Annual Report 2008

West Siberian Resources Ltd 2008

Revenues MUSD • Successful merger with Alliance Oil Company

Cash fl ow from operations, before changes in working capital

MUSD • Cash fl ow increased to MUSD 367

Oil reserve growth Proven and probable reserves • Proven and probable reserves Million barrels increased by 35%

Total oil production and refi ning volumes

• 24.6 million barrels of oil were Million barrels refi ned and 17.4 million barrels

of oil were produced.

Crude oil production Oil refi ning

Comparative information for 2004–2007 presented in graphs and tables on pages 3–21 refers to data from WSR’s previous disclosures, including previous annual reports, unless otherwise noted. In the fi nancial statements presented on pages 34–92, all comparative information refers to Alliance Oil Company’s historical fi nancial statements unless otherwise noted.

Annual Report 2008

The Annual General Meeting

The company’s Annual General Meeting (“AGM”) will be held on May 28, 2009 at 4 pm at the Stockholm Concert Hall (The Grünewald Hall), in Stockholm, Sweden. Holders of Swedish Depository Receipts, (“SDRs”), of the Company who wish to attend the AGM must be listed in the register of directly registered holders of SDRs kept by Eu- roclear Sweden AB on Friday, May 22, 2009 and notify Skandinaviska Enskilda Banken AB (publ) (“SEB”) of their intention to attend the AGM not later than the same day, Friday, May 22, 2009 at 5.00 pm. SDR holders registered in the name of a nominee must have their SDRs re-registered in their own names in the Euroclear Sweden AB register in order to attend and vote at the AGM. SDR holders who hold SDRs through a nominee must therefore notify their nominee to request a temporary owner registration (so-called voting-right registration) in ample time before Friday, May 22, 2009 if they wish to attend and vote. SDR holders who are directly registered in the shareholder register or who have a voting-right registration by May 22, 2009 may vote at the AGM. Notice of the intention to attend the AGM should be given to SEB, by mailing to the address: SEB Issue department, Special Services, RB6, SEB Group Operations, SE-106 40 Stockholm, email: [email protected] or by faxing +46 8 763 62 50 or phone +46 8 763 55 60.

Financial information

The company plans to publish the following fi nancial reports: Three months report (January – March 2009) on May 28, 2009 Six months report (January – June 2009) on August 27, 2009 Nine months report (January – September 2009) on November 26, 2009 Twelve months report (January – December 2009) in February 2010

The company provides continuous operations updates and reports major developments in accordance with the listing agreement with NASDAQ OMX Nordic.

All information is directly published on the company’s website: www.westsiberian.com

WEST SIBERIAN Resources Ltd

Annual Report 2008

Contents

West Siberian Resources Ltd 2008 3

Overview of Operations 6

Message from the Managing Director 8

Summary 2008 10

Share Data 20

Corporate Governance Report 22

Corporate Social Responsibility 32

Financial Statements 2008 34 • Income statement 34 • Balance sheet 35 • Statement of cash fl ow 36 • Statement of changes in equity – group 37 • Statement of changes in equity – parent company 38 • Key fi nancial and operating ratios, with defi nitions 39

Notes to the fi nancial information 41

Independent Auditors’ Report 94

Supplemental information 96

Abbreviations and Terms Used 98

Addresses 99

Annual Report 2008

Overview of Operations

Timano-Pechora Region Russian Far East Crude oil production Network of gas stations, wholesale terminals and transportation

Moscow Head office

Khabarovsk Oil refinery

Atyrau Region (Kazakhstan) Tomsk Region Crude oil production Crude oil production

Volga-Urals Region Crude oil production

WEST SIBERIAN Resources Ltd

Tynda

The Amur oblast Skovorodino Bolshoy Never

Taldan Zeya Magdagachi Tygda Sivaki

Shimanovsk

Novokievsky Uval Svobodny The Khabarovsk krai Seryshevo Berezovy Belogorsk Ivanovka Ekaterinoslavka Komsomolsk-na-Amure Blagoveshchensk Zavitinsk Tambovka Amursk Raychikhinsk Talakan Konstantinovka Progress Poyarkovo Novobureysk Selikhino Arkhara Lidoga Tyoploe Ozero Troitskoye Pashkovo Bira Obluchye Kirga Mayak Birobidzhan Smodovichi Khabarovsk Nikolayevka Korfovsky Pereyaslavka Khor СHINA Novostroyka Vyazemsky Kotikovo Lermontovka Bikin

Luchegorsk Pozharskoe Roshchino Dalnerechinsk Novopokrovka Rakitnoe The Primorsky krai Lesozavodsk Gornye Klyuchi Terney Plastun Kamen-Rybolov Dalnegorsk Pogranichny Spassk-Dalny Kavalerovo Chernigovka Chuguevka Sibirtsevo Arsenyev Ussuriysk Anuchino Olga Kiparisovo Artyom Volno-Nadezhdinskoe JAPAN Tavrichanka Vladivostok SEA OF JAPAN Nakhodka Zarubino

Annual Report 2008

Arsen E Idrisov Managing Director

Message from the Managing Director

Dear Shareholders, ess our own crude oil which provides supply security for For West Siberian Resources, 2008 was a year of many refi ning and marketing operations. We are also witness- achievements and challenges. We experienced a rapid ing the operational and fi nancial benefi ts of vertical in- price increase with crude oil prices fi rst reaching histori- tegration. In recent months, it has become evident that cal highs and then falling dramatically as recession fears we are well positioned to face the challenging market hit the oil market. Overall, the demand for crude oil and environment. oil products decreased precipitously driving down prices. For 2008, we report record revenues, EBITDA and cash Market conditions became more challenging towards fl ow. The net result was aff ected by a non-cash impairment the end of the year, particularly for our upstream seg- charge to the book value of upstream assets. Pro forma for ment. The economic downturn is expected to further the merger, in 2008 the combined company generated deepen this year to expose us to new threats and to open revenues of USD 2.9 billion, EBITDA of MUSD 629, and net new opportunities at the same time. income of MUSD 321 excluding the impairment charge. Our performance in 2008 was exceptionally good and Our diverse upstream asset base provides low-risk showed the ability to deal with an unstable environment. development opportunities and exploration opportuni- The merger with Alliance Oil Company and the transfor- ties from which we can grow reserves and production for mation into a fully integrated oil company has made us years to come. However, the market volatility is testing less vulnerable to market volatility with the downstream our industry with new challenges. We seek to minimise segment becoming increasingly important to our oper- operating costs, optimize capital expenditures and ef- ating and fi nancial performance. The integration has also fi ciently invest in development and exploration drilling. created a well balanced company with better fi nancing The company will maintain the focus on improving oper- opportunities, lower cost of capital and increased inves- ating effi ciencies while insuring long-term growth. tor awareness. The downstream refi ning and marketing business is The merger has enabled us to integrate upstream and well positioned to benefi t both from the growing Rus- downstream activities and participate throughout the oil sian Far East and neighbouring export markets. The industry value chain. We are now in the position to proc- Khabarovsk Oil Refi nery is located close to the borders

WEST SIBERIAN Resources Ltd

with China, North Korea and Japan which facilitates ac- the capital structure and lower the cost of capital as the cess to Asia Pacifi c rising petroleum markets. Our long- fi nancial markets stabilise. Important steps have been term outlook for the downstream sector stays clear and taken towards securing the long term debt funding for fi rm. In 2007, we initiated a great modernisation plan to the refi nery upgrade. make the Khabarovsk Oil Refi nery the best-in-class player Looking ahead to coming years, our objectives have in terms of operational effi ciency and quality of products, not changed. We will, however, always adjust to chang- and we look forward to complete this plan in 2012. ing markets. Despite current demanding conditions West Alliance Oil is a well recognised premium brand and Siberian Resources is committed and well positioned to market leader in the region with a strong focus to supply continue strengthening its presence in the Russian oil in- domestic markets with high quality oil products. We will dustry and growing both its upstream and downstream maintain our strategy on providing our customers with segments. a guaranteed quality and most excellent services while We owe our strong position to the dedicated eff orts improving our performance and delivering strong results of our employees in all regions. I wish to thank them all to shareholders. for their continued support and loyalty to the company For 2009, the budgeted targets are to produce 16 through these troublesome times. million barrels of crude oil and to refi ne and market 21 In order to further capitalise on the high awareness million barrels of oil products. The downstream target and greatly recognized value of the Alliance Oil brand refl ects that maintenance of the refi nery’s reforming will in the Russian oil markets, we plan to integrate all seg- reduce refi ning volumes in the last quarter 2009. ments under this brand and will propose that share- The capital expenditures budget amounts to MUSD 194 holders approve the change of the corporate name to out of which we plan to spend MUSD 58 in the upstream Alliance Oil Company Ltd. Following last year’s merger segment and MUSD 136 in the downstream segment. In this step marks the fi nal integration into one company, an environment of severely disrupted fi nancial markets – a dynamic and profi table business with a solid interna- and an uncertain oil price outlook, the modernisation of tional reputation. Khabarovsk Oil Refi nery and the Kolvinskoye oil fi eld development continue at slower rates than originally planned. We seek to maintain a solid balance sheet and fi nan- Arsen E Idrisov cial fl exibility. Our position should allow us to improve Managing Director

Oil production and refi ning capacity crude oil produced and refi ned per annum

mln bbls p.a. 35

20 Crude oil production 15 Oil refi ning capacity 10

0 2008 2012 actual estimated capacity

Annual Report 2008

Summary 2008

On April 10, 2008 West Siberian Resources completed the ended December 31, 2007 unless otherwise indicated. merger with Alliance Oil Company. Through the merger, Group revenue for the fi nancial year ended Decem- West Siberian Resources Ltd expanded its exploration and ber 31, 2008 was MUSD 2,721.57 (MUSD 1,618.10). The production (upstream) operations and added signifi cant revenues include revenues from sales of oil products, sa- oil refi ning and marketing (downstream) operations. Con- les of crude oil and other sales. Crude oil and oil product sequently, the enlarged group has vertically integrated oil volumes increased and average prices were higher than operations in Russia and Kazakhstan, set to capitalize on the in 2007. benefi ts of vertical integration in all stages of the oil and gas Cost of sales (including production costs for crude oil industry value chain. and oil products and costs of other sales) were MUSD In the merger, Alliance Oil’s shareholders contributed the 1,884.59 (MUSD 1,242.46) for the fi nancial year. entire share capital of Alliance Oil to WSR in exchange for EBITDA amounted to MUSD 585.04 (MUSD 194.81). 1,783,540,968 ordinary shares issued by WSR. In addition, Cash fl ows from operations amounted to MUSD 300.27 WSR issued warrants to subscribe for 99,682,500 ordinary (MUSD 124.24). shares at an exercise price of SEK 6.21 per share as part of the The net result was aff ected by a non-cash impairment merger agreement. charge amounting to MUSD 316.85 resulting from an im- From the second quarter of 2008, Alliance Oil Company’s pairment test of the oil and gas properties of the group. operations are consolidated in WSR’s fi nancial statements The impairment charge adjusts the upstream asset val- using the accounting model prescribed by IFRS 3 “Business ues recorded at the time of the merger with Alliance Oil combination” for “reverse acquisitions”. This accounting Company to refl ect current market conditions in accord- treatment requires Alliance to be treated as the accounting ance with relevant accounting standards. acquirer and WSR being presented as the acquiree. WSR will, The operating income amounted to MUSD 135.85 as the legal parent, continue to be presented as parent com- (MUSD 140.93). pany in future fi nancial reports. Net fi nance expenses were MUSD 31.32 (MUSD Thus, WSR’s operations before April 10, 2008 were not 32.65). Currency exchange rate losses amounted to consolidated in the group’s consolidated fi nancial state- MUSD 25.75 (gains of MUSD 15.52). The exchange rate ments for the fi nancial year ended December 31, 2008. losses were mainly represented by exchange rate loss- All comparative fi nancial information refers to Alliance es on the external loans and borrowings denominated Oil Company’s fi nancial statements for the fi nancial year in dollars obtained by the group’s Russian subsidiaries.

Net Result

MUSD Net Result

* Including an impairment charge of MUSD 317

WEST SIBERIAN Resources Ltd

Annual Report 2008

The exchange rates are recorded in equity as a translation diff erence, net of used for the Russian income tax, whereas for operating loans such gains and Rouble to the USD at losses are recorded in the income statement. The impact December 31, 2008 of the reassessment is that a loss of MUSD 117.75 before and 2007 were 29.38 income tax has been recorded in equity. The tax charge and 24.55 per USD. As amounted to MUSD 32.81 (MUSD 49.60). The net income from August 1, 2008 was MUSD 40.57 corresponding to USD 0.01 per share certain intercompany (MUSD 63.56 and USD 0.04 per share, respectively). loans to subsidiaries Total pro forma revenue for the fi nancial year 2008 in- have been reassessed cluding WSR’s operations from January 1, 2008 amount- Yevgeny Vorobeichik, to be viewed as ex- ed to MUSD 2,864.96. Pro forma EBITDA for the fi nancial Chief Operating Offi cer tended investments year amounted to MUSD 629.23. The pro forma operating rather than operating loans. The accounting treatment income for the fi nancial year amounted to MUSD 150.03 for such loans is that currency exchange gains and losses including the impairment charge of MUSD 316.85.

Financial Summary

PROFORMA TUSD 2008 2008 2007 2006 2005 2004 12 months 12 months 12 months 12 months 12 months 15 months

Total assets 2 391 450 2 390 941 1 133 818 970 206 425 848 91 752 Oil and gas properties 1 131 422 1 131 931 1 045 879 864 465 378 982 74 551 Refi ning properties 366 139 366 139 - - - - Current assets 587 571 587 573 77 054 95 368 38 242 9 457 Total liabilities 1 233 359 1 233 265 487 151 468 159 251 525 21 451 Shareholders’ equity 1 128 849 1 128 441 646 667 502 047 174 323 70 300 Minority share 29 242 29 235 295 310 313 - Profi t margin (before net fi nancial income/expenses and before tax) 5% 5% 9% 11% 15% 106% Equity ratio 48% 48% 57% 52% 41% 77% Result for the period 67 135 45 969 29 891 30 225 231 17 415 Result for the period excluding impairment charge and related deferred tax income 320 822 299 656 29 891 30 225 231 17 415 EBITDA (excluding impairment (charge)/reversal and disposal of subsidiaries shares) 629 232 585 042 120 899 81 628 25 727 3 702 Return on shareholders equity 6% 4% 5% 6% 0% 24% Oil production, bbls 17 415 838 13 892 793 10 637 650 8 010 855 2 976 312 1 176 903 Oil sales (to external customers), bbls 13 166 915 9 834 623 10 529 411 7 832 055 2 787 846 1 100 838 Total revenue 2 864 963 2 721 565 380 334 245 210 79 181 22 360 Revenue from sales of crude oil 598 041 455 424 371 696 237 980 73 544 22 119 Revenue from sales of barrel of crude oil, USD 45.42 46.31 35.30 30.39 26.38 20.09 Production costs per barrel of crude oil sold, USD 29.44 29.69 25.38 22.96 17.62 11.87 Oil refi ning, bbls 24 624 001 24 554 479 - - - - Revenue from sales of oil products 2 236 580 2 233 650 - - - - Revenue from sales of barrel of oil products, USD 90.83 90.97 - - - - Production costs per barrel of oil products, USD 70.63 70.61 - - - -

The pro forma fi nancial information was based on WSR’s and Alliance Oil’s audited fi nancial statements for 2008 prepared in accordance with IFRS and was compiled based on the assumption that WSR acquired 100% of the shares in Alliance Oil Company as at January 1, 2008 using the accounting model prescribed by IFRS 3 “Business combinations” for “reverse acquisitions” as Alliance’ shareholders owned 60% of WSR following the merger. This accounting treatment requires the assets and liabilities of WSR, being the legal parent, should be initially recorded at fair value in the consolidated fi nancial statements, while the assets and liabilities of the legal subsidiary, Alliance Oil, should be recognized and measured at their pre-combination carrying amounts. The diff erence between the cost of combination and consolidated net assets of WSR as at January 1, 2008 was allocated to WSR oil and gas properties and corresponding deferred tax liability. As a result the pro forma depletion charge for the fi nancial year 2008 and closing balances of oil and gas properties as of December 31, 2008 diff er from the respective values in the consolidated fi nancial statements for the fi nancial year ended December 31, 2008. Additional data and ratios are presented in the ”Key fi nancial and operating ratios” on page 39.

WEST SIBERIAN Resources Ltd

Urals Spot Price USD/bbl

2008 2009 Source: EIA

Exploration and Production (Upstream)

West Siberian Resources Ltd operates in three Russian 31, 2008. The proven oil rese rves increased by 60% (or by regions: Tomsk, Timano-Pechora and Volga-Urals, and in 98 million barrels) to 261.04 million barrels. The proven, Kazakhstan. In 2008, the exploration and development probable and possible reserves increased to 619.17 mil- program together lion barrels. The reserves were estimated by DeGolyer & with the acquisition of McNaughton (D&M) in accordance with Petroleum Re- Alliance Oil Company sources Management System (PRMS) guidelines. added proven and The group’s oil production for 2008 amounted to probable oil reserves 17,415,838 barrels (14,003,040 barrels) based on pro of 126 million barrels forma WSR and Alliance Oil Company production for the which increased total period. The consolidated fi nancial statements included proven and probable WSR oil production of 13,892,793 barrels. 4,290,673 bar- (2P) reserves by 35% rels were produced and sold intra-group for the period

Oleg Makeev, to 487.28 million bar- from April 11, 2008 to December 31, 2008. CEO Upstream rels as at December

Oil reserves and production

Production PRMS classifi cation of reserves as of Russian classifi cation of reserves as of 2008 December 31, 2008 December 31, 2008 (12 months) ’000 bbl 1P 2P 3P A+B+C1 C2 TOTAL Tomsk region oil fi elds 4 436 27 425 67 271 75 256 52 723 20 975 73 698

Timano-Pechora region oil fi elds 5 165 120 362 264 625 361 180 149 245 125 365 274 610

Volga-Urals region oil fi elds 7 393 105 213 142 245 169 593 90 795 26 735 117 530

Kazakhstan oil fi elds 422 8 039 13 136 13 136 9 973 - 9 973

Total 17 416 261 039 487 277 619 165 302 736 173 075 475 811

Additional information on oil reserves are presented in the ” Supplemental information” on page 96.

Annual Report 2008

Revenues from sales of crude oil were MUSD 455.42 Actual crude oil sales volumes and prices for export and (MUSD 72.15). Revenues from export of crude oil amoun- domestic markets (excluding intra-group crude oil sales ted to MUSD 223.19, revenues from export to CIS countri- of 4,290,673 barrels) are presented in the following table es amounted to MUSD 104.26 and revenues from do- (based on pro forma WSR and Alliance Oil Company sales mestic sales amounted to MUSD 127.97. volumes).

Oil sales volumes and prices in 2008

Export CIS Domestic Total

Sold volume (barrels) 5 489 786 2 931 547 4 745 582 13 166 915

Gross price (USD/barrel) 88.83 61.31 47.36 64.89

Net price (USD/barrel) 46.90 52.20 39.52 45.42

Selling expenses (USD/barrel) 4.94 11.90 1.63 5.29

Netback price (USD/barrel) 41.96 40.30 37.89 40.13

The net prices are calculated by deducting VAT (for Russian domestic sales) or export duty (for export far abroad and to CIS countries sales) from the gross prices. The netback prices are calculated by deducting VAT (for Russian domestic sales), railway and pipeline transportation costs or export duty, brokers’ commission and certain other costs (for export sales) or transportation, brokers’ commission and certain other costs (for CIS countries export) from the gross price.

Oil production costs were MUSD 316.14 (MUSD 60.15). from impairment test of the group’s oil and gas proper- Production and other taxes included in the oil produc- ties. The upstream segment operating income excluding tion costs amounted to MUSD 221.65 (MUSD 44.41). impairment charge amounted to MUSD 101.88. The depletion and depreciation charge for upstream assets was MUSD 106.93 (MUSD 23.57). The depletion Tomsk Region charges were calculated based on D&M PRMS classifi ca- Total pro forma production in the Tomsk region was tion of the company’s recoverable proven and probable 4,436,300 barrels (3,545,502 barrels) in 2008. Total oil reserves and estimates of future capital expenditures. production of 3,257,997 barrels was included in the con- The upstream segment operating result for the year solidated fi nancial statements for the fi nancial year 2008. was a loss of MUSD 214.97 (an income of MUSD 38.84) In total, 17 wells were drilled in the Tomsk region in the including impairment charge of MUSD 316.85 resulting fi nancial year 2008.

Production and Oil reserves – Tomsk Region

Production PRMS classifi cation of reserves as of Russian classifi cation of reserves as of 2008 December 31, 2008 December 31, 2008 (12 months) ’000 bbl 1P 2P 3P A+B+C1 C2 TOTAL

Middle Nyurola 1 241 9 678 28 865 35 646 28 743 - 28 743

Kluchevskoye 2 123 7 580 12 954 13 808 3 362 - 3 362

Puglalymskoye 527 7 209 8 932 9 161 10 803 13 332 24 135

Khvoinoye 545 2 958 16 520 16 641 9 815 7 643 17 458

Tomsk Region totals 4 436 27 425 67 271 75 256 52 723 20 975 73 698

WEST SIBERIAN Resources Ltd

Timano-Pechora Region was included in the consolidated fi nancial statements for Total pro forma production in the Timano-Pechora region the fi nancial year 2008. amounted to 5,164,573 barrels (3,343,502 barrels) for the In total, 11 production wells and 1 sidetrack were fi nancial year. Total oil production of 3,863,288 barrels drilled in the region in the fi nancial year 2008.

Production and Oil reserves – Timano-Pechora Region

PRMS classifi cation of reserves as of Russian classifi cation of reserves as of Production December 31, 2008 December 31, 2008 2008 (12 months) ’000 bbl 1P 2P 3P A+B+C1 C2 TOTAL

Middle Kharyaga 1 777 7 901 22 768 24 023 40 430 2 761 43 191

North Kharyaga 604 9 842 52 571 102 691 46 580 27 362 73 942

Lek-Kharyaga 2 784 13 493 35 465 46 405 16 222 2 982 19 204

Kolvinskoye 0 89 126 153 821 188 061 46 013 92 260 138 273

Timano-Pechora Region totals 5 165 120 362 264 625 361 180 149 245 125 366 274 610

Volga-Urals region fi nancial year consolidated fi nancial statements. Total pro forma production in the Volga-Urals region In total, 26 production wells, 5 exploration wells and amounted to 7,392,933 barrels in 2008 (6,863,433 barrels). 3 sidetracks were drilled in the region in the fi nancial Oil production of 6,349,477 barrels was included in the year 2008.

Production and Oil reserves – Volga-Urals Region

PRMS classifi cation of reserves as of Russian classifi cation of reserves as of Production December 31, 2008 December 31, 2008 2008 (12 months) ’000 bbl 1P 2P 3P A+B+C1 C2 TOTAL

Novo-Kievskoye 1 365 8 664 12 039 12 100 10 264 1 531 11 795

Kochevnenskoye 1 265 3 253 3 253 3 253 3 553 - 3 553

West Kochevnenskoye 491 2 106 2 594 2 594 2 503 - 2 503

Solnechnoye 460 1 294 1 747 5 016 1 428 - 1 428

Kovalevskoye 521 3 189 7 629 7 988 1 125 1 292 2 417

Borschevskoye 4 133 339 3 080 632 - 632

Kulturnenskoye 10 426 851 851 365 441 806

West Borshchevskoye - - 676 1 533 - - -

Stepnoozerskoye 2 214 69 047 93 586 106 782 50 298 9 509 59 807

Yelginskoye 1 063 17 101 19 531 26 396 20 627 13 962 34 589

Volga-Urals Region totals 7 393 105 213 142 245 169 593 90 795 26 735 117 530

Annual Report 2008

Kazakhstan Total production in the Kazakhstan region amounted to In total, 11 exploration wells were drilled in the region in 422,031 barrels in 2008 (250,602 barrels). the fi nancial year 2008.

Production and Oil reserves – Kazakhstan

PRMS classifi cation of reserves as of Russian classifi cation of reserves as of

Production December 31, 2008 December 31, 2008 2008 (12 months) ’000 bbl 1P 2P 3P A+B+C1 C2 TOTAL

Central Zhanatalap 331 5 970 9 670 9 670 6 397 - 6 397

South Zhanatalap 91 2 069 3 466 3 466 3 576 - 3 576

Kazakhstan totals 422 8 039 13 136 13 136 9 973 - 9 973

Total Assets vs Equity

MUSD

3 000

2 500

2 000 1 500

1 000

500

The equity ratio increased to 48% (41%) in 2008 and the debt to equity ratio decreased from 96% to 77%, refl ecting an improved fi nancial position. The debt coverage ratio in 2008 was 7.02 times. For defi nitions of fi nancial ratios, please refer to page 40.

