Annual Review 2009

Annual Review and Summary Financial Statements 2009

people, technology, efficiency A new production center in the Uvat district in the south south the in district Uvat the in center production new A 2009 February in commissioned region Tyumen the of >> Abbreviations 2P (reserves) proved and probable (reserves) 3P (reserves) proved, probable, possible (reserves) APG associated petroleum gas B2B business to business DAFWC days away from work cases ESP electric submersible pump HSE health, safety and environment LOF life of field NGOs non-governmental organizations OFS oilfield services OGP The International Association of Oil and Gas Producers PRMS Petroleum Resources Management System RUR Russian roubles SEC Securities and Exchange Commission USD US dollars Units bbl barrel (1 bbl = 0.134 metric tons) boe barrel of oil equivalent bcm billion cubic meters bcma billion cubic meters per year bn billion ha hectare km kilometer mmboed million barrels of oil equivalent per day mbpd thousand barrels per day mmbpd million barrels per year

Cautionary statement This publication contains forward-looking statements regarding TNK-BP's assets and financial and operational performance and strategy. Actual results may differ depending on a variety of factors.

Slavneft TNK-BP shareholders own close to 50% of Slavneft, which is managed independently and reports as a separate entity. TNK-BP’s Net Income and EBITDA numbers include its share of Slavneft’s results. Any other figures quoted in this publication exclude Slavneft unless stated otherwise. Contents

1. Key events in 2009...... > 2 7. Key figures in 2009...... > 34

7.1: health and safety data ...... > 34 2. From the Executive Chairman 7.2: environmental data...... > 35 of the Board of Directors...... > 4 7.3: operational data...... > 36

3. strategic priorities...... > 6 7.4: financial data...... > 37

4. innovation in TNK-BP...... > 8 8. interview with the COO...... > 38

5. Corporate governance...... > 13 map of assets...... > 42

5.1: Board of Directors...... > 14 9. RESERVES AND EXPLORATION...... > 44 5.2: Interview with independent director Gerhard Schroeder...... > 15 10. upstream...... > 49

5.3: Board committees...... > 16 10.1: licenses...... > 51

5.4: the CEO, Management Board 10.2: technology...... > 51

and corporate committees...... > 16 10.3: Well stock...... > 51

5.5: internal control and risk management ...... > 18 10.4: production...... > 51

5.6: corporate structure...... > 19 11. Gas business development...... > 57

6.1 social Responsibility...... > 23 11.1: natural gas...... > 59

6.1.1: taxes...... > 24 11.2: associated petroleum gas...... > 59

6.1.2: government relations...... > 25 12. Downstream...... > 63 6.1.3: our large-scale social programs...... > 26 12.1: Refining...... > 65 6.1.4: our social projects in the regions ...... > 27 12.2: sales, trading and logistics...... > 66 6.1.5: our charity projects...... > 27 12.3: retail...... > 67 6.2 health, Safety and Environment...... > 28 12.4: product mix development...... > 69 6.2.1: health...... > 28

6.2.2: Safety...... > 29 13. Slavneft...... > 70

6.2.3: Environment...... > 30 14. OUR FINANCIAL PERFORMANCE...... > 72 6.3 Our People...... > 32

6.3.1: educational programs ...... > 32

6.3.2: Targeted programs...... > 32

TNK-BP Annual review 2009 People, technology, efficiency > 2 Highlights of the year 1 9 January 10 May New shareholder New oil field agreement approved We launch commercial production in Our two principal shareholders, AAR and the northern hub of Kamennoye in the BP, sign an amended shareholder agree- Khanty-Mansi autonomous district in West ment which defines our corporate govern- Siberia, ensuring a significant increase in ance, strategy and financial framework. production in one of our largest greenfield projects. 16 February New oil fields launched 14 May We launch commercial oil production Ryazan turnaround at the Urnenskoye and Ust-Tegusskoye complete fields in the Uvat district of the Tyumen We complete a major turnaround at the Rya- region, which have an estimated 300 mil- zan Refinery with seventeen units upgraded lion tons of oil in place. This event signified and modernized in just over 40 days on the opening of a new oil and gas province budget, ahead of plan and injury-free. in Russia. 20 May 27 February Restoration of the Audit results Alexander Nevsky Lavra announced Restoration of part of the UNESCO-pro- We announce the results of DeGolyer tected Alexander Nevsky Lavra, a center and MacNaughton’s independent audit, of Russian Orthodox culture, is completed recording another successful year for in St. Petersburg. We sponsor St. Peters- resource renewal, bringing our three- burg’s World Architectural and Cultural

year average reserve replacement ratio Heritage Restoration Program to restore to 146% under SEC-LOF criteria. historical monuments. 27 March 9 July Oil trading started in St. Investment in Ukraine Petersburg TNK-BP brings its effective shareholding We become one of the first oil companies in LINIK, a refinery in the Ukrainian city of to trade its oil products on the St. Peters- Lisichansk, close to 100%. This is more burg International Mercantile Exchange, evidence of our strong commitment to events

promoting exchange trade as a transpar- developing business in Ukraine. ent tool for price-setting. 2009

Key in

TNK-BP Annual review 2009 > 3

Key events in 2009

13 July 9 October 4 December More retail assets Billion dollar TNK-BP receives acquired in Russia investment in fuel refineries investment grade TNK-BP and Gazprom Neft complete the The Board support the launch of a five- Standard & Poor’s upgrades TNK-BP’s split of Russian retail assets of Slavneft year fuel quality investment program worth rating to investment grade (BBB-, stable owned jointly by the two companies. As USD 1.3 billion to upgrade our refineries outlook) on improved governance and a result, TNK-BP acquired control of 88 in Russia and Ukraine. shareholder alignment, resilient operating retail sites and 12 oil depots in the Yaroslavl, performance and strong financial metrics. Kostroma and Ivanovo regions. TNK-BP now has investment grade ratings 15 October from all three international rating agencies. PULSAR launched 28 July We launch our new unleaded A95 gasoline, We report industry- PULSAR, at TNK-branded service stations 21 December leading production growth in Moscow and the Moscow region. PUL- Agreement reached We report 3% year-on-year growth in our oil SAR complies with Euro-4 requirements to expand retail business and gas production for the first half of 2009. and has greater cleaning power compared in Ukraine to common fuels. We enter into agreements to acquire a 100% interest in VikOil, a company 29 July engaged in the retail and wholesale dis- Oil field services sold 20 October tribution of petroleum products in Ukraine. to Weatherford International Million tons of oil We complete the sale of our oil field serv- from East Siberia ices to Weatherford International, following We reach 1 million tons of crude produced 29 December approval by Russia’s Federal Antimonopoly from Verkhnechonskoye, our greenfield New markets open Service. project in East Siberia. for our crude First phase of the East Siberia — Pacific Ocean pipeline launched, enabling us to 20 August 19 November sign an off-take agreement to sell the first First million tons of oil Board of Directors 100 thousand tons of oil from the Kozmino from Uvat nominates CEO port on Russia’s Pacific coast. We reach 1 million tons of crude oil at Urn- The TNK-BP Board of Directors unani- enskoye and Ust-Tegusskoye since the mously agree to appoint Maxim Barsky launch of production in February 2009. as the TNK-BP Group’s CEO, effective 1 January 2011. 28 August Official data on 27 November greenhouse gas emissions Cooperation under released Kyoto Protocol For the first time, we report official data TNK-BP and BNP Paribas commit to on our greenhouse gas emissions for the cooperate under the Kyoto Protocol on cli- period 2005 to 2008 which illustrate consist- mate change. ent reductions. > 4 People, technology, efficiency 2 n a s m r r i a to

c Mikhail FRIDMAN Executive Chairman

e of the Board of Directors r i 2009 was a challenging year, not only for the oil and gas industry but also for the entire global economy. Hydrocarbon D

prices fell sharply, credit markets shrank and a large number

f of oil and gas companies were forced to revise their capital

utive Ch utive investment programs, suspend projects and downsize their operations. c Nevertheless, the professionalism and solidarity of the TNK-BP team enabled us not only

d o d to fully honour all of our obligations to employees, creditors, customers and the state but

xe also to record solid operational and financial performances in 2009. Last year, our production volume amounted to 1.69 million barrels of oil equivalent E

ar per day, which is the highest level in the history of TNK-BP. This increased production was also supported by a successful reserves replacement program. Based on SEC-LOF criteria, o we replaced 177% of our production volumes in 2009. This success in reserves replacement provides us with a reliable foundation for sustainable long-term growth. Moreover, it B further strengthens Russia’s position in the global energy market. the the om the the om f r F o

TNK-BP Annual review 2009 > 5

From the Executive Chairman of the Board of Directors

It should be noted that TNK-BP achieved this outstanding perform- Innovation and technology will continue to be major drivers ance while working as a socially responsible corporate citizen of of our success. But technology cannot function without peo- Russia. We proved ourselves to be efficient managers of the natural ple. Throughout this difficult year, we focused on retaining and resources that were entrusted to us by the Russian Federation. developing talent. Going forward, this will remain a priority as TNK-BP is one of Russia’s top taxpayers; in 2009, our tax contribu- we continue to invest in the next generation of Russian talent, tions exceeded USD 16 billion. Since our inception in 2003, we have while also attracting and retaining the best international expertise. paid more than USD 100 billion of taxes, duties and excise taxes This powerful combination of Russian and international talent is to state budgets at all levels. Over the last year, we continued to a distinctive trademark of TNK-BP. implement our social investment program, which saw the alloca- tion of more than USD 40 million for projects to facilitate social and Times of crisis and instability force or- economic development in the regions in which we operate. ganizations to focus on what they do We continued working to transform TNK-BP into a safe, envi- best. In 2009, TNK-BP once again dem- ronmentally responsible business in 2009. We cut the number onstrated the strength of its corporate of fatalities by 62% and decreased the number of leaks by 14%. culture. Our team showed resilience, 275 hectares of land were remediated to high environmental flexibility and the ability to focus on our standards and handed back to the state. We still have some way core business and drive efficiency, while to go, but we are committed to progressing along this path until laying the foundations for long-term, sus- we can rightly claim to be the HSE leader in Russia. tainable growth in Russia and abroad. As ever, we remain focused on leveraging our access to world-class technology and innovation to improve operational As a result, we entered 2010 as a dynamic and robust company, efficiency and develop complex greenfields. Investments in well-positioned for the next stage in our development. This next reservoir management, better seismic and advanced drilling step will see our accession to international markets and gradual contributed to our strong upstream performance. In downstream, transformation of the company into an international player that can the Board of Directors supported the launch of a USD 1.3 bil- compete with industry leaders from developed countries in terms lion fuel quality program, which will modernise our refineries, of financial and operational performance. This was the goal set by enabling us to produce lighter and cleaner fuels that meet the the shareholders when TNK-BP was founded in 2003, and I feel requirements of our customers and the regulatory authorities. certain that we now have everything we need to achieve it.

Mikhail Fridman > 6 People, technology, efficiency 3

Maxim BARSKY Deputy CEO

In 2009, we invested a long time in refreshing our strategy. In particular, we are looking hard at our asset base and how to utilize our resources in order to drive increased shareholder value. We are looking at various options to take TNK-BP to the next stage in its development and transform it into a world- class integrated private oil and gas company with a focus on profitability and efficient growth. Our move forward will be accompanied by steady progress in corporate governance and HSE standards, ultimately making TNK-BP a recognized leader. Our goals will be secured by retaining a strong team of professionals, cultivating

c inspirational leadership and mutually beneficial engagement with stakeholders. ities tegi r io ra r t p S

TNK-BP Annual review 2009 > 7

Strategic priorities

TNK-BP is the third largest vertically integrated oil company in Russia and one of the top ten private oil producers in the world

Our vision is to ■■Ensure the sustainable development of our business by ■■Become a world-class integrated private oil and gas com- using the best technology and investing in our upstream pany with a focus on efficiency and growth, including portfolio. internationally. ■■Boost netback price and enhance value through targeted ■■Become a safer and cleaner company for our people, midstream and downstream investments. We aim to pro- contractors and those who live in the areas in which duce high quality oil products and deliver them to B2B we operate. customers and end consumers through an expanded ■■Establish new health and safety standards for the Rus- company-owned retail network. sian oil and gas industry. ■■Grow a significant gas business to monetize the com- ■■Strengthen and embed transparent, fair and efficient pany’s large free and associated gas opportunities and principles of corporate governance in every aspect of fully develop our gas resource base. our business to safeguard shareholder value, guarantee ■■Expand through a series of value-accretive acquisitions robust performance and enhance our corporate social while upgrading our portfolio. responsibility.

■■Become an employer of choice and attract talent by developing the knowledge, skills and abilities of our people to meet our long-term needs and their personal aspirations. > 8 People, technology, efficiency 4

Viktor VEKSELBERG Executive Director

Innovation is a driving engine of modern business. In this Annual Review we discuss innovation in our company and what we are doing to embed it into all aspects of our business.

Joseph Schumpeter, an outstanding economist of the first half of the 20th century, argued that innovation and technological change of a nation come from entrepreneurs, or wild spirits. In a modern setting, this means that business drives change and has the commercial incentive to support, test and put into practice the best ideas and findings of modern science. Large corporations have better resources, more market power and the organizational capacity to innovate. We believe that a truly innovative company is one where innovation is embedded in the corporate culture. TNK-BP was set up in 2003 as a unique company in the Russian oil landscape, a joint venture between a group of Russian businessmen and BP, an oil major with an impressive record in the application of technology and corporate governance. Since then, we have developed an innovative spirit and successfully transferred tion tion BP international technology and expertise to Russia to effectively blend it with the best Rus-

a sian ideas and industry experience. K- TN nnov I in in

TNK-BP Annual review 2009 > 9

Innovation in TNK-BP

We drive the spirit of innovation and renewal in our business by 4.3: Application of international technology embedding the following activities in our day-to-day operations: and expertise We have learnt to put the most effective international ideas 4.1: Staff involvement and engagement to commercial use in Russia. We seek to bring out the intellectual wealth of our team by We are implementing unique technology in upstream in dif- involving our people in improving business processes and opera- ferent areas. One of the leading technological advances relates tions. In refining, for example, we conduct brainstorming sessions to well stimulation. We are performing various fracturing projects at our plants to air ideas and then ensure their implementation. In (foam fracturing, fiber fracturing, scale fracturing) which make upstream, we have established working groups with industry lead- a big difference in depleted brownfield formations and help ers to find unique tailored solutions in particular fields. develop new assets. New bottom hole treatment technologies We encourage young talent both inside the company, via (foamed acid, emulsified acid, solvents, gelled acid) are now knowledge-sharing meetings of young specialists, and externally, widely used in TNK-BP and significantly improve the results of through support of the main oil and gas institutes. bottom hole treatments. In 2009, we attracted new leaders who complement our New technology for drilling muds, cement and equipment management team with fresh ideas. This powerful combination help improve the efficiency of the drilling process. Stream line of continuity and renewal will enable us to take the company to modeling, tracer injection and water alternating gas are applied the next stage of its development. for reservoir development; dual completion, equalizers — for production enhancement. 4.2: Сooperation with Russian scientific In order to promote specific solutions at our fields, we are institutions engaging in a multitude of short-term partnerships with local and TNK-BP is working with ten top Russian universities to international oil service companies, leveraging their research and bring in intellectual wealth through young specialists and new development programs and resources to come up with joint inno- thinking. vative technologies allowing us to increase our competitive edge. We work in continuous cooperation with Russian scientific This approach has brought spectacular results. A significant institutes, including with: part of our crude is now produced at the fields or accumulations

■■The Gubkin Russian State Oil and Gas University on chemical which were long considered either uneconomic or unrecoverable. methods of formation treatment and down hole equipment We feel confident about our ability to “commercialise” scientific selection. findings and consider frontier energy projects like super heavy

■■The Novamet Construction Bureau on small submersible oil extraction in Venezuela or develop unconventional gas. Our pumps. way forward is through innovation and renewal, and this constant

■■The Imashresource Institute at the Russian Academy of Sci- rejuvenation will create additional value for the company, our ences on down hole well equipment durability. people and the stakeholders.

