $503,500 and $636,000 respectively, and amortization of $325,958 and $650,180 of the deferred compensation asset.



28



Summary of Non-cash Compensation Expense for the three months ended June 30, 2004:

|                                  | Expense    | Unamortized Deferred Compensation
|--------------------------------- | ---------- | ---------------------------------
|Options                           |            |                                  
|Options granted February 2, 2001  | $-         | $-                               
|Options granted June 29, 2001     | 391        | 3,058                            
|Options granted November 13, 2001 | 10,711     | 129,759                          
|Options granted August 27, 2002   | 482        | 1,524                            
|Options granted October 21, 2002  | 2,219      | 4,627                            
|Options granted October 21, 2002  | (195,011)  | 207,354                          
|Options granted April 26, 2003    | 3,667      | 12,009                           
|Total                             | ($177,541) | $358,331                         



Losses



The Chengdu joint venture is accounted for on an equity basis.  The loss in the Chengdu joint venture was $29,027 for the three months ended June 30, 2004 (2003 - $46,035) and $87,845 for the six months ended June 30, 2004 (2003 - $86,248) and has not been recognized in the consolidated statement of operations as a result of the write down of the entire investment in the Chengdu joint venture in 2001.



The loss per share for the three months ended June 30, 2004 was $0.02 (2003 - $0.02) and $0.04 (2003 - $0.04) for the six months ended June 30, 2003.



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



CAPITAL EXPENDITURES AND INVESTMENTS



China Energy Ventures Corp.



In 2003, we decided to redirect our efforts towards the exploration and exploitation of oil and gas in selected countries.  Our objective is to find fields with proven reserves 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 such country that meets these criteria and commenced efforts to locate acquisition opportunities there.



During the first quarter, we successfully completed the acquisition of BSEK and its subsidiary,  KoZhaN, and in the second quarter, 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. We expect this new direction to bring increased value as the management team has much greater expertise and experience in the oil and gas business. We also acquired a royalty interest on the revenues of BSEK.



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 $14,000,000.  We anticipate we will be able to meet these capital costs through a number of financing alternatives. The investment commitment of $14,000,000 is required to be spent on capital 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.



29





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.



As a result of these commitments, the majority of our future capital expenditures are expected to be incurred in the oil and gas business.  We are forecasting capital expenditures of $1,500,000 in 2004 to develop the Morskoe field in Kazakhstan, including the licensing and drilling of one well, the installation of production facilities and related overhead. As of June 30, 2004, we had not incurred any of these expected costs.



Chengdu Big Sky Technology Services Ltd.



During the three and six months ended June 30, 2004, we advanced an additional $Nil (2003 - $Nil) and $10,000 (2003 - $Nil) in working capital to our Chengdu Technology Services. We have invested approximately $640,488 in equipment and working capital to date. We intend to add equipment and working capital based on an analysis of the potential return on investment from such equipment or working capital. Additional investments will be made based upon the potential for a short-term payback of such investment.  Future growth is anticipated to be funded primarily by revenues from services.



LIQUIDITY AND CAPITAL RESOURCES



As of June 30, 2004, we had cash and cash equivalents of $664,106 that were included in the working capital deficit of $1,723,482.  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 six month period.  During the first half of 2004, we closed on the first tranche of a private placement and issued 13,483,750 shares for proceeds of $6,561,235 net of share issuance costs.  Subsequent to June 30, 2004, we closed the private placement raising an additional $1,308,125 by issuing an additional 2,616,250 shares.   Costs associated with both tranches of the private placement include a finders 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 $280,157 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.



Despite showing signs that Chengdu Technology Services was generating sufficient cash flow from operations to fund its ongoing capital requirements in 2003, Chengdu Technology Services required additional capital investment of $10,000 from China Energy Venture Corp. during the period. Management is committed to maintaining these operations only if the additional capital will have the potential for a short-term payback of such investment. If Chengdu Technology Services generates cash flow that is in excess of its requirements, we anticipate it will re-invest this excess cash flow in related business opportunities in China. We do not anticipate Chengdu Technology Services will pay any dividends in the foreseeable future.



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 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 $200,000 per month.  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 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. On August 2, 2004, we entered into a Letter of Intent with BT Oil LLP, a Kazakhstan construction company.  This Letter of Intent contemplates that BT Oil LLP will complete all road and lease construction and pay for the drilling of our first well on the Morskoe field in return for a 45% interest in our Morskoe field.  Management anticipates that the well will be spud by mid-September 2004 following the completion of lease construction. We intend to leverage our relationships with personnel at Chinese national oil companies to have them partner with us in these projects and to have them provide the initial funding to establish production at the selected oil and gas fields in Kazakhstan.  BTMeeting our future financing requirements will be dependent on our ability to develop oil and gas joint venture partnerships on favourable terms, our ability to access equity capital markets and, after achieving or acquiring sustainable production, 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. Should the Company be unable to meet its obligations under the Subsurface Use Contracts due to a lack of capital, the Competent Body has the right to terminate the contracts after giving the Company 90 days written notice.