WEST SIBERIAN Resources Ltd

Refi ning, transportation and marketing (Downstream)

Following the merger with Alliance Oil Company, the 519.88 and revenues from domestic sales amounted to group operates the Khabarovsk Oil Refi nery and a net- MUSD 1,746.26. No sales of oil products to CIS countries work of gas stations and wholesale oil terminals, all lo- were made in 2008. cated in the Russian Far East. Sales volumes and prices for oil products for export Revenues from sales of oil products for the fi nancial and domestic (wholesale and retail) markets are presented year were MUSD 2,233.65 (MUSD 1,528.92). In 2008, rev- in the following table: enues from export of oil products amounted to MUSD

Oil product sales volumes and prices in 2008

Export Wholesale Retail Total

Sold volume (barrels) 8 556 672 12 004 734 3 932 448 24 493 854

Net price (USD/barrel) 60.76 100.28 129.67 91.19

Cost of crude oil purchased for refi ning for the fi nancial The downstream segment operating income was MUSD year were MUSD 901.44 (MUSD 857.18). 349.71 (MUSD 132.59). Transportation costs for the fi nancial year were In the second quarter of 2008, West Siberian Re- MUSD 479.83 (MUSD 296.84). Transportation costs in- sources completed the merger with Alliance Oil Com- clude expenses for crude oil delivery to the Khabarovsk pany, through which it added signifi cant oil refi ning and Oil Refi nery, oil products transportation to gas stations marketing operations to the group’s business model. and crude oil insurance. Costs of refi ning of crude oil for Given the fact that the Company releases for the fi rst the fi nancial year were MUSD 53.39 (MUSD 40.98). time its combined audited twelve months fi nancial in- The depreciation charge for downstream assets was formation which included the downstream segment, 13.94 (MUSD 12.69). the company do not provide adequate comparison in

Refi nery Capacity Description, total (000 tonnes)

Installations and facilities Current annual capacity Start-up year Modernisation year

Atmospheric crude distillation 4 178 1966 Initial oil processing, including: 4 350 Atmospheric distillation 2 950 1936 2001 Vacuum distillation 1 400 1988 Catalytic reforming 300 1973 1998 Isomerisation 108 2004 Bitumen 318 1939 Absorption and gas fractionation 225 1998 Gas desulphurisation 34 2001 Inert gas 1.8 1973

Annual Report 2008

Refi nery Capacity after modernisation (000 tonnes)

Installation Annual Capacity Notes

Hydrogenation facility, including

hydrofi ning 1 180 New construction

hydrocracking 506 New construction

Amine regeneration, acid waste steaming and sulphur extraction 13.38

installation combined with end gas distillation unit (sulphur prill) New construction

New Hydrogen production 20.02 (including 100% hydrogen 19.95) New construction

Catalytic reforming unit 450 Reconstruction

Asphaltum oil visbreaking unit 1 000 New construction

Fuel oil vacuum distillation unit 1 800 New construction

this segment for the pre- of a new chemical water treatment unit, an intermediate vious periods. tank fl eet (10 tanks with 400 m3 capacity each) and boiler Refi ning volumes at modernization. In 2008 an agreement was signed to ac- the Khabarovsk Oil Re- quire licenses for vacuum fuel oil distillation (with 1,800 fi nery amounted to 24.3 thousand tons per year capacity) and oil tar visbreaking million barrels. Out of installation. Basic engineering of these units has started. total oil products out- The commercial bitumen site was reconstructed and a put for the fi nancial year new rack for loading dark oil products into rail road tank about 60% were repre- cars was commissioned. A new tank with 4,900 m3 capac-

Alexander Sutyagin, sented by higher value ity was installed to store aviation kerosene. A treatment CEO Downstream light products. facilities fl otation fi lter was put into operation. In 2008 35% of oil products, primarily fuel oil, were exported. 49% of products, primarily diesel were sold through domestic wholesale and 16% - through the group’s retail network which Oil products output volumes was primarily marketed gasoline. Preparations are underway, and initial investments ’000 bbl 2008 2007 were made in order to upgrade the Khabarovsk Oil Refi nery to a very modern high complexity refi nery in- Nafta 2 324 2 012 tended to produce higher quality oil products for the Far Gasoline 3 041 2 575 East markets. The upgrade project is proceeding, but at Diesel fuel 8 024 7 684

a slower rate than originally planned, which means that Mazut 9 097 8 795 the upgrade now is scheduled to be completed by 2012. Jet fuel 1 559 1 391 Upgrade activities in 2008 included engineering, pro- Bitumen and оthers 606 552 curement and construction of a hydrogenation process- es complex. Construction of facilities for ensuring com- Total 24 651 23 009 plex operation is in progress, including the construction

WEST SIBERIAN Resources Ltd

MUSD EBITDA

Investments, Financing and Liquidity

Investments development program. In November 2008 West Sibe- Total pro forma net invest- rian Resources Group, through its downstream subsidi- ments in upstream assets ary Alliance Oil Company, and Bank VTB renewed and for 2008 amounted to prolonged the 5 billion Russian Roubles (MUSD 170.18) MUSD 242.88 and were credit line for the ongoing Khabarovsk Oil Refi nery mod- made in the Timano- ernization program. Pechora region (MUSD 109.13), Tomsk region Liquidity (MUSD 53.56), Volga-Urals As of December 31, 2008 the group’s liquidity amounted AngelikaA lik AdievaAdi , region (MUSD 70.61) and to MUSD 335.37 (MUSD 408.37). Consolidated cash fl ow Chief Financial Offi cer Kazakhstan (MUSD 9.58). from operations, before changes in working capital, for the For the fi nancial year to- fi nancial year amounted to MUSD 366.71 (MUSD 119.90). tal consolidated net investments in upstream assets As of December 31, 2008 the amount of MUSD 42.10 amounted to MUSD 175.70 (MUSD 55.61). For the fi nan- (MUSD 190.88) was held by Bank VTB as cash collateral cial year net investments in refi ning assets amounted to for the letters of credit opened by the Khabarovsk Oil MUSD 350.79 (MUSD 46.21) and net investments in mar- Refi nery in favour of Tecnicas Reunidas. keting, selling and other assets amounted to MUSD 14.95 (MUSD 16.33). Parent company The parent company’s net loss before tax for the fi nan- Financing cial year ended December 31, 2008 amounted to MUSD In April 2008, MSEK 1,006.20 (MUSD 170.31 before place- 12.31 (MUSD 2.34). ment costs) was raised through a private placement of As of December 31, 2008 the liquidity of the parent 258 million common shares. The net proceeds after place- company amounted to MUSD 1.31 (MUSD 0.63). ment costs amounted to MSEK 974.66 (MUSD 165.15). In April 2008, the parent company issued shares to In October 2008 West Siberian Resources Group the shareholders of Alliance Oil Company as described renewed a short-term unsecured revolving MUSD 50 above. In April 2008, the parent company issued 258 loan facility from UniCredit Bank for ongoing upstream million shares as described above.

Annual Report 2008

Share Data

Share Capital, Voting Rights and Trading not currently plan to propose dividend payments for the foreseeable future. The dividend policy is reviewed The registered share capital as of December 31, annually. 2008 amounted to USD 161,528,415 represented by 3,230,568,280 shares with a par value per share of USD 0.05. Each share carries one vote. The shares are traded as Largest Shareholders Swedish Depository Receipts (SDRs) at the NASDAQ OMX Nordic in Stockholm, where they were approved for tra- The 10 largest shareholders of West Siberian Resources ding from May 23, 2007. SEB acts as the custodian bank. Ltd (as per Euroclear’s (VPC) data as of February 28, 2009 combined with known changes thereafter).

Market Capitalisation and Share Turnover CJSC Investment Company Alliance Capital 892 742 594 27.63% The market capitalisation as of December 31, 2008 was OJSC Alliance Group 616 339 940 19.08% MSEK 8,237.95 (MSEK 5,065.26 as of December 31, 2007). Daumier Investments Ltd 224 458 434 6.95% In 2008, 3,412,194,649 shares were traded. The average daily turnover during the year amounted to 13,594,401 SIX SIS AG 151 630 191 4.69% shares. The 2008 year high of SEK 8.50 was noted on June Repsol Exploracion S.A. 118 902 732 3.68%

24, and the year low of SEK 1.87 on October 27. BNP Paribas (Suisse) S.A. 79 660 474 2.47%

JP Morgan Chase Bank 68 121 896 2.11% Dividend Policy Andra AP-Fonden 39 672 485 1.23% AFA Sjukförsäkrings AB (AKT) 35 069 045 1.09% WSR’s strategy is to redeploy cash fl ows from operations Subtotal 10 largest shareholders 2 226 597 791 68.92% through its capital expenditure programme aimed at Other, approximately 37,500 increasing oil reserves and production and upgrading shareholders 1 003 970 489 31.08% the Khabarovsk refi nery. The company has not paid any Total 3 230 568 280 100.00% dividends since it went public in the year 2000 and does

WEST SIBERIAN Resources Ltd

Share- Share Distribution of Shareholders Holdings holders No of SDBs capital

Share distribution by size of holdings (as per 1–500 5 326 1 323 423 0.04% Euroclear’s (VPC) data as of February 28, 2009 501–1 000 5 194 4 842 930 0.15% combined with known changes thereafter). 1 001–5 000 13 028 37 830 568 1.17% 5 001–10 000 6 041 50 364 123 1.56%

10 001–15 000 1 703 22 262 913 0.69%

15 001–20 000 1 862 35 090 750 1.09%

20 001– 4 394 3 078 853 573 95.30%

Total 37 548 3 230 568 280 100.00%

Share Price Development and Turnover mln of SEK/share shares 2007 2008 2009

Data per share

2008 2007 2006 2005 2004 12 months 12 months 12 months 12 months 15 months

Earnings per share for the period, USD 0.01 0.03 0.03 0.00 0.06 Earnings per share for the period (dilluted), USD 0.01 0.02 0.03 0.00 0.06 Market capitalization at the end of the period, MSEK 8 237.95 5 065.26 8 077.85 3 851.68 806.61 Revenue per share, USD 0.95 0.32 0.23 0.12 0.08 Revenue per share (dilluted), USD 0.95 0.32 0.23 0.12 0.08 Cash fl ow per share, USD 0.10 0.08 0.05 0.02 0.03 Cash fl ow per share (dilluted), USD 0.10 0.08 0.05 0.02 0.03 Assets value per share, USD 0.74 0.95 0.88 0.54 0.21 Share price at fi nancial period end, SEK 2.55 4.26 7.35 4.86 1.88 Dividend per share - - - - - Average share trading volumes 13 594 401 4 564 925 7 182 847 6 191 797 2 338 677 Number of shares at fi nancial period end 3 230 568 280 1 189 027 312 1 099 027 312 792 527 312 429 050 500 Weighted average number of shares for the fi nancial period 2 863 316 355 1 186 447 178 1 060 073 994 635 615 586 296 350 869 Weighted average number of shares for the fi nancial period (dilluted) 2 866 153 325 1 186 447 178 1 064 214 168 635 615 586 296 350 869 Number of outstanding options at fi nancial period end 73 031 000 66 455 000 38 499 000 - -

Annual Report 2008

Eric Forss Chairman of the board

Corporate Governance Report

The Code Application on March 3, 2008, to approve the merger with Alliance Oil Company. The meetings are held in the Swedish lan- West Siberian Resources Ltd was incorporated in Ber- guage, or translated into Swedish when necessary. The muda in 1998 where it has its registered offi ce. The AGM is open to all registered shareholders of the com- company’s shares are publicly traded, through Swedish pany who have the right to participate either in person Depositary Receipts, on the NASDAQ OMX Nordic in or by proxy. At the AGM, the board, the management and Stockholm where they are listed since May 2007. The the auditors are available to answer questions relating to company’s governance is based on the company’s arti- the company and its activities. Shareholders who wish cles of association and bye-laws, the listing agreement to have a certain matter included on the agenda for the with the NASDAQ OMX Nordic and other applicable AGM should send such request or proposal to the board laws and regulations. In the absence of a Bermudian of directors not later than three months prior to the AGM. corporate governance code, the implementation of the At the AGM, the managing director informs about the Swedish Code of Corporate Governance started in 2006. company’s progress and annual accounts are presented Since July 1, 2008 the revised Swedish Code of Corpo- for approval. The AGM also considers matters such as elec- rate Governance is applied. Since 2006, WSR has de- tion and remuneration of board members, the Chairman veloped and implemented an application of the code of the board, and the auditors. Directors and auditors are that also corresponds to Bermudian law and company elected for the period until the next AGM. Principles for practice. appointing the nomination committee and for remuneration of management are approved by the AGM. Annual General Meeting Nomination Committee for the Annual The annual shareholders’ meeting is West Siberian’s high- General Meeting 2009 est decision making body. The AGM is held annually in Stockholm, Sweden. The latest AGM was held on May In line with the Swedish Code of Corporate Governance, 21, 2008, and the next meeting will be held on May 28, the principles for appointing a nomination committee 2009. A Special General Meeting was held in Stockholm and its guidelines, was presented to and approved by

WEST SIBERIAN Resources Ltd

Annual Report 2008

the shareholders at the AGM on May 21, 2008. In accord- tries and corporate governance. The directors are citizens ance with this resolution, the nomination committee was of six countries (Sweden, Russia, USA, Switzerland, France appointed by the four largest shareholders in the com- and Spain). The managing director is a member of the pany as of November 25, 2008 which were OJSC Alliance board of directors. The board of directors participates in Capital, OJSC Alliance Group, Daumier Investments Ltd the company’s global share option plan (described at and Alltech Investments Ltd who together held approxi- page 29 and in Note 24 and 33). mately 60% of the shares and the votes in the company. These four shareholders appointed the following repre- sentatives to constitute the nomination committee for Chairman of the Board the Annual General Meeting 2009: The chairman ensures that the work of the board is pur- Christer Sandberg, sued eff ectively and that the board discharges its duties. Chairman of the nomination committee representing The duties of the chairman also include keeping regular OJSC Alliance Capital and OJSC Alliance Group. contact with the managing director and function as a dis- cussion partner and support for the managing director. Andrei Sletov, The current chairman is not an employee of the company. representing Daumier Investments Ltd. A Swedish company associated with the current chairman has been remunerated for providing administrative Fred Boling, and investor relations services for the company. Since representing Alltech Investments Ltd. 2008, the Chairman has been appointed by the AGM.

Eric Forss, Chairman of the board West Siberian Resources Ltd. Board Meetings and Procedures The Nomination Committee shall present proposals for The board of directors holds at least four ordinary meet- the election of the Chairman and other members of the ings during the calendar year. The Board had thirteen Board of Directors, election of auditors, and proposals re- meetings during 2008 including telephonic board garding remuneration for the board of directors and the meetings. All directors attended all meetings, except auditors as well as related questions for adoption at the for Mr. Nemesio Fernandez-Cuesta who attended four Annual Shareholders’ Meeting. The nomination commit- meetings. At meetings which Mr. Fernadez-Cuesta did tee shall complete its tasks and consider the independ- not attend, Mr. Fernando Martinez-Fresneda attended as ence of the Directors as set out in the Swedish Code of alternate. At each of these meetings, the following mat- Corporate Governance. ters were addressed:

• Review and approval of the minutes from the Composition of the Board preceding meeting • Management report including fi nancial report and The company’s bye-laws stipulate that the board of di- update on state of business rectors shall consist of not less than three and not more than fi fteen members. The present board of directors is • Investment proposals composed of seven directors and one alternate director, • Financing all elected at the AGM in May 2008. Five directors are in- • Business-related decisions dependent in relation to the company and the manage- • Reports from Audit and Remuneration Committees ment and six directors are independent in relation to the major shareholders. The directors represent competence • Miscellaneous issues of material importance for and experience from the oil business, several other indus- the company

WEST SIBERIAN Resources Ltd

In 2008, the activities focused on the execution of the AB and Forsinvest Aktiebolag. He is also a member of the merger with Alliance Oil Company, the integration of board of directors of S.O.G. Energy and a deputy board the merged entities into the group and related organi- member of Betalt och Klart i Stockholm AB and Forsin- zational changes. In this process, the procedures for re- vest Fastighetskapital AB. He has also served as a director porting and control were reviewed and revised reporting of and advisor to several public and private Swedish and and communication policies were adopted. Financing international companies including oil groups Forest Oil activities included an equity off ering in April 2008 and Inc. and Forcenergy Inc. reviews of the group’s loan agreements and associated risk exposure. In the second half of the year, the manage- Holding in WSR: 1,660,000 SDRs and 2,176,717 options.* ment structure of the company was reorganized, with new management positions established and appointed including those of the Managing Director and Chief Fi- Arsen E Idrisov, Director and Managing Director nancial Offi cer. Following a review of operating perform- Not independent in relation to the company, ance, fi nancing strategy and future capital expenditures management nor major shareholders in the fourth quarter 2008 and in response to the rapidly changing business environment, the board resolved to Mr. Arsen Idrisov, a Russian citizen, was born in 1970. He defer signifi cant capital expenditures related to the mod- has been a member of the board of directors since May ernization of the Khabarovsk Oil Refi nery and upstream 2008 and Managing Director since November 2008. Mr. development projects. Idrisov graduated with Honors from the Russian Eco- The board has appointed a secretary and an assisting nomic Academy named after G. V. Plekhanov in 1993 after secretary, none of which are board members. majoring in international economic relations. In 1992- Annually, immediately after the AGM, the board con- 1993 Mr. Idrisov studied in Otto Beisheim School of Man- venes to adopt the board’s rules of procedure and agree agement/WHU (Vallendar, Germany) and had training on the division of tasks. Members of the remuneration with Marquard & Bahls AG and with Deutsche Shell AG. and audit committees are appointed. Between 1993 and 1997 he held a number of senior positions in international trading business including a Swiss trading company LIA OIL S.A., Russian oil major Sidanco. In Board of Directors 1998, Mr. Idrisov became the general director of Alliance Capital Investment Company and joined the board of di- Eric Forss, Chairman rectors of Alliance Group. Since 2002, he has served as a Independent in relation to the company, vice-president for corporate fi nance at Alliance Group. In management and major shareholders 2001, he was elected to serve on the board of directors of Alliance Oil Company. Mr. Idrisov was President/CEO of Al- Mr. Forss, a Swedish citizen, was born in 1965. He has liance Oil Company from 2002 until July 2006. Within this been a member of the board of directors since July 2004. period the Alliance Oil advanced to the top 50 Russian Mr. Forss holds a B.Sc. degree in Finance from Babson largest companies. He has been a member of the Board of College, Wellesley, MA, U.S.A. He has served as chief ex- Directors of Alliance Oil Company since its establishment ecutive offi cer of Forssgruppen since 1998 and of S.O.G and has served as the Chairman of its Board of Directors Energy AB – Svenska Oljegruppen AB – since 2005. Be- between 2006 and 2008. Mr. Idrisov is also Chairman of tween 1991 and 1998, Mr. Forss served as president of the Supervisory Board of Alliance Oil Company Ukraine Forcenergy AB, a public Swedish oil and gas corporation LLC, Chairman of the Board of Finprombank JSB, member where he also served as Vice President between 1990 of the Board Cicerone Holding B.V. (JV with Shell Overseas and 1991. Mr. Forss is chairman of the board of directors Investments B.V.). of D.O.Y. AB and Mediagruppen Stockholm MGS AB, as well as a member of the board of directors of Forcenergy Holding in WSR: 1,733,540,968 SDRs and 0 options.**

* Holdings including associated companies and family members. ** As representative for CJSC Investment Company Alliance Capital, OJSC Alliance Group and Daumier Investments Ltd.

Annual Report 2008

Maxim Barski, Director Claes Levin, Director Not independent in relation to the company nor Independent in relation to the company, management. Independent in relation to major management and major shareholders shareholders Mr. Levin, a Swedish citizen, was born in 1941. He has Mr. Barski, a Russian citizen, was born in 1974. Mr. Barski been a member of the board of directors since July 2004. has been a member of the board of directors since March Mr Levin has a law degree and a B.A. degree in econom- 2004, and the Managing Director between July 2004 and ics from the University of Lund. From 1971 to 1980, Mr. November 2008. Mr. Barski graduated from St. Peters- Levin held various management positions with SEB. He burg University and also studied in the Business School was the managing director for Diligentia between 1980 of the University of California, Berkeley. Prior to becom- and 1983, Reinhold Bygg AB between 1983 and 1985 ing a member of the WSR board of directors, Mr. Barski and Platzer Bygg between 1986 and 1998, all listed com- worked as a head of the Corporate Finance Department panies. Today, Mr. Levin holds positions as chairman of at Gazpromenergo LLC, Vice President in the investment several companies including Bröderna Falk AB, Sh-Bygg company Troika Dialog, and head of the Moscow offi ce AB, Strict AB, Want AB, Variant Fastighets AB och Wiking of Salford Continental, an investment fund management Mineral AB. Mr Levin is also member of the board of di- company. Maxim Barski is a partner at Biotek Limited rectors of First Baltic Property Ltd, Norrlands Industrier AB since 2002 and BMG Finance since 1997. and Amok Studios AB.

Holding in WSR: 0 SDRs and 17,462,000 options. Holding in WSR: 1,174,368 SDRs and 1,637,000 options.*

Raymond Liefooghe, Director Fred Boling, Director Independent in relation to the company, management Independent in relation to the company, and major shareholders management and major shareholders

Mr. Raymond Liefooghe was born in 1942 and is a Swiss Mr. Boling, a U.S. citizen, was born in 1940. He has been resident with Swiss and French nationalities. He has been a member of the board of directors since July 2004. Mr. a member of the board of directors since May 2008. Ray- Boling holds B.Sc. and M.Sc. degrees from the Georgia mond Liefooghe served as a member of the Board of Direc- Institute of Technology where he also lectured. He is tors of Alliance Oil Company between 2006 and 2008. Mr. currently president and director of Commonwealth Oil Liefooghe graduated from the International Trade Institute Refi ning and Wyatt Energy. He was formerly an executive in Paris in 1973. Between 1974 and 1991, Mr. Liefooghe with Sinclair Oil, Atlantic Richfi eld, BP Oil Corp., Gibbs Oil, worked in BNP New York, Montreal, Geneva and Paris. From and Astroline Oil Trading Corp. In addition to 41 years ex- 1992 to 2002, he worked in the United European Bank perience in the oil industry, Mr. Boling has been active in (Geneva) and in 1999 he was elected as its chief executive banking and was president of Security National Bank, a offi cer. Mr. Liefooghe founded a consulting company in director of Bank of New England and a director of Pacifi c 2002 that mainly worked for the BNP Paribas Group until National Bank, Massachusetts. Also, Mr. Boling is a direc- July 2005. Between 2002 and 2005, he was the chairman of tor of Clear Springs Land Company and Investors Life the supervisory board of BNP Paribas Bank ZAO in Moscow. Insurance Company. Mr. Liefooghe also holds a position of Director at Diamond Capital Fund, Diamond Growth Fund, Sucafi na S.A., Sucafi - Holding in WSR: 1,600,000 SDRs and 1,637,000 options. na Ingredients SA and Metinvest International.

Holding in WSR: 0 SDRs and 0 options.

* Holdings including associated companies and family members.

WEST SIBERIAN Resources Ltd

Nemesio Fernández-Cuesta, Director Fernando Martinez-Fresneda, Alternate Director Independent in relation to the company, for Nemesio Fernandez-Cuesta. Independent in relation management and major shareholders to the company, management and major shareholders

Mr. Fernandez-Cuesta, a Spanish citizen, was born in Mr. Fernando Martinez-Fresneda, a Spanish citizen, was 1957. He has been a member of the board of directors born in 1951. Mr. Martinez- Fresneda is a Mining Engineer since May 2006. Mr. Fernández-Cuesta holds a degree from the ETSIM, Mining Engineer School at the Polytechnic in economics and business administration from the University of Madrid and has a PDD in Business Admin- Autonomous University of Madrid. He is currently the istration from the INALDE in Bogotá. He is currently the Executive Director of Upstream at Repsol YPF. Mr. Fern- Managing Director of Repsol YPF’s offi ce and operations ández-Cuesta has held various management positions in the Russian Federation. Prior to his current position, Mr. at Repsol YPF since its creation in 1989 and has served as Martínez-Fresneda was Petroleos Sudamericanos’ Gen- the Secretary of state for energy and mineral resources eral Manager in Ecuador. Since 1981, he has held various in the Spanish Ministry of Industry and Energy and as positions in the Repsol organization including being Rep- President of Prensa Espanõla. Mr. Fernández -Cuesta is sol’s General Manager in Colombia and Bolivia. also vice chairman of the board of directors of Repsol- Gas Natural Lng, S.L. as well as member of the board of Holding in WSR: 0 SDRs and 0 options. directors of Gas Natural.

Holding in WSR: 0 SDRs and 0 options.

Group Management

Arsen E Idrisov, Director and Managing Director Yevgeny Vorobeichik, Chief Operating Offi cer (See page 25) Mr. Yevgeny Vorobeichik, a Russian citizen, was born in Angelika Adieva, Chief Financial Offi cer 1958. He has served as president of Alliance Oil Com- pany since July 2006. Mr. Vorobeichik graduated from the Ms. Angelika Adieva, a Russian citizen , was born in 1975. Kuibyshev Polytechnic Institute in 1980 after majoring in She joined the company in 2008. Her previous expe- chemical technologies related to oil and gas. He won the rience includes international oil and gas investment honorary title of a Merited Oil Industry Worker in 1997. banking, and downstream and upstream project man- Mr. Vorobeichik spent more than 15 years with the Kuiby- agement. Prior to joining West Siberian Resources, Ms. shev Oil Refi nery, working his way up from an operator Adieva most recently held a management position in the and the supervisor of an installation to Deputy Head of European Energy and Power Investment Banking team at the Production and Sales Offi ce. Between 1996 and 1998, Merrill Lynch International in London. Ms. Adieva holds Mr. Vorobeichik headed the Petroleum and Petroleum a Bachelors degree in Economics from the Institute of product Sales Department at Sidanco. He has been with Practical Oriental Studies in Moscow and an MBA from Alliance Oil Company since 1999, serving fi rst as a vice McCombs School of Business at the University of Texas at president and then president of Alliance Oil Company. Austin with a concentration in Finance and specialization From 2002 to July 2006, he served as the First Vice Presi- in Energy Finance. dent of Alliance Oil.