■■Giprotyumenneftegas on down hole well equipment corrosion issues.

■■The Ufa State Oil University on well and formation scaling problems.

>> NOVOSTI

People, technology, efficiency > 10 RIA © © 4 PHOTO

President Dmitry Medvedev meets with Viktor Vekselberg, President of Foundation for Development of the Center for Elaboration and Commercialization of New Technologies (Skolkovo Foundation) The energy sector has significant innovation potential. Unlike many other sectors of Russia’s economy that need modernization, the energy sector has the necessary resources to make technological advances. Dmitry Medvedev President of the Russian Federation, speaking at the meeting of the Commission for Modernization and Technological Development in Khanty-Mansiysk on 23 March 2010.

TNK-BP Annual review 2009 NOVOSTI

RIA > 11 © ©

PHOTO Innovation in TNK-BP

Innovations

UPSTREAM GAS ■■Advanced seismic imaging utilizing the lat- ■■Twelve gas utilization projects analyzed for est acquisition, processing and inversion Kyoto eligibility and three projects selected techniques. for execution — Samotlor Gas Gathering,

■■State of the art reservoir simulation — opti- and two projects in the Orenburg region at mizing waterfloods with streamline models, Vakhitovskoye and Rodnikovskoye. forecasting hydraulic fracture stimulation DOWNSTREAM performance, evaluating reservoir geology ■■PULSAR launched, a performance unleaded with pressure transient analysis. A95 gasoline complying with Euro-4 environ-

■■High tech formation consolidation methods mental requirements.

to avoid sand production. ■■Active promotion of transparency in pricing

■■New fracturing technologies for low stress and support in setting up exchange trades.

and close to water formations. ■■Visbreaking unit at Ryazan refinery upgraded

■■Enhanced oil recovery methods — gas injec- to reduce hydrogen sulphide content in fuel oil. tion, polymer injection, steam injection and STRATEGY multi-lateral wells, dual completion. ■■Integrated financial and operational model

■■Latest water shut off technologies in developed for all assets, allowing the com- brownfields. pany to make long-term strategic decisions

■■Wind and solar power plants for power gen- and modeling based on different scenarios. eration for separation facilities and pumps.

■■Thermal paints used to insulate pipelines, flow lines, and storage tanks to reduce oil viscosity.

■■Intelligent field management using nodal analysis, SCADA, strategically placed pressure sensors and flow meters, and controllers to automatically control well production and injection.

■■Nano cells used for tracer studies to identify flow regimes from well to well.

■■Seismic sensors placed on offset wells to monitor time-lapse fracture generation. > 12

Creating long-term value through efficient governance and transparency

TNK-BP Annual review 2009 > 13 People, technology, efficiency 5 orporate orporate governance C > 14 People, technology, efficiency Good corporate governance is the foundation of any successful business that aims to grow value in the long term. We believe that our corporate governance is among the best implemented by any Russian company and we are working constantly to raise it to the highest international 5 standards. Good governance is an ongoing commitment shared by our people at all levels in the company. Our key business principles are cascaded down the organization through our Code of Business Policies and underlying corporate standards to which all employees are expected to adhere. We foster a culture where both corporate and personal ethics, integrity and accountability are inherent in our everyday business practices. Our Code of Business Policies is discussed in more detail on page 18. The general principles underpinning corporate governance at TNK-BP are stipulated in the Shareholder Agreement between our two principal shareholders, BP and AAR (which is composed of Alfa Group, Access Industries and Renova). One of the highlights of 2009 was the signing of an amended Shareholder Agree- ment by AAR and BP. Under the amended agreement, as well as specifically addressing key elements of governance and authorities, independent directors were appointed to TNK-BP’s Board of Directors, allowing for more effective decision-making and conflict resolution. The revised agreement establishes three decision-making bodies within the TNK-BP group: the Board of Directors, the Management Board and the CEO.

5.1: Board of Directors The Board of Directors of TNK-BP Limited, the ultimate holding company of the TNK-BP group (see corporate structure on p. 19), is comprised of 11 members: four directors representing each of the two shareholder groups (AAR and BP) and three independent directors. The Board provides strategic guidance to the company, reviews company performance and strategy implementation, advises on major acquisitions and divestments, endorses capital expenditure, appoints and evaluates executives, executes financial control and ensures that TNK-BP meets high ethical standards of business. The terms of reference of the Board of Directors are determined by the Shareholder Agreement.

In 2009, members of the Board e of Directors were:

c AAR nominees BP nominees Independent ■■Mikhail Fridman, ■■Lord Robertson directors* te n Executive Chairman of Port Ellen ■■Gerhard Schroeder

■■Viktor Vekselberg ■■Andy Inglis ■■Alexander Shokhin a ■■Len Blavatnik ■■David Peattie ■■James Leng ra

n ■■Alex Knaster ■■Iain Macdonald

r Biographies of the Board members can be found on pages 20–21 of this report. In 2009, the Board of Directors met four times. po

* the Shareholder Agreement describes an independent director as a person who is not and has not

r been, for the three years prior to his appointment, an employee, officer or consultant to any of the shareholders; does not receive and has not received, for five years prior to his appointment, remuneration from the TNK-BP group (except for a director’s fee) and other shareholders; does not have and has not had, in the three years prior to his appointment, any business relations with any of the shareholders; and is not a close relative of any director or senior employee of any of the shareholders. gove Co

TNK-BP Annual review 2009 > 15

Corporate governance

independent directors in guiding TNK-BP in 2009? 2009 was the first year for TNK-BP to have independent directors on its Board and one of our tasks from the shareholders was to give independent and impartial advice to the Board on two CEO candidates based on our opinion of their competencies and leadership abilities. We spent sufficient time with the two candidates in order to perform a thorough evaluation. The result, much to our satisfaction, was supported by the shareholders and the Board.

There is a fundamental link between good corporate governance and shareholder value. In 2009, the company worked under corporate governance principles approved by the amended shareholder agreement. How well did the new system work? Gerhard Schroeder Independent director Do you think the company’s system of corporate governance will evolve further? I was not familiar with the old corporate governance system but judging by the fact that the new shareholders agreement was adopted following the well-known shareholder dispute and that it protects the interests of both shareholder groups it would be fair 5.2: to say that the new corporate governance system suits its purpose Interview with independent director and has worked well since its introduction in 2009. For this reason it Gerhard Schroeder is premature and, in my view, unnecessary to introduce any further 2009 was your first year on the Board changes as the system should be given more time to mature. The of Directors of TNK-BP. How would you current corporate governance system is well balanced and with the assess the company’s performance over independent directors on the Board it corresponds to international the last year? practice existing in oil and gas companies of TNK-BP’s scale. When I was first appointed to serve as an independent director for TNK-BP I knew little about the company’s performance and What will be your main task as an competitive position. That is why I undertook several field trips independent director in 2010? My main task as an independent director will be to ensure that the to visit TNK-BP’s operations in West Siberia such as Samotlor existing balance of interests is maintained at the Board level and and Kamennoye. This experience helped me better understand that TNK-BP sustains the pace of performance in all key areas, TNK-BP’s portfolio and was very useful as I am also a member including production growth, HSE and financial performance. of the HSE Committee, so I’m happy to say that 2009 was the best year on record in key HSE areas for TNK-BP. As for the operational and financial performance, the 2009 results have both improved on 2008 and exceeded our original plan.

Independent directors are increasingly regarded as an important indicator of good corporate governance. What do you think has been the main contribution of >> > 16 People, technology, efficiency 5

5.3: Board committees 5.4: The CEO, Management Board To assist the Board in fulfilling its responsibilities, three and corporate committees Board committees have been set up: the Audit Committee; the Beyond matters reserved by the Board for its consideration Compensation Committee; and the Health, Safety and Environ- and decision-making, all decisions related to the daily running of ment Committee. Each committee acts within its scope of authority the business rest with the CEO and the management. delegated by the Board. The committees are represented by an Chief Executive Officer equal number of members from the two shareholder groups and The CEO is nominated by BP and is approved by the Board of one independent director. Directors for a period of three years. The CEO is entitled to make Audit Committee decisions related to the business activities of the company, generally The Audit Committee assists the Board in fulfilling its functions up to a limit of USD 100 million, and is accountable to the Board in relation to internal control and financial reporting, monitoring for the performance of the company. compliance with legal and regulatory requirements, assessing the In the first half of 2009, the position of interim CEO was work of the internal audit function and the effectiveness of the risk held by Tim Summers, Chief Operating Officer of TNK-BP. In management and internal control systems. the second half of 2009, Mikhail Fridman took over this position Members of the Audit Committee in 2009: Lord Robertson in addition to his role as Executive Chairman of the Board of of Port Ellen (Chairman), Len Blavatnik, Iain Macdonald, Alex Directors of TNK-BP Limited. Knaster and Alexander Shokhin. Meanwhile, a search was undertaken for a candidate for the In 2009, the Audit Committee met five times. position of TNK-BP CEO. In November 2009, after a rigorous Compensation Committee selection process, the Board of Directors, together with the The Compensation Committee determines compensation packages active participation of independent directors, elected Maxim and agrees performance contracts for the CEO and top manage- Barsky, TNK-BP’s Executive Vice President for Strategy and ment and reviews their performance. It also reviews the company’s Business Development, as CEO, effective from 1 January 2011. performance against the performance indicators and agrees annual Until this time, Mikhail Fridman will continue in his role as TNK- performance rewards (subject to the Board’s approval). BP’s interim CEO. Members of the Compensation Committee in 2009: Viktor Management Board Vekselberg (Chairman), Len Blavatnik, James Leng, Iain Mac- The Management Board of TNK-BP Management (the managing donald and David Peattie. company of TNK-BP Holding — please see the corporate structure In 2009, the Compensation Committee met four times. on page 19 of this report) is the company’s executive body. It is HSE Committee comprised of the Chief Executive Officer (who chairs the Manage- The HSE Committee monitors major HSE risks and compliance with ment Board), Chief Operating Officer, Chief Financial Officer and relevant laws and applicable corporate policies, approves the HSE three Executive Directors. strategy and policy, and reviews the company’s HSE performance. The functions of the Management Board are related to the Members of the HSE Committee in 2009: David Peattie (Chair- day-to-day running of the business. The Management Board’s man), Alex Knaster and Gerhard Schroeder. terms of reference include approving the company’s business In 2009, the HSE Committee met four times. plan, making changes to TNK-BP’s organizational structure and appointing executives, reviewing reports from company streams, approving the Code of Business Policies and corporate standards, creating and dissolving corporate committees and working groups and controlling their activity.

TNK-BP Annual review 2009 > 17

TNK-BP Management Bill Schrader, Viktor Vekselberg, German Khan, Board (from left to right): Mikhail Fridman, Maksim Barsky, Didier Baudrand, Jonathan Muir

Corporate committees ■■Assures the efficiency of contracting processes (procure- Corporate Committees are created by the decision of the Man- ment and marketing), endorses approaches and oversees agement Board and work to resolve specific issues related to adherence to contracting rules. corporate governance and project management. There are seven ■■Reviews and endorses stream operational strategies and Corporate Committees at TNK-BP. business priorities. Policies and Compliance Committee Investment Committee ■■Oversees risk management. ■■Approves and monitors major investment projects. ■■Sets the norms for ethical business behaviour and moni- ■■Optimizes the investment process and redistributes capital tors adherence to corporate business ethics regulations. among company streams. ■■Manages conflicts of interest. ■■Approves key performance indicators and the principles ■■Acts as a single coordination centre to control efficient for investment project assessment. implementation of the enterprise wide risk management Internal Finance Committee system and the Internal Control System. ■■Approves and implements our internal financing strategy HR Committee and key principles. ■■Manages the development of corporate HR standards and ■■Reviews financial transactions that may lead to material programs. financial or legal risks. ■■Assures that these programs are implemented in head- Credit Committee quarters and subsidiaries. ■■Manages our credit risks by introducing and monitoring ■■Makes recommendations related to the development of our a number of internal control processes. corporate culture. ■■Approves major credit transactions. Operations Committee IT Committee ■■Develops and oversees the delivery of the company’s business plan. ■■Endorses a uniform IT strategy and implementation plans, ■■Assures the implementation of major projects and opera- aligned with business needs and priorities. tional strategies. ■■Oversees the implementation of our main corporate projects in IT. ■■Assures high standards of operational efficiency, optimisa- ■■Controls the efficiency of IT investments. tion and integration across streams. >> > 18 People, technology, efficiency 5

A dedicated intranet site on matters 5.5: Internal control and risk management related to corporate governance is avail- Our internal control system enables the preparation of able to our employees. All normative financial statements, safeguards the reliability of our business documents, the company’s governance results and ensures compliance with the relevant legislation. The structure, decisions of the Management system was developed in accordance with the methodology of the Board and committees, are posted on Committee of Sponsoring Organizations of the Treadway Commis- a regularly updated website. sion (the COSO Framework). In 2008, we completed a comprehensive internal control improvement project (ICP), which helped to identify and eliminate deficiencies in the system. The ICP team of professionals with international experience also focused on computer controls, an The Code important area in terms of the reliability of our internal control system. of Business Today fast-response internal control teams are working within all business streams to support regular self-assessment, Policies internal control system testing and risk review processes for TNK-BP. In 2009 we further developed our system by improving Over the past few years, we have created a comprehensive the testing and monitoring process. As a result, internal control internal regulatory framework that governs our operations managers from 10 locations assessed controls in 84 processes and the behavior of our people. The documents that make (including 19 entities for general computer control) and with the up this framework are structured into four tiers: majority of controls recognized as effective.

■■The first tier contains the Code of Business Policies, We continue to improve our IT systems and computer con- which includes five policy commitments address- trols. Since 2008, we have been actively developing our segrega- ing Ethics, Employees, External Affairs, HSE and tion of duty expertise in order to ensure efficiency in the overall Finance and Control. control process. As part of this, a corporate-wide methodology

■■Tier two consists of 15 corporate standards detailing was developed and implemented. In 2008 and 2009, the scope the practical meaning of these policies. of our work covered only the so-called ‘new’ SAP systems (SAP

■■Tier three includes documents (core procedures) templates for Finance, HR and procurement processes). describing how processes are to be executed in Our internal control team has created a permanent support accordance with the standards. There are 55 key system offering advice on internal control matters and best procedures supporting our corporate standards. practice. Annual training is provided to business owners, internal

■■The fourth tier includes documents (procedures, control managers, accountants, internal auditors and general instructions, technical standards and process directors. We also plan to improve our incident reporting system maps) detailing business processes and identify- and increase integration between enterprise risk management ing responsible individuals, timelines and other and internal control systems. matters. The policies and underlying documents are communicated to our people through training workshops and seminars, the intranet and emails. The policies and standards are mandatory rules that cover the behavior of all our people and those acting on our behalf.