30



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 June 30, 2004.



|                                                                                     |             | Exploration phase | Production phase
|------------------------------------------------------------------------------------ | ----------- | ----------------- | ----------------
|Time period                                                                          | Total       | Within 1 year     | 1 - 3 years     
|Estimated dates                                                                      |             | 2004              | 2005 - 07       
|Production levels (tonnes of oil)

(One barrel of oil equals approximately 7 tonnes) | 4,000t      | 40,000t           | 150,000t        
|                                                                                     |             |                   |                 
|Operating leases                                                                     | $283,578    | $ 86,958          | $196,620        
|Historical costs (Owed to Kazkhstan Government)                                      | 11,424,278  |                   |                 
|Social sphere development liability (Astana and Atyrau)                              | 3,030,000   |                   |                 
|Social development commitment (Astana and Atyrau)                                    | 1,389,000   |                   |                 
|Investment commitment (Including investment in local personnel)                      | 122,900,000 | 1,500,000*        | 3,000,000*      
|Liquidation fund (Obligations incurred to date)                                      | 40,000      |                   |                 
|Commercial production milestone payments                                             | 1,300,000   |                   |                 
|                                                                                     |             |                   |                 
|Total                                                                                | 140,366,856 | 1,586,958         | 3,196,620       



* As disclosed in note 13 g) to the condensed 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 of payment and or the dollar amount of the future payments:



1.

Quarterly payments to the non-controlling partners in the Partnership  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.

31





PLAN OF OPERATION



On a monthly basis, our minimum operating costs are approximately $150,000.  As of August 23, 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 November 2004.

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 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. On August 2, 2004, we entered into a Letter of Intent with BT Oil LLP, a Kazakhstan construction company.  This Letter of Intent contemplates that BT-Oil LLP will complete all road and lease construction and pay for the drilling of our first well on the Morskoe field in return for a 45% interest in our Morskoe field.  Management anticipates that the well will be spud by mid-September 2004 following the completion of lease construction.



We intend to leverage our relationships with personnel at Chinese national oil companies to have them partner with us in these projects and to have them provide the initial funding to establish production at the selected oil and gas fields in Kazakhstan. Meeting our future financing requirements will be dependent on our ability to develop oil and gas joint venture partnerships on favourable terms, our ability to access equity capital markets and, after achieving or acquiring sustainable production, 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. Should the Company be unable to meet its obligations under the Subsurface Use Contracts due to a lack of capital, the Competent Body has the right to terminate the contracts after giving the Company 90 days written notice.



CRITICAL ACCOUNTING ESTIMATES



The accounting policies used in preparing the unaudited interim condensed consolidated financial are consistent with those used in the preparation of the 2003 annual condensed consolidated financial statements, except as disclosed in Note 3 to the unaudited interim condensed consolidated financial statements. Certain of these policies involve critical accounting estimates because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.  The following is a summary of the newly adopted critical accounting estimates.



Successful efforts



Under this policy we capitalize all expenditures for property acquisitions and all development costs (including development dry holes) and support equipment and facilities. 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.



The critical estimates relating to this policy involve determining when the Company is involved in exploration versus development of oil and gas reserves. This choice effects whether costs related to the drilling of dry holes are capitalized or expensed in the period.



We believe that this accounting estimate is significant because it is susceptible to a significant judgment by management and the company has no previous experience on its properties from which to draw conclusions, and the impact of classification of wells as either exploratory or development would have a material impact on the assets reported on our balance sheet as well as our results from operations.



We believe that our estimates regarding the company being in the exploration stage of development are reasonable. Also we believe that this estimate is consistent with current conditions, internal planning and expected future operations, this estimate is subject to significant uncertainties and judgment.



The adoption of this policy in the period has resulted in the capitalization of all cost relating to oil and gas property acquisitions. No depletion or other expenses have been recorded for the period the properties have not yet begun any production. As there was no drilling activity in the period the application of estimates has not had a significant impact on the companys reported financial results in the period, however it may in future periods.



32



Impairment of long-lived assets - oil and gas properties



We review long-lived assets including oil and gas properties and certain identifiable intangible assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the assets, whereas such assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.