Holding in WSR: 0 SDRs and 0 options. Holding in WSR: 0 SDRs and 0 options.

Annual Report 2008

Oleg Makeev, CEO Upstream Auditors

Mr. Oleg Makeev, a Russian citizen, was born in 1958. Mr. Klas Brand, born in 1956. Authorised Public Accountant. Makeev graduated from the Tyumen Industrial Institute Member of FAR SRS. Company auditor since 1998. with specifi cation in mining. Mr. Makeev has over 22 years PricewaterhouseCoopers AB, Göteborg, Sweden. experience in the oil and gas industry with 9 years working for Alliance Oil Company’s upstream subsidiaries. Johan Rippe, born in 1968. Authorised Public Account- ant. Member of FAR SRS. Company auditor since 2006. Holding in WSR: 0 SDRs and 0 options. PricewaterhouseCoopers AB, Göteborg, Sweden.

The address to PricewaterhouseCoopers AB is: Alexander Sutyagin, CEO Downstream Lilla Bommen 2, 405 32 Göteborg, Sweden.

Mr. Sutyagin a Russian citizen, was born in 1958. Mr. Suty- agin graduated from the Kuibyshev Polytechnic Institute Board Committees and holds a doctorate in Engineering. He has served as First Vice President and Vice President for Development Remuneration Committee and Coordination of Commercial Activity of Alliance Oil Company since 2006. He served as Head of a Swiss trad- Members: Eric Forss (Chairman), Fred Boling ing company LIA OIL S.A. representation offi ce in Samara and Maxim Barski in 1995-1998. In 2003–2006 he served as General Director of Far Eastern Alliance. The Remuneration Committee establishes principles and makes recommendations to the board for execu- Holding in WSR: 0 SDRs and 0 options. tive remuneration and contracts, determines remunera-

WEST SIBERIAN Resources Ltd

tion packages and manages the company’s long-term incentive plan. The remuneration committee had four meetings during 2008 including telephonic committee meetings. In 2008, the committee reviewed compensation issues related to the merger with Alliance Oil Company and the integration of the merged entities. Upon completion of the merger, completion gratifi cation was awarded to certain employees including the former managing director and chief fi nancial offi cer. The committee also reviewed and made recommendations to the board related to the employment and termination contracts for the group management team, including the new Managing Director and Chief Financial Offi cer. In 2008, it was determined that all performance conditions for all outstanding options had been met and thus do not restrict the exercise of options in accordance with the option plan. and has entered into revised employment agreements with management. The executive remuneration consists of a base salary, an annual bonus and participation in the Audit Committee company’s long-term incentive plan. The annual bonus is individually capped at 50 %–100 % of the base salary and Members: Fred Boling (Chairman), Raymond Liefooghe is based on the company’s performance related to the and Claes Levin annual budget. In connection with the merger with Al- liance Oil Company, which was a transformational trans- The Audit Committee performs duties customary for best action that accomplished important strategic objectives practice corporate governance. This includes reviewing and signifi cantly increased the scope and volume of the drafts of interim reports, preliminary annual fi nancial re- operations, the company deviated from this principle as ports, audit fees and making recommendations to the certain employees, including the former managing di- nomination committee on the election of external audi- rector and chief fi nancial offi cer, were awarded merger tors and supervision of the internal reporting and con- completion gratifi cation in addition to the annual bonus. trolling functions. Annual option grants are based on the employee’s total The audit committee had seven meetings during compensation and the value of granted options shall 2008 including telephonic committee meetings, includ- amount to 100 %–200 % of annual compensation. Notice ing six meetings with auditors. In 2008 the committee periods are not to exceed twelve months, during which focused on the accounting issues related to the merger the employee is entitled to full compensation. with Alliance Oil Company. The fi nancial reporting and accounting systems together with internal controls were important considerations of the audit committee. Global Share Option Plan

At the Extraordinary General Meeting in the company Remuneration and Terms of Employment on November 14, 2000, it was resolved to adopt a Glo- bal Share Option Plan (the “Option Plan”). The amended Remuneration for 2008 and individual terms of employ- Option plan was amended adopted on January 31, 2006. ment are presented in Note 33 to the fi nancial statements. The Option Plan allows for managers and directors of From 2006, the company has adopted the following prin- the group (eligible employees) to be granted call op- ciples for executive remuneration, which were approved tions each entitling the holder to acquire one depository by the shareholders at the AGM in May 2007 and 2008, receipt in the company. The Option Plan is administered

Annual Report 2008

by the remuneration committee which has been author- oped and are being implemented throughout the Group. ized, from time to time, to make and vary such regula- Every employee of the company has a responsibility tions for the implementation and administration of the of ensuring that the work conducted is in line with the Option Plans as it deems fi t. company’s policies and guidelines as well as with exter- The total number of shares which may be allocated un- nal laws and regulations. der the Option Plan over 10 years shall not exceed 10 % of In order to ensure the quality of the fi nancial reporting, the ordinary share capital of the company in issue. the board of directors has established a specifi c instruc- On the date of adoption of the Option Plan and simulta- tion on what type of information that should be submit- neously with adoption, option grants with an aggregate ted to the board. In addition to the quarterly reports that number of options corresponding to 5 % of the out- are made public, the board reviews wide-ranging man- standing shares of the company at the time of adoption agement and fi nancial information including segments and annual grants of up to 1 % of the outstanding shares reports. Through its audit committee, the board also re- thereafter were authorized. views the accounting principles and practices applied by In connection with option grants, the remunera- the group. The audit committee has not recommended tion committee determines what performance con- the establishment of an internal audit function as current ditions have to be satisfi ed for the options to become internal control functions and segregation of duties and exercisable. Initial grants are determined based on the authorities in combination with substantive external au- employee’s position in the company. Annual grants are dits are believed to suffi ciently cover the relevant review limited to 1 % of the share capital per year for fi ve years. functions. Annual option grants are based on the employee’s to- WSR’s external auditors report potential observations tal compensation for the current year and the value of to the audit committee. The auditors report to the audit granted options shall amount to 100 %–200 % of an- committee on a regular basis and to the board once a nual compensation. As of December 31, 2008 the total year or more often if necessary. number of outstanding options amounted to 73,031,000 In 2008, NASDAQ OMX Nordic initiated a follow-up re- corresponding to 2 % of the outstanding shares after full view of the listing started in 2007. In connection with this, dilution. Exercise prices range from SEK 4.09 to SEK 7.00. the internal control structure and revised reporting and All options are exercisable after 3 years subject to certain communication policies were reviewed by external au- non-market conditions and expire in 5 years from the date of grant. The number of exercisable options as of the date of the issuance of the annual report amounted to 31,744,000 (1 % of diluted outstanding shares) out of which none have been exercised. (For details of the option grants see Note 24.)

Internal Control

The objective of the internal control systems is to estab- lish that operations of WSR are conducted effi ciently. The purpose is to ensure that the fi nancial reporting is trust- worthy and compliant with laws and regulations. It is the board of directors who has the overall responsibility that the internal control system is effi cient. Following the merger with Alliance Oil Company, unifi ed procedures for cash management, planning and budgeting and internal and external reporting were devel-

WEST SIBERIAN Resources Ltd

ditors appointed by the exchange. The review was com- Siberian Resources Ltd have chosen to deviate from this pleted early in 2009 and concluded that the merged com- clause of the code. pany was in compliance with the listing requirements.

Clause 9.2 Deviations from the code Members of the board are not to participate in share and share-price related incentive schemes designed West Siberian Resources has chosen to deviate from the for executive management or other employees of the following Clauses of the Code: company.

Explanation of the deviation: Clause 4.2 In accordance with the company’s shareholder approved Deputies for directors elected by the shareholders’ meet- Option Plan that was adopted in 2006, prior to the listing are not to be appointed. ing at NASDAQ OMX Nordic, directors are eligible to participate in the Option Plan. Stock options were issued to Explanation of the deviation: directors in 2006, 2007 and 2008. At the annual general meeting on May 21, 2008 the shareholders unanimously voted in accordance with Other requirements of the Code the proposal presented by the nomination committee West Siberian Resources believes that it in all other re- to elect Mr. Fernando Martinez-Fresneda as alternate for spects is meeting the requirements of the Code. Mr. Nemesio Fernandez-Cuesta. The shareholders of West

The auditors have not reviewed the Corporate Governance Report.

Annual Report 2008

Corporate Social Responsibility

The group’s operations are subject to the health, safety oil fi elds, roads and pipelines, treatment facilities at the and environmental risks inherent in the oil industry in- refi nery, oil products terminals. Failure to comply fully cluding oil fi elds’ development and oil refi ning activities. with environmental legislation may result in warnings, These risks concern our employees as well as society at fi nes, or, in extreme cases, the closing down of the opera- large and are regulated by complex laws and govern- tions of the oil company. In 2008, some insignifi cant vio- ment instructions. Such legislation governs, among other lations of current legislation were made and have been things, the composition of emissions discharged into promptly corrected. In connection with these minor vio- the atmosphere, water use and wastewater discharge lations penalties were assessed and paid. and discharges to the sea, air and water venting of de- The company did not have a signifi cant oil or waste trimental impurities, the use, handling and disposal of spill or other environmental incident during the fi nancial hazardous substances and waste, soil and groundwater year ended December 31, 2008 and the company is not contamination, land reclamation and employee health aware of any claims or penalties from Russian domestic and safety. environmental authorities that have not been corrected After the merger with Alliance Oil, WSR has more than and/or settled. 7,000 employees and 37,500 shareholders, and strongly Every unit within WSR has adopted a health, safety, realizes the company’s social responsibility to interact environmental and social (HSES) policy that meets Rus- with employees, shareholders, local communities and sian domestic requirements and complies with the inter- society in a proper manner. national standards. Each major subsidiary has a special Russian Federal Environmental Legislation is far- HSES department, represented by 3-4 employees. The reaching, especially for oil companies. Each of the activi- units report to the senior management in Moscow. Each ties performed by an oil and gas developer or oil refi nery of the operating units has individual HSES Management requires the preparation of an environmental impact as- System in place. Employees undergo an obligatory HSES sessment, which is approved and monitored by the lo- instruction course. In each operating unit there is an In- cal environmental authorities in each of WSR’s operating struction Manual which is to be adhered by personnel regions. There are frequent environmental inspections of staff .

WEST SIBERIAN Resources Ltd

Annual Report 2008

Financial Statements 2008

Income Statement

Group Parent company Jan 1, 2008 - Jan 1, 2007 - Jan 1, 2008 - Jan 1, 2007 - (Expressed in USD thousand) Note Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

Revenue Revenue from sales of crude oil 3 455 424 72 148 - - Revenue from sales of oil products 3 2 233 650 1 528 919 - - Other income 35 32 491 17 034 - 4 838 2 721 565 1 618 101 - 4 838 Cost of sales Production costs - crude oil 4 -316 138 -60 147 - - Production costs - oil products 5 -1 556 688 -1 173 916 - - Cost of other sales -11 768 -8 394 - - Depletion and depreciation 3,11 -120 872 -36 260 - - Impairment of property, plant and equipment 11 -316 849 - - - Impairment of goodwill 13 -208 - - - Investment write-down - - - -1 251 Gross profi t 399 042 339 384 - 3 587

Selling expenses 6 -169 799 -119 418 - - Administration expenses 7 -61 280 -32 506 -17 405 -15 707 Depreciation of selling and other non-production assets 3,11 -11 262 -9 050 - - Other operating expenses -20 850 -28 914 - - Loss on disposal of shares in subsidiaries 15 - -8 569 - - Operating income/(loss) 135 851 140 927 -17 405 -12 120

Interest income 35 18 578 1 092 38 769 34 729 Interest expense 8 -47 063 -35 340 -21 195 -22 318 Other fi nancial income/(expenses) 8 -2 836 1 598 -701 -2 035 Currency exchange gains/(losses), net -25 749 15 516 -11 775 -594 Share of result from associated companies - 6 040 - - Result before tax from continuing operations 78 781 129 833 -12 307 -2 338

Income tax 9 -32 812 -49 600 - -

Result for the period from continuing operations 45 969 80 233 -12 307 -2 338

Loss from discontinued operations 15 - -12 489 - -

Result for the period 45 969 67 744 -12 307 -2 338

Attributable to: Equity holders of the parent 40 566 63 558 -12 307 -2 338 Minority interests 5 403 4 186 - -

Earnings per share (USD) 10 0,01 0,04 -0,00 -0,00 Diluted earnings per share (USD) 10 0,01 0,04 -0,00 -0,00

* The financial figures represent Alliance Oil Company financial information for the financial year ended December 31, 2007.

WEST SIBERIAN Resources Ltd

Balance Sheet

Group Parent company (Expressed in USD thousand) Note Dec 31, 2008 Dec 31, 2007* Dec 31, 2008 Dec 31, 2007

NON-CURRENT ASSETS Tangible and intangible assets Property, plant and equipment 11, 12 1 742 800 593 097 44 58 Intangible assets 8 554 1 093 34 91 Goodwill 13 11 242 2 611 - - 1 762 596 596 801 78 149 Financial assets Shares in subsidiaries 14 - - 1 850 646 437 505 Receivables from group companies 35 - - 541 193 343 175 Deferred tax assets 9 38 443 11 880 - - Other fi nancial assets 16 2 329 471 - - 40 772 12 351 2 391 839 780 680 CURRENT ASSETS Inventories 17 83 948 110 108 - - Trade accounts receivable 18 31 192 47 953 - - VAT and other taxes receivable 19 66 501 48 974 - - Current income tax receivable 9 30 905 2 519 - - Advances paid 20 25 249 66 525 - - Other current receivables 21 13 219 87 391 117 122 Other short-term fi nancial assets 22 1 192 108 259 - - Restricted cash 23 42 101 190 879 - - Cash and cash equivalents 23 293 266 217 493 1 305 633 587 573 880 101 1 422 755 TOTAL ASSETS 2 390 941 1 489 253 2 393 339 781 584 SHAREHOLDERS’ EQUITY Share capital 24 161 528 33 656 161 528 59 451 Other paid in capital 24 997 181 27 801 1 914 979 451 669 Other reserves -304 840 93 702 - - Retained earnings 234 006 359 511 30 966 26 812 Net result 40 566 63 558 -12 307 -2 338 1 128 441 578 228 2 095 166 535 594 Minority interest 29 235 28 518 - - 1 157 676 606 746 2 095 166 535 594 NON-CURRENT LIABILITIES Long-term borrowings 26 234 163 207 025 180 000 235 875 Deferred tax liabilities 9 171 847 69 562 - - Financial lease long-term liabilities 27 6 888 10 636 - - Provision for site restoration costs 25 13 695 3 298 - - Other long-term liabilities 2 122 - - - 428 715 290 521 180 000 235 875 CURRENT LIABILITIES Short-term borrowings 26 629 450 359 638 115 824 546 Financial lease short-term liabilities 27 3 800 4 199 - - Trade accounts payable 28 51 488 6 034 - - Advances received 29 58 546 176 651 - - Accrued expenses 30 18 068 11 358 2 337 8 578 Current income tax payable 9 7 169 4 589 - - Other taxes payable 31 25 034 21 598 - 984 Other current liabilities 32 10 995 7 919 12 7 804 550 591 986 118 173 10 115 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 2 390 941 1 489 253 2 393 339 781 584

* The financial figures represent Alliance Oil Company financial information for the financial year ended December 31, 2007.

Annual Report 2008

Statement of Cash Flow

Group Parent company Jan 1, 2008 - Jan 1, 2007 - Jan 1, 2008 - Jan 1, 2007 - (Expressed in USD thousand) Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007 Cash fl ow from continuing and discontinued operations Operating income/(loss) 3 135 851 132 058 -17 405 -12 120

Adjustment for: Interest paid -54 837 -31 653 -21 153 -25 983 Income tax paid 9 -169 374 -38 615 - - Depletion and depreciation for property, plant and equipment 11 132 134 45 918 72 56 Loss on disposal of assets 3 862 17 570 - 1 Impairment of property, plant and equipment 11 316 849 - - - Impairment of goodwill 13 208 - - - Investment write-down - - - 1 251 Other non-cash items 2 021 -5 378 5 611 -1 107 Operating cash fl ow before changes in working capital 366 714 119 900 -32 875 -37 902 Changes in working capital Change in inventories 17 20 715 -13 894 - - Change in trade and other current receivables, VAT and other taxes receivable, advances paid 18-22 57 721 47 127 5 30 Change in trade payables, advances received, accrued expenses, taxes payable and other current liabilities 28-32 -144 884 -28 893 -8 342 97 Total cash fl ow from/used in continuing and discontinued 300 266 124 240 -41 212 -37 775 operations Cash fl ow used for investments in continuing and discontinued operations Investment in oil and gas properties 11 -175 703 -55 614 - - Investment in refi ning properties 11 -350 785 -46 205 - - Investment in selling and other non-production assets 11 -14 946 -16 330 - -130 Investment in shares in subsidiaries 14 -8 905 -2 787 -12 166 -57 391 Proceeds from disposal of shares in subsidiaries/associated companies 15 73 451 32 549 - - Proceeds from disposal of assets 4 924 5 214 - - Change in intercompany loan drawn down - - -169 949 10 968 Non-interest bearing loans provided to related parties 22 -2 326 -75 252 - - Proceeds from repayment of non-interest bearing loans by related parties 22 113 998 44 321 - - Loans provided to third parties 22 -1 058 - - - Investment in other short-term fi nancial assets 22 - -1 245 - - Proceeds from disposal of other short-term fi nancial assets 22 45 14 097 - - Proceeds from other fi nancial activities 16 576 1 518 - - Total cash fl ow used for investments -344 729 -99 734 -182 115 -46 553

Cash fl ow from/used for fi nancing in continuing and discontinued operations Proceeds from share issues (net of issue costs) 24 165 154 - 165 470 77 827 Proceeds from borrowings 26 757 606 821 098 60 000 8 333 Repayment of borrowings 26 -690 589 -577 019 - -10 000 Finance lease liabilities repayment 27 -5 725 -6 250 - - Dividends paid to shareholders by subsidiaries -193 248 - - - Cash contribution from minority shareholders to share capital of subsidiaries 1 064 - - - Total cash fl ow from fi nancing 34 262 237 829 225 470 76 160 Eff ect of exchange rate changes on cash and cash equivalents 12 859 -707 -1 471 -586 Eff ect from translation into presentation currency -75 663 20 880 - -

Change in cash and cash equivalents -73 005 282 508 672 -8 754

Cash and cash equivalent at beginning of period 23 408 372 125 864 633 9 387 Cash and cash equivalent at end of period 23 335 367 408 372 1 305 633

* The fi nancial fi gures represent Alliance Oil Company fi nancial information for the fi nancial year ended December 31, 2007.

WEST SIBERIAN Resources Ltd

Statement of Changes in Equity − Group

Attributable to equity holders of the parent company Share Other paid Other Retained Minority Total (Expressed in USD thousand) capital in capital reserves earnings Total interest equity Equity at Dec 31, 2006* 33 656 19 304 54 566 364 455 471 981 22 025 494 006 Eff ect of translation to presentation currency - - 39 136 - 39 136 - 39 136 Result for the period Jan 1, 2007 – Dec 31, 2007 - - - 63 558 63 558 4 186 67 744 Total recognised income and expenses for the period - - 39 136 63 558 102 694 4 186 106 880 Acquisition of additional interest in subsidiaries from related parties, net of tax (Note 24) - 538 - - 538 -7 110 -6 572 Disposal of subsidiaries to related parties, net of tax (Note 15, 24) - 14 878 - - 14 878 -90 14 788 Disposal of associates to related parties, net of tax (Note 24) - -6 919 - - -6 919 - -6 919 Decrease of ownership in subsidiaries due to change of voting power of preference shares - - - -4 928 -4 928 4 928 - Acquisition of subsidiaries, net of tax, and increase of ownership in subsidiaries - - - -16 -16 4 579 4 563 Equity at Dec 31, 2007* 33 656 27 801 93 702 423 069 578 228 28 518 606 746 Eff ect of translation to presentation currency - - -293 507 - -293 507 246 -293 261 Currency exchange diff erences on loans classifi ed as net investments in subsidiaries, net of tax (Notes 2, 9) - - -105 035 - -105 035 - -105 035 Result for the period Jan 1, 2008 – Dec 31, 2008 - - - 40 566 40 566 5 403 45 969 Total recognised income and expenses for the period - - -398 542 40 566 -357 976 5 649 -352 327 Disposal of subsidiaries to related parties, net of tax (Note 24) - -11 119 - - -11 119 - -11 119 Changes in ownership in subsidiaries ------4 932 -4 932 Merger of Alliance Oil Company and West Siberian Resources Ltd (reverse acquisition) (Note 24) 114 972 828 424 - - 943 396 - 943 396 Private placement (Note 24) 12 900 152 075 - - 164 975 - 164 975 Dividends paid to shareholders by subsidiaries (Note 35) - - - -193 199 -193 199 - -193 199 Share option plan (Note 24) - - - 4 136 4 136 - 4 136 Equity at Dec 31, 2008 161 528 997 181 -304 840 274 572 1 128 441 29 235 1 157 676

* The fi nancial fi gures represent Alliance Oil Company fi nancial information for the fi nancial year ended December 31, 2007.

Annual Report 2008

Statement of Changes in Equity − Parent Company

Attributable to equity holders of the parent company

Other paid Retained Minority Total (Expressed in USD thousand) Share capital in capital earnings Total interest Equity Equity at Dec 31, 2006 54 951 378 385 21 843 455 179 - 455 179 Result for the period Jan 1, 2007 – Dec 31, 2007 - - -2 338 -2 338 - -2 338 Total recognised income and expense for 2007 - - -2 338 -2 338 - -2 338 Private placement (Note 24) 4 500 73 284 14 77 798 - 77 798 Share option plan (Note 24) - - 4 955 4 955 - 4 955 Equity at Dec 31, 2007 59 451 451 669 24 474 535 594 - 535 594 Result for the period Jan 1, 2008 – Dec 31, 2008 - - -12 307 -12 307 - -12 307 Total recognised income and expense for 2008 - - -12 307 -12 307 - -12 307 Issuance of shares to Alliance Oil Company shareholders (Note 24) 89 177 1 310 918 - 1 400 095 - 1 400 095 Private placement (Note 24) 12 900 152 392 - 165 292 - 165 292 Share option plan (Note 24) - - 6 492 6 492 - 6 492 Equity at Dec 31, 2008 161 528 1 914 979 18 659 2 095 166 - 2 095 166

WEST SIBERIAN Resources Ltd

Key Financial and Operating Ratios

Jan 1, 2008 - Jan 1, 2007 - GROUP Dec 31, 2008 Dec 31, 2007 * Financial ratios EBITDA 1 585 042 194 806 Return on shareholders’ equity 2 4% 11% Return on capital employed 3 8% 16% Debt/equity ratio 4 77% 96% Equity ratio 5 48% 41% Risk-bearing capital 6 56% 45% Interest coverage ratio 7 1.86 4.57 Debt coverage ratio 8 7.02 5.40 Weighted average number of shares for the fi nancial period 9,10,11 2 863 316 355 1 783 540 968 Weighted average number of shares for the fi nancial period (diluted) 9,10,11 2 866 153 325 1 783 540 968 Number of shares at fi nancial period end9,10,11 3 230 568 280 1 783 540 968 Operational ratios ** Crude oil Sales volume (consolidated), barrels 13 689 695 to external customers 9 399 022 to intergroup companies 4 290 673 Oil revenue per barrel sold, USD/barrel 46.31 Export 47.83 Export CIS 51.32 Domestic 40.80 Production costs per barrel sold, USD/barrel 29.69 Production costs 5.68 Production and other taxes 16.19 Depletion and depreciation 7.81 Oil products Sales volume (consolidated), barrels 24 493 854 Oil products revenue per barrel sold, USD/barrel 91.19 Export 60.76 Wholesale 100.28 Retail 129.67 Production costs per barrel sold, USD/barrel 70.61 Cost of refi ning 2.18 Transportation - crude oil for refi ning 16.32 Transportation - oil products 3.27 Cost of crude oil purchased for refi ning 42.50 Cost of oil products purchased for re-sale 2.55 Taxes 3.23 Depreciation of refi ning assets 0.57

* The fi nancial fi gures represent Alliance Oil Company fi nancial information for the fi nancial year ended December 31, 2007. ** Given the fact that the company releases its fi rst combined fi nancial statements following the merger providing comparison for operational ratios is not relevant.

Annual Report 2008

Key fi nancial ratio defi nitions

1. Earnings before interest, tax, depreciation and amortisation is 7. Interest coverage ratio is defi ned as the Group’s net result defi ned as the Group’s operating result plus depletion and de- after fi nancial items, plus interest expenses, plus/minus currency preciation, impairment of oil and gas properties if applicable and exchange diff erences on fi nancial loans, divided by interest minus gain on disposal of shares in subsidiaries if applicable. expenses.