TNK-BP Annual review 2009 > 19

Corporate governance

5.6: Corporate structure of the TNK-BP group1

Alfa-Access-Renova (AAR) 50% BP 50%

TNK-BP Limited 100% TNK-BP Commerce (Ukraine) 100% RUSIA Petroleum2 63%

LINIK (Ukraine) 95% TNK-BP Slavneft c.50% International Ltd. TNK-BP Management3 100% STBP Holdings Limited 100%

TNK-BP Holding 95%

The percentages shown below represent aggregate equity stakes of the TNK-BP group of companies

Production Refining Marketing

Buguruslanneft 100% Krasnoleninsk Refinery 100% Kaluganefteproduct 98% Corporation Yugraneft 80% Nizhnevartovsk Oil Refining Enterprise 100% Karelianefteproduct 100% Nizhnevartovsk Oil Producing Enterprise 100% Ryazan Oil Refining Company 100% Kurskoblnefteproduct 100% Novosibirskneftegaz 100% Saratov Oil Refinery 85% Ryazannefteproduct 99% Orenburgneft 100% Saratovnefteproduct 93% Rospan International 100% TNK-BP Northern Capital 100% Samotlorneftegaz 100% TNK Lubricants 100% TNK-Nizhnevartovsk 100% TNK South Management >50% TNK-Nyagan 100% TNK-Stolitsa 100% TNK-Uvat 100% TNK-Yaroslavl 94% Tyumenneftegaz 100% Tulanefteproduct 91% 1 showing principal holding and operating Vanyoganneft 100% companies as of 31 December 2009. Ural Oil Company 51% 2 negotiations are in progress to Varyoganneftegaz 94% sell the Kovykta gas field. Zapsibnefteproduct 100% 3 tnK-BP Management is the managing Verkhnechonskneftegaz 74% company of TNK-BP Holding. >> > 20 People, technology, efficiency

Board of Directors

AAR BP Mikhail Fridman Len Blavatnik Lord Robertson ■■Executive Chairman ■■Founder and Chairman of Access of Port Ellen ■■Interim CEO of TNK-BP since June Industries ■■Deputy Chairman of the Board and

2009 ■■Director of numerous companies in Chairman of the Board Audit Com-

■■Chairman of the Board of the Alfa the Access portfolio, including UC mittee since 2006

Group Consortium RUSAL ■■Elected to the House of Commons

■■Member of the Board of Vimpel-Com, ■■Member of academic boards at Cam- (Labour, Hamilton) in 1978

Member of the Board of Alfa-Bank bridge University, Harvard Business ■■Re-elected five times and on his ap- and the Supervisory Board of X5 Re- School and Tel Aviv University pointment to NATO elevated to the

tail Group ■■An active philanthropist, he sits on House of Lords

■■Member of the Bureau of the Manage- the Board of Directors of the 92nd ■■Served as Executive Deputy Chair- ment Board of the Russian Council of Street Y, The White Nights Foundation man of Cable & Wireless Communica- Industrialists and Entrepreneurs of America and the Center for Jewish tions plc and Non-Executive Director

■■Founder and member of the Board of History in New York of the Smiths Group plc Genesis Philanthropy Group Alex Knaster ■■Currently Senior Advisor to Cable & Viktor Vekselberg ■■Chairman and Founder of Pamplona Wireless and Non-Executive Director ■■Founder and current Chairman of the Capital Management of the Weir Group plc and Western Fer-

Board of Directors of the Renova Group ■■CEO of Alfa Bank in Russia from 1998 ries (Clyde) Ltd

■■President of the SUAL Group from to 2004 ■■Senior Counsellor with the Cohen

1996 to 2003, Chairman of the Board ■■General Director of Sidanco from 2002 Group of Washington, D.C.

of Directors of the SUAL Group since to 2003 ■■Defence Secretary of the United King-

January 2003 to April 2007 ■■Managing Director, President and CEO dom from 1997 to 1999

■■Chairman of the Board of Directors of of Credit Suisse First Boston in Russia ■■Secretary General of NATO from 1999 the UC RUSAL since April 2007 and the CIS from 1995 to 1998 to 2003

■■Chairman of the TNK Management ■■Managing Director at Bankers Trust ■■Held a number of official positions in Board from 2002 to September 2003 Company from 1993 to 1995 the opposition between 1979 and 1997

■■President of Non-Profit Organization ■■Managing Director and Partner at Sim- ■■Currently Joint President of the Lon- - Foundation for Development of the mons & Company from 1985 to 1993 don-based Royal Institute of Interna-

Center for Elaboration and Com- ■■Member of the Board of Directors of tional Affairs, Joint President of the mercialization of New Technologies Alfa-Bank UK/Russia Round Table, Chairman of

(Skolkovo Foundation) ■■Member of the International Society the Ditchley Foundation and a member

■■Member of the Bureau of the Man- of Financial Analysts and the National of Her Majesty’s Privy Council agement Board of the Russian Union Association of Petroleum Investment Iain Macdonald of Industrialists and Entrepreneurs Analysts ■■Joined BP in 1979; held a variety of

since 2003 ■■Founder and Chairman of the Board project management and operational

■■Member of the Board of Directors of of Directors of Genesis Philanthropy roles, including field management of the Russian Industrialists Association Group the Prudhoe Bay oilfield in Alaska

■■Co-Chairman of the Coordinating ■■Led the Acetyls business unit, served as Council on Social Partnership and Vice President for Strategy and Devel- member of the Board of Trustees of opment for the Petrochemicals segment

the Bolshoi Theatre ■■Led the Financial Control and Ac-

■■Member of the Board of Trustees of counting functions, having previously the State University Higher School of been Group Vice President for Plan- Economics ning and Performance Management

TNK-BP Annual review 2009 > 21

Independent directors Gerhard Schroeder ■■Head of Finance and Deputy Group ■■Elected to the Bundestag in 1980 ■■Currently heads the Russian Union

CFO for BP until March 2010 ■■Prime Minister of Lower Saxony from of Industrialists and Entrepreneurs

■■Currently Chief Financial Officer at 1990 to 1998 ■■President of the State University High-

Fairfield Energy Limited ■■Re-elected to the Bundestag in 1998 er School of Economics and Chair- David Peattie and became Chancellor of the Fed- man of the Department of Theory and ■■Joined BP in 1979; became leader of eral Republic of Germany; served as Practice of Business — Government the Algeria/Southern Europe gas busi- Chancellor for seven years Relations

ness unit in 1995 ■■Chairs the Shareholders’ Committee ■■Elected to TNK-BP’s Board of Direc-

■■Worked as Head of Investor Relations of Nord Stream AG tors in January 2009 for over three years ■■Member of the European Advisory James Leng ■■Appointed Group Vice President and Council of Rothschild Group and advi- ■■European Chairman of AEA, an Ameri- member of the Executive Committee of sor to the Ringier publishing company can private equity partnership

BP’s Petrochemicals business in 2001, ■■Elected to TNK-BP’s Board of Direc- ■■Non-Executive Director on the Board responsible for BP’s businesses in Asia tors in January 2009 of Alstom, chairing the Nomination ■■Became Group Vice President, Group Alexander Shokhin and Remuneration Committee Planning in 2003 ■■Assistant for economic matters to the ■■Senior Advisor to HSBC, a Governor

■■Appointed Group Vice President, Exp Minister of Foreign Affairs of the USSR, at Ashridge Business School and the loration and Production in 2005 head of the International Economic Re- National Institute of Economic and

■■Became a member of the Exploration lations Directorate from 1987 to 1991 Social Research

and Production Operating Committee ■■Worked as Deputy Chairman of ■■Between 2001 and 2009, Chairman of in 2007; deputy to BP’s Exploration the Government of the Russian Corus, a global steel company, and and Production Chief Executive Federation Deputy Chairman of Tata Steel of In-

■■Head of BP Russia since September ■■In the course of three years, held the dia until July 2009

2008 positions of Minister of Labour and ■■Past Non-Executive Directorships in- Andy Inglis Employment, Minister of Economics clude Chairman Doncasters Group ■■Joined BP Exploration in 1980 and Chairman of the Russian Agen- Ltd., Pilkington plc, Hanson plc and

■■Appointed Chief of Staff for BP Exp cy for International Cooperation and IMI plc

loration in 1997 Development ■■Occupied the position of CEO at La-

■■Became Vice President of the US ■■Elected to the State Duma in 1994 porte plc, an international chemicals western gas business unit in 1999 and worked in three consecutive par- company, and before that at Low &

■■Appointed Executive Vice President liaments as First Deputy Chairman Bonar plc, a diverse materials and and Deputy Chief Executive of Explo- of the State Duma and Chairman of packaging company

ration and Production in 2004 the State Duma Committee for Credit ■■Elected to TNK-BP’s Board of Direc-

■■Chief Executive of BP’s Exploration Organizations and Financial Markets tors in January 2009

and Production and Executive Direc- ■■In 1998, worked in the Government tor of BP since February 2007 of the Russian Federation as Deputy

■■Fellow of the Royal Academy of Engi- Chairman with responsibility for finan- neering and a Fellow of the Institute cial and economic issues

of Mechanical Engineers ■■Joined Renaissance Capital Invest-

■■Non-executive Director of BAE Sys- ment Group in 2002; headed the tems plc since June 2007 group’s Supervisory Board until 2006

■■

>> > 22

A responsible corporate citizen wherever we operate

TNK-BP Annual review 2009 > 23 People, technology, efficiency 6 USD 16 bn paid in taxes in 2009 11,107 km of pipeline protected against corrosion 480,000 hours of training for our people orporate social social orporate C responsibility > 24 People, technology, efficiency We understand that our operations have an impact on the communities in which we operate, and we are actively taking steps to ensure that this impact is positive. By creating new jobs and opportunities for human development, through support for local communities and our work 1 with charities, and through the enhancement of environmental and safety awareness, we make a positive social contribution to the communities 6 in which we operate. We believe that by continuing our direct dialogue with federal, regional and municipal authorities, we can ensure social stability, human development and economic prosperity in the regions in which we operate. In 2009, our revenues suffered due to the drop in oil prices. As a result, we were forced to prioritize our core activities, which unfortunately led to the suspension of some of the social programs we had planned (in 2009, we invested USD 40 million in social activities). However, we are proud to have honoured all of our commitments under previously concluded agreements and look forward to stepping up our social investments in 2010.

6.1.1: Taxes The total amount of taxes, duties and excise that we have paid to the federal and regional budgets of Russia and Ukraine over our six years of operations exceeded USD 100 billion. In most of the regions in which we operate, our tax payments represent a major contribution to both the local economy and social welfare. USD 109 billion paid in taxes in six years

Taxes paid in 2004–2009

40 USD bn

20 l

a 10 i c 30 20 20 7 00 16 16 2004 2005 2006 2007 2008 2009 o Responsibility S

TNK-BP Annual review 2009 > 25

Corporate social responsibility

Prime Minister Vladimir Putin DEPUTY PRIME MINISTER Igor Sechin visiting TNK-BP’s research at the launch of commercial center in Tyumen production at Urnenskoye and Ust-Tegusskoye at the Uvat project

6.1.2: Government relations Transfer of best technology and We are an important part of the Russian economy. TNK-BP innovation to the Russian industry is the third largest Russian oil company and one of the country’s We have the benefit of having access to the best international biggest tax-payers. We are proud that our company is invited to technology thanks to the presence of BP, a global leader in that take part in important discussions about the development of the area, as our shareholder. Our approach is to mix the best achieve- industry. In some of these discussions our company takes the lead ments of the Russian oil industry with international best practice if we feel that our knowledge and expertise as well as that of our and global technology. The Tyumen Scientific Oil Center (TNNC), shareholders can be of value. part of our company, is the focal point of technological expertise Exchange trade and analysis for our upstream asset base. At the beginning of 2010, In March 2009, TNK-BP was one of the first companies to start Prime Minister Vladimir Putin visited TNNC to personally inspect the trading on the St. Petersburg International Mercantile Exchange efficiency of such a link between science, education and business. and remains one of the two largest exchange participants. We The centre has more than once been visited by Vladimir Yakushev, have always been ardent supporters of developing exchange the governor of the Tyumen region. trade in Russia as one of the most transparent tools for determin- Our operations are a practical example of the increased value ing the market price and establishing fair relations between buy- technology can deliver in both mature fields and new projects. In ers and sellers. Our company is a member of the St. Petersburg 2009, Igor Sechin, Deputy Prime Minister, launched production Exchange Council, the Federal Antimonopoly Committee Expert at our major greenfield development at Uvat, and, at the begin- Council and is actively participating in developing exchange ning of 2010, visited our main brownfield base at Samotlor to see trading mechanisms. We were honoured to host a government our method of producing oil in an environmentally sensitive area meeting on further development of exchange trading in Russia and familiarize himself with the main elements of the associated in October 2009. petroleum gas utilization value chain from processing to power generation for own use. We hope that these visits will help to share our successful experience with other industry players. >> > 26 People, technology, efficiency 6.1

Socially responsible behavior is a strategic priority for our business. In 2009, we paid USD 16 billion in taxes with over USD 100 billion paid to the state budget over the last six years. Despite a challenging economic environment, we continued to support high priority programs in the areas in which we operate. Over five years, our social investment reached USD 473 million, and we are committed to growing our contribution to society. German KHAN Executive Director

Integrated development of Yamal 6.1.3: Our large-scale social programs We are one of the major license-holders in the Yamal-Nenets We supported the following programs in 2009:

autonomous area and in the north of the Krasnoyarsk region (see ■■We donated RUR 150 million to the Olympic Sports Program, Early development greenfield projects on page 55). We are part which exists to develop athletes and improve sporting facili- of a working group under the auspices of the Ministry of Energy ties in Russia.

which is looking at the integrated development of Yamal to trans- ■■We continued our financial support for the St. Petersburg Cul- form the area into an oil and gas province of global significance. tural Heritage Restoration Program. In the period 2004–2009, Venezuela we donated over RUR 1.3 billion to this cause. We are part of the National Oil Consortium (NNK) established to ■■We continued to invest in the Education by Internet Program develop the Junin-6 project in the Orinoco oil belt in Venezuela. for teachers and students in Karelia and Tyumen.

The consortium unites the five largest oil companies of Russia, ■■We supported the foundation of the Moscow School of the combined strength and expertise of which should ensure Management Skolkovo, to which we have provided RUR their competitive operation on the new market. We believe that 180 million of financial support since 2006.

our experience of developing high-viscosity oil in Russia as well ■■For many years now, we have supported the Gorchakov as project management skills for technologically and logistically Boarding School in Pavlovsk. The school aims to revive challenging projects will make our company a valuable contribu- the traditions of the Tsarskoye Selo Lyceum by educating tor to the consortium. gifted children.

TNK-BP Annual review 2009 > 27

Corporate social responsibility

6.1.4: Our social projects in the regions 6.1.5: Our charity projects Each year, to assist the social and economic development We pay special attention to the impact of our operations on of the regions in which we operate, we establish or renew agree- the local communities in the north of Russia. We help the indigenous ments with regional administrations and municipal entities. These community in this region to acquire machinery and equipment for agreements set out our obligation to provide jobs, pay taxes and their everyday needs, as well as provide the necessary financing make other payments to regional and municipal budgets. They also to help them obtain qualified medical and veterinary services. outline our social commitments, such as environmental protection, We support the preservation of national cultures in our social charity, and sponsorship. In 2009, we entered into 14 regional programs by sponsoring a number of annual celebrations and agreements and 40 municipal agreements. festivals. In the Khanty-Mansi autonomous district, for example, In 2009, we continued to implement a number of social pro- we support the traditional national celebrations of the Khanty grams in the regions in which we operate, with the main areas and Mansi, such as Reindeer Herdsman and Hunter Day, provide of activity being Saratov, Tyumen, Orenburg and regions and financing for a bead weaving workshop and traditional sporting the Khanty-Mansi autonomous district: competitions.

■■Generation 2020 helps educational establishments in their In 2009, we helped organize the VI Traditional Golden search for young talent and assists in subsequent develop- Yugorka Festival, as well as a cycle of events for children named ment (RUR 62 million). By the Khanty Fireplace, which were both aimed at supporting

■■TNK-BP Family — Love, Support and Care supports several local cultural heritage. projects aimed at helping disadvantaged and disabled children, troubled teenagers, veterans and other disadvantaged groups (RUR 100 million).

■■Our Health is Our Success sets out a series of measures designed to support regional healthcare systems, lend as- sistance to those of frail health and promote a healthy lifestyle (RUR 106 million).

■■The Green Program includes environmental protection events and educational programs for children and young adults (RUR 6.5 million).

>> > 28 People, technology, efficiency As a responsible corporate citizen, we play an important role in the community. Ensuring that our people are healthy and work in a safe 6 2 environment is at the core of our business. 6.2.1: Health In 2009, we focused on cardiovascular health, education and upgrades to our medical screening. Key results from last year include:

■■The continued implementation of our Cardiovascular Disease Prevention Program. The program has been designed to identify any signs of medical conditions that may lead to cardiovascular problems. It also incorporates a risk reduction program, which provides preventative, educational and administrative support for our employees.