We believe that the accounting estimate related to asset impairment is a critical accounting estimate because it is highly susceptible to change from period to period as it requires management to make assumptions about future sales and margins and market conditions over the long-term life of the assets; and the impact that recognizing an impairment would have on the assets reported on our balance sheet as well as our operations may be material.



We believe that our estimates of future cash flows and fair value are reasonable. Although we believe these estimates are consistent with current conditions, internal planning and expected future operations, such estimates are subject to significant uncertainties and judgments. As a result, it is reasonably possible that the amounts reported for asset impairments in connection with the above-described initiatives could be different if we were to use different assumptions or if market and other conditions were to change in the future. It is also possible that forecast cash flows used to support the remaining carrying values of the assets may change in the future due to uncertain market conditions, changes to our strategies, or other factors and could also result in higher charges than estimated to date. The changes could result in non-cash charges that could materially affect our results of operations and financial position.



The applications of estimates in the period did not result in any adjustments to the carrying values of our assets or the companys reported financial results, however it may in future periods.



Income taxes



We operate in and in several tax jurisdictions and have acquired assets in other jurisdictions. As such, our future earnings, and potentially our capital are subject to various rates of taxation. We are required to estimate our income taxes in each of these jurisdictions as part of preparing our consolidated financial statements. These estimates consider, among other factors, differing tax rates between jurisdictions, allocation factors, tax credits, nondeductible items, changes in enacted tax laws and rates, and managements expectations of future results.



We estimate deferred income taxes based upon temporary differences between the carrying basis of our assets that we report in our consolidated financial statements and our tax basis as determined under applicable tax laws. We record the tax effect of these temporary differences as deferred income tax assets or liabilities, as applicable, in our consolidated financial statements. Future income tax assets generally result in deductible amounts in determining taxable income of future periods when the carrying amount of the asset or liability is recovered or settled. Future income tax liabilities typically reflect taxable amounts in determining taxable income of future periods when the carrying amount of the asset or liability is recovered or settled.



We use judgment and estimates when calculating income taxes. If our judgments and estimates prove to be inaccurate, or if certain tax rates or laws change, our results of operations and financial position could be materially impacted in future periods.



Based on these estimates, during the period we recorded a deferred tax liability due to a temporary difference that arose on the acquisition of BSEK and BSEA that could not be offset against our tax losses in other jurisdictions.



OFF-BALANCE SHEET ARRANGEMENTS



We did not have any off-balance sheet arrangements at June 30, 2004.



33



ITEM 3. CONTROLS AND PROCEDURES



As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the Exchange Act), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as at June 30, 2004, being the date of our most recently completed fiscal quarter.  This evaluation was carried our under the supervision and participation of Mr. Matthew Heysel, our Chief Executive Officer and Mr. Thomas Milne, our Chief Financial Officer.



Based upon the aforementioned evaluation, Mr. Heysel and Mr. Milne concluded that the Company's disclosure controls and procedures are effective in timely alerting management to material information relating to the Company required to be included in our periodic SEC filings.  There have been no significant changes in our internal control over financial reporting or in other factors that have materially affected or is reasonably likely to materially affect our internal control over financial reporting.



PART II



ITEM 1.  LEGAL PROCEEDINGS



On July 6, 2004, we and our Chief Executive Officer, Matthew Heysel (collectively the Plaintiffs), filed for a Temporary Restraining Order and Preliminary Injunction Hearing in the Third Judicial District Court of the State of Utah, County of Salt Lake.  The Plaintiffs allege that Mr. Louis Wang, a former director of one of China Energy Ventures Corp.s wholly-owned subsidiaries, (the Defendant) entered into a Resolution, which constituted a lock-up agreement in connection with Mr. Wangs shares of China Energy Ventures Corp.  Under the terms of the lock-up agreement, Mr. Wang agreed not to sell, assign or encumber his shares of China Energy Ventures Corp. until December 1, 2006.  Mr. Wang has made attempts to remove the restrictive legend from his shares and asserts that his stock is not bound by the lock-up agreement.  The Court in this matter issued a temporary restraining order enjoining Lu Wang and our transfer agent from attempting to sell, assign or encumber any of the 810,000 shares of common stock held in Mr. Wangs name.  A hearing on the preliminary injunction was held on July 19, 2004, and was continued through to July 26, 2004. At the July 26, 2004 hearing, the Temporary Restraining Order was continued and a preliminary injunction was granted enforcing the terms of the lock-up agreement.



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 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS



a)  Sales of Unregistered Securities



Regulation S Issuances



On April 12, 2004, we issued 299,716 common shares to Canaccord Capital (Europe) Limited 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. These securities were issued to a non-U.S. entity outside the United States.



On May 13, 2004, we issued 5,483,750 shares to accredited investors at $0.50 per share for gross proceeds of $$2,741,875.  These securities were issued to non-U.S. persons outside the United States.