2. Return on shareholders’ equity is defi ned as the Group’s net re- 8. Debt coverage ratio is defi ned as the Group’s earnings before sult divided by the shareholders’ equity at the end of the fi nancial interest, tax, depletion and depreciation, divided by interest period. expenses.

3. Return on capital employed is defi ned as the Group’s net result 9. On April 10, 2008 the Group completed the merger with Alli- after fi nancial items, plus interest expenses, plus/minus currency ance Oil Company issuing 1,783,540,968 shares after which the exchange diff erences on fi nancial loans, divided by average total number of shares increased from 1,189,027,312 to 2,972,568,280. capital employed (the average total assets less non-interest bearing liabilities over the fi nancial period). 10. On April 18, 2008 the Group completed the private share placement after which the number of shares increased by 4. Debt/equity ratio is defi ned as the Group’s interest-bearing 258,000,000 from 2,972,568,280 to 3,230,568,280. liabilities in relation to shareholders’ equity. 11. As of December 31, 2008 73,031,000 options were outstanding 5. Equity ratio is defi ned as the Group’s shareholders’ equity, plus with the right to subscribe for 1 share of common stock at exercise minority interest, in relation to total assets. prices ranging from SEK 4.09 to SEK 7.00 which have an eff ect on the average number of shares when calculated on a diluted basis. 6. The percentage of risk-bearing capital is defi ned as the total sum of shareholders’ equity, plus minority interest and deferred tax liabilities, divided by total assets.

Operational ratio defi nitions

Crude oil Oil products 1. Oil revenue per barrel ratios are defi ned as net sales price (gross 1. Oil products revenue per barrel are defi ned as net sales price price less VAT or export duties) per barrel of oil sold to external (gross price less VAT or export duties) per barrel of oil products customers. sold to external customers.

2. Operating costs per barrel ratios are based on volumes of crude 2. Operating costs per barrel ratios are defi ned as operating cost oil sold both intergroup and to external customers. component (including purchases of crude oil and other services from intergroup companies) divided by volumes of oil products sold both intergroup and to external customers.

WEST SIBERIAN Resources Ltd

Notes to the fi nancial information Expressed in USD thousand unless indicated otherwise

Note 1 General

Incorporation erations and added signifi cant oil refi ning and marketing West Siberian Resources Limited was incorporated in Ber- (downstream) operations. Consequently, the enlarged muda on September 1, 1998, as a tax exempted limited Group has vertically integrated oil operations in Russia liability private company, and is domiciled in the same and Kazakhstan, set to capitalize on the benefi ts of ver- country. Historically West Siberian Resources Ltd through tical integration in all stages of the oil and gas industry its Russian subsidiaries was involved in oil and gas explo- value chain. ration and development activities. Alliance was incorporated on November 26, 2001 in On April 10, 2008 West Siberian Resources completed Moscow, Russian Federation. the merger with OJSC “Alliance” Oil Company (“Alliance”). The principal activities of the signifi cant entities of the Through the merger, West Siberian Resources Ltd ex- Group as at December 31, 2008 were as follows: panded its exploration and production (upstream) op-

Operating entity Activity Country

West Siberian Resources Ltd Holding company Bermuda OJSC “Alliance” Oil Company Holding company Russian Federation Vostok Oil (Cyprus) Ltd Holding company Cyprus O&G Credit Agency Ltd Financing of subsidiaries Cyprus LLC West Siberian Resources Invest Management services Russian Federation LLC Alliance-WSR Management Management services Russian Federation OJSC Vostochnaya Transnationalnaya Kompaniya (‘VTK’) Oil exploration and production Russian Federation LLC Khvoinoye Oil exploration and production Russian Federation OJSC Pechoraneft Oil exploration and production Russian Federation CJSC Saneco Oil exploration and production Russian Federation LLC Kolvinskoye Oil exploration and production Russian Federation OJSC Tatnefteotdacha Oil exploration and production Russian Federation LLP Potential Oil Oil exploration and production Kazakhstan OJSC Khabarovsk Oil Refi nery Oil refi nery Russian Federation LLC Alexandrov Refi nery Oil refi nery Russian Federation OJSC Khabarovsknefteproduct Trading of oil products Russian Federation OJSC Khabarovsknefteproduct Service Trading of oil products Russian Federation OJSC Amurnefteproduct Trading of oil products Russian Federation OJSC Primornefteproduct Trading of oil products Russian Federation LLC A-Spect Trading of oil products Russian Federation LLC Dalnevostochny Alliance Trading of oil products Russian Federation LLC Alliance Khabarovsk Trading of oil products Russian Federation CJSC Alliance Oil Trading of oil products Russian Federation LLC Naftatekhresource Trading of oil products Russian Federation LLC Ussury Neft Trading of oil products Russian Federation LLC Alliance Bunker Trading of oil products Russian Federation CJSC Alliancetransoil Transportation services Russian Federation CJSC Alliancepromservice Leasing of machinery and equipment Russian Federation LLC Alliance-Bioprom Production of biofuels Russian Federation CJSC Ecobioprom Production of biofuels Russian Federation LLC TD Ecobioprom Trading of biofuels Russian Federation

Annual Report 2008

Note 2 Accounting principles

Basis of preparation ity with IFRS requires the use of estimates and assump- Entities of the Group maintain their accounting records tions that aff ect the reported amounts of assets and li- in accordance with the laws and accounting and report- abilities and disclosure of contingent assets and liabilities ing regulations of the countries of incorporation. Statu- at the date of the fi nancial statements and the reported tory accounting principles and procedures may diff er amounts of revenues and expenses during the reporting substantially from those generally accepted under IFRS. period. Although these estimates are based on manage- Accordingly, the accompanying consolidated fi nancial ment’s best knowledge and current events and actions, statements on pages 34–92, which have been prepared actual results ultimately may diff er from those estimates. from the Group’s statutory accounting records, refl ect adjustments necessary for such fi nancial statements to New accounting developments be presented in accordance with IFRS. The parent com- In preparing the Group consolidated fi nancial statements pany fi nancial statements are prepared in accordance for the fi nancial year ended December 31, 2008 the with IFRS. Group followed the requirements of all new International The fi nancial statements have been prepared on the Financial Reporting Standards (“IFRS”) and interpretations historical cost basis except for the fair value of subsidiar- issued by International Financial Interpretation Reporting ies acquired, in accordance with IFRS 3 “Business Combi- Interpretation Committee (“IFRIC”) that are mandatory for nations”. adoption in the annual periods beginning on or after 1 The accounting policies used in the preparation of January 2008. Adoption of these standards and interpre- the consolidated and parent company fi nancial state- tations did not have any eff ect on the fi nancial perform- ments are consistent with those used in the annual fi nan- ance or position of the Group. cial statements for the year ended December 31, 2007 At the date of approval of the Group’s consolidated fi - except for what is described in the section “New account- nancial statements, the following new and revised Stand- ing developments”. ards and Interpretations have been issued, but are not ef- The preparation of fi nancial statements in conform- fective for the fi nancial year ended December 31, 2008:

Eff ective for the accounting periods beginning on or after

Amendment to IAS 1 “Presentation of fi nancial statements” 1 January 2009 Amendment to IAS 16 “Property, plant and equipment” 1 January 2009 Amendment to IAS 19 “Employee Benefi ts” 1 January 2009 Amendment to IAS 20 “Government Grants and Disclosure of Government Assistance” 1 January 2009 Amendment to IAS 23 “Borrowing Costs” 1 January 2009 Amendment to IAS 27 “Consolidated and separate fi nancial statements” 1 July 2009 Amendment to IAS 28 “Investments in associates” 1 July 2009 Amendment to IAS 31 “Interest in joint ventures” 1 July 2009 Amendment to IAS 32 “Financial instruments: presentation” 1 January 2009 Amendment to IAS 36 “Impairment of Assets” 1 January 2009 Amendment to IAS 38 “Intangible Assets” 1 January 2009 Amendment to IAS 39 “Financial Instruments: Recognition and Measurement” 1 January 2009 Amendment to IAS 40 “Investment Property” 1 January 2009 Amendment to IAS 41 “Agriculture” 1 January 2009 Amendment to IFRS 1 “First-time Adoption of International Financial Reporting Standards” 1 January 2009 Amendment to IFRS 2 “Share based payments” 1 January 2009

WEST SIBERIAN Resources Ltd

Eff ective for the accounting periods beginning on or after

Revised IFRS 3 “Business combinations” 1 July 2009 Amendment to IFRS 5 “Non-current assets held for sale and discontinued operations” 1 July 2009 IFRS 8 “Operating segments” 1 January 2009 IFRIC 13 “Customer loyalty programmes” 1 July 2008 IFRIC 15 “Agreements for the construction of real estate” 1 January 2009 IFRIC 16 “Hedges of a net investment in a foreign operation” 1 October 2008 IFRIC 17 “Distributions of Non – cash Assets to Owners” 1 July 2009 IFRIC 18 “Transfers of Assets from Customers” 1 July 2009

The impact of adoption of these Standards and Interpre- The translation of the fi nancial statements of the Group tations in the preparation of consolidated fi nancial state- entities from their functional currencies to the presenta- ments in the future periods is currently assessed by the tion currency is made in accordance with the require- Group’s management as insignifi cant except for the IAS 1 ments of IAS 21 “The Eff ects of Changes in Foreign Ex- “Presentation of fi nancial statements” and IFRS 8 “Operat- change Rates” as follows: ing Segments”. The revised standard IAS 1 “Presentation of • All assets, liabilities, both monetary and non-monetary fi nancial statements” will result in changed presentation are translated at closing exchange rates at the dates of of the Group’s income statement and balance sheet. The each consolidated balance sheet presented; revised standard IFRS 8 “Operating Segments” requires • All income and expenses in each consolidated income the Group’s segments of activities to be reported based statement are translated at the average exchange on the internal reporting structure. The adoption of IFRS rates for the periods presented; 8 is not expected to change the number and defi nition of segments. • Resulting exchange diff erences are included in equity and presented separately as “Eff ect of translation to Functional and presentation currencies presentation currency”; and Items included in the fi nancial statements of each of • All cash fl ows are translated at the average exchange the Group’s entities are measured using the currency of rates for the periods presented. Resulting exchange the primary economic environment in which the entity diff erences are presented as “Eff ect of translation to operates (“functional currency”). The individual fi nancial presentation currency”. statements of each Group’s entity are presented in its functional currency: The balance sheet rates of exchange used regarding the Russian Rouble (RUR) to the USD at December 31, 2008 • For entities operating in the Russian Federation – and 2007 were RUR 29.38 and RUR 24.55 to USD 1.00, re- Russian Rouble (“RUR”); spectively. The average exchange rates for the fi nancial • For entities operating in Ukraine – Ukrainian Hrivna years ended December 31, 2008 and 2007 were RUR (“UAH”) (only applicable for the fi nancial year ended 24.86 and RUR 25.58 to USD 1.00, respectively. December 31, 2007); As from August 1, 2008 certain intercompany loans • For entities operating in Kazakhstan – Kazakhstan given to subsidiaries have been reassessed to be viewed Tenge (“Kazakh Tenge”). as extended investments rather than operating loans. The accounting treatment for such loans is that foreign • For entities operating in Cyprus – US Dollar (“USD”) exchange gains and losses are recorded in equity as a • The consolidated and parent fi nancial statements translation diff erence, net of income tax, whereas for op- are presented in USD, which is the parent company’s erating loans such gains and losses are recorded in the functional and presentation currency. income statement.

Annual Report 2008

The Russian Rouble, Kazakh Tenge and Ukrainian Hrivna siness combination is measured as the aggregate of the are not fully convertible currencies outside the territory of fair values (at the date of exchange) of assets given, liabi- the Russian Federation, Kazakhstan and Ukraine, respecti- lities incurred or assumed, and equity instruments issued vely. The translation of assets and liabilities, denominated by the Group in exchange for control of the acquiree, in these currencies, into USD for the purpose of these plus any costs directly attributable to the business com- consolidated fi nancial statements does not indicate that bination. The acquiree’s identifi able assets, liabilities and the Group could or will in the future realise or settle in contingent liabilities that meet the conditions for recog- USD the translated values of these assets and liabilities. nition under IFRS 3 “Business Combinations” are recognised at their fair values at the acquisition date, except for Basis of consolidation non-current assets (or disposal groups) that are classifi ed The consolidated fi nancial statements include the ac- as held for sale in accordance with IFRS 5 “Non-current As- counts of the parent company and each of those compa- sets Held for Sale and Discontinued Operations”, which are nies in which it owns, directly or indirectly, shares repre- recognised and measured at fair value less costs to sell. senting more than 50% of the voting rights or otherwise Goodwill arising on acquisition is recognised as an has the sole right to exercise control over the operations. asset and initially measured at cost, being the excess of Control is achieved where the Company has the power the cost of the business combination over the Group’s to govern the fi nancial and operating policies of an inves- interest in the net fair value of the identifi able assets, lia- tee enterprise so as to obtain benefi ts from its activities. bilities and contingent liabilities recognised. If, after reas- Subsidiaries are consolidated from the date on which sessment, the Group’s interest in the net fair value of the control is transferred to the Group and are no longer acquiree’s identifi able assets, liabilities and contingent consolidated from the date that control ceases. liabilities exceeds the cost of the business combination, The fi nancial statements of subsidiaries are prepared the excess is recognised immediately in the consolidated for the same reporting period as those of the holding income statement. company; where necessary, adjustments are made to the Any diff erences arising on acquisition of additional fi nancial statements of subsidiaries to bring the account- interest in subsidiaries from parties related by means of ing policies used by them into line with those of the Group. common control between the cost of acquisition and All intercompany profi ts, transactions and balances the Group’s interest in the carrying value of the identifi - are eliminated on consolidation. able assets, liabilities and contingent liabilities of a sub- Minority interests in the net assets of consolidated sidiary at the date of acquisition, is recognised directly in subsidiaries are identifi ed separately from the Group’s eq- equity. Any diff erences between consideration paid and uity therein. The interest of minority shareholders in the acquired net assets arising on acquisition of additional acquiree is initially measured at the minority’s proportion interest in subsidiaries from third parties is recognised as of the net fair value of the assets, liabilities and contingent goodwill or written off to the consolidated income state- liabilities recognised. Minority interests at the reporting ment. date consist of the amount of those interests at the date Following the completion of the merger with Alliance of the original business combination and the minority’s the fi nancial statements have been prepared using the share of changes in equity since the date of the combi- accounting model prescribed by IFRS 3 “Business com- nation. Losses applicable to the minority in excess of the bination” for “reverse acquisitions” since the shareholders minority’s interest in the subsidiary’s equity are allocated of Alliance owned 60% of WSR at the date of the merger. against the interests of the Group except to the extent This accounting treatment requires Alliance to be treated that the minority has a binding obligation and is able to as the accounting acquirer for the consolidated fi nancial make an additional investment to cover the losses. information and WSR being presented as the acquiree. As a consequence, the assets and liabilities of WSR, be- Business combinations ing the legal parent, have been recorded at fair value ini- Acquisitions of subsidiaries and businesses are accoun- tially in the consolidated fi nancial statements. The assets ted for using the purchase method. The cost of the bu- and liabilities of the legal subsidiary Alliance have been

WEST SIBERIAN Resources Ltd

recognized and measured in the combined fi nancial immediately in the consolidated income statement. statements at their pre-combination carrying amounts. Where a group company transacts with an associate The comparative fi nancial information for the fi nancial of the Group, unrealised profi ts and losses are eliminated year ended December 31, 2007 represent the Alliance Oil to the extent of the Group’s interest in the relevant asso- Company’s fi nancial statements for this period. ciate, except where unrealised losses provide evidence of WSR as the legal parent continue to be presented an impairment of the asset transferred. as parent company in future fi nancial reports. The parent company’s fi nancial statements have been included Intangible assets in the consolidated fi nancial statements for the period Intangible assets other than goodwill with an estimated since April 10, 2008, the date of the merger, till Decem- useful life are amortised on a straight-line basis over their ber 31, 2008 due to application of reverse acquisition. The estimated useful lives (for periods up to 20 years). standalone fi nancial statements of the parent company Acquired computer software licenses are capitalised are presented for the twelve months ended December on the basis of the costs incurred to acquire and bring to 31, 2008 with comparative information for the twelve use the specifi c software. These costs are amortised over months ended December 31, 2007. their estimated useful lives (3 to 5 years). Costs associated with developing and maintaining Investments in associates computer software programs are recognized as an ex- An investment in an associated company is an invest- pense as incurred. Costs that are directly associated with ment in a company where the Group holding represents the development of identifi able and unique software at least 20%, but no more than 50% of the votes and over products controlled by the Group, and that will probably which the Group exercises signifi cant infl uence. Signifi - generate economic benefi ts exceeding costs beyond cant infl uence is the power to participate in the fi nancial one year, are recognized as intangible assets. Computer and operating policy decisions of the investee but is not software development costs recognized as assets are control or joint control over these policies. amortised over their estimated useful lives (not exceed- The results and the assets and liabilities of associates ing 3 years). are incorporated in the consolidated fi nancial statements using the equity method of accounting. Under Goodwill the equity method, investments in associates are car- Goodwill arising on acquisition of a subsidiary represents ried in the consolidated balance sheet at cost as adjust- the excess of the cost of acquisition over the Group’s ed for post-acquisition changes in the Group’s share of interest in the net fair value of the identifi able assets, li- net assets of the associate, less any impairment in the abilities and contingent liabilities of the subsidiary at the value of individual investments. Losses of an associate date of acquisition. Goodwill is initially recognised as an in excess of the Group’s interest in that associate (which asset at cost and is subsequently measured at cost less includes any long-term interest that, in substance, form any accumulated impairment losses. part of the Group’s net investment in the associate) are not recognised. Testing of Goodwill for Impairment Any excess of the cost of acquisition over the For the purpose of impairment testing, goodwill is al- Group’s share of the net fair value of the identifiable located to each of the Group’s cash generating units assets, liabilities and contingent liabilities of the as- expected to benefi t from the synergies of the combina- sociate recognised at the date of acquisition is recog- tion. Cash generating units (CGUs) to which goodwill has nised as goodwill. The goodwill is included within the been allocated are tested for impairment annually, or carrying amount of the investment and is assessed for more frequently when there is an indication that the unit impairment as the part of the investment. Any excess may be impaired. If the recoverable amount of the CGU of the Group’s share of the net fair value of the identifi- is less than the carrying amount of the unit, the impair- able assets, liabilities and contingent liabilities over the ment loss is allocated fi rst to reduce the carrying amount cost of acquisition after re-assessment is recognised of any goodwill allocated to the unit and then to the

Annual Report 2008

other assets of the unit pro-rata on the basis of the carry- shorter than the production phase of the oil fi eld, the oil ing amount of each asset in the unit. Any impairment loss and gas properties are depreciated over the production recognised for goodwill is not reversed in a subsequent phase of the oil and gas fi elds, as management believes period. that such licenses will be renewed. The production phase On disposal of a subsidiary, the attributable amount of oil and gas fi elds is determined based on the valuation of goodwill is included in the determination of the profi t of oil and gas reserves. or loss on disposal. Proved reserves are those volumes of petroleum which, by analysis of geological and engineering data, are Property, plant and equipment estimated with reasonable certainty to be commercially The Group’s property, plant and equipment in general recoverable, from a given date forward, from known reser- consist of oil and gas properties involved in crude oil ex- voirs and under current economic conditions, operating ploration and production (or “upstream assets”), refi ning methods and governmental regulations. Proved reserves and marketing properties involved in oil refi ning, oil and can be categorised as developed or undeveloped. oil products transportation and marketing of oil products Probable reserves are those unproved reserves which (or “downstream assets”) and other non-production assets. analysis of geological and engineering data suggests are more likely than not to be recoverable, under current eco- Oil and gas properties nomic conditions, operating methods and government Expenditures for oil and gas properties are accounted regulations. In this context, when probabilistic methods for at historic cost less depletion and impairment losses are used, there should be at least a 50% probability that if applicable. All costs for acquiring concessions, licenses the quantities actually recovered will equal or exceed the and for the exploration and evaluation, survey, drilling sum of estimated proved plus probable reserves. and development of such interests are capitalised on a fi eld area cost centre basis. Refi ning and selling properties and other non-production assets Exploration and evaluation expenditures may include Refi ning and marketing properties and other non-pro- costs of license acquisition, technical services and stud- duction assets are stated at historical cost less accumu- ies, seismic research, exploration drilling and testing, but lated depreciation and impairment losses if applicable. do not include costs incurred prior to having obtained Historical cost includes expenditure that is directly attrib- the legal rights to explore an area, which are expensed utable to the acquisition of the items. directly to the income statement as they are incurred. Deprecation is calculated using the straight-line Depletion is determined by adding anticipated future method utilising useful lives of the assets determined by capital costs for the development of the proved and prob- independent appraisers and over the esti-mated useful able reserves determined at the balance sheet date price economic lives of assets, which are: levels to net capitalised costs to reporting date. This total is depleted based on the year’s production in relation to

estimated total proved and probable reserves of oil and Buildings and Infrastructure 20–50 years

gas in accordance with the unit of production method. Machinery and Equipment 8–20 years Depletion of a fi eld area is charged to the income state- Pipelines and Cables 5–20 years ment when production has commenced. Exploration and evaluation assets related to each exploration license Vehicles 3–5 years are not depleted and carried forward until existence (or Fixtures and Fittings 4–6 years otherwise) of commercial reserves has been determined. Proved and probable reserves include oil quantities The gain or loss arising on the disposal or retirement of which the Group expects to produce after the expiry an item of property, plant and equipment is determined dates of its current licenses. The Group’s current licenses as the diff erence between the sales proceeds and the for exploration, production and development of oil fi elds carrying amount of the asset and is recognised in the expire between 2011 and 2033. Where the license term is consolidated income statement.