■■Medical screening organized for over 32,000 people (64% of our workforce). Treat- ment and rehabilitation plans were developed for employees that were found to be ill.

■■Solid results from our Medical Emergency Response Program, under which we have upgraded field facilities, acquired new medical equipment and trained first aid assistants across all business units. In late 2009, the number of medical volunteers recruited and trained to provide first aid treatment totalled 4,200. An additional 1,000 volunteers are slated to undergo training in 2010.

■■The roll out of our Industrial Hygiene and Occupational Health Standard at our refining companies.

■■The continued implementation of our Program to Mitigate the Risks of Infectious Diseases. For over five years, we have invested more than USD 350 million in our employee health program. USD 80 million of this was spent in 2009.

USD 350 million spent on

ety ety employee health

onment program over r Saf 5 years

2010 will see us remain focused on our medical emergency response program, as we

nvi continue training and retraining first aid assistants. We will take further steps to communi- cate and promote our cardiovascular disease prevention program, as well as introduce an E occupational hygiene standard in upstream. 2010 will see the launch of our telemedicine lth, lth, pilot at production sites. As with previous years, we will vaccinate our employees against

a seasonal flu and continue to acquire medical equipment and ambulances for our fields. e nd nd H a

TNK-BP Annual review 2009 > 29

Corporate social responsibility

6.2.2: Safety Total vehicle accident rate In 2009, we continued to foster an environment of safety (per 1 million km driven) that has been built up at TNK-BP since our inception. Using new 0.09 competency development programs, we trained our people in the importance of safety in the workplace. We continued to reinforce 0.08 our Golden Rules of Safety, the principles that form the foundation 0.07 of our operations. We also stepped up safety regulations by applying a more stringent set of restrictions across all areas of our operations. 0.06 Highlights from 2009 include: 0.05 ■■The introduction of a computer based training and examina- tion system, which enables managers and employees to be 0.04 trained and tested directly at their workplaces. 0.03 ■■The full application of our Golden Rules of Safety across the company. Our key principles of safety now apply to all our 0.02 people and contractors working on our sites. 0.01 Transportation remains the main challenge to the safety of our operations. Over the last year, we tightened criteria for our trans- 0.00 0.077 0.076 portation service providers by demanding higher qualifications. 2008 2009 We also made the use of vehicle monitoring systems a mandatory requirement, as well as introduced new measures to control access Major vehicle accident rate and manage the use of heavy duty vehicles in the field. Thanks to (per 1 million km driven) these positive steps towards increasing transportation safety, we cut 0.008 the frequency of major road accidents in 2009 by 25% compared with the previous year. 0.007

0.006 Major road 0.005 0.004

accidents rate 0.003 down by 25% 0.002 0.001

in 2009 0.000 0.008 0.006 2008 2009 We also saw positive results in the area of occupational safety. In 2009, our average days away from work cases ratio was 0.070, which is an impressive 26% lower than in 2008 (0.094). A key priority in 2010 will be to ensure that we remain focused on health and safety issues as we expand our operations.

>> > 30 People, technology, efficiency 6.2

6.2.3: Environment Land remediation In 2009, our key priorities in protecting and improving the Land remediation has long been our top environmental priority. environment were: Since 2004, we have rehabilitated and handed back to the gov-

■■Inventory and remediation of land polluted ernment close to 2,500 hectares of land which had been polluted by previous license holders. by previous license holders. In 2009, we carried out remediation

■■Reduction of atmospheric emissions. work on 275 hectares of land. We also conducted land remediation

■■Associated petroleum gas utilization. research and completed a complex inventory of polluted land. We

■■Pipeline integrity. continued our rehabilitation program to prevent polluted ground

■■Waste management. waters from the territory adjacent to the Uvek oil depot from con-

■■Dialogue with environmental NGOs. taminating the Volga river. This work will continue in 2010.

TNK-BP Annual review 2009 > 31

Corporate social responsibility

Reduction of carbon emissions In 2009, for the first time in the company’s history, we reported official data on greenhouse gas emissions for the period 2005 to Spills down 2008. The data demonstrates a positive, consistent trend to reduce greenhouse gas emissions at our subsidiaries. The full report can by 69% be found on our website at www.tnk-bp.com/hse/programs/gases- emissions. associated petroleum gas utilization since 2005 We are committed to increasing our APG utilization rate. In 2009, Waste management we produced 12.5 billion cubic meters of APG, a 2.5% increase on The recovery of production waste is a major concern for us. With 2008. Our utilization rate was 84.4%. this in mind, in 2009 we began a program to improve the quality Pipeline integrity and capacity of our waste recovery. We also intend to apply new Increasing the integrity of our pipelines is a major challenge, with waste recovery technology, tailored to meet the individual needs our principal goal being to increase the accident-free life of our of each of our sites. For example, in the Orenburg region, we will pipelines. Our pipeline inhibition program reduces corrosion by 90% use special technology for the biological destruction of oil sludge. and more than doubles the period of incident-free operation at our Continuing dialogue pipelines. In 2009, we protected 11,107 km of pipeline, an increase with environmental NGOs of 22% on 2008. Over the last year, we continued our dialogue with leading non- In 2009, we significantly reduced our leak rate. Compared to governmental environmental organizations, including the World 2008, the number of leaks from our pipelines fell by 14%. Spills Wildlife Fund, the Russian Bird Conservation Union, the International fell by 11% compared to 2008 and an impressive 69% compared Union for Conservation of Nature and the Biodiversity Conservation to 2005 when work to improve integrity began. Center. We actively participate in round tables and also fund several environmental initiatives such as the Shtilmark annual award for scientific research in nature and wildlife reserves.

>> > 32 People, technology, efficiency Delivering on our goals depends on the talent of our people. We aim to attract the best professionals and develop and retain our employees by building an environment which 6 3 fosters and rewards talent. 6.3.1: Educational programs In 2009, more than 7,500 employees participated in targeted and individual learn- ing programs and 10,000 employees were given the opportunity to join internal corporate training courses. In total, our people received almost 500,000 hours of training aimed at developing their professional and managerial skills. Organizational development programs Here are the main programs aimed at developing the management potential of our people across all levels of the company. Top managers Leadership to make a difference

Middle INSEAD: Creating managers a World Class Company, ASSET Front line Perspective managers and Perspective– Moscow Young Three Horizons specialists

■■Three Horizons is a professional enhancement program which offered 550 young specialists the chance to improve their technical and business skills.

■■Perspective is a training course aiming to develop the team management skills of production site supervisors and other managers.

■■ASSET is a program that was designed for our company in order to enhance our people’s managerial skills. Nearly 400 entry-level and mid-level managers have completed the program since it began in 2005.

■■Creating a World-Class Company was designed specifically for us by INSEAD, the global business school. The program has been completed by 250 of our managers who have the potential to be promoted to senior executive level positions.

■■Leadership in Action is a program oriented at our mid-level and high-level management teams. It was designed for various business divisions and complies with their particular needs. In 2009, our people received 189 professional awards from the Ministry of Energy, the highest number since the establishment of our company.

6.3.2: Targeted Programs We have developed various in-house training courses for our people that serve

eople to improve their professional qualifications:

■■Power Engineers aims to improve the skills of our power industry engineers and P

dispatchers in traffic control, start-up and commissioning and regulatory frameworks.

■■Capital Construction looks to ensure efficient control over capital construction r costs and timetables by improving the management skills of capital development contractors. u ■■Young Drillers is designed to attract, develop and retain qualified drilling specialists. O

TNK-BP Annual review 2009 > 33

Corporate social responsibility

■■Young Specialists in Technology aims to train and develop young specialists in reservoir evaluation management, petroleum engineering and petroleum geosciences.

■■Workover Supervisors is aimed at improving performance and reducing injury rates.

■■Project Management for Refinery Project Teams aims to improve the efficiency of our refinery project teams by enhancing their professional skills in project planning and management.

■■Refinery Integrity Management is designed to improve the skills of our engineers, with a focus on reducing accident rates.

■■The Human Capital Development Program was especially designed to enhance the competencies and knowledge of our HR team leaders.

Since 2007, with support of the Ministry of Education and Science, we have organized grant competitions with the goal 480,000 hours of re-equipping specialized universities and upgrading their educational programs. In 2009, we allocated RUR 18.5 million of training for to support the winning projects from the 2008 competition. We also strive to develop the right competencies for university graduates before they become our employees. In 2009, we our people launched the Start Program, which aims to develop selected students at the Gubkin University of Oil and Gas by providing in 2009 targeted training and internship. In 2010, we plan to extend this program to other partner universities. Partnership with universities Corporate training centers Our main goal in pursuing partnerships with leading oil and gas In 2009, we implemented a number of targeted programs with the universities is to ensure new generations of highly skilled special- aim of improving the quality of our corporate training centers. For ists in the Russian energy sector. This is achieved not only through example, we carried out a professional assessment of 300 of our sponsorship support programs but by conducting systematic work oil well operators which will result in developing targeted programs enabling a qualitative shift in specialized education, which complies designed to improve their professional skills. with the needs of modern business. In 2009, we continued introducing advanced methods of A new approach to cooperation with universities was tested automated training in our corporate training centers. We equipped in 2009, when four universities, which are a key source of young our new training center at the Irkutsk State Technical University talent for us, were united as the TNK-BP Inter-university Center, with a modern drilling simulator, we procured a full-size oil well which will serve to ensure that the level of education in disciplines service simulator for our training center in Nizhnevartovsk, and that are core to our company meets our requirements. The Center we fully equipped our training center in the city of Buzuluk. will allow us to make targeted investment in enhancing the skills We continued introducing a corporate standard to improve of young professionals to meet the needs of modern business. the operations of our regional training centers. This enables us to bring our training standards in line with best international practices, while making state-of-the-art training facilities available for our people. > 34 People, technology, efficiency Our operational and financial performance 7 2009 2008 2007 2006 2005 2004 Operating data Total liquids production 1,680 1,651 1,664 1,752 1,822 1,671 (thousand barrels per day), ncl. Slavneft Total gas sales 208 195 155 188 168 154 (thousand barrels of oil equivalent per day), incl. Slavneft Total liquids production 1,489 1,454 1,451 1,477 1,554 1,416 (thousand barrels per day), excl. Slavneft Total gas sales 201 188 149 131 157 120 (thousand barrels of oil equivalent per day), excl. Slavneft Refining throughput (thousand barrels 675 698 701 661 620 569 per day), incl. Slavneft Selected financial information Total sales (USD million) 34,753 51,886 38,926 35,725 30,180 17,226 EBITDA (USD million) 9,007 10,093 9,565 11,255 9,143 6,386 EBITDA (USD million per barrel of liquids 14.7 16.7 15.8 17.6 13.7 10.4 production) Net income (USD million) 4,973 5,284 5,342 6,678 4,784 4,017 Net income (USD million per barrel 8.1 8.7 8.8 10.4 7.2 6.6 of liquids production) Cash flow from operating activities 6,581 8,611 7,097 3,078 5,090 4,722 (USD million) Net debt / Net debt plus equity ratio (%) 28% 32% 30% 34% 21% 25% ROACE (%) 24% 27% 31% 48% 38% 34% Market data Brent (USD/bbl) 61.5 97.1 72.5 65.1 54.4 38.2 RUR/USD 31.72 24.86 25.58 27.19 28.29 27.75

7.1: Health and safety data es es Days away from work cases rolling average DAFWC halved over the last two years and are substantially below the industry average r as reported by the Association of Oil and Gas Producers (OGP), an international platform for safety performance benchmarking.

0.13

igu 0.11

f 0.08

0.03 1.141 0.094 0.070 Dec 2007 Dec 2008 Dec 2009

DAFWC rolling average per 200,000 man-hours Key Key in 2009 in OGP world average

TNK-BP Annual review 2009 > 35

Key figures in 2009

HiPo incidents* HiPo incidents by cause Further reduction of high potential incidents in 2009. 4% Powerline contacts 350 341 332 6% Fires and explosions 300 8% Spills 216 Upstream 157 Upstream 8% Falls,trips 250 79 Downstream 147 Downstream 9% Injured by equipment, 24 OFS 17 OFS moving items and parts 200 3 Gas 6 Gas 12% Health 150 19 Other 5 Other 15% Road traffic accidents 17% Equipment breakdown 100 and failure

21% Other 50

0 2008 2009

* A HiPo (high potential) incident is an incident or a potential incident which, in case of unfavorable development, could have led to a major loss. Figures do not include alcohol-related cases (66 in Jan-Dec 2009).

7.2: Environmental data Pipeline integrity program Reduction in oil spills since 2005 A total of 3,545 km of pipelines replaced in 2004–2009. Oil spills down by 69% in 2009 compared to 2005 as a result of inhibition and replacement of pipelines. 12,000 km 0 % km 4,000 10,000 11 3,500 9,080 8,606 20 8,000 3,000

6,547 2,500 6,000 2,000 40

52 1,500 4,000 3,438

2,300 1,000 60 65 2,000 500 69 ,282

982 3 2,651 3,545 434 0 1,794 0 80 2004 2005 2006 2007 2008 2009 2006 2007 2008 2009

Pipelines replaced (cumulatively, excl. divestments) Pipelines inhibited (cumulatively, excl. divestments)

>> > 36 People, technology, efficiency 7

Legacy remediation Associated gas utilization Since 2004, we have remediated and handed over to the state close APG utilization is up 6% on 2008 to 84.4% in 2009. Improving to 2,500 hectares of inherited polluted land. This is roughly half of APG utilization remains our target set forth in our APG utiliza- the total legacy pollution, and we intend to continue our legacy tion program. remediation program. 100 %

2,500 hа 80 2,000 60 1,500 40 1,000 500 20 2,209 721 2,484 1,176 1,582 1,751 84.4 68.4 0 0 75.5 77.6 79.8 79.6 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009

7.3: Operational data Production growth (liquids, adjusted for Production (oil and gas), excl. Slavneft divestments and acquisition), excl. Slavneft In 2009, we reached a record production of 1.69 mmboed. We are steadily growing production by applying select new technology at our 2.0 mmboed Organic production prowth brownfields while investing for the long-term in greenfields, with Verkhnec- nonskoye, Uvat and Kamennoye contributing to 2009 production growth. 1.5 1.5 mmbpd

1.0

1.4 0.5 +1.2% -1.2% +0.2% +2.4% +8.5% 1.34

1.3 brownfield maintenance 0 1.50 1.61 1.65 1.60 1.64 * 1.49 ** 1.69 2004 production 2005 2006 2007 2008 2009 2009 production 2004 2005 2006 2007 2008 2009

* drilling and wellwork optimization Underlying production ** new greenfield contribution Acquisitions and divestments

Refining throughput Reserves replacement ratio As a result of our continuous investment, our refining throughput Our strategy is to replace a minimum of 100% of our annual has increased significantly over a six-year period and has remained production each year. Our six-year average reserve replacement stable in the last few years. ratio is 139% on a SEC-LOF basis and 197% on a PRMS basis.