On May 28, 2004, we issued warrants exercisable to acquire 69,000 common shares at $0.50 per share to Credifinance Securities Limited as part of their commission in assisting us raise funds through a private placement.  These warrants expire on May 18, 2007.



On June 24, 2004, we granted options exercisable to acquire 100,000 common shares to a consultant.  These options were priced at the fair market value on the date of grant with an exercise price of $0.56 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 June 24, 2009.



On July 6, 2004, we issued warrants exerciseable to acquire 491,315 common shares at $0.50 per share to Camp Kuriakos, Wolverton Securities and Canaccord International Ltd. as part of their commission in assisting us raise funds through a private placement.  These warrants expire on January 6, 2006.



On July 7, 2004, we issued 2,616,250 shares to accredited investors at $0.50 per share for gross proceeds of $1,308,125.  These securities were issued to non-U.S. persons outside the United States.

34





Except as noted below, 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 therefrom and we are required to refuse to register any transfer that does not comply with such requirements.



Regulation D Issuances



On May 13, 2004, we issued 8,000,000 shares to accredited investors at $0.50 per share for gross proceeds of $$4,000,000.  Such investors subscribed for a total of 8,000,000 shares at a price of $0.50 per share or total proceeds of $4,000,000. These issuances of shares were exempt from registration pursuant to Rule 506 of Regulation D. Neither we nor any person acting on our behalf offered or sold these securities by any form of general solicitation or general advertising. The shares sold are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom. Each purchaser represented to us that he was purchasing the securities for his own account and not for the account of any other persons. Each purchaser was provided with written disclosure that the securities have not been registered under the Securities Act of 1933 and therefore cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom.



b)  Use of Proceeds from Sales of Registered Securities



Not Applicable.



ITEM 3.  DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



ITEM 5.  OTHER INFORMATION



Not Applicable.



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K



a) Exhibits.



|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 (5)     | Certificate of Amendment to Articles of Incorporation of Institute For Counseling, Inc. filed with the Secretary of the State of Nevada on March 22, 2000  
|3.3 (3)     | Certificate of Amendment to Articles of Incorporation of Institute For Counseling, Inc. filed with the Secretary of the State of Nevada on April 14, 2000  
|3.4 (1)     | By-Laws of the Company, dated November 9, 1993                                                                                                             
|3.5 (14)    | Amended and Restated By-Laws of the Company, dated August 8, 2001                                                                                          

35



|3.6 (25)  | Certificate of Amendment to Articles of Incorporation of China Broadband Corp. filed with the Secretary of State of Nevada on December 29, 2003                                                                                                                                                           
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.7 (25)  | Certificate of Amendment to Articles of Incorporation of China Energy Ventures Corp. filed with the Secretary of State of Nevada on April 9, 2004                                                                                                                                                         
|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                                                                                                                                                                                    
|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.

36



|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                                                                                        
|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                                                      

37



|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 (26) | 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 (26) | 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      | Drilling Contract No. KOZ/CON/001/04 dated August 16, 2004 between KoZhaN LLP and Precaspiburneft-Kazakhstan LLP                                                                                             
|14 (23)    | Code of Business Conduct and Ethics                                                                                                                                                                          
|16.1 (9)   | Change in Auditor Letter of Amisano Hanson                                                                                                                                                                   
|16.2 (10)  | Change in Auditor Letter of Arthur Anderson LLP                                                                                                                                                              
|21.1 (26)  | List of subsidiaries of registrant                                                                                                                                                                           
|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 27, 2004.                                                                                                                                                              



b) Reports on Form 8-K.



|i.   | Form 8-K filed May 18, 2004 reporting the approval by the Companys board of directors of commencement of a private placement of up to 30,000,000 shares of common stock at a price of $0.50 and the closing of the first tranche of said private placement, the completion of the acquisition of Vector Energy West LLP and the completion of an Agreement for Assignment of Creditors Rights as part of the Vector Energy West LLP acquisition.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ii.  | Form 8-K filed July 6, 2004 reporting the closing of the Companys private placement raising $8,050,000.                                                                                                                                                                                                                                                                                                                                          
|iii. | Amended Form 8-K filed August 6, 2004 to report the financial statements of Vector Energy West LLP, as well as the Pro Forma unaudited condensed consolidated financial statements of China Energy Ventures Corp. in connection with the acquisition of Vector Energy West LLP.                                                                                                                                                                   

38



SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





|                       | China Energy Ventures Corp.
|---------------------- | ---------------------------
|Date:  August 23, 2004 | By:                        
|Date:  August 23, 2004 | By:                        



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