WEST SIBERIAN Resources Ltd

Impairment of tangible assets The oil and gas properties related to decommissioning The Group’s tangible assets are reviewed for impairment and site restoration are depreciated using the unit-of- regularly or when events or changes in circumstances production method based on proved and probable re- indicate that the carrying amount of the tangible as- serves. The unwinding of the obligation resulting from sets may not be recoverable. If any such indication ex- the passage of time by applying an interest method of al- ists, the recoverable amount of the asset is estimated in location to the amount of the obligation is subsequently order to determine the extent of the impairment loss (if released over the life of the fi eld and is charged to fi nan- any). Where it is not possible to estimate the recoverable cial expenses. amount of an individual asset, the Group estimates the The adequacy of the decommissioning and site res- recoverable amount of the Cash Generating Unit (CGU) toration provision is periodically reviewed in the light to which the asset belongs. of current laws and regulations, and adjustments made Recoverable amount is the higher of fair value less as necessary. Changes in the estimated expenditure are costs to sell or value in use. In assessing value in use, refl ected as an adjustment to the provision and the cor- the estimated future cash fl ows are discounted to their responding property, plant and equipment. present value, using a pre-tax discount rate that refl ects current market assessments of the time value of money Leases and the risks specifi c to the asset for which the estimates Leases are classifi ed as fi nance leases whenever the terms of future cash fl ows have not been adjusted. of the lease transfer substantially all the risks and rewards If the recoverable amount of an asset (or CGU) is es- of ownership to the lessee. All other leases are classifi ed timated to be less than its carrying amount, the carrying as operating leases. amount of the asset (or CGU) is reduced to its recoverable Assets held under fi nance leases are recognised at amount. An impairment loss is recognised immediately their fair value at the inception of the lease or, if lower, in the consolidated income statement. at the present value of the minimum lease payments. Where an impairment loss subsequently reverses, the The corresponding liability to the lessor is included in the carrying amount of the asset (or CGU) is increased to the consolidated balance sheet as a fi nance lease obligation. revised estimate of its recoverable amount but so that Lease payments are apportioned between fi nance the increased carrying amount does not exceed the car- charges and reduction of the lease obligation so as to rying amount that would have been determined had no achieve a constant rate of interest on the remaining bal- impairment loss been recognised for the asset (or CGU) in ance of the liability. Finance charges are charged directly prior years. A reversal of an impairment loss is recognised to the consolidated income statement, unless they are immediately in the consolidated income statement. directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s gen- Provision for decommissioning and site restoration costs eral policy on borrowing costs. Decommissioning and site restoration provision is related Operating lease payments are recognised as an ex- primarily to the conservation and liquidation of the wells, pense on a straight-line basis over the lease term, except pipelines, other oil and gas facilities and site restoration where another systematic basis is more representative of on fi elds where the Group operates. The management the time pattern in which economic benefi ts from the estimates the obligation related to these costs based on leased asset are consumed. internally generated engineering estimates, current statutory requirements and industry practices. At the date Inventory of acquisition of the fi eld or at fi rst production, future Inventories are stated at the lower of cost and net real- decommissioning and site restoration costs, discounted isable value. Costs, including an appropriate portion of to net present value, are capitalised and corresponding fi xed and variable overhead expenses, are assigned to obligation raised as soon as a constructive obligation to inventories held by the method most appropriate to the incur such costs arises and the amount can be reliably particular class of inventory, with the majority being val- estimated. ued on a fi rst-in-fi rst-out basis and crude oil stock being

Annual Report 2008

valued on a weighted average basis. Net realisable value of the fi nancial asset, the estimated future cash fl ows of represents the estimated selling price for inventories in the investment have been impacted. the ordinary course of business less all estimated costs of For certain categories of fi nancial assets, such as trade completion and applicable variable selling expenses. Pro- receivables, assets that are assessed not to be impaired vision is made for obsolete or slow-moving items where individually are subsequently assessed for impairment on appropriate. a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past Financial assets experience of collecting payments, an increase in the Financial assets are recognised and derecognised on the number of delayed payments in the portfolio past the trade date where the purchase or sale of an investment average credit period of 30-45 days, as well as observable is under a contract whose terms require delivery of the changes in national or local economic conditions that investment within the timeframe established by the mar- correlate with default on receivables. ket concerned, and are initially measured at fair value, For fi nancial assets carried at amortised cost, the plus transaction costs. amount of the impairment is the diff erence between the Financial assets are classifi ed into the following speci- asset’s carrying amount and the present value of estimat- fi ed categories: ‘available-for-sale’ (“AFS”) fi nancial assets ed future cash fl ows, discounted at the fi nancial asset’s and ‘loans and receivables’. The classifi cation depends on original eff ective interest rate. the nature and purpose of the fi nancial assets and is de- The carrying amount of the fi nancial asset is reduced termined at the time of initial recognition. by the impairment loss directly for all fi nancial assets with the exception of trade receivables, where the carry- Eff ective Interest Method ing amount is reduced through the use of an allowance The eff ective interest method is a method of calculating account. When a trade receivable is considered uncol- the amortised cost of a fi nancial asset and of allocating lectible, it is written off against the allowance account. interest income over the relevant period. The eff ective Subsequent recoveries of amounts previously written off interest rate is the rate that exactly discounts estimated are credited against the allowance account. Changes in future cash receipts (including all fees on points paid or the carrying amount of the allowance account are recog- received that form an integral part of the eff ective interest nised in profi t or loss. rate, transaction costs and other premiums or discounts) If, in a subsequent period, the amount of the impair- through the expected life of the fi nancial asset, or, where ment loss decreases and the decrease can be related appropriate, a shorter period. objectively to an event occurring after the impairment was recognised, the previously recognised impairment Loans and Receivables loss is reversed through profi t or loss to the extent that Trade receivables, loans, and other receivables that have the carrying amount of the fi nancial asset at the date the fi xed or determinable payments that are not quoted in impairment is reversed does not exceed what the am- an active market are classifi ed as loans and receivables. ortised cost would have been had the impairment not Loans and receivables are measured at amortised cost been recognised. using the eff ective interest method, less any impairment. Interest income is recognised by applying the eff ective Derecognition of Financial Assets interest rate, except for short-term receivables when The Group derecognises a fi nancial asset only when the the recognition of interest would be immaterial. contractual rights to the cash fl ows from the asset expire; or it transfers the fi nancial asset and substantially Impairment of Financial Assets all the risks and rewards of ownership of the asset to Financial assets are assessed for indicators of impairment another entity. If the Group neither transfers nor retains at each balance sheet date. Financial assets are impaired substantially all the risks and rewards of ownership and where there is objective evidence that, as a result of one continues to control the transferred asset, the Group or more events that occurred after the initial recognition recognises its retained interest in the asset and an as-

WEST SIBERIAN Resources Ltd

sociated liability for amounts it may have to pay. If the Compound Instruments Group retains substantially all the risks and rewards of The component parts of compound instruments issued ownership of a transferred fi nancial asset, the Group by the Group are classifi ed separately as fi nancial liabili- continues to recognise the fi nancial asset and also ties and equity in accordance with the substance of the recognises a collateralised borrowing for the proceeds contractual arrangement. At the date of issue, the fair val- received. ue of the liability component is estimated using the pre- vailing market interest rate for a similar non-convertible Cash and cash equivalents instrument. This amount is recorded as a liability on an Cash and cash equivalents comprise cash balances, cash amortised cost basis using the eff ective interest method deposits and highly liquid investments with maturities until extinguished upon conversion or at the instrument’s of three months or less, that are readily convertible to maturity date. The equity component is determined by known amounts of cash and are subject to an insignifi - deducting the amount of the liability component from cant risk of changes in value. the fair value of the compound instrument as a whole. This is recognised and included in equity, net of income Provisions tax eff ects, and is not subsequently re-measured. Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past Financial liabilities event, it is probable that the Group will be required to Financial liabilities, including borrowings, are initially settle the obligation, and a reliable estimate can be made measured at fair value, net of transaction costs. Financial of the amount of the obligation. liabilities are subsequently measured at amortised cost The amount recognised as a provision is the best using the eff ective interest method, with interest ex- estimate of the consideration required to settle the pense recognised on an eff ective yield basis. present obligation at the balance sheet date, taking The eff ective interest method is a method of calcu- into account the risks and uncertainties surrounding lating the amortised cost of a fi nancial liability and of al- the obligation. Where a provision is measured using locating interest expense over the relevant period. The the cash flows estimated to settle the present obliga- eff ective interest rate is the rate that exactly discounts es- tion, its carrying amount is the present value of those timated future cash payments through the expected life cash flows. of the fi nancial liability, or, where appropriate, a shorter period. Share capital Ordinary shares are classifi ed as equity. Incremental costs Derecognition of Financial Liabilities directly attributable to the issue of new shares or options The Group derecognises fi nancial liabilities when, and are shown in equity as a deduction, net of tax, from the only when, the Group’s obligations are discharged, can- proceeds. celled or they expire.

Financial Liabilities and Equity Instruments Borrowings Classifi cation as Debt or Equity Borrowing costs directly attributable to the acquisition, Debt and equity instruments are classifi ed as either fi - construction or production of qualifying assets, which nancial liabilities or as equity in accordance with the sub- are assets that necessarily take a substantial period of stance of the contractual arrangement. time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets Equity Instruments are substantially ready for their intended use or sale. An equity instrument is any contract that evidences a re- Borrowing costs directly related to fi nancing of the ac- sidual interest in the assets of an entity after deducting all quisition of producing oil and gas properties are charged of its liabilities. Equity instruments issued by the Group are to the income as incurred. Borrowings costs related to recorded at the proceeds received, net of direct issue costs. fi nancing of fi elds under development are capitalised

Annual Report 2008

within oil and gas properties until signifi cant commercial Revenue recognition production commenced. Revenue is measured at the fair value of the considera- All other borrowing costs are recognised in the con- tion received or receivable and represents amounts re- solidated income statement in the period in which they ceivable for goods and services provided in the normal are incurred. course of business, net of discounts, value added tax and custom duties. Employee benefi t obligations, share based payments Revenue from the sale of crude oil and oil products is and bonus plans recognised when the following conditions are satisfi ed: Remuneration to employees, including unused vacation • The Group has transferred to the buyer the signifi cant and bonuses and appropriate accruals of unifi ed social risks and rewards of ownership; tax in respect of services rendered during the period is recognised as an expense in the consolidated income • The Group retains neither continuing managerial in- statement. volvement to the degree usually associated with own- The Group’s entities are legally obliged to make de- ership nor eff ective control over the goods sold; fi ned contributions to the State Pension Funds of the • The amount of revenue can be measured reliably; Russian Federation and CIS countries where Group operates (a defi ned contribution plan fi nanced on a pay-as- • It is probable that the economic benefi ts associated you-go basis). In the Russian Federation all obligatory so- with the transaction will fl ow to the Group; and cial contributions, including contributions to the Russian • Costs incurred or to be incurred in respect of the trans- Federation State Pension Fund, are collected through a action can be measured reliably. unifi ed social tax (“UST”) calculated by the application of a regressive rate from 26% to 2% of the annual gross re- Until quantities of proven and probable reserves were de- muneration of each employee. The Group’s contributions termined and commercial production commenced inci- to the State Pension Funds of the Russian Federation and dental revenues from production of crude oil were off set CIS countries where the Group operates relating to de- against capitalised costs of the related fi eld area cost centre. fi ned contribution plans are charged to the consolidated Revenue from rendering of services is recognised at income statement in the period to which they relate. the time the services are provided. The Group operates the global share option plan. The Interest income is accrued on a time basis by refer- fair value of the employee services received in exchange ence to the principal outstanding and at the eff ective for the grant of the options is recognised as an expense. interest rate applicable, which is the rate that exactly The total amount to be expensed over the vesting period discounts the estimated future cash receipts through the is determined by reference to the fair value of the options expected life of the fi nancial asset to that assets net car- granted, excluding the impact of non-market vesting rying amount. conditions. Non-market vesting conditions are instead included in assumptions about the number of options Income tax that are expected to vest. At the balance sheet date, the Income tax expense represents the sum of the tax Company revises its estimates of the number of options currently payable and deferred tax. Income taxes are that are expected to vest. The Company recognises the computed in accordance with the laws of countries impact of the revision to original estimates in the income where the Group operates. The tax currently payable statement with a corresponding entry to equity. The pro- is based on taxable profit for the year. Taxable profit ceeds received net of any directly attributable transac- differs from profit as reported in the consolidated in- tion costs are credited to share capital (nominal value) come statement because it excludes items of income and share premium when the options are exercised. or expense that are taxable or deductible in other The Group recognises a liability and an expense for years and it further excludes items that are never tax- bonuses. The Group recognises a provision for bonuses able or deductible. The Group’s liability for current tax where contractually obliged. is calculated using tax rates that have been enacted

WEST SIBERIAN Resources Ltd

or substantively enacted by the balance sheet date. posted to the accounts. VAT is recoverable on the basis of Deferred income tax is provided in full, at rates applica- VAT invoices issued in compliance with the requirements ble at the balance sheet date, using the liability method, of the Russian Tax Code. Input VAT related to export sales on temporary diff erences arising between the tax bases may be recovered once the export confi rmation docu- of assets and liabilities and their carrying amounts in ments are approved by the tax authorities. The procedure the fi nancial statements. The principal temporary diff er- for the recovery of input VAT depends on whether the ences arise from depletion and depreciation on prop- subsequent sale of goods (services, property rights) is erty, plant and equipment, provisions, fair value adjust- made to the export or domestic market. According to ments to long-term items, and expenses charged to the the VAT transition rules in 2006 input VAT in respect of income statement before they become deductible for accounts payable booked before January 1, 2006 is re- tax purposes. coverable upon payment for the purchases. Deferred tax assets attributable to temporary diff erences, unused tax losses and credits are recognised to Earnings per share the extent that it is probable that future taxable profi ts Basic earnings per share have been calculated by divid- or temporary diff erences will be available against which ing the net result for the fi nancial period by the weighted they can be utilised. average number of issued outstanding shares. Diluted Deferred income tax assets and liabilities are off set earnings per share have been calculated by dividing the when the Company has a legally enforceable right to set net result for the fi nancial period by the diluted weighted off current tax assets against current liabilities, when de- average number of shares. ferred tax balances relate to the same regulatory body, For the fi nancial year ended December 31, 2008 during and when they relate to the same taxable entity. which the reverse acquisition of West Siberian by Alliance Current and deferred tax are recognised as an ex- Oil Company occurred the weighted average number pense or income in the consolidated income statement, of ordinary shares outstanding included 1,783,540,968 except when they relate to items credited or debited di- shares issued by West Siberian to the shareholders of Al- rectly to equity, in which case the associated income tax liance Oil Company for the period from the beginning is also recognised directly in equity, or where they arise of the reporting period to the merger completion date from the initial accounting for a business combination. In of April 10, 2008 and the actual number of WSR ordinary the case of a business combination, the tax eff ect is taken shares outstanding for the period since the merger com- into account in calculating goodwill or determining the pletion date till December 31, 2008. excess of the acquirer’s interest in the net fair value of the The earnings per share disclosed for the fi nancial acquiree’s identifi able assets, liabilities and contingent li- year ended December 31, 2007 was calculated by divid- abilities over cost. ing the profi t or loss of the legal subsidiary, Alliance Oil Company, attributable to ordinary shareholders in each Value added tax of those periods by 1,783,540,968, i.e. the number of or- From January 1, 2006, output value added tax related dinary shares issued by the legal parent, West Siberian, to sales performed after January 1, 2006 is charged on to the shareholders of the legal subsidiary in the reverse an accrual basis when goods (works, services, property acquisition. rights) are shipped (transferred) to buyers. Export sales are subject to VAT at a zero VAT rate provided certain Segments documentary requirements are met according to the Following the merger with Alliance the Group’s manage- Russian Tax Code. In addition, according to the VAT transi- ment determine its reporting segments based on diff er- tion rules output VAT on sales of goods (works, services) ences in the nature of operations of the Group’s compa- performed before January 1, 2006 is calculated upon col- nies. As a result two business segments are presented: lection of receivables from customers. Input VAT is recov- upstream segment which includes crude oil exploration, erable against VAT charged when the goods (works, serv- extraction and production and downstream segment ices, property rights) purchased after January 1, 2006 are which includes oil refi ning, transportation, marketing

Annual Report 2008

and sales of oil products. The Group’s management re- Oil and gas reserves view and evaluate the performance of these segments The total proved and probable oil and gas reserves are on a regular basis. depleted on a unit of production basis at a rate calcu- Segment revenue is the revenue reported in the lated by reference to proved and probable commercial Group’s income statement that is directly attributable to reserves and incorporating the anticipated future capital a segment and the relevant portion of the Group’s rev- cost for the development of those reserves. Commercial enue that can be allocated on a reasonable basis to a seg- reserves are determined using estimates of oil in place, ment, whether from sales to external customers or from recovery factors and future oil prices. Anticipated future transactions with other segments of the Group. Segment development costs are estimated using assumptions as revenue does not include interest or dividend income to number of wells required to produce the commercial and gains on sales of investments. reserves, the cost of such wells and associated produc- Segment expense is the expense resulting from the tion facilities, and other capital costs. operating activity of a segment that is directly attributable to the segment and the relevant portion of an ex- Useful economic lives and residual values of property, plant and equipment pense that can be allocated on a reasonable basis to the Property, plant and equipment other than oil and gas segment, including expenses relating to sales to external properties are depreciated on a straight-line basis customers and expenses relating to transactions with over their useful economic lives. Management peri- other segments of the Group. odically, at the end of each reporting period, reviews Segment expense does not include interest, including the appropriateness of the assets useful economic lives interest incurred on advances or loans from other seg- and residual values. The review is based on the current ments and income tax expense. condition of the assets, the estimated period during Segment result is segment revenue less segment which they will continue to bring economic benefi t to expense, and is determined before any adjustments for the Group and the estimated residual value. minority interest. Segment assets and liabilities are those operating as- Impairment of tangible assets sets and liabilities that are employed by a segment in its The Group’s tangible assets are reviewed for impairment operating activities and that either are directly attribut- regularly or when events or changes in circumstan- able to the segment or can be allocated to the segment ces indicate that the recoverable amount of the Group’s on a reasonable basis. Segment assets do not include tangible assets has declined below the carrying value. income tax assets. Segment assets are determined after The recoverable amount is the higher of the tangible as- deducting related provision that are reported as direct off sets’ fair value less costs to sell or their value in use. When sets in the Group’s balance sheet. Segment liabilities do such decline is identifi ed, the carrying amount is reduced not include borrowings and income tax liabilities. to the recoverable amount. The amount of the reduction is recorded in the consolidated Group’s income state- Critical accounting estimates and judgments ment in the period in which the reduction is identifi ed. Estimates, judgments and assumptions are continually If conditions change and management determines that evaluated and are based on historical experience and the assets’ value has increased, the impairment provision other factors, including expectations of future events that will be fully or partially reversed. are believed to be reasonable under the circumstances. Determining whether Group’s tangible assets are im- The Group makes estimates and assumptions concern- paired requires an estimation of the value in use of the ing the future. The resulting accounting estimates will, cash-generating units (CGU) within the Group. The value by defi nition, seldom equal the related actual results. The in use calculation requires the entity to estimate the fu- estimates and assumptions that have a signifi cant risk of ture cash fl ows expected to arise from the CGU and a causing a material adjustment to the carrying amounts suitable discount rate in order to calculate present value. of assets and liabilities within the next fi nancial year are Due to the fact that indicators of impairment of tan- discussed below. gible assets existed at the balance sheet date as a result

WEST SIBERIAN Resources Ltd

• the oil products average demand was estimated of decreased crude oil prices, the management of the based on retail market share of approximately 45% Group has performed an annual impairment review as in the fi nancial year ended December 31, 2008 with at December 31, 2008 in respect of its upstream CGUs estimated growth of oil products demand for 2% per defi ned on fi eld area cost centre bases (representing by annum considered by management to be reasonably the group of three Kharyaga fi elds and the Kolvinckoye achievable; fi eld located in the Timano-Pechora region, the group of three fi elds and the Khvoinoye fi eld located in the Tomsk • the corresponding costs included crude oil purchases, region, the Kochevnenskaya group of six fi elds and three operating and administration expenses; separate fi elds located in the Volga-Urals region of the • the cash fl ows forecast included the eff ect from the Russian Federation and one fi eld located in Kazakhstan) modernization program, and the subject tangible as- and downstream business segment as a whole. sets included the ongoing con-struction-in-progress; Cash infl ows from the upstream CGUs were calcu- • the capital expenditures included maintenance of cur- lated based on the following assumptions: rent tangible assets and cost incremental for modernization program; and • crude oil price Brent based on Intercontinental Ex- change crude oil price futures data; • the fi nancial pre-tax discount rate of 14.04% per annum. • production volumes based on the approved fi eld’s de- The results of the review performed have shown no im- velopment program; pairment of the downstream business segment’s tangi- • the corresponding operating costs included produc- ble assets to be recognised in the Group’s consolidated tion and other taxes, other controllable production income statement for the fi nancial year ended Decem- and administration expenses; ber 31, 2008. • the cash fl ows forecast included the eff ect from the modernization program, and the subject tangible as- Taxation sets included the ongoing construction-in-progress; The Group is subject to income tax and other taxes. Sig- nifi cant judgement is required in determining the provi- • the capital expenditures included drilling costs and sion for income tax and other taxes due to the complex- other capital expenditures expected to be incurred for ity of the tax legislation of countries where the Group fi led development; operates. There are many transactions and calculations • fi nancial pre-tax discount rate of 14.04% per annum. for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit For each oil fi eld or group of fi elds tests were performed issues based on estimates of whether additional taxes for the period of expected profi table operations but no will be due. Where the fi nal tax outcome of these matters longer than the fi eld development period determined in is diff erent from the amounts that were initially recorded, the reserve report prepared by DeGolyer & McNaughton. such diff erences will impact the amount of tax and tax As a result of impairment test performed the impair- provisions in the period in which such determination is ment charge for the oil fi elds located in the Timano- made. Pechora region and Tomsk region was recorded in the Group’s consolidated income statement for the fi nancial Site restoration costs year ended December 31, 2008. On fi elds where the Group is required to contribute to Cash infl ows from downstream business segment decommissioning and site restoration costs, a provision were calculated based on the following assumptions: is recorded to recognise the commitments. The Group performs analysis and estimates in order to determine • the cash fl ows were calculated in real terms for a ten- the probability, timing and amount involved with prob- year period; able required outfl ow of resources. Estimating the • the prices of oil products were forecast on the basis of amounts and timing of those decommissioning and site oil price and refi ning margins for diff erent oil products; restoration obligations that should be recorded requires

Annual Report 2008

signifi cant judgment. The judgment is based on cost and Allowances engineering studies using currently available technology The Group creates allowances for doubtful debts to re- and is based on current environmental regulations. Li- fl ect estimated losses resulting from potential inability abilities for decommissioning and site restoration costs of customers to make required payments. When eva- are subject to change because of change in laws and luating the adequacy of an allowance for doubtful debts, regulations, and their interpretation. management bases its estimates on the current overall Estimated decommissioning and site restoration economic conditions, the ageing of accounts receivable costs, for which disbursements are determined to be balances, historical write-off experience, customer cre- probable, are recognised as a provision in the Group’s fi - ditworthiness and changes in payment terms. Changes nancial statements. When the fi nal determination of such in the economy, industry or specifi c customer conditions obligation amounts diff ers from the recognised provi- may require adjustments to the allowance for doubtful sions, the Group’s income statement is impacted. debts recorded in the consolidated fi nancial statements.

Note 3 Segment information

For presentation purposes the Group’s other income and corresponding segment result are included in the downstream business segment in the below table.

Elimination Upstream Downstream Subtotal adjustments Total

Year ended December 31, 2008 Export 223 188 519 883 743 070 - 743 070 Export CIS 104 262 - 104 262 - 104 262 Domestic 288 824 1 751 563 2 040 388 -166 155 1 874 233 Total segment revenue 616 274 2 271 446 2 887 720 -166 155 2 721 565 Less: Intersegment revenue 160 850 5 305 166 155 -166 155 - Segment revenue 455 424 2 266 141 2 721 565 - 2 721 565 Segment result/Operating income -214 966* 350 817 135 851 - 135 851* Net fi nancial items -57 070 Result before tax from continuing operations 78 781 Income tax -32 812 Result for the period 45 969 Segment EBITDA 209 053 375 989 585 042 585 042 Year ended December 31, 2007 Export 72 148 382 952 455 100 - 455 100 Export CIS - - - - - Domestic 62 866 1 163 001 1 225 867 -62 866 1 163 001 Total segment revenue 135 014 1 545 953 1 680 967 -62 866 1 618 101 Less: Intersegment revenue 62 866 - 62 866 -62 866 - Segment revenue 72 148 1 545 953 1 618 101 - 1 618 101 Segment result/Operating income 38 843 102 084 140 927 - 140 927 Net fi nancial items -11 094 Result before tax from continuing operations 129 833 Income tax -49 600 Result after tax from continuing operations 80 233 Loss from discontinued operations -12 489 Result for the period 67 744 Segment EBITDA 52 954 141 852 194 806 194 806

* The segment and total result for the fi nancial year ended December 31, 2008 included the impairment charge for certain segment assets amounted to 316,849.

WEST SIBERIAN Resources Ltd

Elimination Upstream Downstream Subtotal adjustments Total

Dec 31, 2008 Segment assets 1 217 375 777 908 1 995 283 -16 659 1 978 624 Assets not allocated to segments - - 412 317 - 412 317 Total assets - - 2 407 600 -16 659 2 390 941 Segment liabilities 90 623 123 840 214 463 -16 659 197 804 Liabilities not allocated to segments - - 1 035 461 - 1 035 461 Total liabilities - - 1 249 924 -16 659 1 233 265

Capital expenditures 175 703 365 731 541 434 - 541 434 Depletion and depreciation -106 961 -25 173 -132 134 - -132 134 Impairment of property, plant and equipment -316 849 - -316 849 - -316 849

Dec 31, 2007 Segment assets 179 114 1 231 072 1 410 186 -42 255 1 367 931 Assets not allocated to segments - - 121 322 - 121 322 Total assets - - 1 531 508 -42 255 1 489 253 Segment liabilities 15 244 267 260 282 504 -42 255 240 249 Liabilities not allocated to segments - - 642 258 - 642 258 Total liabilities - - 924 762 -42 255 882 507

Capital expenditures 55 614 62 535 118 149 - 118 149 Depletion and depreciation -14 111 -31 199 -45 310 - -45 310 Impairment of property, plant and equipment - - - - -

As at December 31, 2008 and 2007 the upstream assets amounted to 54,994 and 14,528, respectively. All of the located in Russia amounted to 1,162,381 and 164,586, downstream assets are located in Russia. respectively, and upstream assets located in Kazakhstan

Note 4 Production costs – crude oil

The production costs for extracting crude oil are presented below.

Group Jan 1, 2008 – Jan 1, 2007 – Dec 31, 2008 Dec 31, 2007

Production tax 213 555 43 408 Wages and salaries including social charges 24 788 2 180 Cost of oil purchased for re-sale 17 794 - Transportation (other than Transneft charges) 10 510 3 255 Repairs and maintenance 9 934 1 119 Other taxes 9 089 1 006 Materials and fuel 7 321 3 006 Exploration costs 6 404 1 734 Production overheads 6 046 3 670 Other 10 697 769 316 138 60 147

Annual Report 2008

Note 5 Production costs – oil products

The production costs for oil products are represented by refi ning and other related costs presented below.

Group Jan 1, 2008 – Jan 1, 2007 – Dec 31, 2008 Dec 31, 2007

Cost of crude oil purchased for refi ning 900 844 750 743

Cost of oil products purchased for re-sale 43 623 41 483

Transportation costs 479 829 283 440

Other taxes (including excise tax) 79 140 66 746

Salary and wages including social charges 22 767 18 941

Other 30 485 12 563

1 556 688 1 173 916

Transportation costs include expenses for crude oil delivery to the Khabarovsk Oil Refi nery, oil products transportation to gas stations and crude oil insurance.

Note 6 Selling expenses

Group Jan 1, 2008 – Jan 1, 2007 – Dec 31, 2008 Dec 31, 2007

Salaries and wages including social charges 52 810 47 199 Transportation to customers 48 064 4 264 Repairs and maintenance 14 078 10 286 Export related selling costs 13 093 15 094 Insurance expenses 8 956 6 632 Other taxes 6 348 8 227 Utilities 6 112 4 874 Rent expenses 5 463 7 787 Advertising and marketing expenses 2 614 828 Security expenses 2 602 1 713 Communication expenses 1 000 887 Other 8 659 11 627 169 799 119 418

WEST SIBERIAN Resources Ltd

Note 7 Administration expenses

Group Parent company Jan 1, 2008 – Jan 1, 2007 – Jan 1, 2008 – Jan 1, 2007 – Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

Salaries and wages including social charges and share options* 20 720 8 999 8 012 8 370 Professional services (legal, audit, consulting, etc.) 12 302 11 400 4 533 5 792 Bank charges 7 640 3 978 27 31 Rent expenses 5 708 2 149 458 371 Trademark use charges 3 423 3 490 - - Other taxes 2 570 1 125 - - Security expenses 2 287 159 - - Communication expenses 960 55 68 97 Advertising and marketing expenses 899 255 349 104 Repairs and maintenance 426 2 - - Insurance expenses 309 273 - - Other 4 036 621 3 958 942 61 280 32 506 17 405 15 707

* For more detailed information on share options refer to Note 24.