800 mbpd 350 % 700 300 600 250 500 200 400 150 300 100 200 100 50 675 297 329 569 620 661 698 104 127 125 149 156 129 179 146 701 82 82

0 0 177 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009

PRMS (former SPE) SEC-LOF

TNK-BP Annual review 2009 > 37

Key figures in 2009

7.4: Financial data Price environment 2004–2009 Operating cash inflow Consistently strong financial results despite market price volatility. Strong operating cash flows to support business needs and efficient working capital management. 150 USD/bbl 10 USD bn

100

5 50

0 0 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009

Urals Prior years tax payments Domestic price Operating cash

Revenues Organic CAPEX Flexible sales channels to maximize netbacks. Sustainable investments in major projects, including greenfield developments. 60 USD bn 5 USD bn 50 4 40 3 30

2 20

10 1

0 0 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009

Other revenues Crude oil domestic Other Petroleum products domestic Crude oil export Refining and marketing Petroleum products export (EU and CIS) (EU and CIS) Exploration and production

EBITDA and Net Income Free cash flow per barrel of liquids production 2009 EBITDA and Net Income down only 11% and 6% One of the industry leaders in cash generation and capital efficiency. respectively vs 2008 despite average Urals down 36% 8 USD/bbl

12 USD bn 6

4 6

0 0 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009

Divestment income EBITDA Net income > 38 People, technology, efficiency 8

Bill SCHRADER Chief Operating Officer

What are the highlights of 2009? It was an exceptional year with TNK-BP delivering very strong performance across all key metrics, including HSE, operations, financials and portfolio management. Despite an average decline in crude oil price of 36% year-on-year, we generated net income of USD 5 billion — almost on a par with 2008’s results. The main drivers of this performance were continued improvement in operational efficiency, financial prudence, stringent cost control and a focus on our core business of producing and refining oil and gas. I had the privilege of joining the company in 2009, and what I will remember most about my first year here is the incredible team spirit and management cohesion dis- OO

played throughout the downturn. Empowered by the new shareholder agreement, the team delivered exceptional results in a very tough external environment. Health, safety and environment remains a challenging area for all Russian oil and gas companies; what progress did TNK-BP make on this front? I am pleased that we were able to deliver a solid improvement across all HSE metrics, view view including a 62% reduction in fatalities, 26% decrease in injuries leading to days away

r from work, and a 11% reduction in oil spills. Road accidents remain a major source of injury. In 2009 we achieved a 25% reduction in our major vehicle accident rate. This is solid progress, but, clearly, more needs to be done. Transportation safety will be an important area of focus for us in 2010. nte I with the C the with

TNK-BP Annual review 2009 > 39

Interview with the COO

I had the privilege of joining the company in 2009, and what I will remember most about my first year here is the incredible team spirit and management cohesion displayed throughout the downturn.

In terms of the environment, we continued a clean-up of legacy In addition, 2009 became the first year when earlier invest- pollution, and handed 275 hectares of remediated land back to ments in greenfield projects had a material impact on our produc- the authorities. tion profile. Kamennoye, Uvat and Verkhnechonskoye contributed My last point on HSE — this is an area in which we must 6% to our production output. Two hundred and fifty new wells were never be complacent. We need to continue delivering ongoing put into operation, with production ramp-up moving ahead of plan. year-on-year improvement. This is one of my personal priorities as COO. To what extent is this production growth sustainable? What drove TNK-BP’s strong Our progression of reserves from non-proved to proved and production performance in 2009? subsequently into production serves to ensure that this growth In 2009 we continued to grow production, reaching the highest is in fact sustainable. Our enduring goal is to replace each barrel underlying rate of 1.69 million barrels of oil equivalent per day since we produce in-year with a barrel of new proved reserves, and the company was formed (adjusted for divestments). What’s more to add new barrels on top of that replacement to support new important, is that we achieved this growth in production in a cost- production growth. effective manner, with a finding and development cost of USD 2.2 In 2009, we achieved that goal, replacing 177% of produc- per barrel and lifting costs down 25% on 2008, to USD 5 per barrel. tion on SEC-LOF basis, and 329% of production on PRMS This growth was driven both by our brownfield and green- basis, with new proved reserves. Another way of looking at field assets. TNK-BP’s brownfield base still holds significant this — we added 1.1 billion barrels of new proved reserves reserve and production potential. A combination of wellwork, under SEC-LOF criteria. waterflood management and other interventions allowed us to improve the annual decline rate by 4% over the past three years. Some mature areas, such as Orenburg, actually delivered a 6% production growth rate in 2009. >> > 40 People, technology, efficiency 8

Global refining margins were hit hard What is the role of technology in driving by a fall in demand in developed the business forward? economies. What was the impact The role of technology in our business is crucial and it feeds directly of this on TNK-BP’s downstream into our efficiency agenda. Technology helps unlock new resources business? and speeds up the development cycle; it also helps reduce our In 2009, refining margins were very volatile. However, the finan- environmental footprint. Very often, your ability to apply the right cial delivery of our downstream (EBITDA) was 39% above our technology to the right asset is the key to commercial success. business plan target. This was driven by improved operational For example, our access to world-class exploration and efficiency and optimization that allowed us to capture the maxi- seismic capability enabled us to deliver a 74% exploration well mum benefit of domestic refining margins. success rate in 2009. Also in downstream, we safely completed two major refinery Another example: most of our production is through artificial turnarounds, ahead of plan in terms of time and budget, achiev- lift. TNK-BP uses roughly 5% of the world’s electric submersible ing operational availability of 93%, and continued to expand pumps. In 2009, we increased the mean time between failure the presence of our popular retail brands, TNK and BP, in key to more than 500 days, which represents an 18% increase on growth markets. the previous year. This is an example of how applying the right Last but not least, TNK-BP emerged as a leader in utilizing technology generates significant cost reduction. the St. Petersburg Exchange, Russia’s new national product trading platform, to increase the transparency of petroleum product What opportunities do you see for pricing in Russia. TNK-BP’s gas business? In 2009, our prime focus in gas business development was on How do you balance the growth agenda increasing the utilization of associated petroleum gas (APG). We with a focus on efficiency and cost achieved an 84.4% APG utilization rate, which is a 6% improvement management? on the previous year. Significantly reducing gas flaring will remain Simply put, our goal is to be the most efficient oil and gas company a priority in the medium term. in Russia. This means driving efficiency in everything we do — We will also be seeking gas value assurance for our major capital investment, operational excellence, project management gas projects such as Rospan and the Orenburg integrated gas and so on. project as well as commercial development of gas caps at major I am pleased to say that we have already achieved strong oil fields. We aim to strengthen our market position, securing industry-leading positions on a whole range of efficiency met- access to existing and new customers through the establishment rics. For example, in 2009 we demonstrated Upstream CAPEX of joint ventures and long-term contracts. efficiency of USD 4.3 per barrel and a Depreciation, Depletion and Amortization cost of USD 2.6 per barrel. Our efficiency agenda is comprehensive and has many aspects. Lowering production costs by increasing energy efficiency is one of the most important tasks currently on our agenda. Our energy efficiency program includes two main aspects: firstly, construction of energy generating facilities using associated petroleum gas as feedstock and secondly, energy conservation and losses reduction during operations. In 2009, the economic effect of our energy saving activities amounted to USD 21 million.

TNK-BP Annual review 2009 > 41

Interview with the COO

Simply put, our goal is to be the most efficient oil and gas company in Russia. This means driving efficiency in everything we do — capital investment, operational excellence, project management.

What is TNK-BP’s strategy for 2010? Our strategic goal is to become the most efficient operator among our Russian and emerging markets peers, and a world-class integrated Russian oil and gas company. We will continue to improve the quality of our operations and become a cleaner and safer company every year. We remain focused on growth. This will be driven by production increases, growing refining and marketing cover, mon- etization of our gas resources, and targeted international expansion. As ever, we will retain our underlying focus on efficiency, while taking care to ensure the health and safety of our employees, contractors, and the communities in which we operate. 2009 was a challenging year but the strength of our team and our track record of delivery gives me every reason to look ahead with great confidence. We remain poised for sustainable and responsible growth. > 42 People, technology, efficiency Our production, refining and marketing assets in Russia and Ukraine

Yamal project Suzunskoye and Tagulskoye Messoyakhskoye* St. Petersburg Timan Pechora

Rospan Russkoye

Krasnoleninsk Refinery Novy Urengoy Kaluga Moscow Nyagan Nizhnevartovsk Samotlor Refinery Kiev Tula Nizhny Novgorod Ryazan Kursk Kamennoye

Lisichansk Refinery Nizhnevartovsk Ryazan Refinery Ekaterinburg Lisichansk Uvat Saratov Tyumen Rostov-on Don

Krasnodar Orenburg Saratov Refinery Novosibirsk Astrakhan

ssets p a

a f m o

TNK-BP Annual review 2009 > 43

Early development greenfield projects

Greenfield projects in the commercial production phase

Gas projects

Brownfield

Bluefield focus areas

Refinery assets Verkhnechonskoye Marketing presence

Kovykta** *Developed with Gazprom Neft

**Negotiations are in progress for the sale of the Kovykta gas field.

Irkutsk > 44 People, technology, efficiency The effective application of technology is the driving force of our growth. In 2009, technology continued to enable investment and operational efficiency by identifying reservoir challenges and tailoring solutions with the help of our in-house experts or in collaboration with the leading 9 services companies in the industry. Technology in TNK-BP aims to increase shareholder value by:

■■Giving access to new reserves or to previously by-passed reserves.

■■Reducing operating costs.

■■Providing accelerated production.

■■Extending the life-time of fields. The principal indicator of our successful track record in applying technology is our continuous reserve replacement ratio. Our oil and gas reserves grew significantly in 2009, underpinned by sustained brownfield performance and expanded greenfield development in West and East Siberia. Reserves replacement history

350 %

300

250

200

150

100

50 82 297 329 0 104 127 125 149 156 129 179 146 177 2004 2005 2006 2007 2008 2009 TION PRMS (former SPE) SEC-LOF

RA In 2009, we completed our seventh annual reserve audit. Under the SEC-LOF methodol-

ogy, our total proved reserves were 8.586 billion barrels of oil equivalent. The addition of 1.091 billion barrels of total proved reserves constitutes a total proved SEC-LOF reserve replacement ratio of 177%. Our average SEC-LOF reserve replacement ratio over the past six years amounted to 139%. The latest audit also confirms that as of 31 December 2009, according to the VES PRMS (formerly SPE) criteria, TNK-BP’s total proved reserves were 11.7 billion barrels

R of oil equivalent. This represents a total proved PRMS reserves replacement ratio of EXPLO

329% in 2009. As well as the additional proved PRMS reserves, approximately 250 million barrels of non-proved oil reserves were added through exploration and appraisal activities, marking another successful year of resource renewal. ESE ND R A

TNK-BP Annual review 2009 > 45

Francis SOMMER Executive Vice President, Technology

TNK-BP is an innovative company and we encourage the use of new tools and technologies. We have a strong entrepreneurial attitude to technology, including lively debate about technology inside our company, efficient business processes and a strong team of practitioners capable of effectively putting our ideas into practice. In 2010, technology will continue to underpin the growth of our business. We will focus on four areas crucial for our future:

— Improved efficiency of well completions for enhanced oil recovery at our mature fields. — Development of geophysics to obtain a better understanding of the reservoirs. — Selection of economically sound technologies to develop heavy oil at our greenfield deposits in the Yamal Nenets autonomous area and in the north of the Krasnoyarsk region. — Associated petroleum gas utilization across our upstream asset base.

>> > 46 People, technology, efficiency 9

Map of exploration and drilling activity

Year 2D seismic (km) 3D seismic (sq. km) Drilling Timan-Pechora, Komi 2010 (plan) 1,200 200 Rospan, Russkoye, Suzunskoye, Tagulskoye TIMAN-PECHORA , ROSPAN, RUSSKOYE, 2009 5 wells KOMI SUZUNSKOYE, 2010 (plan) 1,200 500 8 wells TAGULSKOYE West Siberia (excluding Uvat) WEST SIBERIA, 2009 7 wells EXCL. UVAT 2010 (plan) 1,200 9 wells East Siberia EAST SIBERIA UVAT 2009 280 2010 (plan) 650 Uvat ORENBURG 2009 7 wells 2010 (plan) 2,650 1,450 9 wells Growth options for existing production Orenburg ASTRAKHAN centers 2009 997 8 wells 2010 (plan) 100 2,400 11 wells New potential production centers Astrakhan 2009 468 2010 (plan) 600

The new reserve additions came from the following consistent effort ■■We carried out petrophysical studies resulting in reserve by our Technology and Upstream teams: reassessment due to the seismic and log data as well as

■■In greenfields, we expanded development in the Uvat group petrophysical and volumetric studies.

of fields in the south of the Tyumen region, the Verkhnechon- ■■Finally, the high reserve replacement ratio was also sup- skoye oilfield in East Siberia and the Kamennoye oil field in ported by a more favourable price indicator as compared to West Siberia. 2008 which stemmed from a change in the SEC methodol-

■■In brownfields, we achieved breakthrough results in the ogy switching to the use of an average annual price rather Orenburg region, in particular at Bobrovskoye and Soro- than the end of the year oil price as the basis for reserve chinsko-Nikolskoye fields, by accessing near field satellites booking. In 2009, the average price for Dated Brent crude and confirming a better inventory for sustained production oil was USD 61 per barrel as compared to USD 36 per barrel over the next five to seven years. at the end of 2008.

■■In base production, we demonstrated sustained performance through significant expansion of the Ryabchik development at Samotlor and application of advanced technologies and expertise in water flooding, drilling and well work. This has translated into significant production improvement over the past few years, as witnessed by the decrease in the rate of base production decline by 4% since 2007.

TNK-BP Annual review 2009 > 47

RESERVES AND EXPLORATION

Exploration We conduct exploration in the main regions in which we operate, including the Yamal Nenets and the Khanty-Mansi autonomous areas, the Tyumen region in West Siberia and the Orenburg regions. Innovative We aim to continuously enhance and expand our portfolio of new areas available for exploration. Between 2006 and 2009, we acquired approach 39 new combined exploration and production licenses, including ■■New injection management techniques to achieve three licenses adjacent to the giant Astrakhan gas field and the four improved reservoir pressure maintenance. licenses at the eastern flank of the Timano-Pechora basin. ■■Adoption of the block-level management approach In 2009, we continued to show industry-leading exploration when each well is monitored on a regular basis — results. Our exploration success rate reached 74%, contribut- delivering a decrease in the base production decline. ing to a three-year average indicator of 73%. This outstanding ■■Seventeen technology pilot programs implemented performance was achieved due to the extensive use of seismic during the year. surveys, modern drilling techniques and sound project management skills. We are one of the biggest consumers of seismic surveys in Russia. Our leading position in using 3D seismic is supported by: Efficiency ■■Use of the latest acquisition technology.

■■Availability of a seismic processing centre, Western-Geco, ■■Electric submersible pumps meantime between implementing the latest technologies. failures improved to over 500 days, compared to

■■Initiation in developing our own expertise in advanced inter- 295 days in 2006.

pretation techniques for reservoir quality protection. ■■Drilling and sidetracking cycle time reduced by 15% We have established long-term relationships with leaders in the compared to 2008. services industry — Schlumberger, Halliburton, Baker Hughes, and Weatherford — to ensure the necessary progress in our business development. In 2010, we plan to drill 60 new exploration wells and more than double our exploration budget compared to 2009. > 48

Delivering sustainable production growth through major projects delivery

TNK-BP Annual review 2009 > 49 People, technology, efficiency 10 daily production 1.69 in 2009 mmboe 2.9% industry-leading production growth 211 licenses Upstream > 50 People, technology, efficiency 10

Sergei Brezitsky Executive Vice President, Upstream

In 2009, we continued to successfully manage our brownfield base while adding material new production from our major greenfield projects. A combination of wellwork, waterflood optimization and new drilling drove record underlying production performance, balanced by strong reserve replacement, at a highly competitive cost. We remain poised for sustainable production growth going forward.

Our vision is to continue to develop as a major oil and gas company of international significance and an important supplier of hydrocarbons to world energy markets. We will

m always look to apply leading technology, engineering, talent and project management skills to grow production, ensure a sustainable reserve replacement and develop the next

e generation of greenfield projects. We will do this with the minimum impact on the environment and to the benefit r of society. pst U

TNK-BP Annual review 2009 > 51

Upstream

10.1: Licences significant changes to our well stock, reducing the number of We continue to focus on renewal and extension of our idle wells and acting in compliance with the limits set by the resource base. As of 31 December 2009, we held 211 licences, Ministry of Natural Resources of the Russian Federation. Idle including 191 licences for exploration and production and 20 wells are reactivated by sidetracking and transferred to injec- licences for geological surveys. tor well stock. We continue our program of renewal of existing licences and, in 2009, 14 of our licences regulating production in the Oren- 10.4: Production burg region and West Siberia were renewed for 25 years. Today, 2009 was a successful year for our upstream. We 81% of our production comes from licences extended through resumed growth in our production after a plateau output in the 2030–2038. In addition, we continued to access new licences, previous year and stepped up development of the next generation particularly around our existing infrastructure. In 2009, we bid in of our greenfields in Yamal and the Krasnoyarsk region in Rus- auctions for subsoil use winning four licences in the Orenburg sia’s extreme north. This successful performance was ensured region and one licence in the Saratov region. by efficient investment, effective project management and the In 2010, the focus of our attention will be maintaining the targeted application of technology by a talented team of upstream integrity of our licences and compliance with the terms of the specialists. Sustainable exploration and the development of our licence agreements. Over the next two years, we will continue greenfield projects was supported by tax incentives extended to focus on extensions, renewal and access to new licences for by the Russian government, including temporary exemptions on field development. mineral extraction tax and crude export duty for East Siberia, Yamal and the north of the Krasnoyarsk region. We are part of an 10.2: Technology industry dialogue with the government to establish a regulatory Our performance in the long-term will depend on how framework conducive to further investment in frontier oil and well we apply relevant technological advances to our fields, both gas provinces in Russia. new and old. Our upstream technology group continually looks In 2009, our oil and gas production increased by 2.9% com- for new opportunities — working with international contractors pared to 2008 to 1.69 million barrels of oil equivalent per day. and our own engineering experts. In 2009, we implemented Total liquids production amounted to 543.5 million barrels and several technological pilots, with some real successes in testing total gas sales were 12 billion cubic meters, which represents an new fluids for hydraulic fracturing; carrying out hydrodynamic average daily production growth of 2.4% and 6.6%, respectively. formation studies for better reservoir management; and special Incremental production was achieved mainly due an out- well completions in vertical and horizontal wells. standing growth of over 6% in our brownfields in Orenburg, In addition, we continue to expand and monitor programs a solid production growth at the greenfield developments at put in place in previous years. In particular, our work on electric Verkhnechonskoye in East Siberia and early oil at Uvat (1.973 submersible pumps continues to bear fruit. We produce the million tons). majority of our crude oil with ESPs. In the period from 2006 to In 2009, brownfields accounted for 94% of the total produc- 2009, extending ESP meantime between failures resulted in an tion and 6% came from the greenfields in Uvat, Verkhnechon- additional 1.3 million tons produced and USD 237 million of total skoye, and Kamennoye. economic effect from increased ESP run life. Our production success comes from a combination of investment in brownfields and greenfields. Our aim is to increase 10.3: Well stock production at producing greenfields while bringing new green- As of 31 December 2009, there were 36,000 wells in our fields online to drive growth. For brownfields, the challenge fields (including production, injection and other types of wells). lies in efficiency and improving recovery rates. Here a focus In 2009, a total of 535 new wells (449 in 2008) were commis- on continual improvement, rigorous sub-surface analysis and sioned after drilling. Of this number, 510 wells were producing innovation is key. A good example of this is Orenburg where we (430 in 2008) and 25 injector wells (19 in 2008). We have made operate about 100 mature oil fields with a production history of >> > 52 People, technology, efficiency 10

over 60 years. Successful application of select technologies Production (barrels of oil equivalent), enabled us to discover near field satellite structures and ensure excl. Slavneft a sustainable production growth. 2.0 mmboed As for greenfields, our task is twofold: we will continue to increase output from our producing greenfields at Uvat and 1.5 Verkhnechonskoye to bring them on the production plateau on time and on budget. At the same time, we will explore and 1.0 develop the next stage of our greenfield projects, primarily in Yamal, and continue dialogue with other licence-holders in the 0.5 area and the government on creating transportation infrastructure which will make Yamal developments economically feasible. 0 1.50 1.61 1.59 1.60 1.64 1.69 Our upstream investment in the past six years reached USD 2004 2005 2006 2007 2008 2009 16 billion, of which USD 2.8 billion was spent in 2009. Efficiency Acquisitions and divestments of investment was ensured by successful well work projects; high Underlying production well rates at our fields in Volga-Urals (Orenburg), West Siberia (Nizhnevartovsk) and East Siberia (Verkhnechonskoye). Key production areas Higher production levels, a weaker ruble and effective man- Our key producing subsidiaries are located in West Siberia agement of operational costs helped us to improve our lifting and the Volga-Urals region. costs by approximately 25% to USD 4.98 per barrel. Underlying brownfield production In 2010, we plan to accelerate greenfield production at Uvat 1,600 mmboed and Verkhnechonskoye which will sustain our production growth. 1,400 We will continue to improve well work activity at our brownfields to 1,200 recover remaining reserves to support a natural decline in production. 1,000 Resource base at the end of 2009, 800 PRMS 600

35 bn boe 400 1,256 1,286 1,225 1,161 1,252 1,201 Reserve life 200 50 years

30 0 338 355 368 374 383 408 2004 2005 2006 2007 2008 2009

25 Samotlor and other brownfields Orenburg Reserve life > 30 years 20 11 In West Siberia, we produce oil from 85 licence areas. The Nizh- nevartovsk region is home to our largest producing field, Samotlor. 15 Reserve life In Nyagan, another significant site in West Siberia, we produce

19 years 7.9 7.9 from the Krasnoleninsky suite, which includes the Talinskoye, 10 Em-Egovskoye fields and the western part of the Kamennoye field. Kamennoye represents significant greenfield potential 5 and is on our priority list (please see Greenfield projects at the commercial production stage on page 53). 12 12

0 12 Proved 2P* 3P** Samotlor ranks among the top five largest oil fields in the world and the largest oil field in Russia. The field was * Proved and probable reserves ** Proved, probable and possible reserves discovered over 40 years ago and its current 3P reserves

TNK-BP Annual review 2009 > 53

Upstream

amount to 7.6 billion barrels of oil equivalent. Samotlor delivers Greenfield projects at the commercial approximately 40% of our liquids and will remain a reliable production stage producer going forward. Uvat In 2009, production at the field amounted to 27.89 million ■■Estimated 3P PRMS reserves: 1.1 billion barrels of oil tons of oil and we will work hard to keep production broadly flat equivalent in the medium term. Technologies supporting production include ■■Estimated total investment: USD 5.7 billion in eastern and water injection, sidetracking, our reservoir pressure management central hubs currently under development system and well work. ■■Expected production approaching peak: Eastern hub — In the Volga-Urals region, we produce crude from 88 license 6.5 million tons per year (2018); Eastern and central hubs — areas in the Orenburg region and are looking at development 9.5 million tons per year (2017) opportunities in the neighbouring Saratov, Samara and Astra- In 2009, we launched a new production centre in the eastern hub of khan regions. the Uvat project. We were the first to start developing oil reserves Our 3P reserves in Orenburg are estimated at 2.4 billion bar- in the area which were long considered unrecoverable due to the rels of oil equivalent according to PRMS methodology. In 2009, complexity of the reservoir, remoteness and absence of infrastruc- our fields in Orenburg produced 18.4 million tons of crude, which ture. Application of innovative technologies, primarily 3D seismic is over 6% more than in the previous year. Many of the fields in and drilling techniques and a unique project management approach the region have been in operation for over 60 years. However, the allowed us to demonstrate the commercial viability of the Uvat successful application of technology has enabled us to increase development. In 2009, the Urnenskoye and Ust-Tegusskoye fields, production and discover bypassed reserves. The main drivers which constitute the eastern part of the project, produced 2 million behind production growth include optimisation of water injection, tons of crude. In 2009, the number of production wells at the two maintenance of the reservoir pressure system and increased drill- fields reached 124. We finished building the infrastructure necessary ing activity. We were able to identify a large number of near-field for full field development, including completion of a trunk pipeline, satellites through the use of modern 3D seismic. The satellites expansion of the central oil gathering facility, commissioning of we have discovered are close to existing infrastructure and have a multiphase pumping station and diesel power plants, as well as enhanced our operational efficiency. the launch of the reservoir pressure maintenance system. In 2009, we acquired five licences in Orenburg and the neigh- In 2009, our investment in the project amounted to bouring Saratov region. USD 500 million, bringing the total expenditure to date to USD In 2010 and beyond, we intend to continue with the applica- 1.9 billion. tion of seismic and reservoir management in that area, as well as In 2010, we plan to increase production at the eastern hub well work improvements. We will continue looking at development and accelerate exploration and early development activity at the opportunities and participate in auctions both in Orenburg and Tyamkinskoye oil field in central Uvat. in neighbouring areas. This approach will ensure sustainable production growth in the medium term. Orenburg is also a growth area for our gas business (please see page 60 of the Gas business section).

>> > 54 People, technology, efficiency 10

We have adopted a large-scale technological program to maximize production from the field. This includes obtaining results about the reservoir from surveys, both surface and subsurface, and a water injection program that will efficiently maintain pressure and push oil towards the wells. We have also acquired a new 3D seismic tool to create a more detailed map of the geology between the wells. In 2009, investment in the field amounted to USD 400 million with total spending to date at USD 1.4 billion. In 2010, we will continue to build the infrastructure needed to fully develop the field and significantly increase production. We will also complete construction of a power plant, which will generate electricity from the associated petroleum gas produced at the field. Kamennoye ■■Estimated 3P PRMS reserves: 2.4 billion barrels of oil equivalent

■■Estimated total investment: USD 1.6 billion

■■Expected production approaching peak: over 3 million tons per year (2013) In 2009, we launched a greenfield at the northern hub of Kamen- noye, which helped to raise overall output at the field to 1.9 million tons, an increase of close to 50% compared to 2008. Kamennoye is part of the Krasnoleninsky suite, a giant field in the Nyagan region of West Siberia. The field has a complex Verkhnechonskoye geological structure, and is partly located in the ecologically ■■Estimated 3P PRMS reserves: 1.9 billion barrels of oil sensitive area of the Verkhnee Dvuobye wetlands, which are equivalent protected by the Ramsar Convention. We develop the field

■■Estimated total investment: USD 4.9 billion in close collaboration with environmental non-governmental

■■Expected production approaching peak: 7 million tons per organisations. Infrastructure in the northern hub is based year (2017) on a conceptual design, so as to safely increase output and In 2009, the Verkhnechonskoye oil field in East Siberia produced mitigate environmental risks. 1.2 million tons of crude, or 31% more than the planned target. While drafting the field’s development plans, we apply a Verkhnechonskoye, discovered in 1978, is the largest oil field in the tailored technology plan with the use of 3D seismic, hydro- area and we are developing it in partnership with Rosneft, a state dynamic modelling and recovery enhancement — advanced oil company. The field has a complex geological structure and is hydraulic fracturing. located in a scarcely populated and remote region. The launch of In 2009, we invested USD 200 million in drilling and infra- commercial production at the field was facilitated by the construction structure development. of the first stage of the East Siberia — Pacific Ocean pipeline. We In 2010, we plan to maintain investment levels and build a gas also benefit from tax incentives introduced by the Russian govern- turbine power plant to be supplied by the associated petroleum ment, primarily exemption from mineral extraction tax and, in 2010, gas produced at the field. We also intend to modernise trans- exemption from the export duty on crude produced in East Siberia. portation at the field.

TNK-BP Annual review 2009 > 55

Upstream

Early development greenfield projects Tagulskoye In 2009, we began to actively develop our greenfield licences ■■Estimated 3P+3C resources: 1.9 billion barrels of oil equivalent in the Yamal Nenets autonomous area and in the north of the ■■Estimated total investment: USD 3.2 billion

Krasnoyarsk region in Russia’s extreme north. Our reserve ■■Estimated production launch: 2014 potential there is estimated at over 3.2 billion barrels (3P). This ■■Expected production approaching peak: 5 million tons (2019) is the next generation of our new projects which have the The Tagulskoye oil field is located in the north of the Krasnoyarsk potential to account for up to one third of our output by 2020. region beyond the Arctic Circle. It has a complicated structure with The unique hydrocarbon base of Yamal should transform it numerous reservoirs holding paraffin crude. into an oil and gas province of global significance. We are in In 2009, we started the first pilot development project and an ongoing dialogue with other major oil companies and the drilled the first well of the planned five. We took core samples government to find the most effective ways to develop Yamal which confirmed the presence of crude. Engineering activity for and create the necessary transportation infrastructure. Green- construction of a well pad is under way. field development in the area currently enjoys tax holidays for In 2010, we plan to drill the remaining four wells under the mineral extraction tax and is temporarily exempt from export first pilot project, carry out well testing and clarify geological duty on crude oil. and hydrodynamic models, as well as continue with exploration. Suzunskoye Russkoye ■■Estimated 3P+3C resources: 0.3 billion barrels of oil ■■Estimated 3P+3C PRMS reserves: 2.2 billion barrels of oil equivalent equivalent

■■Estimated total investment: USD 2.8 billion ■■Estimated total investment: USD 3.1 billion

■■Estimated production launch: 2014 ■■Estimated production launch: 2014

■■Expected production approaching peak: 4.5 million tons ■■Expected production approaching peak: 7.5 million tons (2019) (2022) The Suzunskoye oil field is located in the north of the Krasnoyarsk The Russkoye field is an enormous potential development with high region beyond the Arctic Circle. It is the best explored field with viscosity oil located in the Yamalo-Nenets autonomous area in West well-understood geology and high quality light oil. Siberia. By the end of 2009, we had drilled eight wells and carried In 2009, we studied data collected during a pilot project out short-term testing. Longer-term testing was not possible due which had been launched in the previous year. We processed to the current absence of oil storage and transportation facilities. the 3D seismic data collected at the field and built geological New well testing showed high flow rates. At the end of 2009, we models of the structure of Suzunskoye. Work was also done started crude transportation by road. We also built infrastructure to construct field facilities and to plan a feasibility study for at the field, including mounting of the next well cluster and the first the field’s development. stage of the crude delivery and acceptance point. Our contractors In 2010, we intend to proceed with pilot development of carried out a field survey for the construction of the Suzun-Tagul- Suzunskoye and consider options for infrastructure. Russkoye-Purpe pipeline, considered options for infrastructure in the field and studied ways to reduce viscosity. In 2010, we plan to build a road which will allow the transportation of crude and the delivery of materials and equipment for the field. The pilot development of Russkoye is expected to be completed in 2012. > 56

Developing a sustainable gas business

TNK-BP Annual review 2009 > 57 People, technology, efficiency 11 1.4bn boe natural gas 3P reserves 12 bcm commercial gas sales

84.4% APG utilization rate as business business as development G > 58 People, technology, efficiency 11

Alastair FERGUSON Deputy Executive Director, Gas Business Development

In 2009, we made significant progress in ensuring commercial use of growing volumes of associated petroleum gas. Going forward, we will continue to monetize our gas resource base by deepening market access while moving toward full compliance with APG utilization requirements.

Our strategic goal is to move from being a predominantly oil-producing business to being a major oil and gas company.