PricewaterhouseCoopers, the Group auditors, and other audit fi rms have during the fi nancial years ended December 31, 2008 and 2007 received remuneration for work accomplished according to the following:

Group Parent company Jan 1, 2008 – Jan 1, 2007 – Jan 1, 2008 – Jan 1, 2007 – Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

PricewaterhouseCoopers - auditing 1 607 - 1 594 892

PricewaterhouseCoopers - other 186 - 173 63

Deloitte & Touche - auditing 1 513 2 023 - -

Deloitte & Touche - other 220 322 - -

Audit Consult - auditing 302 231 - -

BDO Unicon - auditing 63 348 - -

Baker Tilly Russaudit - auditing 59 - - -

Other - auditing 103 180 - -

4 053 3 104 1 767 955

Annual Report 2008

Note 8 Interest expense and other fi nancial income and expenses

Group Parent company Jan 1, 2008 - Jan 1, 2007 - Jan 1, 2008 - Jan 1, 2007 - Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

Interest expense on loans 33 296 22 836 21 195 22 318

Interest expense on bonds 10 772 10 427 - -

Interest expense on fi nance lease obligations 1 461 1 923 - -

Unwinding of discount on site restoration costs 1 504 154 - -

Valuation adjustment on loans to related parties -889 -1 917 - -

Other 3 755 319 701 2 035

49 899 33 742 21 896 24 353

Note 9 Income taxes

The parent company West Siberian Resources Limited 2008 and 2007. An income tax rate of 20% was enacted in domiciled in Bermuda is exempt from profi t tax. November 2008 which became eff ective starting from 1 The profi t of Cypriot subsidiaries, Vostok Oil (Cyprus) January 2009. As this tax rate was enacted by December Limited and O&G Credit Agency Limited, as adjusted for 31, 2008, the eff ect of the change on closing deferred in- tax purposes, is subject to Cypriot income tax at the rate come tax liabilities amounted to 21,716 has been recog- of 10%. On taxable profi ts above current year profi t of nised in these fi nancial statements. MEUR 1 an additional tax of 5% is imposed. Deferred tax asset is recognised for unused tax losses The profi t of the Group’s Russian subsidiaries as adjust- in some of the Group subsidiaries, which are expected to ed for tax purposes, was subject to Russian income tax at be utilised within the ten years expiration period in Russia. the rate of 24% in the fi nancial years ended December 31,

Jan 1, 2008 – Jan 1, 2007 – Dec 31, 2008 Dec 31, 2007

Current tax -139 185 -45 744

Deferred tax 106 373 -3 856

Total tax charge for the period -32 812 -49 600

WEST SIBERIAN Resources Ltd

The tax on the Group’s result before tax diff ers from the theoretical amount that would have arisen using the tax rate of the home country of the Company as follows:

Jan 1, 2008 Jan 1, 2007 Dec 31, 2008 Dec 31, 2007

Result before tax for continuing operations 78 781 119 142

Theoretical tax (rate 24% for Russia) -18 241 -28 594

Theoretical tax (rate 10% for Cyprus) -1 256 -

Theoretical tax for subsidiaries operating in other jurisdictions -711 -93

Eff ect of diff erent tax rate on dividend income -6 092 -11 897

Other non-deductible expenses -18 440 -3 190

Tax eff ect on non-deductible charity expenses -4 727 -7 017

Tax eff ect of gain/(loss) from disposal of shares in subsidiaries and associated companies 2 636 -2 057

Tax eff ect of gains from associated companies - 1 450

Tax eff ect for discontinued operations - 1 798

Deferred tax assets allowance -7 697 -

Reduction in tax rate (from 24 % to 20% for Russia) 21 716 -

Total tax charge for the period -32 812 -49 600

Eff ective tax rate for the Group -42% -42%

The gross movement on the deferred income tax account is as follows:

Jan 1, 2008 Jan 1, 2007 Dec 31, 2008 Dec 31, 2007

Net deferred tax liabilities in the beginning of the year 57 682 43 995

Expense/(income) for the period -84 657 3 856

Addition through reverse acquisition / acquisition of other subsidiaries 220 438 4 182

Disposal of subsidiaries - 2 027

Currency exchange diff erences on loans classifi ed as net investment, recorded in equity -9 245 -

Translation diff erences -29 098 3 622

Change in tax rate -21 716 -

Net deferred tax liabilities in the end of the year 133 404 57 682

Annual Report 2008

The deferred tax assets and liabilities for each temporary diff erence recognised in the Group’s balance sheet are as follows:

Dec 31, 2008 Dec 31, 2007

Deferred tax liabilities

Property, plant and equipment 144 680 55 867

Inventories 2 996 499

Trade and other receivables 1 293 -

Loans and borrowings 20 455 -

Other current liabilities 286 12 397

Other 2 137 799

171 847 69 562

Deferred tax assets

Property, plant and equipment 9 346 7 099

Inventories 6 221 3 482

Trade and other receivables 923 825

Provisions 2 654 37

Loans and borrowings 15 244 -

Trade and other payables 2 081 -

Other 1 974 437

38 443 11 880

Net deferred tax liabilities 133 404 57 682

Note 10 Earnings per share

For the fi nancial year ended December 31, 2008 there was a dilutive eff ect on the shares due to options granted.

Dec 31, 2008 Dec 31, 2007

Weighted average number of ordinary shares issued (outstanding) 2 863 316 355 1 783 540 968

Adjustment for dilutive eff ect of incentive options 2 836 970 –

Weighted average number of ordinary shares for diluted earnings per share 2 866 153 325 1 783 540 968

WEST SIBERIAN Resources Ltd

Note 11 Property, plant and equipment

Refi ning Oil and gas and selling properties properties Other assets Total

Cost at Dec 31, 2007 265 631 461 663 18 221 745 515 Additions through reverse acquisition 1 495 605 3 661 3 616 1 502 882

Reclassifi cations -655 -303 958 -

Additions 192 511 364 317 5 860 562 688

Disposals -14 956 -6 598 -1 928 -23 482

Translation diff erences -402 208 -124 247 -5 309 -531 764

Cost at Dec 31, 2008 1 535 928 698 493 21 418 2 255 839

Accumulated depletion and depreciation at Dec 31, 2007 -50 756 -94 266 -7 395 -152 417 Reclassifi cations of accumulated depletion and depreciation 4 -169 165 -

Depletion and depreciation charge -108 022 -22 407 -3 115 -133 544

Disposals 1 218 1 404 1 167 3 789

Translation diff erences 64 987 19 135 1 860 85 982

Accumulated depletion and depreciation at Dec 31, 2008 -92 569 -96 303 -7 318 -196 190

Accumulated impairment at Dec 31, 2007 - - - - Impairment charge -316 849 - - -316 849

Accumulated impairment at Dec 31, 2008 -316 849 - - -316 849

Net book value at Dec 31, 2008 1 126 510 602 190 14 100 1 742 800

Cost at Dec 31, 2006 194 463 413 669 31 397 639 529

Reclassifi cations 88 11 314 -11 402 -

Additions 56 218 61 262 2 476 119 956

Additions through business combinations - 4 155 65 4 220

Disposals -3 711 -6 211 -1 117 -11 039

Disposal of subsidiaries - -52 017 -4 688 -56 705

Translation diff erences 18 573 29 491 1 490 49 554

Cost at Dec 31, 2007 265 631 461 663 18 221 745 515

Accumulated depletion and depreciation at Dec 31, 2006 -24 666 -71 465 -10 924 -107 055

Reclassifi cations of accumulated depletion and depreciation -134 -3 096 3 230 -

Depletion and depreciation charge -23 307 -19 993 -2 539 -45 839

Disposal of subsidiaries - 4 694 2 543 7 237

Disposals 131 1 423 750 2 304

Translation diff erences -2 780 -5 829 -455 -9 064

Accumulated depletion and depreciation at Dec 31, 2007 -50 756 -94 266 -7 395 -152 417

Net book value at Dec 31, 2007 214 875 367 397 10 826 593 097

Annual Report 2008

Due to the fact that indicators of impairment of tangi- For each fi eld area cost centre impairment test was per- ble assets existed at the balance sheet date as a result formed for the period of expected profi table operations of decreased crude oil prices, the management of the but no longer than the fi eld development period de- Group has performed an annual impairment review as termined in the reserve report prepared by DeGolyer & at 31 December 2008 in respect of its upstream CGUs McNaughton. defi ned on fi eld area cost centre basis (representing by As a result of impairment test performed the impair- the group of three Kharyaga fi elds and the Kolvinckoye ment charge for the oil fi elds located in the Timano- fi eld located in the Timano-Pechora region, the group Pechora region and Tomsk region amounted to 316,849 of three fi elds and the Khvoinoye fi eld located in the was recorded in the Group’s consolidated income state- Tomsk region, the Kochevnenskaya group of six fi elds ment for the fi nancial year ended December 31, 2008. and three separate fi elds located in the Volga-Urals re- The depletion and depreciation charges were in- gion of the Russian Federation and oil fi elds located in cluded in the income statement lines “Depletion and Kazakhstan) and downstream business segment as a depreciation” and “Depreciation of selling and other non- whole. production assets”. The Group’s oil and gas properties are depleted based Cash fl ows for the upstream CGUs were calculated based on the reserves valuation report prepared by DeGolyer & on the following assumptions: McNaughton under Petroleum Resources Management System (PRMS, earlier referred to as Society of Petroleum • crude oil price Brent based on Intercontinental Ex- Engineers (SPE)) classifi cation of recoverable reserves as of change crude oil price futures data; September 1, 2008. The reserve valuation report as of Jan- uary 1, 2007 was prepared by Miller & Lents. For the fi nan- • production volumes based on the approved fi eld’s de- cial years ended December 31, 2008 and 2007 the average velopment program; depletion rate was USD 7.81 and USD 7.01. • the corresponding operating costs included produc- For the fi nancial years ended December 31, 2008 and tion and other taxes, other controllable production 2007 the borrowing costs amounted to 32,600 and 765 and administration expenses; were capitalised in property, plant and equipment. The amount of capitalised borrowing costs represented the • the capital expenditures included drilling costs and interest and other borrowing costs related to the loans other capital expenditures expected to be incurred for obtained for the modernisation of the Khabarovsk Oil fi led development; Refi nery and the loan payable to the syndicate of banks • fi nancial pre-tax discount rate of 14.04% per annum. obtained for acquisition of the Kolvinskoye oil fi eld.

WEST SIBERIAN Resources Ltd

Note 12 Exploration assets

Exploration and evaluation assets, which mainly com- region of the Russian Federation, included in the property, prise capitalised exploration drilling costs and geological plant and equipment and intangible assets balances as at studies and seismic researches related to the exploration December 31, 2008 and 2007, were classifi ed as follows: license oil fi elds and prospects located in the Volga-Urals

Dec 31, 2008 Dec 31, 2007

Opening balance 3 770 -

Additions through reverse acquisition 16 228 -

Transfers to oil and gas properties -36 -

Additions 3 312 3 723

Translation diff erences -4 337 47

Closing balance 18 937 3 770

Note 13 Goodwill

Dec 31, 2008 Dec 31, 2007

Cost – opening balance 2 611 42 393

Additions through reverse acquisition 638 -

Acquisitions of subsidiaries 10 325 366

Disposal of subsidiaries - -41 503

Translation diff erences -2 124 1 355

Cost – closing balance 11 450 2 611

Accumulated impairment loss – opening balance - -1 787 Impairment charge for the year -208 -

Disposal of subsidiaries - 1 839

Translation diff erences - -52

Accumulated impairment loss – closing balance -208 -

Carrying value – opening balance 2 611 40 606

Carrying value – closing balance 11 242 2 611

Annual Report 2008

During 2008, the Group acquired non-controlling inter- write-off of goodwill recorded at acquisition of CJSC Pe- ests in existing subsidiaries from third parties (Note 14). choraneft since for oil and gas properties of this subsidi- The diff erences between consideration paid and ac- ary the impairment charge was recorded as of December quired net assets arising on acquisition of non-control- 31, 2008 (refer to Note 11). ling interests were recognised as goodwill in the amount In September 2007, the Group disposed of 100% of 10,325 and 366 in the fi nancial years ended December share in Alliance Ukraine for MUSD 120. The attributable 31, 2008 and 2007, respectively. amount of goodwill was included in the determination of The impairment charge for the fi nancial year ended the fi nancial result from the disposal of Alliance Ukraine December 31, 2008 amounting to 208 represented the operations.

Note 14 Shares in subsidiaries

The parent company’s investments in shares of subsidiaries as at December 31, 2008 and 2007 were presented as follows:

Percentage of Carrying value at capital and Name of subsidiary Country votes (%) Dec 31, 2008 Dec 31, 2007

Vostok Oil (Cyprus) Ltd Cyprus 100,00 100 100

O&G Credit Agency Ltd Cyprus 100,00 2 2

LLC Khvoinoye Russia 100,00 31 688 31 688

LLC Alexandrov Refi nery Russia 100,00 3 154 1 050

LLC Nikol Russia 100,00 102 774 102 774

CJSC Saneco Russia 100,00 179 404 179 404

LLC Pechora Exploration Russia 100,00 5 048 5 048

CJSC Northoil Russia 100,00 117 669 116 095

LLC Kolvinskoye Russia 100,00 1 -

LLC Alliance-WSR Management Russia 100,00 628 -

OJSC Alliance Oil Company Russia 100,00 1 408 009 -

WSR Finance Switzerland 100,00 - 54

Options granted to the subsidiaries' employees (Note 24) 2 169 1 290

1 850 646 437 505

On April 10, 2008 West Siberian Resources completed the of Alliance owned 60% of WSR following the transaction. merger with Alliance Oil Company. In the merger, Alliance This accounting treatment requires Alliance to be treated Oil’s shareholders contributed the entire share capital of as the accounting acquirer for the consolidated fi nancial Alliance Oil to WSR in exchange for 1,783,540,968 ordina- information and WSR being presented as the acquiree. ry shares issued by WSR. In addition, WSR issued warrants As a consequence, the assets and liabilities of WSR, being to subscribe for 99,682,500 ordinary shares at an exercise the legal parent, have been recorded at fair value initially price of SEK 6.21 per share as part of the merger agre- in the consolidated fi nancial statements. The assets and ement. After the successful completion of the merger liabilities of the legal subsidiary, Alliance Oil, have been the fi nancial statements have been prepared using the recognized and measured in the combined fi nancial accounting model prescribed by IFRS 3 “Business com- statements at their pre-combination carrying amounts. bination” for “reverse acquisitions” since the shareholders The comparative fi nancial information for the fi nancial

WEST SIBERIAN Resources Ltd

year ended December 31, 2007 represent the Alliance rants for 99,682,500 WSR shares issued as a part of the Oil Company’s fi nancial statements for this period. WSR merger included into the cost of combination amounted as the legal parent continue to be presented as parent to 18,145. As a result, the total cost of combination was company in future fi nancial reports. estimated at 969,443. The consolidated WSR and Alliance fi nancial state- The total cost of combination has been allocated to ments have been prepared starting from the second WSR’s assets and liabilities while mainly WSR’s oil and quarter of 2008 using the prescribed accounting model. gas properties have been adjusted for the fair value. This The cost of combination was determined based on the fair value adjustment has resulted in increased deple- number of WSR shares existing at the completion date. tion charges of 8,257 for the period from April 10, 2008 On April 10, 2008 the fair value of existing 1,189,027,312 to December 31, 2008. WSR shares was equal to 933,397. The directly attribut- The preliminarily evaluated fair values of the acquired able merger costs incurred both by WSR and Alliance Oil assets and liabilities of WSR are presented in the table Company amounted to 17,901. The fair value of the war- below.

WSR Fair value WSR book values adjustments fair values

Date of acquisition (merger completion) April 10, 2008 Property, plant and equipment 1 138 622 364 259 1 502 881 Intangible assets 1 458 - 1 458 Goodwill 638 - 638 Deferred tax asset 1 593 - 1 593 Other fi nancial assets 2 255 - 2 255 Inventories 17 286 - 17 286 Trade accounts receivable 14 757 - 14 757 VAT and other taxes receivable 20 444 - 20 444 Current income tax receivable 753 - 753 Advances paid 21 627 - 21 627 Other current receivables 8 540 - 8 540 Other short-term fi nancial assets 273 - 273 Cash and bank 21 706 - 21 706 Long-term borrowings -300 959 - -300 959 Deferred tax liability -134 609 -87 422 -222 031 Provision for site restoration costs -13 676 - -13 676 Trade accounts payable -69 011 - -69 011 Accrued expenses -5 817 - -5 817 Current income tax payable -2 167 - -2 167 Other taxes payable -30 226 - -30 226 Other current liabilities -579 - -579 Net assets at acquisition date 692 908 276 837 969 745 Minority interest -302 - -302 Net assets acquired 692 606 276 837 969 443 Total cost of combination including shares, warrants and acquisition related costs as described above 969 443 Cash paid by Alliance for the acquisition related costs as at December 31, 2008 9 993 Less: Cash and cash equivalents of acquired subsidiary -21 706 Cash fl ow on acquisition, net of cash acquired -11 713 Result for the period of WSR since the acquisition date included in the Group’s consolidated income statement excluding impairment charge and related deferred tax 29 447 Result for the period of WSR since the acquisition date included in the Group’s consolidated income statement including impairment charge and related deferred tax -224 034 Revenue for the combined Group for the twelve months 2008 as though the acquisition date had been January 1, 2008 2 864 963 Result for the period for the combined Group for the twelve months 2008 as though the acquisition date had been January 1, 2008 67 135

Annual Report 2008

As at December 31, 2008 and 2007 the Group’s signifi cant investments in operating subsidiaries were presented as follows:

Eff ective ownership, %

Operating subsidiaries Dec 31, 2008 Dec 31, 2007

OJSC Vostochnaya Transnationalnaya Kompaniya 100.00% - LLC Khvoinoye 100.00% - OJSC Pechoraneft 99.66% - CJSC Saneco 100.00% - LLC Alexandrov Refi nery 100.00% - OJSC Tatnefteotdacha 99.52% 99.52% Bekstar International Limited 99.52% 99.52% LLP Potential Oil 79.62% 79.62% OJSC Khabarovsk Oil Refi nery 95.79% 95.76% OJSC Khabarovsknefteproduct 89.02% 88.50% OJSC Khabarovsknefteproduct Service 89.02% 88.50% OJSC Amurnefteproduct 80.51% 80.02% OJSC Primornefteproduct 93.46% 87.84% LLC A-Spect 93.46% 87.84% LLC Ussury Neft 93.46% 87.84% OJSC BAMnefteproduct - 56.97% LLC Dalnevostochny Alliance 100.00% 100.00% LLC Alliance Khabarovsk 100.00% 100.00% CJSC Alliance Oil 100.00% 100.00% LLC Naftatekhresource 100.00% 100.00% CJSC Alliancetransoil 100.00% 100.00% LLC Alliance Bunker 100.00% 100.00% CJSC Alliancepromservice 100.00% 100.00% LLC Alliance-Bioprom 100.00% 100.00% CJSC Ecobioprom 51.00% 51.00% LLC TD Ecobioprom 51.00% 51.00%

During the twelve months ended December 31, 2008, the Company acquired interests in the following subsidiaries:

Interest acquired Consideration paid

OJSC Khabarovsk Oil Refi nery 0.03% 13 OJSC Amurnefteprodukt 0.78% 807 OJSC Primornefteprodukt 5.62% 7 380 OJSC Khabarovsknefteproduct 0.52% 233 OJSC BAMnefteproduct 13.73% 150 8 583

WEST SIBERIAN Resources Ltd

In 2008 the Group (through Alliance Oil Company) ac- from third parties for a cash consideration of 3,874 and quired from third parties 48.15% of privileged shares 737, respectively. of OJSC Khabarovsk Oil Refi nery for the consideration In October 2008 share capital of OJSC Amurnefte- amounted to 2,875. product was increased by conversion of ordinary and In 2008, an additional 30.99% of the preference shares privileged shares of OJSC BAMnefteproduct to ordinary of OJSC Khabarovsknefteproduct and 23.95% of the pref- and privileged shares of OJSC Amurnefteproduct. erence shares of OJSC Amurnefteproduct were acquired

Note 15 Disposal of subsidiaries

In September 2007, the Group disposed of its interest signifi cant and therefore not disclosed separately in the in LLC NK Alliance Ukraine, a holding company of the consolidated fi nancial statements of the Group. As of the Group’s subsidiaries in Ukraine, and LLC Munai Murza. date of the disposal net assets of LLC NK Alliance Ukraine Net assets of LLC Munai Murza Opt disposed of were not disposed of were as follows:

Net assets disposed of

Property, plant and equipment 49 468

Deferred tax assets 1 361

Other fi nancial assets 878

Inventories 20 231

Trade accounts receivable 4 663

VAT and other taxes receivable 2 413

Advances paid 2 052

Other current receivables 1 164

Cash and cash equivalents 63 506

Deferred tax liability -551

Short-term borrowings -26 370

Trade accounts payable -8 520

Accrued expenses -558

Current income tax and other taxes payable -2 273

Other current liabilities -6 995

Net assets at the date of disposal 100 469

Goodwill 39 644

Translation of foreign operations 2 059

Gain on disposal recorded as other paid in capital 14 878

Proceeds from disposal 157 050

Less: cash and cash equivalents disposed of -63 506

Net cash from disposal of subsidiaries 93 544

Annual Report 2008

The results of the discontinued operations for the period disposal, included in the consolidated income statement from January 1, 2007 to September 4, 2007, the date of are set out below:

Revenue from sales of oil products 213 696

Production costs – oil products -190 902

Gross profi t 22 794

Administration expenses -18 160

Other operating expenses -8 567

Loss on disposal of shares in subsidiaries -5 480

Operating loss -9 413

Interest income 426

Interest expense -290

Share of result of associated companies -1 414

Result before income tax -10 691

Income tax -1 798

Result for the period from discontinued operations -12 489

Cash fl ows from discontinued operations

Cash fl ows used in operations -11 717

Cash fl ows from investments 36 921

Cash fl ows from fi nancing 6 353

Net cash fl ows 31 557

Note 16 Other fi nancial fi xed assets

Group

Dec 31, 2008 Dec 31, 2007

VAT recoverable 2 250 - Other fi nancial fi xed assets 79 471

2 329 471

Management considers some portion of the VAT reco- unlikely to be recovered in the whole amount within the verable related to the assets under construction located twelve months after the reporting date. in the regions with operations as non-current since it is

WEST SIBERIAN Resources Ltd

Note 17 Inventories

Group Dec 31, 2008 Dec 31, 2007

Crude oil 33 661 48 263

Provision for crude oil -879 -

Oil products 31 606 51 425

Spare parts and materials 20 053 11 223

Provision for slow-moving and obsolete spare parts and materials -493 -803

83 948 110 108

Note 18 Trade accounts receivables

Group Dec 31, 2008 Dec 31, 2007

Trade accounts receivable from related parties (Note 35) 10 364 5 056 Trade accounts receivable from third parties 25 202 47 504 Less: allowance for trade accounts receivable from third parties -4 374 -4 607 31 192 47 953

The movements in the allowance for trade accounts receivable are presented below:

Group Jan 1, 2008 - Jan 1, 2007 - Dec 31, 2008 Dec 31, 2007

Opening balance -4 607 -6 382 Additions through reverse acquisition -181 - Accrual of allowance -1 119 -1 813 Release of allowance 353 1 611 Write-off of allowance 311 773 Release of allowance due to disposal of subsidiaries - 1 577 Translation diff erences 869 -373 Closing balance -4 374 -4 607

Annual Report 2008

The Group has the overdue balances of trade accounts ered such balances as non-recoverable. The overdue bal- receivable as of December 31, 2008 and 2007 for which ances of trade accounts receivable are presented below: an allowance was created as the management consid-

Group Dec 31, 2008 Dec 31, 2007

less than 90 days 207 - 90-180 days 1 327 856 180-365 days 506 803 older than 365 days 3 789 3 992 5 829 5 651

The Group has the overdue balances of trade accounts ered such balances as recoverable. The overdue balances receivable as of December 31, 2008 and 2007 for which of trade accounts receivable are presented below: no allowance was created as the management consid-

Group Dec 31, 2008 Dec 31, 2007

less than 90 days 21 304 44 519 90-180 days 1 229 532 180-365 days 1 263 932 older than 365 days 489 926 24 285 46 909

Note 19 VAT and other taxes receivable

Group Dec 31, 2008 Dec 31, 2007

VAT 52 895 45 325 Export and other custom duties prepaid 11 835 850 Excise taxes 25 2 Other taxes receivable 1 746 2 797 66 501 48 974

WEST SIBERIAN Resources Ltd

Note 20 Advances paid

Group Dec 31, 2008 Dec 31, 2007

Advances paid to related parties (Note 35) 101 13 Advances paid to third parties 25 897 66 827 Less: allowance for advances paid to third parties -749 -315 25 249 66 525

The Group’s major balances of the advances paid are presented below:

Group 31 Dec 2008 31 Dec 2007

Advances paid for transportation services 13 777 20 740 Advances paid for crude oil supplied for refi ning 2 433 38 086 Other advances paid 9 788 8 014 Less: allowance for advances paid to third parties -749 -315 25 249 66 525

The movements in the allowance for advances paid are presented below

Group Jan 1, 2008 - Jan 1, 2007 - Dec 31, 2008 Dec 31, 2007

Opening balance -315 -432 Additions through reverse acquisition -220 - Accrual of allowance -580 -82 Release of allowance 215 21 Write-off of allowance - 270 Release of allowance due to disposal of subsidiaries - -67 Translation diff erences 151 -25 Closing balance -749 -315

Annual Report 2008

The Group has the overdue balances of advances paid ance was created as the management considered such as of December 31, 2008 and 2007 for which an allow- balances as non-recoverable.