At the beginning of 2010, we updated our gas strategy, which is aimed at significantly increasing our gas production in five years. This will be achieved through the development of existing world-class gas reserves in Russia, such as Rospan, as well as by seeking participation in the implementation of new gas projects in Russia and abroad. The other important objective is to comply with gas flaring regulations. We have developed an APG utilization program worth USD 1.3 billion, which will allow us to significantly increase APG utilization level by 2012. Additionally, we will continue to invest in power generation where we can monetize our gas and to ensure energy efficiency for oil production and refining. s business business s development Ga

TNK-BP Annual review 2009 > 59

Gas business development

Rospan gas field 1.4 bn boe of natural gas 3P reserves and 15 bcma potential production

11.1: Natural gas We own 100% of Rospan International, a gas-producing Plans are now being finalized to create the necessary pipeline company located in the Yamal-Nenets autonomous area. Rospan infrastructure allowing direct access to Gazprom’s nationwide has a significant gas potential with 1.4 billion barrels of oil equiva- pipeline network. In 2010, we expect Rospan to produce 2.7 lent of natural gas 3P reserves and an ability to produce 15 billion cubic meters. billion cubic meters per year. This ability is currently restricted In addition to Rospan, we have significant reserves in gas by limited access to the gas transportation network operated caps in the Nizhnevartovsk region. In 2009, we began a com- by Gazprom. We are in ongoing negotiations with Gazprom to prehensive technical and commercial analysis of a gas caps gain pipeline access for incremental production. development project which has the potential to deliver gas by In 2009, Rospan sold 2.4 billion cubic meters of gas, almost 2016–2017 and become one of our future major projects. on a par with 2008, despite a significant decline in demand for domestic gas in Russia as a whole. Currently, the marketing of 11.2: Associated petroleum gas Rospan gas is conducted through a joint venture with Mezhre- TNK-BP produces most of its associated gas in its key oil giongaz (a Gazprom subsidiary), established in December 2007. producing areas in Nizhnevartovsk in West Siberia and the Orenburg The joint venture began operations in March 2008 and sells region in the Volga-Urals basin. gas to industrial and commercial customers on the Russian In 2009, we produced 12.5 billion cubic meters, 2.5% more market at prevailing market prices. The primary goal of the joint than in 2008. Our associated petroleum gas utilization rate venture is to provide a stable outlet for Rospan’s gas and to equalled 84.4%, which is an improvement on 2008 (79.6%). allow the field’s production to increase over time, leveraging Increasing our APG utilization is a priority. In 2010, APG pro- Mezhregiongas marketing expertise and established presence duction is expected to reach 12.7 billion cubic meters. We plan in Russia’s regional markets. The joint venture markets the entire to invest approximately USD 1.3 billion in 2009-2012 to materi- gas production of Rospan. In 2009, Rospan gas was delivered to ally enhance our overall associated gas utilization. This program new regional markets with higher margins (such as Sverdlovsk involves the construction of new gas gathering and processing region), which, combined with the general increase in gas prices facilities and the potential application of gas reinjection as well in Russia, allowed us to secure a better price for gas. In 2009, as the construction of power plants at our fields to generate we completed modernization of the East Urengoy Gas Treatment electricity for our own consumption. The utilization of associated Unit to improve the plant’s efficiency and progressed with sub- petroleum gas is an essential part of our commitment to protect surface and engineering activity required to develop the field. the environment and fulfill license obligations. >> > 60 People, technology, efficiency 11

10% increase in the volume of APG processed compared to 2008

In 2009, we proceeded with a number of APG utilization projects, increase in the amount of final output products, such as dry gas including the Yugragazpererabotka project, Nizhnevartovsk power and natural gas liquids (NGL). project and the Orenburg integrated project. NIZHNEVARTOVSK POWER PROJECT We plan to significantly increase the share of our own power In August 2008, we created a joint venture with OGK-1 at the Nizh- generation in the total power consumption and have launched nevartovsk power plant. As a result, we own a 25% plus one share the construction of power generating facilities at the Verkhne- in the existing capacity of 1,600 MW and plan to construct a third chonskoye, Kamennoye, Van-Eganskoye, Bakhilovskoye and power generation unit with a capacity of 400–600 MW (Phase 1). Samotlor fields for the total cost of USD 74 million in 2009. We It is anticipated that commercial operations at the third unit will have thoroughly analyzed all of our options to further broaden start in 2013, and this will allow us to supply an extra 0.6 billion our gas-to-power business in the regions in which we operate cubic meters of gas in addition to the current annual consumption and are currently assessing opportunities to enhance our power of 3 billion cubic meters, and to secure electricity supply for our oil projects portfolio. We plan to invest over USD 700 million in field operations. We also have an option to acquire an additional development of power generation projects in the next three years. 25% of the venture and increase our share in the Nizhnevartovsk YUGRAGAZPERERABOTKA PROJECT power plant to 50% plus one share. In 2009, we agreed with our In November 2006, TNK-BP and SIBUR Holding created a joint partner in the joint venture on contracting and financial strategies, venture to process associated gas at the Nizhnevartovsk and and started a bidding process for the construction of a third unit. Belozerny gas processing plants in West Siberia. The joint venture, We plan to sign a long-term gas supply agreement in 2010. Yugragazpererabotka, which commenced commercial opera- ORENBURG integrated PROJECT tions in April 2007, processes associated petroleum gas that We are also pursuing a project aimed at increasing the use of TNK-BP and other gas companies produce in the Nizhnevartovsk associated gas in our Orenburg fields through investment in gas area. TNK-BP takes and markets the gas which is produced and gathering, compression and treatment facilities. The project will SIBUR receives the liquid products. In 2009, we implemented entail a major expansion of our associated gas gathering infra- a number of initiatives to increase operational efficiency at the structure, the construction of a gas fractionation unit and a railway gas processing plants operated by the joint venture and grow terminal at the Zaikinskiy gas processing plant, the expansion of their production volumes to reduce shutdown time and new railway connections and the development of several other gas equipment assembly. The volume of associated petroleum gas treatment facilities. that was processed at the plants increased by 10% (to 9.4 billion cubic meters) compared to 2008, which led to a respective

TNK-BP Annual review 2009 > 61

Gas business development

One of the main achievements from 2009 in Orenburg was the commissioning of gas gathering and transportation facilities at the Vakhitovskoye field and power generation capacities at the Rodnikovskoye field. Completion of the projects has led to the utilization of an additional 0.2 billion cubic meters of associated gas and the achievement of a 95% utilization rate at the fields. In addition to the associated gas utilization program in Oren- burg, we are considering ways of using the natural gas resource potential in the area, the development of which will allow us to fully leverage the scale of our operations in the region. A technical and commercial analysis of these opportunities commenced in 2009 and will continue in 2010. > 62

TNK-BP Annual review 2009 > 63 People, technology, efficiency

Meeting 12 demand for 5 refineries in Russia and Ukraine lighter and plus a 50% share in YANOS refinery cleaner fuels 675 mbpd refining throughput in 2009 including our share in YANOS 1,466 retail sites in Russia and Ukraine Downstream > 64 People, technology, efficiency 12

Didier BAUDRAND Executive Vice President, Downstream — Executive Director

In 2009, we focused on increasing the availability and efficiency of our refineries, while significantly extending our presence in the key growth markets of Russia and Ukraine. Our Sales, Trading and Logistics organization delivered superior netbacks in the face of a highly volatile trading environment. We are gaining momentum to reach the next stage in performance and the scale of our business. m

a Our continuous investment in refining throughout the period 2003–2009 increased capacity by 15%, raised light product yield by over 3% and improved plant availability from 85% to e over 93%. In 2009, the Board supported the launch of a USD 1.3 billion project for further

r refinery upgrades between 2009 and 2015. These upgrades will ensure that the quality of our products complies with Euro-4 and Euro-5 fuel standards. In retail, we continued to invest in our network of service stations, achieving a leading position in the Moscow market and strengthening our presence in key markets supplied by our refineries. We also signed a sales and purchase agreement with a view to acquiring over 100 retail stations and depots in Ukraine, which will substantially expand our market presence in the country. ownst D

TNK-BP Annual review 2009 > 65

Downstream

Oil product yield by refinery

5.000 thousand tons 4.500 4.000 3.500 3.000 2.500 2.000

1.500 1.000 500 0 G asoline Diesel F uel oil G asoline Diesel F uel oil Diesel G asoline Diesel F uel oil G asoline Diesel F uel oil

Ryazan refinery Saratov refinery NNPO* LINIK YANOS**

2005 Note: gasolines including alkilate and M grade; fuel oil excluding furnace oil Note: lower demand in 1H 2009 and large-scale turnarounds at our 2006 * Nizhnevartovsk Oil Refining Enterprise refineries drove lower light products yield compared to 2007 and 2008. 2007 ** Showing our 50% share However, in 2010 we expect gasoline and diesel yields to grow thanks 2008 to optimization works and equipment modernization. 2009 2010 estimate

12.1: Refining worn out equipment. Our overall investment in improvements We operate five refineries: in Ryazan (Central Russia), to our refining portfolio amounted to over USD 1 billion in the Saratov (Volga-Urals region), Nizhnevartovsk and Nyagan (West period 2004–2009. Siberia) and Lisichansk (Ukraine). The refineries have a nameplate Last year, the financial results of our downstream business capacity of around 630 thousand barrels per day. We also account were significantly better than business plan targets. The key for 50% of the output at the YANOS refinery in Yaroslavl (Central drivers behind this outstanding performance were improved Russia), which we co-own with Gazprom Neft through a Slavneft operational efficiency, optimized refining yields and trading joint venture. Capacity at YANOS is 286 thousand barrels per day. operations, both internationally and domestically, as well as solid Utilization at our refineries is close to maximum. In 2009, the performance in the retail and jet fuel businesses. total refining throughput at our refineries in Russia and Ukraine Operational safety is the hallmark of a world-class company. (including our share in YANOS) amounted to around 675 thousand In 2009, we launched a new approach to safety in our down- barrels per day which represents 42% of our crude extraction stream operations, giving increased responsibility to managers (including our share in Slavneft). Our operating availability was when it comes to daily risks. They will also be charged with over 93% in 2009. Our goal for the coming years is to increase improving the behaviour and attitude of our people towards safety. this figure to the international best practice level of 95% and In October 2009, the Board of Directors supported the launch above. of a five-year program worth USD 1.3 billion to improve the quality In 2009 and beyond, our strategic focus has been to develop of motor fuel and bring it in line with new technical regulations. The and maintain a first-class refining portfolio, and also to increase program is made up of 11 projects with varying timelines. One of the our refining coverage (a ratio of refining production divided by first projects to be implemented under the program is construction crude extraction). of an isomerization unit at the Saratov refinery at a cost of USD 150 In 2009, we invested USD 196.5 million in refining, with million. We are also progressing a USD 55 million investment in the a major focus on asset integrity, HSE and the replacement of LINIK refinery in Ukraine. >> > 66 People, technology, efficiency 12

Last year, we also completed major turnarounds at the Ryazan and Saratov refineries without any work-related accidents, on budget and ahead of time. We will continue to upgrade our refineries, delivering Promoting improved reliability and a higher yield of quality products. As with all other aspects of our business, cost, HSE and integrity oil exchange will remain at the core of our long-term business success. In 2010, capital investment in refining will be USD 285 million. trade in Investment in refining Russia 250 USD million We were one of the first Russian oil companies to start

200 selling oil products on a commodity exchange. We have had a presence on the Inter-Regional Stock Exchange of

150 the Oil and Gas Complex (ISEOGC) since August 2009 and at St. Petersburg International Mercantile Exchange (SPIMEX) — since March 2009. From October 2009, more 100 than 10% of our domestic light products were sold via open trade. Our marketing subsidiaries take part in monthly 50 auctions and daily trading sessions on a competitive basis. We support the sales of oil products through the 208 205 231 0 193 181 197 commodity exchange as a transparent and fair mecha- 2004 2005 2006 2007 2008 2009 nism that allows the determination of market value of our products. TNK-BP is an active participant of the Section Council of the Oil Products Section on both the ISEOGC 12.2: and SPIMEX. We also take part in the working groups Sales, trading and logistics of the State Duma, Ministry of Economic Development, We sell both oil and oil products on export and domestic Federal Antimonopoly Service and Federal Service for markets, including supplies of oil to refineries and oil products to Financial Markets on issues related to exchange trade. marketing subsidiaries. Oil sales amounted to 348 million barrels in 2009, of which 84% was exported (including to countries in the CIS) and 16% was sold in Russia. Oil product sales totalled 32.6 million tons in 2009, of which 21.7 million tons were supplied for export (including to countries in the CIS). We transport more than 40 different types of oil products, We sell eight different types of oil, which are transported mostly by rail. Some of our vacuum gas oil and fuel oil is also in fifty different destinations, with around 90% of crude oil transported by barge to ports on the Black Sea, and some of our supplied by the Russian national pipeline system operated by diesel and jet fuel is supplied through a pipeline system managed Transneft. The remaining volume of crude is transported by by Transnefteprodukt, a state-owned company. rail. In 2009, we were active in developing eastern oil supply In 2009, we started to sell our light oil products on a com- destinations (Kyrgyzstan, Kazakhstan and China) and started modity exchange and the share of oil products sold in this way supplying oil produced by Verkhnechonskneftegaz, a joint is rising. venture with Rosneft, via the ESPO pipeline — the new export We use over 500,000 rail tank cars per year to transport route to the Pacific coast. crude oil and oil products.

TNK-BP Annual review 2009 > 67

Downstream

Map of refining and marketing Retail sites assets in Russia and Ukraine

Refineries YANOS (50%) LINIK Modernized in 2006 Modernized in 2008 Capacity:...... 286 mbpd Capacity:...... 144 mbpd Conversion ratio . . . . . 63% Conversion ratio: ...... 71% KRASNOLENINSK Light products Light products output:...... 57%. output:...... 58% YANOS (50%) Utilization:...... 96% Utilization:...... 71% Belarus RYAZAN SARATOV RYAZAN Modernized in 2006 Modernized in 2004 Capacity:...... 323 mbpd Capacity:...... 132 mbpd Conversion ratio: ...... 63% Conversion ratio: ...... 70% RUSSIA Light products Light products UKRAINE NIZHNEVARTOVSK output:...... 55% output:...... 44%. Utilization:...... 91% Utilization:...... 88% SARATOV KRASNOLENINSK Nizhnevartovsk LINIK Built in 1998 Built in 1998 Capacity:...... 4 mbpd Capacity:...... 29 mbpd Utilization:...... 78%. Utilization: ...... 90%

* Including Retail network at end 2009* 850 jobber sites Russia: 1,100 retail sites, including 62 BP sites Ukraine: 326 retail sites, including two BP sites Belarus: 40 retail sites

>> > 68 People, technology, efficiency 12

With our river transportation, we apply international safety standards, using ships with international certificates for operation on rivers, and undertake industrial safety audits of transhipment terminals. We have developed a complex netback optimization system, Launching which takes into account all operational, logistical, cost and price indicators to identify the most profitable routes for supplying new perfor- crude oil and oil processing products. mance fuel 12.3: Retail We are always looking for ways to improve the quality of In 2009, we focused on expanding the range of products our value proposition by offering better fuels to custom- offered at our retail sites. In addition to the launch of PULSAR, we ers while having the minimum impact on the environment. expanded sales of BP Ultimate 95 and 98 to St. Petersburg. Both In October 2009, we launched PULSAR, a performance PULSAR and BP Ultimate deliver increased performance and are unleaded A95 gasoline. The new fuel, developed using more environmentally friendly than average fuel. Over the last year, innovative technology, went on sale at our TNK-branded we also introduced 58 new products under TNK and BP trademarks. service stations in Moscow and the Moscow region. In 2009, our investment in retail amounted to USD 106 mil- PULSAR complies with Euro-4 environmental lion and was mainly spent on upgrading TNK- and BP-branded requirements and significantly exceeds the relevant retail sites in Moscow; rebranding retail sites in Yaroslavl and Russian technical standard (GOST R 51866). PULSAR designing new service stations in St. Petersburg. was tested at two independent technical centers in We progressed with the inorganic expansion of our business Germany and its advanced technical properties were and entered into agreements to split retail assets owned by Slavneft confirmed by ZAO Nami-Khim, the Russian center for (which we co-own with Gazprom Neft). In July 2009, we acquired automobile expertise. the majority stake in TNK-Yaroslavl held by Slavneft, and as a result PULSAR contains three times less sulphur and 16.7% of the transaction, we obtained control over 88 retail stations and less aromatic hydrocarbons than ordinary fuel, making its 12 oil depots in Yaroslavl, Kostroma and Ivanovo regions in Russia. introduction a considerable milestone in the company’s A split of retail assets in Belarus has added 40 retail sites and six efforts to contribute to a better environment. oil depots to our portfolio. The new fuel was well accepted by the market, and In December 2009, we signed a sales and purchase agree- by the end of 2009, in the regions where we launched ment to acquire Vikoil, a retailer and wholesale distributer of oil the new fuel, 33% of regular A95 gasoline sales were products in Ukraine. replaced by sales of PULSAR, while our overall A95 In light of the economic downturn, we continued to dispose sales grew by 10%. of non-core assets, such as oil depots and retail sites that we inherited, in a bid to increase operational efficiency and decrease environmental risks. In 2010 and beyond, we will continue to expand our retail channels domestically and abroad. We will actively pursue opportunities when a profitable value chain and sustainable competitive advantage can be established, whilst maintaining the strength of our brand. In the regions in which we already have a retail presence, we will make efforts to sustain our market share. Beyond Moscow and St. Petersburg, we intend to offer our performance fuels in other regions, while developing marketing initiatives to capture new customer segments.