Group Dec 31, 2008 Dec 31, 2007

less than 90 days 20 2 126 90-180 days 32 16 180-365 days 70 21 older than 365 days 693 160 815 2 323

The Group has the overdue balances of advances paid ance was created as the management considered such as of December 31, 2008 and 2007 for which no allow- balances as recoverable.

Group Dec 31, 2008 Dec 31, 2007

less than 90 days 31 786 65 363 90-180 days 338 4 180-365 days 765 - older than 365 days 485 - 33 374 65 367

Note 21 Other current receivables

Group Dec 31, 2008 Dec 31, 2007

Other accounts receivable from related parties (Note 35) 180 82 402 Other accounts receivable from third parties 13 265 5 367 Less: allowance for other accounts receivable from third parties -226 -378 13 219 87 391

Other receivables from related parties at December 31, outstanding consideration on the sale of the Alliance 2007 included the amount of 78,148 representing the Ukraine (Note 15) which was settled in 2008.

WEST SIBERIAN Resources Ltd

The movements in the allowance for other current receivables are presented below:

Group Jan 1, 2008 - Jan 1, 2007 - Dec 31, 2008 Dec 31, 2007

Opening balance -378 -2 024

Additions through reverse acquisition -62 -

Accrual of allowance -51 -209

Release of allowance 15 737

Write-off of allowance 207 210

Release of allowance due to disposal of subsidiaries -4 966

Translation diff erences 47 -58

Closing balance -226 -378

The Group has the overdue balances of other current re- allowance was created as the management considered ceivables as of December 31, 2008 and 2007 for which an such balances as non-recoverable.

Group Dec 31, 2008 Dec 31, 2007

less than 90 days 154 650

90-180 days 448 14

180-365 days 22 -

older than 365 days 90 193

714 857

The Group has the overdue balances of other current re- allowance was created as the management considered ceivables as of December 31, 2008 and 2007 for which no such balances as recoverable.

Group Dec 31, 2008 Dec 31, 2007

less than 90 days 1 198 5 097

90-180 days 236 79 235

180-365 days 47 -

older than 365 days 132 334

1 613 84 666

Annual Report 2008

Note 22 Other short-term fi nancial assets

Group Dec 31, 2008 Dec 31, 2007

Short-term loans to related parties (Note 35) 321 108 259 Short-term loans to third parties 847 - Promissory notes 24 - 1 192 108 259

As at December 31, 2007 short-term loans to related par- All short-term loans granted in 2008 are denominated ties included non-interest bearing loans provided by Al- in RUR, not collateralised and mature in 2009. The non- liance to CJSC “Investment Company Alliance Capital”, a interest bearing loans to related parties were discounted shareholder of the Group, amounted to 103,181 which using an eff ective market interest rate for similar borrow- were repaid in April 2008. ings of 11.0% in 2008 and 10.6% in 2007.

Note 23 Cash and cash equivalents and restricted cash

Group Parent company Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

Cash in bank: in USD 25 930 11 617 1 132 472 in RUR 10 309 60 057 13 3 in EUR 10 31 - - in Kazakh Tenge 883 318 - - in SEK 144 - 144 154 Cash in transit 1 428 1 998 - - Cash deposits: -- in USD 117 473 30 025 - - in RUR 52 417 112 342 - - in EUR 83 778 - - - Petty cash 894 1 105 16 4 293 266 217 493 1 305 633 Restricted cash: in USD 18 307 24 459 - - in RUR 4 169 5 056 - - in EUR 19 625 161 364 - - 42 101 190 879 - - 335 367 408 372 1 305 633

WEST SIBERIAN Resources Ltd

Cash and deposits in banks at December 31, 2008 and 2007 Restricted cash is represented by letters of credit on a include amounts of 126,956 and 108,452, respectively, held special account with OJSC “VTB Bank” in accordance with in OJSC Finprombank, a related party (Note 35). The depos- the agreements for the modernisation of the Khabarovsk its in USD, RUR and EURO placed with OJSC Finprombank, Oil Refi nery. The cash can only be used for settlement of a related party, beared interest of 0.25-10% per annum and payments under these contracts. matured within three months after the date of origination.

Note 24 Share capital and other paid in capital

The parent company’s share capital changes are presented below:

Increase in number of Par value per Increase in Other paid Parent Company shares held share (USD) share capital in capital

Formation of Company – Sep 1998 12 000 1.00 12 – Share split 4:1 – Nov 2000 36 000 0.25 – – New share issue – Dec 2000 30 904 664 0.25 7 726 8 250 New share issue – Jan 2001 1 227 325 0.25 307 347 Share issue costs – Dec 2000/Jan 2001 – – – -1 057 Reduction of share capital - Feb 2004 – 0.05 -6 436 6 436 Issue through set-off - Feb 2004 75 082 636 0.05 3 754 14 502 Preferential subscription rights issue - Mar 2004 321 787 875 0.05 16 089 13 380 Preferential subscription rights issue costs - Mar 2004 – – – -3 193 Preferential subscription rights issue - Apr 2005 257 430 300 0.05 12 872 36 128 Preferential subscription rights issue costs - Apr 2005 – – – -1 611 Private placement - Sep 2005 106 046 512 0.05 5 302 54 698 Private placement issue costs - Sep 2005 – – – -3 037 Private placement - Feb 2006 306 500 000 0.05 15 325 262 900 Private placement issue costs - Feb 2006 – – – -9 358 Private placement - Jan 2007 90 000 000 0.05 4 500 75 856 Private placement issue costs - Jan 2007 – – – -2 572 Issue of shares for exchange with the shares of Alliance Oil Company – Apr 2008 1 783 540 968 0.05 89 177 1 310 918 Private placement - Apr 2008 258 000 000 12 900 157 414 Private placement issue costs - Apr 2008 – – – -5 022 3 230 568 280 0.05 161 528 1 914 979

As of December 31, 2008 the authorised number of between the net proceeds from the issue of share capi- shares was 4,000,000,000 of which 3,230,568,280 were tal and the par value of that share capital. Each ordinary issued. Share issue costs associated with the issuance share carries one vote. of new equity are treated as a direct reduction of pro- In January 2007 a private placement of common ceeds. Other paid in capital is defi ned as the diff erence shares raising 80,357 (before placement costs) was com-

Annual Report 2008

pleted. Institutional investors subscribed for 90,000,000 currency rate for the contract selling price was changed. new shares/depositary receipts with a subscription price The eff ect from changing the currency rate amounted to of SEK 6.25. The net proceeds net of placement costs 11,119 was recognised in other paid in capital as the dis- amounted to 77,827 were included in the parent compa- posal was made to a related party. ny’s cash fl ow statement line “Proceeds from share issues Since January 31, 2006 the Group has followed the (net of issue costs)” for the fi nancial year ended Decem- WSR Global Share Option Plan under which the share ber 31, 2007. options are granted to directors and selected manage- In 2007 the Group through Alliance acquired addition- ment. Each option gives the right to subscribe for one al common shares of LLC Dalnevostochny Alliance, LLC share of common stock at the exercise price equal to the Naftatekhresource and OJSC BAMnefteproduct for a to- market price of the shares on the date of the grant. All op- tal consideration 2,259 (at December 31, 2007 exchange tions are exercisable after 3 years subject to certain non- rate) from parties related by means of common control. market conditions such as the Company’s and individual The excess of the book value of net assets at the date of performance and expire in 5 years from issuance. The fair acquisition over cash consideration in the amount of 538 value of the employee services received in exchange for was recorded as other paid in capital. the grant of the options is recognized as an expense. The In November 2007 all the shares of OJSC Finprom- total amount to be expensed over the vesting period of bank were sold by the Group through Alliance for a cash 3 years is determined by reference to the fair value of the consideration of 15,679. The loss on disposal of OJSC options granted excluding the impact of any non-market Finprombank amounted to 14,706. The loss on disposal vesting conditions. For the fi nancial years ended Decem- of OJSC Finprombank shares originally acquired from ber 31, 2008 and 2007 the share option charges amount- CJSC Investment Company Alliance Capital, a related ed to 6,492 and 4,955 increased the parent company’s party, in the amount of 6,919 was recorded as other paid income statement line “Administration expenses” and in capital. correspondingly the retained earnings. For the fi nancial In September 2007 the Group through Alliance dis- year ended December 31, 2008 the share option charge posed of its interest in Alliance Ukraine to parties related amounted to 4,136 increased the Group’s income state- by means of common control, for a cash consideration ment line “Administration expenses” and correspondingly 157,050. The gain on disposal in the amount of 14,878 the Group’s retained earnings. was recognised in other paid in capital. On April 30, 2008 Movements in the number of share options outstand- an additional agreement to the share sale agreement ing as of December 31, 2008 and 2007 and their related of Alliance Ukraine was signed under which the stated weighted average exercise prices were as follows:

2008 2007 Average exercise price Average exercise price in SEK per share No. of options in SEK per share No. of options

At 1 January 6.21 66 455 000 6.22 38 499 000

Granted/corrected during the period 4.09 26 784 000 6.15 31 281 000

Forfeited during the period 5.33 -20 208 000 5.97 - 3 325 000

At 31 December 5.59 73 031 000 6.21 66 455 000

As of December 31, 2008 and 2007 there were no exercis- port 31,744,000 options were exercisable none of which able options. As of the date of issuance of the annual re- have been exercised.

WEST SIBERIAN Resources Ltd

Share options outstanding as of December 31, 2008 and 2007 have the following grant and expiry dates and exercise prices:

No. of options outstanding Exercise price in SEK Grant date Expiry date per share Dec 31, 2008 Dec 31, 2007

January 31, 2006 January 31, 2011 6.13 27 274 000 36 774 000 April 10, 2006 April 10, 2011 7.00 4 500 000 4 500 000 February 28, 2007 February 28, 2012 6.20 18 573 000 24 181 000 May 22, 2007 May 22, 2012 5.55 1 000 000 1 000 000 May 2, 2008 May 2, 2013 4.09 21 684 000 - 73 031 000 66 455 000

The weighted average fair value of options granted de- prices at the grant dates and the exercise prices as shown termined using the Black-Scholes valuation model was above, volatility varied in the range between 37% and SEK 2.50 per option for the options granted as of Janu- 48%, no dividend yield, an expected option life of 5 years, ary 31, 2006, SEK 3.01 for the options granted on April 10, and annual risk-free interest rate varied between 4% and 2006, SEK 1.92 for the options granted on February 28, 5%. The volatility measured at the standard deviation of 2007, SEK 1.72 for the options granted on May 22, 2007 continuously compounded share returns is based on sta- and SEK 1.39 for the options granted on May 2, 2008. The tistical analysis of daily share prices over the last 3 years. signifi cant inputs into the model were reference share

Note 25 Provision for site restoration costs

A provision is made to recognise the commitment for site recognised at fi rst production or at the date of acquisi- restoration costs on oil and gas fi elds. The provision was tion at the present value of the future commitment.

Group Dec 31, 2008 Dec 31, 2007

Opening balance 3 298 1 430 Addition through reverse acquisition 13 676 - Additions for new objects 2 702 1 125 Changes in estimates -3 852 415 Unwinding costs 1 407 154 Translation diff erences -3 536 174 Closing balance 13 695 3 298

Annual Report 2008

Note 26 Borrowings

Initially, the borrowings are recognised at the fair value of the period of these borrowings. These charges amounted the proceeds received, net of transaction costs incurred. to 3,906 and 139 for the fi nancial years ended December In subsequent periods, the borrowings are stated at am- 31, 2008 and 2007. ortised cost using the eff ective yield method; any diff er- The summary of long- and short-term borrowings’ ence between fair value of the proceeds, net of transac- principal and interest accrued payable as of December tion costs, and the redemption amount is evenly charged 31, 2008 is presented in the table below. to the income statement as other fi nancial expense over

Dec 31, 2008 Bank Currency Interest rate range Principal Interest Total

Non-convertible interest bearing bonds RUR 8.92% 102 109 2 523 104 632

Bank loans nominated in RUR RUR From 11% to 16% 232 172 909 233 081

Bank loans nominated in USD USD From LIBOR 3m+2.5% to 13.75% 520 016 1 466 521 482

Loans and borrowing from related parties RUR From 14% to 16% 4 394 24 4 418

Total loans and borrowings 858 691 4 922 863 613

Less long-term loans and borrowings 234 163

Short-term portion of long-term and short-term loans and borrowings 629 450

The summary of the long- and short-term borrowings’ principal and interest accrued payable as of December 31, 2007 is presented in the table below.

Dec 31, 2007 Bank Currency Interest rate range Principal Interest Total

Non-convertible interest bearing bonds RUR 8.92% 121 656 3 020 124 676

Bank loans nominated in RUR RUR From RBA+3.5% to MosPrime 3m +2.75% 249 544 827 250 371

Bank loans nominated in USD USD From 8.3% to 10.17% 183 110 1 877 184 987

Loans and borrowing from related parties RUR From 0% to 14% 6 591 38 6 629

Total loans and borrowings 560 901 5 762 566 663

Less long-term loans and borrowings 207 025

Short-term portion of long-term and short-term loans and borrowings 359 638

WEST SIBERIAN Resources Ltd

The weighted average eff ective interest rates at the balance sheet date were as follows:

Group Parent company Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

Weighted average interest rate 8% 10% 5% 9%

During the fi nancial years ended December 31, 2008 related parties, LLC Beta-Project and Lambros Over- and 2007 52% and 58%, respectively, of the Group’s bor- seas SA, related parties. rowings were at fl oating interest rates. As a result the Group managed to some extent mitigate its exposure to On January 19, 2009, the share pledge agreement with changes in market interest rates. International Finance Corporation in respect of 23.86% shareholding in OJSC Primornefteproduct was termi- For capitalised borrowing costs refer to Note 11. nated. As of February 27, 2009 the share pledge agreements At of December 31, 2008, the loans and borrowings were were signed for the Group’s holdings in OJSC Khabarovsk collateralised by: Oil Refi nery (95.76% of shares), CJSC Alliance Oil (100% of shares), OJSC Khabarovsknefteproduct (88.48%), OJSC • 100% of the Group’s shareholding in Vostok Oil Primornefteproduct (76.14%), OJSC Amurnefteproduct (Cyprus) Ltd, OJSC VTK, OJSC Pechoraneft, CJSC (76.61%) as collateral under the loan payable to Bank VTB. Saneco, LLC Khvoinoye, LLC Nikol; Some of the Group’s loan and borrowings payable are • 97.44% of the Group’s shareholding in OJSC Tatnefte- subject to covenant clauses under which some Group’s otdacha and 23.86% Company’s shareholding in companies are required to meet certain operational and OJSC Primornefteproduct; fi nancial indicators including current liquidity ratio. As of • Property, plant and equipment with a carrying value December 31, 2008 one of the Group’s companies did of 30,652; not meet the current liquidity ratio covenant as a result the lender had the right to request early repayment of • Oil products with an approximate carrying value of the outstanding balance amounted to 15,271. The lender 6,209 and crude oil and oil products which can be has not requested the early repayment of the outstand- realised to recover the pledge amount of 44,000; ing amount as of the date of the issuance of the annual • Financial guarantees of the Group companies and report. Management considers the likelihood of the Lambros Overseas SA, a related party. lender requesting early repayment of the outstanding amount solely due to non-compliance of this covenant to be remote. As of 31 December 2007, the loans and borrowings In September 2006, the group through Alliance Oil were collateralised by: Company issued 3,000,000 non-convertible interest • 97.44% Company’s shareholding in OJSC Tatnefteot- bearing bonds with a nominal value of RUR 1 thousand dacha and 23.86% Company’s shareholding in OJSC (about USD 38 as of December 31, 2006 exchange rate), Primornefteproduct; maturing on the 1,820th day from the start date of the • Property, plant and equipment with a carrying value fl otation, i.e. in September 2011. Under the terms of is- of 81,700; suance Alliance is obliged to off er the bonds for early redemption in September 2009. As a result the amount • Oil products with an approximate carrying value of of bonds payable of 104,632 was reclassifi ed from 40,541; long-term borrowings to short-term borrowings as of • Financial guarantees of the Group companies and December 31, 2008.

Annual Report 2008

The expected cash fl ows including proceeds from and re- rate eff ective as of December 31, 2008. The principal and payment of loan principal and payment of interest relat- interest payments nominated in RUR were converted into ed to the long- and short-term borrowings are presented USD using the exchange rate as of December 31, 2008. below. The interest payments were based on the interest

Principal Interest Total

Within one year from December 31, 2008 624 528 58 716 683 244 Within one and two years from December 31, 2008 69 808 27 600 97 408 More than two years from December 31, 2008 164 355 12 413 176 768 Total amount estimated to be repaid 858 691 98 729 957 420

Note 27 Finance lease liabilities

As of December 31, 2008 and 2007 the fi nance lease li- these assets. For the fi nancial years ended 31 December abilities included in the balance sheet were mainly rep- 2008 and 2007, the average eff ective borrowing rate was resented by leased tank-wagons. Total number of tank- within range of 6.3-13.8% and 6.0-13.6%, respectively. wagons leased by the Group in 2008 and 2007 was 1,433. The fair value of obligations under fi nance lease approxi- The lease agreements are denominated in US Dollars mately equals to its carrying amount. and the average lease term is 7-8 years. At the end of the Minimum lease payments due for payment were as lease term the Group has the option to take ownership of follows:

Group Dec 31, 2008 Dec 31, 2007

Less than one year 4 781 5 647 Between one and fi ve year 7 781 12 542 Future fi nance charges on fi nance leases -1 874 -3 354 Present value of fi nance lease minimum fi nance lease payments 10 688 14 835

Present value of fi nance lease minimum fi nance lease payments due for payment were as follows:

Group Dec 31, 2008 Dec 31, 2007

Less than one year 3 800 4 199 Between one and fi ve year 6 888 10 636 Present value of fi nance lease minimum fi nance lease payments 10 688 14 835

WEST SIBERIAN Resources Ltd

Movement in future fi nance charges on fi nance leases were as follows:

Group Dec 31, 2008 Dec 31, 2007

Opening balance 3 354 5 463

Charge for the reporting period -1 440 -1 923

Decrease of future fi nance charges due to re-arrangement of lease contracts -39 -483

Translation diff erences -1 297

Closing balance 1 874 3 354

Movement in minimum fi nance lease payments were as follows:

Group 31 Dec 2008 31 Dec 2007

Present value of fi nance lease minimum fi nance lease payments: opening balance 14 835 16 863

Additions through reverse acquisition 59 -

Lease payments during the year -5 725 -6 250

Finance charges for the year 1 440 1 923

Increase/(decrease) due to re-arrangement of lease contracts -1 1 203

Translation diff erences 80 1 096

Present value of fi nance lease minimum finance lease payments: closing balance 10 688 14 835

The net carrying amount of the leased assets as of December 31, 2008 and 2007 amounted to 30,167 and 38,583, respectively.

Note 28 Trade accounts payable

Group Dec 31, 2008 Dec 31, 2007

Trade accounts payable to related parties (Note 35) 32 24

Trade accounts payable to third parties 51 456 6 010

51 488 6 034

Annual Report 2008

The table below summarises the maturity profi le of the 2008 and 2007 based on contractual undiscounted pay- Group’s trade accounts payable as of December 31, ments.

Group Dec 31, 2008 Dec 31, 2007

less than 90 days 28 512 5 725 90-180 days 22 589 201 180-365 days 296 12 older than 365 days 91 96 51 488 6 034

Note 29 Advances received

Group Dec 31, 2008 Dec 31, 2007

Advances received from related parties (Note 35) 34 933 21 183

Advances received from third parties 23 613 155 468

58 546 176 651

Note 30 Accrued expenses

Group Parent company Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

Wages and salaries accrued 9 631 6 772 406 960

Accrued professional services fees 4 179 1 784 1 931 7 618

Other accrued expenses 4 258 2 802 - -

18 068 11 358 2 337 8 578

WEST SIBERIAN Resources Ltd

Note 31 Other taxes payable

Group Dec 31, 2008 Dec 31, 2007

Production tax 9 121 5 137 Excise taxes 7 316 9 462 VAT 3 395 2 639 Other taxes payable 5 202 4 360 25 034 21 598

Note 32 Other current liabilities

Group Dec 31, 2008 Dec 31, 2007

Other accounts payable to related parties (Note 35) 242 1 635 Other accounts payable to third parties 10 753 6 284 10 995 7 919

Note 33 Personnel costs

The Group’s personnel costs for the fi nancial years ended December 31, 2008 and 2007 are presented below.

Group Jan 1, 2008 - Jan 1, 2007 - Dec 31, 2008 Dec 31, 2007

Salaries and remuneration (including social charges and pension costs, annual bonus and share options) to the Members of the Board of Directors and the Managing Director 2 966 - Salaries to other employees (including social costs, annual bonuses and share options granted) 118 119 77 318 121 085 77 318

Annual Report 2008

The Group’s personnel costs for the fi nancial years ended were consolidated in the Group’s fi nancial statements December 31, 2008 and 2007 are included in the income from the date of the merger due to application of reverse statement lines “Production costs – crude oil”, “Production acquisition approach. The total personnel costs of the par- costs – oil products”, “Selling expenses” and “Administra- ent company for the fi nancial year ended December 31, tion expenses”. 2008 amounted to 7,764 as presented below. The Group has no pension commitments beyond the Due to application of reverse acquisition approach state pension contributions that are mandatory for em- the parent company’s fi nancial statements for the fi nan- ployees in Russia. cial year ended December 31, 2007 were not included The average number of employees during the report- in the Group’s fi nancial statements for the respective ing years ended December 31, 2008 and 2007 for the West period as the consolidated comparative information is Siberian Resources Limited Group was 7,071 and 5,677. represented by the fi nancial information of Alliance Oil The salaries and remuneration to the Members of the Company only. Board of Directors and the Managing Director amounting The personnel costs of the parent company and man- to 5,378 represent the appropriate expenses of the parent agement companies of the Group for the fi nancial years company for the period from April 11, 2008 to Decem- ended December 31, 2008 and 2007 are presented below. ber 31, 2008 as the parent company’s fi nancial statements

Parent company Jan 1, 2008 - Jan 1, 2007 - Dec 31, 2008 Dec 31, 2007

Salaries and remuneration (including social charges and pension costs, annual bonus and share options) to the Members of the Board of Directors and the Managing Director* 4 932 3 429

Salaries to other employees (including social costs, annual bonuses and share options granted) 2 832 4 924

7 764 8 353

* A specifi cation of the salaries and remuneration to the Management and the Board of Directors follows below.

As per employment contract eff ective as at December ing 6 months of full salary. The Managing Director and 31, 2008 the Managing Director had the right to receive other management of the Company received during the 6 months’ full salary if his employment was terminated fi nancial year ended December 31, 2008 from the parent at the Company’s request. Should he himself decide to company and management companies of the Group the leave the Company, he must give 6 months’ notice. The following remuneration including salaries, annual bonus employment agreements of other management of the (related to 2007), bonus related to the merger with Alli- Group contained clauses on severance pay not exceed- ance Oil Company and share options granted:

Total Management Salary Bonus Share options remuneration

Managing Director – Mr. Arsen Idrisov 333 - - 333

Managing Director – Mr. Maxim Barski 903 1 155 1 615 3 673

Other management 1 842 3 899 2 330 8 071

3 078 5 054 3 945 12 077

WEST SIBERIAN Resources Ltd

The salary paid to Mr. Maxim Barski included salary paid The annual bonus accrual for the fi nancial year ended for the period January 1, 2008 - October 31, 2008 and December 31, 2008 was based on the company’s fi nan- termination fee. The salaries paid to other management cial performance related to the annual budget and cal- included the salaries to management in the parent com- culated as 5-50% of the base salary depending on the pany, in the corporate centre LLC Alliance-WSR Manage- position and performance of the individual employees. ment, in the management company LLC West Siberian The Group’s total bonus accrual for the fi nancial year end- Resources Invest which provides management services ed December 31, 2008 amounted to 3,090 to be paid in to the Group’s upstream subsidiaries and salaries paid in 2009 after issuance of the annual report. Alliance Oil Company. During the fi nancial year ended December 31, 2008 The bonus payments made in the fi nancial year end- board fees were paid and the share options were granted ed December 31, 2008 were represented by annual bo- to the Board of Directors as presented in the table below. nus expensed in the fi nancial year ended December 31, Other fees represent consulting fees paid to certain Di- 2007 and bonus paid in connection with the merger with rectors in connection with the merger with Alliance Oil Alliance Oil Company. Company.

Board of Directors Board fee Other fee Share options Total remuneration

Chairman of the Board 115 - 177 292

Other Board members 220 96 317 633

335 96 494 925

Note 34 Commitments and contingencies

Under the contracts eff ective at December 31, 2008 and The Alliance’ leasing subsidiary CJSC Alliancepromserv- 2007 future capital expenditures amounted to 601,947 ice was charged by tax authorities for additional taxes and 979,557 (excluding VAT), respectively. amounted to about 829 for improper use of Alliance The Federal Antimonopoly Service (FAS) of the Russian trademarks. The charge was appealed to the court. Federation charged two Alliance Oil Company subsidiar- The Alliance’ subsidiary LLC Naftatekhresource was ies engaged in oil products distribution with violating the charged by tax authorities for additional taxes amounted antimonopoly law in relation to the oil products pricing. to about 1,186 as a result of tax audit for the fi nancial One of the cases was appealed in the fi rst instance and years ended December 31, 2007 and 2006. The charge successfully won by Alliance Oil’s subsidiary. The other one will be appealed to the court. was partially lost in the fi rst instance with the fi nes charged WSR signed an option deed in favor of International amounted to approximately 594 accrued and paid in the Finance Corporation (“IFC”) under which IFC would be fi nancial year ended December 31, 2008. The Alliance’ sub- entitled to exercise its options in a future WSR shares of- sidiaries appealed both cases to the court where for both fering at the lowest subscription price for the amount not cases the initial courts’ decisions were confi rmed. exceeding MUSD 25.

Annual Report 2008

Note 35 Related party transactions

Related parties include shareholders, associates and oth- Included in the Group’s consolidated balance sheet as at er related parties representing numerous entities under December 31, 2008 and 2007 were the following signifi - common ownership and control with the Group. cant balances with the related parties:

Group Dec 31, 2008 Dec 31, 2007

Shareholders Other fi nancial assets - 103 181 Loans and borrowings - 399 Other related parties Other fi nancial assets 381 5 259 Trade and other accounts receivable 10 544 85 214 Advances paid and prepaid expenses 101 13 Advances paid for construction 70 - Cash and cash equivalents 127 268 108 452 Loans and borrowings 4 419 6 192 Trade and other accounts payable 187 1 659 Advances received and accrued expenses 34 933 155 468 Accounts payable for property, plant and equipment 155 - Capitalized interest on loans 294 - 178 352 465 837

Included in the Group’s consolidated income statement 2007 were the following signifi cant transactions with the for the fi nancial years ended December 31, 2008 and related parties:

Group Jan 1, 2008 - Jan 1, 2007 - Dec 31, 2008 Dec 31, 2007

Associates Share of associate profi t - 6 040 Shareholders Trademark use charges 3 423 3 490 Revenue from sales to related parties 15 - Purchase of services from related parties 1 225 - Other related parties Revenue from sales to related parties 696 302 483 560 Purchase of services from related parties 25 436 9 267 Charity contributions to the fund named by Z.Bazhaev 11 893 26 036 Interest expense 404 2 848 Interest income 1 694 2 477 740 392 533 718

WEST SIBERIAN Resources Ltd

Revenue from sales to related parties includes sales of Transactions with shareholders, associates and other re- crude oil and oil products in the domestic and export lated parties relate to transactions in the ordinary course markets. Purchase of services from related parties relates of business with terms and conditions, similar to trans- to insurance services and rent services provided by a re- actions with third parties except for non-interest bearing lated party. loans provided and obtained. All related party balances No allowance for doubtful debts in respect of the are unsecured and will be settled in cash under normal amounts owed by related parties has been recognised in commercial credit terms. No guarantees have been given the consolidated income statements for the years ended or received in relation to any related party balance. December 31, 2008 and 2007. The charity contributions to the fund named by In 2008 as a part of the merger agreement a dividend Z. Bazhaev were made with the purpose of their further payment was made to the Alliance Oil Company’s share- transfer to the Federal Treasury of the Russian Federation holders in the amount of 193,248 which was paid back and other governmental organisations. to the company as a repayment of the loans given to the The parent company’s balance sheet as at December related parties in prior years and proceeds from disposal 31, 2008 and 2007 included the following balances with of subsidiaries and associates. the related parties:

Parent company

Dec 31, 2008 Dec 31, 2007

Receivables from group companies

O&G Credit Agency Ltd Loan given 508 240 305 983

Vostok Oil (Cyprus) Ltd Loan given 32 952 30 381

VTK Secondment of personnel - 1 908

Pechoraneft Secondment of personnel - 1 904

Saneco Secondment of personnel - 2 999

541 192 343 175

Accrued expenses

Repsol Exploracion S.A. Secondment of technical personnel - 366

S.O.G. Energy Administration and investor relations services 41 -

41 366

Annual Report 2008

The parent company’s income statement for the twelve the following transactions with the related parties: months ended December 31, 2008 and 2007 included

Parent company

Jan 1, 2008 - Jan 1, 2007 - Dec 31, 2008 Dec 31, 2007

Income O&G Credit Agency Ltd Interest income 37 339 33 173 Vostok Oil (Cyprus) Ltd Interest income 1 333 1 283 VTK Secondment of personnel - 1 617 Pechoraneft Secondment of personnel - 1 611 Saneco Secondment of personnel - 1 611 38 672 39 295 Administration expenses West Siberian Resources Invest Management and consulting fees 2 225 - Alliance-WSR Management Management and consulting fees 1 315 - Repsol Exploracion S.A. Secondment of technical personnel 130 536 S.O.G. Energy Administration and investor relations services 733 240 4 403 776

Note 36 Risks and uncertainties

In the oil business, companies face a number of risks relat- companies operating in other countries. The business is ing to the activities and the industry. Risk management conducted in several currencies, primarily USD and RUR is a critical success factor for any oil company to prosper. for which exchange rates fl uctuate. The Group does not The business is capital intensive as it requires large in- use hedging techniques, such as derivatives, to reduce vestments. These investments are based on a number of its exposure to commodity prices, currency fl uctuations factors and evaluations, for example, technical, geologi- nor interest rates. cal, geophysical, and economic. There are uncertainties The operations are based on permissions and licenses and assumptions associated with all such determinations granted by Russian governmental authorities. It is crucial which mean that the outcome of any project could diff er to be in compliance with the terms of such licenses, to to the better or to the worse. The oil industry investments get necessary approvals when needed and to fulfi ll ob- execution also contains a number of risks. Unforeseen ligations to tax and other authorities. Risks associated events are continuously encountered in oil operations. with the Russian legislation and its implementation in Crude oil and refi ned oil products are sold in com- operations are addressed and managed. West Siberian’s petitive markets where prices fl uctuate and price swings growth in the past few years would not have been pos- can be large in short time. High prices are benefi cial and sible, absent the successful management of such risks. the fi nancial performance is negatively aff ected when In recent months, volatile capital and credit markets prices come down. Price changes also aff ect the amount globally and in Russia, notwithstanding any fi scal eco- of production taxes and export duties to be paid there- nomic stabilisation measures that may be put into place fore the oil price exposure is lower than for many oil has raised the economic uncertainties surrounding the

WEST SIBERIAN Resources Ltd

continued availability and cost of credit both for the ditions similar to those applied to earlier transactions. Group and its counterparties, the potential for economic Some of the Group’s subsidiaries are subject to ex- uncertainties to continue in the foreseeable future and, ternal capital requirements and covenants imposed on as a consequence, the potential that assets may not be loans provided by banks and fi nancial institutions. As of recovered at their carrying amount in the ordinary course December 31, 2008, one of the Group’s subsidiaries did of business, and a corresponding impact on the Group’s not fully comply with current liquidity ratio covenant for profi tability. a loan in the amount of 15,721. Consequently, the lender The Group faces a number of risks and uncertainties had the right to request early repayment which has not in its operations, which may have a negative impact on been done as of the date of the issuance of this annual the assets of the Group. Such risks include for example, report and the Group’s management believes that the but not limited to: likelihood of the lender requesting early repayment of the outstanding amount solely due to non-compliance Capital Risk Management of this covenant to be remote. Management believes The Group manages its capital to ensure that the Group’s that it is taking all necessary actions to allow the Group companies will be able to continue as a going concern in to meet current loan requirements and facilitate renewal order to provide return to the Group’s shareholders and or refi nancing of current debt obligations. reduce the cost of capital maintaining while managing Based on the results of the capital ratios review, the the risk exposure. The capital structure of the Group in Group takes steps to balance its overall capital structure 2008 and 2007 included loans and borrowings, cash and through obtaining new fi nancing or the redemption of cash equivalents and equity attributable to shareholders existing debt. of the parent company. The management of the Group reviews and approves the following ratios on a quarterly Major Categories of Financial Instruments basis: gearing and liquidity ratios, EBIT to interest ratio, The Group’s principal fi nancial liabilities comprise loans debt to interest ratio, liabilities to net assets ratio and and borrowings, fi nancial lease, trade and other accounts equity structure. The availability of external funding in fi - payable. The main purpose of these fi nancial instruments nancial markets has been signifi cantly reduced and may is to raise fi nance for the Group’s operations. The Group aff ect the ability of the Group to obtain new borrowings has various fi nancial assets such as trade receivables and and re-fi nance its existing borrowings at terms and con- loans given, cash and cash equivalents.

Dec 31, 2008 Dec 31, 2007

Financial assets Other fi nancial assets 1 192 108 259

Trade and other accounts receivable 44 411 135 344

Cash and cash equivalents 335 367 408 372

Other fi nancial assets 76 203

381 046 652 178

Financial liabilities

Measured at amortised cost

Loans and borrowings 863 613 566 663

Finance lease liabilities 10 688 14 835

Other fi nancial liabilities

Trade and other accounts payable 64 605 13 953

938 906 595 451

Annual Report 2008

Foreign Currency Risk ity of the Group’s operational costs and investments are Currency risk is the risk that the fi nancial results of the denominated in RUR. At the same time management of Group will be adversely impacted by changes in ex- the Group is trying to mitigate such risk by repayment change rates to which the Group is exposed through of its foreign currency denominated loans and borrow- the subsidiaries with other than USD functional curren- ings, maintaining adequate cash on deposits accounts cies. The Group undertakes certain transactions denomi- in foreign currency and renewal of its main loan facilities nated in foreign currencies. The Group does not use any in RUR. derivatives to manage foreign currency risk exposure. The carrying amount of the Group’s foreign currency The signifi cant part of the Group’s revenues is denomi- denominated monetary assets and liabilities as at the re- nated in USD or dependant on USD, whereas the major- porting date are as follows:

Nominated in USD Nominated in EUR Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007

Assets

Trade and other receivables 618 39 436 - -

Cash and cash equivalents 142 311 41 642 103 412 161 397

142 929 81 078 103 412 161 397

Liabilities

Loans and borrowings 225 660 183 110 - -

Finance leases obligations 10 702 14 835 - -

Trade and other payables 1 107 155 505 - -

237 469 353 450 - -

Total net position -94 540 -272 372 103 412 161 397

The table below details the sensitivity of the Group’s net assessment of the reasonably possible change in foreign result to changes of exchange rate of the RUR against the exchange rates. The analysis was applied to monetary USD and EURO by 10% which is the sensitivity rate used items at the balance sheet dates denominated in respec- when reporting foreign currency risk internally to key tive currencies. management personnel and represents management’s

Nominated in USD Nominated in EUR 2008 2007 2008 2007

Profi t or loss 9 454 26 139 10 341 16 140

Interest Rate Risk interest rate risk exposure. The Group manages its inter- The Group is exposed to interest rate risk as entities in the est rate risk through maintaining an appropriate mix be- Group borrow funds at both fi xed and fl oating interest tween fi xed and fl oating rate borrowings. rates. The fl oating rate debt exposes the Group to fl uc- The table below details the Group’s sensitivity to in- tuations in interest payments due to changes in interest crease or decrease of the fl oating rate by 1%, which is rates. The Group does not use any derivatives to manage used when reporting interest rate risk internally to key

WEST SIBERIAN Resources Ltd

management personnel and represents management’s ended December 31, 2008 the Group renegotiated the assessment of the reasonably possible change in inter- terms of the majority of its oil products sales contracts for est rates. The analysis was applied to loans and borrow- an advance payment basis, and in addition, the Group’s ings (fi nancial liabilities) based on the assumptions that policy for collecting doubtful debts has become stricter amount of liability outstanding as at the balance sheet and monitoring of the trade debtors is now performed date was outstanding for the whole year. by a special committee on a daily basis. In addition, management prepares detailed budgets, forecasts, cash fl ows and reviews the global and domestic oil price environ- Profi t or Loss ment on a monthly basis in order to optimise crude oil Jan 1, 2008 Jan 1, 2007 sales, supply routes, oil product mix and refi nery volumes. Dec 31, 2008 Dec 31, 2007 Accordingly, management considers that it is taking all LIBOR 4 090 1 250 necessary actions to allow the Group to meet its current BNP 400 - obligations as they fall due. MosPrime - 2 037 Management plans to fund the 2009 investment pro- IBR - 129 gram from operating cash fl ow. In addition, spending on 4 490 3 416 major investment projects including the modernisation of the Khabarovsk Oil Refi nery and the Kolvinskoye fi eld development has been delayed. Management is focus- ing on reducing short-term debt through repayment and Credit Risk extending the maturity of existing short-term loans. Credit risk is the risk that a customer may default or not At December 31, 2008 and 2007 the Group had access meet its obligations to the Group on a timely basis, lead- to fi nancing facilities, the total unused amount of which ing to fi nancial losses to the Group. was 37,035 and 63,207. Credit risk from fi nancial assets of the Group, which comprise cash and cash equivalents, loans and receivables and other fi nancial assets, arises from default of the Other risks counterparty, with maximum exposure equal to the car- • Safety, fi re-safety and environmental risks: The Group rying value of these instruments. is subject to extensive federal, state and local environ- There were no guarantees given to secure fi nancing mental controls and regulations in the countries in of third parties at 31 December 2008 and 2007. which it operates. The Group’s operations involve air The Group has a concentration of cash and cash and water venting of detrimental impurities, potential equivalents with a related party commercial bank as at impact to fl ora and fauna in the region of operations, December 31, 2008 and 2007 represented by 38% and and other environmental concerns. The management 27% of total Group’s cash and cash equivalents. believes that the Group’s operations are in compliance with all current existing environmental laws and regulations of the countries in which the Group op- Liquidity Risk erates. However, environmental laws and regulations The Group’s liquidity is aff ected by several operating fac- continue to evolve. The Group is unable to predict the tors as well as the availability of external fi nancing. The timing or extent to which those environmental laws availability of external funding in fi nancial markets has and regulations may change. Such change, if it occurs, been signifi cantly reduced and may aff ect the Group’s may require that the Group modernise technology to liquidity. meet more stringent standards. The net cash fl ow position of the Group is monitored on a daily basis by the central treasury function with • Legal risk: The legal system in Russia is not fully devel- weekly cash movements and cash balances being report- oped and cannot be compared with the legal system ed to the Group’s management. During the three months in the West. It is also subject to constant changes,

Annual Report 2008

sometimes with retroactive eff ect. This fact could im- be challenged. As a result, signifi cant additional taxes, ply negative consequences to the companies of the penalties and interest may be assessed. Fiscal periods West Siberian Resources Group. remain open to review by the authorities in respect of taxes for three calendar years preceding the year of • Political risk: Certain aspects of the Group companies’ review. Under certain circumstances reviews may cov- operations require the consent or favourable deci- er longer periods. As at December 31, 2008 manage- sions of Russian federal, regional or local governmen- ment believes that its interpretation of the relevant tal bodies. legislation is appropriate and the Group’s tax, currency • Third party risk: The Group can from time to time be and customs positions will be sustained. Where man- dependent on services, access to facilities and con- agement believes it is probable that a position cannot struction assistance contributed from third parties in be sustained, an appropriate amount is accrued for in order to fulfi l its operative plans. This dependence on the fi nancial statements. third parties could negatively impact the Group’s rev- • Geological risk: All estimates of recoverable oil re- enues and timely implementation of operating plans. serves are based on probability. Consequently, there • Tax risk: Russian tax, currency and customs legislation is no guarantee that estimated oil reserves will be un- is subject to varying interpretations, and changes, changed over time. which can occur frequently. Management’s interpretation of such legislation as applied to the transac- The Group tries to mitigate these risks by ascertaining tions and activity of the Group may be challenged by the relevant competence of the board of directors and the relevant regional and federal authorities. Recent company management. Therefore, the Company tries to events within the Russian Federation suggest that the plan ahead and to take necessary and appropriate action tax authorities may be taking a more assertive posi- in order to mitigate and handle such risks. tion in their interpretation of the legislation and as- Additionally the Company from time to time obtains sessments, and it is possible that transactions and ac- advice from various specialists. tivities that have not been challenged in the past may

Note 37 Signifi cant events after the end of the period

On March 3, 2009, in Madrid, Spain, the Russian Vnesh- memorandum of understanding to develop the project econombank and the Spanish Export Credit Agency an- involving trade and investment relationships between nounced their plans to bilaterally support the modernisa- business entities from their respective countries where tion of the Khabarovsk Oil Refi nery. The parties signed a participation might be bilaterally benefi cial.

Note 38 Adoption of the annual report

The annual report has been submitted by the Board of Di- statement are to be adopted by the Company’s share- rectors on April 27, 2009. The balance sheet and income holders at the annual general meeting on May 28, 2009.

WEST SIBERIAN Resources Ltd

Annual Report 2008

Independent Auditors’ Report

To the shareholders of obtain reasonable assurance whether the fi nancial statements are free from material misstatement. West Siberian Resources Ltd An audit involves performing procedures to obtain We have audited the accompanying consolidated and audit evidence about the amounts and disclosures in the parent company fi nancial statements of West Sibe- fi nancial statements. The procedures selected depend on rian Resources Ltd, appearing on pages 34–92, which the auditor’s judgment, including the assessment of the comprise balance sheets as at December 31, 2008, and risks of material misstatement of the fi nancial statements, income statements, statements of changes in equity whether due to fraud or error. In making those risk as- and cash fl ow statements for the year then ended, and sessments, the auditor considers internal control relevant a summary of signifi cant accounting policies and other to the entity’s preparation and fair presentation of the fi - explanatory notes. nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the Management’s Responsibility for purpose of expressing an opinion on the eff ectiveness of the entity’s internal control. the Financial Statements An audit also includes evaluating the appropriateness Management is responsible for the preparation and fair of accounting policies used and the reasonableness of presentation of these fi nancial statements in accordance accounting estimates made by management, as well as with International Financial Reporting Standards. This evaluating the overall presentation of the fi nancial state- responsibility includes: designing, implementing and ments. maintaining internal control relevant to the preparation We believe that the audit evidence we have obtained and fair presentation of fi nancial statements that are is suffi cient and appropriate to provide a basis for our au- free from material misstatement, whether due to fraud dit opinion. or error; selecting and applying appropriate accounting policies; and making accounting estimates that are rea- Opinion sonable in the circumstances. In our opinion, the fi nancial statements present fairly, in all material respects, the fi nancial position of West Siberian Auditor’s Responsibility Resources Ltd, the parent company and West Siberian Our responsibility is to express an opinion on these fi - Resources Ltd and its subsidiaries, the Group as of De- nancial statements based on our audit. We conducted cember 31, 2008, and of its fi nancial performance and its our audit in accordance with International Standards on cash fl ows for the year then ended in accordance with Auditing. Those standards require that we comply with International Financial Reporting Standards. ethical requirements and plan and perform the audit to

Gothenburg, April 27, 2009

PricewaterhouseCoopers AB

Klas Brand Johan Rippe Lead Partner / Authorised Public Accountant Authorised Public Accountant

WEST SIBERIAN Resources Ltd

Annual Report 2008

Supplemental information

Reserve quantity information (Unaudited)

Tomsk Timano-Pechora Volga-Urals Proven and probable oil reserves Region Region Region* Kazakhstan Total

As of January 1, 2007 65 395 213 925 132 016 18 367 429 703 -revisions 7 867 50 152 15 534 - 1 788 71 764 -extensions and discoveries - - 759 - 759 -production -3 545 -3 344 -6 864 -251 -14 003 Total changes for the period 4 322 46 808 9 429 -2 039 58 520 As of December 31, 2007 69 717 260 733 141 445 16 328 488 223 -revisions 1 990 9 057 8 193 -2 770 16 470 -production -4 436 -5 165 -7 393 -422 -17 416 Total changes for the period -2 446 3 892 800 -3 192 -946 As of December 31, 2008 67 271 264 625 142 245 13 136 487 277

* Volga-Urals Region includes oil proven and probable reserves in the oil fi elds located in Tatarstan and the Samara region of the Russian Federation.

The balances of proven and probable oil reserves as of Jan- oil fi elds owned by West Siberian Resources Group in the uary 1, 2007 in the Tomsk region, Timano-Pechora region Tomsk, Timano-Pechora and Volga-Urals regions by D&M and certain oil fi elds in the Volga-Urals region owned by and for the oil fi elds owned by Alliance Oil Company in West Siberian Resources Group were based on the reserve the Volga-Urals region and Kazakhstan by M&L during evaluation report prepared by DeGolyer & McNaughton the fi nancial year ended December 31, 2007. (D&M), an international petroleum consulting fi rm, under Out of total crude oil production for the fi nancial year PRMS classifi cation. The balances of proven and probable ended December 31, 2008 amounted to 17,416 thou- oil reserves as of January 1, 2007 in the Kazakhstan and cer- sand barrels the volume of 13,892 thousand barrels was tain oil fi elds in the Volga-Urals region owned by Alliance included in the Group’s consolidated fi nancial statements Oil Company were based on the reserve evaluation report representing the crude oil production from the oil fi elds prepared by Miller & Lents (M&L), an independent petro- owned by West Siberian Resources Group for the period leum consulting fi rm, under PRMS classifi cation. from April 11, 2008, the date of the merger completion, The ‘Revisions’ lines in the above table included the till December 31, 2008. eff ect of the oil reserves estimates revision made for the

WEST SIBERIAN Resources Ltd

This report, for the fi nancial year from January 1, 2008 and fair view of the Group’s fi nancial position and results to December 31, 2008 is submitted by the Board of Di- of operations, and that the fi nancial statements of the rectors and the Managing Director of West Siberian Re- parent company have been prepared in accordance with sources Ltd. The Group’s retained earnings amount to IFRS and give a true and fair view of the parent company’s TUSD 274,572. The Board and the Managing Director profi nancial position and results of operations. pose that the retained earnings in the parent company The Statutory Corporate Governance and the other of TUSD 18,659, out of which the net loss for the fi nan- parts of the Annual Report of the Group and the parent cial year ended December 31, 2008 amounted to TUSD company provides a fair review of the development of 12,307, be carried forward and that no dividend be paid the Group’s and the parent company’s operations, fi nan- for the fi nancial year ended December 31, 2008. cial position and results of operations and describes ma- The Board of Directors and the Managing Director terial risks and uncertainties facing the parent company declare that the consolidated fi nancial statements have and the companies included in the Group. been prepared in accordance with IFRS and give a true

April 27, 2009

Eric Forss Fred Boling Chairman Director

Arsen E Idrisov Nemesio Fernandez-Cuesta Director and Managing Director Director

Maxim Barski Raymond Liefooghe Director Director

Claes Levin Director

AnnualAnnual Report 2008

Abbreviations and Terms Used

Brent Term referring to oil produced in the North Sea Controllable costs Costs associated with production, including but not limited to, supplies, electricity, salaries, lifting, materials, technologies and chemicals, but not including tax, specifi cally the Mineral Resources Extraction Tax D&M DeGolyer & McNaughton, independent petroleum engineering consulting firm M&L Miller & Lents, independent petroleum engineering consulting fi rm ESPO Pipeline Eastern Siberia - Pacifi c Ocean pipeline Licence area The particular subsoil plot specifi ed in the subsoil licence issued by the applicable Russian federal which the licence holder has the right to use for the purpose and on the terms specifi ed in the subsoil licence. A licence area may contain one or more fi elds or may encompass only a portion of a fi eld LIBOR The London Inter-Bank Off ering Rate MSEK Million Swedish kronor MUSD Million US dollar Recoverable reserves An estimation of the amount of exploitable reserves held by the oil company concerned Samara The Samara area of the Volga-Urals region Siberian Light Russian oil grade TUSD Thousand US dollar 1P Proven reserves 2P Proven and Probable reserves 3P Proven, Probable and Possible reserves Conversion factors 1 ton of oil = 7.6 barrels of oil 1 ton of condensate = 8.5 barrels of condensate

Filling Station Railway

Oil Product Terminal Motorway

Oil Refinery Oil Pipeline Marine Terminal ESPO (1st construction stage) Licensed Block ESPO (2nd construction stage)

WEST SIBERIAN Resources Ltd

Addresses

West Siberian Resources Limited Registered address: Clarendon House 2 Church Street Hamilton HM11 Bermuda E-mail: [email protected] Internet: www.westsiberian.com

Alliance Oil Company 39 Sivtsev Vrazhek pereulok 119002 Moscow Russia Tel.: +7 495 777 18 08 Fax: +7 495 745 85 62

Swedish representative offi ce Tel: +46 8 613 00 85 Fax: +46 8 613 00 90 E-mail: [email protected]

Wikströms, Uppsala 1081442