TNK-BP Annual review 2009 > 69

Downstream

12.4: Product mix development Jet fuel TNK-BP is one of the largest suppliers of jet fuel in Russia, with the third largest market share in the industry in 2009. Last year Quality we began direct sales to airlines under the TNK-Avia brand and focused on establishing our presence in key airports. We created control a joint venture enabling us to use existing fuelling facilities at the In 2009, we unified operational standards for our retail Sheremetyevo airport and began wing sales at the Vnukovo airport subsidiaries and made them compliant with the technical in Moscow. We also implemented a pilot pricing policy which should regulation “On requirements for automobile gasoline and increase transparency. aviation fuel, diesel and marine fuel, jet fuel and mazut”. In 2010, we plan to increase our wing sales at Sheremetyevo We created a common approach to certification of our and Vnukovo and also expand to other airports. marketing subsidiaries and began a program to optimize Bitumen business processes, including quality control. In 2009, we became the largest retailer of bitumen in Russia, despite The key principles of our quality control policy reduced state investment in roads and the construction freeze. We state that the quality of our products should exceed developed and introduced specially tailored HSE standards for the requirements of the law, particularly with regard trucks used by our distributors. We launched production of a new to performance and environmental stipulations. We bitumen product, BV 50/70, which is compliant with European quality conform to the international requirements of ISO 9001 standards. We also brought a new bitumen loading rack online at in all of our refineries, setting a new benchmark in the the Yaroslavl refinery. Russian oil industry. In 2010, we will continue market diversification for our bitumen products, both for domestic and international use, and will stringently apply our HSE standards to all vehicles used to transport our products. Lubricants Marine fuel In 2009, we increased lubricant sales despite the testing environ- In 2009, our refineries in Saratov and Ryazan started manufactur- ment. A highlight of the year was when our lubricants business ing IFO-380, a type of bunker fuel. This new product helped us to received ISO 9001:2008 certification, confirming compliance with expand our fuel sales to key ports in the south and north of Russia, stringent quality control standards. Certification came as the result of including Novorossiisk, Murmansk and Arkhangelsk. We also began the implementation of a new quality control system and an upgraded to export bunker fuel from the port in St. Petersburg. packaging production line. Last year also saw us launch a new com- In 2010, we plan to grow this business further. munications strategy for our lubricants business to raise customer awareness of our product. As a result of these developments and growing customer confidence, our share of the commercial vehicle market in Russia continued to grow and reached 8% in 2009. In 2010, we will focus on introducing new products in a wider range of Russian regions. We will also carry out extensive research to enhance the quality of our products. > 70 People, technology, efficiency Slavneft is one of the largest oil companies in Russia. We effectively own 49.9% of Slavneft on a par basis with another Russian company 13 Gazprom Neft.

With its significant oil and gas production and modern refining facilities, Slavneft is a strategic investment for us. The joint venture enjoys the benefits of having as its shareholders two oil and gas companies which rank among the largest in Russia and which bring in operating efficiency, new technology and a high level of corporate governance and corporate social responsibility. We and Gazprom Neft have equal representation on the Slavneft board of directors, as well as on the boards of directors of Slavneft’s main subsidiaries. Slavneft’s oil and gas production areas are located principally in West Siberia. As of 31 December 2009, Slavneft held a total of 28 production and exploration licenses, for fields in the Nizhnevartovsk region in West Siberia. Slavneft also holds two licences to explore and develop extensive potential resources at the Messoyakha deposits in Yamal and eight licences for fields in the Krasnoyarsk region (including the Kuyumbinsky and Tersko-Kamovsky licence areas). In 2009, total oil production amounted to 383 thousand barrels per day of crude t oil, making Slavneft the seventh largest oil producer in Russia. f Application of efficient technology is a key to successful reserve renewal, sustaining production and decreasing the natural decline rate. Slavneft uses advanced technologies in reservoir management, drilling and well work. In 2009, the company commissioned 189 new wells and decreased the quantity of idle wells by 0.8% compared to 2008. In

vne 2010, Slavneft plans to significantly increase exploration drilling in the Khanty-Mansi autonomous area and Krasnoyarsk region with an additional 655 square kilometers a to be covered by 3D seismic. l S

TNK-BP Annual review 2009 > 71

Slavneft

Slavneft operates YANOS, one of the largest and most modern refineries in Central Russia with a refining throughput of 274 thousand barrels per day in 2009. YANOS produces some high quality fuels, including 10ppm diesel, which meets Euro-5 2009 quality standards. Slavneft also owns a 42.58% interest in the Mozyr refinery in Belarus with a total refining throughput of 217 Quality thousand barrels per day of oil in 2009. We and Gazprom Neft purchase the bulk of crude oil pro- Award FOR duced by Slavneft on a pro rata basis. We process approximately 40% of this oil at the YANOS refinery and then sell the refined YANOS products domestically and for export. ■■Management of two subsidiaries — Slavneft-Kras- In 2009, Slavneft invested USD 909 million in its operating noyarskneftegaz and Slavneft Research and Pro- activity, including USD 784 million in geology and upstream, duction Center — won the Russian Government and USD 125 million in downstream. In 2010, Slavneft plans Science and Technology Award for development and to increase its capital expenditure program by 12.4% to USD implementation of innovative seismic and acous- 1,022 million. tic technology for oil and gas field exploration and Slavneft is one of the leading companies in Russia with a development. high level of corporate social responsibility. In May 2009, Slavneft implemented a new HSE management system, under which they can better control dangerous operating factors and prevent accidents and breakdowns. In 2010, Slavneft completed quality management system certification for compliance with ISO 14001:2004 requirements (environment obligations) and OHSAS 18001:2007 (industrial and labor safety). > 72 People, technology, efficiency 14

Jonathan MUIR Chief Financial Officer

Our financial strategy is focused on supporting the Group’s growth while minimizing financial risks and maintaining a strong balance sheet with adequate liquidity and financial flexibility. In 2009, we delivered a strong set of results undeterred by market volatility and took full advantage of an improving trading environment in the second half of the year. Going

forward, our focus will remain on operational efficiency, financial discipline and effective cost management with strong commitment to transparency L

E and good corporate governance. A C I N

C 2009 was another successful year for TNK-BP with strong

A financial results, despite a challenging macroeconomic N environment.

A M 2009 financial highlights ■■EBITDA and net income resisted the oil price decline. R

IN ■■Strong cash flow from operations.

O ■■Total organic investments of USD 3.1 billion, including an additional USD 500 million approved mid-year. ■■Strong liquidity throughout the year with gearing at the R F R

RF lower end of the target band. ■■Access to required levels of debt financing even amid the global liquidity crisis. PE OU ■■Full investment grade credit ratings obtained.

TNK-BP Annual review 2009 > 73

OUR FINANCIAL PERFORMANCE

Urals price Exchange rates

130 USD/bbl 40 RUR/USD

100 35

90 30

25 50

30 20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2008 2008 2009 2009

14.1: Environment Key drivers behind net income changes, In 2009, we saw substantially weaker crude oil markets 2009 vs. 2008 than in 2008. Despite a recovery from the four-year low reached 6 USD bn at the beginning of 2009, the average Urals price was still 36% lower year-on-year (USD 61 per barrel in 2009 compared to USD 95 per barrel in 2008), while domestic crude oil and petroleum product prices followed the Urals trend. Another important external factor, the ruble/dollar exchange rate, also underwent 3 a substantial change with the average rate being 28% weaker in 2009 compared to 2008 (RUR 32 and 25 to 1 USD respectively).

14.2: 5.0 Overview of financial results 0 5.3 These macroeconomic conditions had a substantial impact on our financial results. However, while we were affected by the

fall in oil prices, we benefited from the weaker ruble and positive ax 2008 P rice F orex T legislation O perations and other 2009 changes in tax legislation, as well as improvements in operational efficiency. The 36% fall in average Urals prices translated into only tion from cost saving initiatives implemented in the company in a 33% reduction in our revenues primarily due to a production late 2008 and early 2009, our overall cost base in USD terms growth of 2.9%. reduced by 24%. On the cost side, we achieved a 17%, or USD 1.7 billion Another important positive factor was changes in tax legisla- reduction in operating, transportation, and selling, general and tion, which included a 4% reduction in the statutory income tax administrative expenses compared to 2008. This reduction rate and a change in the method for calculating mineral extraction came despite continued significant inflation of 19% and 21% in tax, resulting in a lower overall tax burden. transportation and energy costs from state monopolies. However, As a result of the above, as well as a contribution of USD due to the impact of a weaker ruble and the positive contribu- 200 million from the sale of our oil field services business to >> > 74 People, technology, efficiency 14

Weatherford, we saw a total net income for the year of USD 5 Sources and uses of cash billion, down only 6% on our 2008 results, despite the much 24 USD bn more dramatic fall in prices year-on-year.

Taxes 15.8 Operations 22.4 14.3: Cash flows and liquidity In terms of cash flows, our ability to generate cash remained undiminished with healthy inflows from operations. Alongside fund- ing an organic capex of USD 2.5 billion, we also continued to make selective inorganic portfolio acquisitions, particularly in marketing and refining. In addition, we maintained our focus on working capi- 12 tal management, minimizing the impact of oil price growth on our receivables and allowing us to generate pre-tax operating cash in excess of USD 22 billion.

Organic Capex 2.5 Our liquidity remained strong throughout the year, allowing us to strengthen our balance sheet and reduce our gearing by the end of 2009 to 28%, which is at the lower end of the 25–35% Dividends 3.5 band set by our shareholders. 0 Sources Uses 14.4: Financing policy and credit ratings Acquisitions 0.4 We continued to follow a prudent debt financing policy, Net debt repayment 1.0 while demonstrating the ability to borrow to meet our business plan needs. We raised USD 1.8 billion of new debt in 2009, includ- Return on average capital employed ing USD 600 million in Q1 2009, when the banking world was in (ROACE) turmoil. We repaid USD1.3 billion of debt prior to its maturity in the 50 % course of 2009 and replaced it with substantially cheaper financing. We maintained a smooth debt repayment profile, in line with 40 our policy of matching debt maturity with cash paybacks from our organic portfolio. 30 Our strong financial performance is reflected in our credit ratings. As at the end of 2009, we had investment grade ratings 20 from all three international rating agencies, Moody’s, Fitch and Standard and Poor’s, with a stable outlook. Notably, we received 10 two ratings upgrades from Standard and Poor’s in 2009, including an investment grade rating in December 2009. 0 In 2010 and beyond we will continue to maintain strong invest- 2004 2005 2006 2007 2008 2009 ment grade financial metrics, exercise a prudent debt financing ТNК-ВР ROACE policy, invest with discipline and keep control of costs to ensure Peer ROACE (average 2004–2009 Rosneft and 2004–2008 Lukoil) sustainable growth and value creation for our shareholders. For more detailed information on factors affecting our financial results please refer to the Management’s Discussion and Analysis section on our website by following this link: http://www. tnk-bp.com/investors/financial/

TNK-BP Annual review 2009 > 75

OUR FINANCIAL PERFORMANCE

14.5: Report of independent auditors

ZAO PricewaterhouseCoopers Audit White Square Office Center 10 Butyrsky Val Moscow, Russia, 125047 Telephone +7 (495) 967 6000 Fax +7 (495) 967 6001 www.pwc.ru

REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of TNK-BP International Limited: We have audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheets of TNK-BP International Limited and its subsidiaries as at 31 December 2009 and 2008, and the related consolidated statements of income, of cash flows and of changes in equity for the years then ended (not presented herein); and in our report dated 1 March 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.

Moscow, Russian Federation 1 March 2010

>> > 76 People, technology, efficiency 14

14.6: Condensed Consolidated Balance Sheets

expressed in USD million, except as indicated 31 December 31 December 2009 2008 ASSETS Cash and cash equivalents 890 1,745 Restricted cash 11 6 Bank deposits with maturity of more than 3 months 150 — Short-term investments 413 — Trade and other receivables, net 3,966 3,553 Inventories 950 786 Assets held for sale 682 715 Other current assets 168 192 Total current assets 7,230 6,997 Long-term investments 2,786 2,763 Property, plant and equipment, net 17,800 17,188 Goodwill and intangible assets 877 918 Other long-term assets 755 841 Total assets 29,448 28,707 LIABILITIES AND EQUITY Short-term debt and current portion of long-term debt 1,425 1,898 Trade accounts and notes payable 1,707 1,556 Other accounts payable and accrued expenses 1,120 1,247 Taxes payable 830 812 Liabilities associated with assets held for sale 21 42 Total current liabilities 5,103 5,555 Long-term debt 5,593 6,094 Asset retirement obligations 347 341 Deferred income tax liabilities 1,669 1,659 Other long-term liabilities 305 269 Total liabilities 13,017 13,918 Commitments and contingencies — — Ordinary share capital (authorised and issued — 54,000 shares, USD 1 par value) — — Additional paid-in capital 2,901 2,976 Retained earnings 12,492 10,831 Accumulated other comprehensive loss (80) (124) Total Group shareholders’ equity 15,313 13,683 Noncontrolling interest 1,118 1,106 Total equity 16,431 14,789 Total liabilities and equity 29,448 28,707

TNK-BP Annual review 2009 > 77

OUR FINANCIAL PERFORMANCE

14.7: Condensed Consolidated Statements of Income

expressed in USD million Year ended Year ended 31 December 31 December 2009 2008 Sales and other operating revenues 34,753 51,886 Total revenues 34,753 51,886 Export duties 8,360 15,974 Taxes other than income tax 6,043 11,182 Operating expenses 4,142 5,240 Transportation expenses 3,115 3,208 Cost of purchased products 2,993 4,261 Depreciation, depletion and amortization 1,803 1,564 Selling, general and administrative expenses 1,268 1,825 Loss on disposals and impairment of assets 144 173 Exploration expenses 58 85 Total costs and other deductions 27,926 43,512 Earnings from equity investments 26 278 Gain on disposals of subsidiaries 212 60 Interest income and net other income (expense) 180 (15) Exchange loss, net (180) (229) Interest expense (261) (500) Total other income and expenses (23) (406) Income before income taxes 6,804 7,968 Current tax expense 1,434 2,439 Deferred tax expense (benefit) 100 (116) Total income tax expense 1,534 2,323 Net income 5,270 5,645 Less: net income attributable to noncontrolling interest 297 361 Net income attributable to Group shareholders 4,973 5,284

>> > 78 People, technology, efficiency 14

14.8: Condensed Consolidated Statements of Cash Flows

expressed in USD million Year ended Year ended 31 December 31 December 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES Net income 5,270 5,645 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortisation 1,803 1,564 Deferred tax expense(benefit) 100 (116) Loss on disposals and impairment of assets 144 173 Gain on disposals of subsidiaries (212) (60) Earnings from equity investments less dividends received 70 (179) Dry hole expenses 24 9 Other non-cash adjustments, net 31 78 Changes in operational working capital, excluding cash and cash equivalents: Restricted cash (5) — Trade and other receivables, net (472) 1,914 Inventories (226) 586 Accounts and notes payable and accrued expenses (85) (255) Taxes payable 68 (802) Other 71 54 Net cash provided by operating activities 6,581 8,611 INVESTING ACTIVITIES Capital expenditures (2,524) (3,924) Grants used for capital expenditures (407) (622) Grants received 445 673 Purchase of intangible assets (14) (67) Proceeds from disposal of non-current assets 17 19 Acquisition of subsidiaries and joint ventures (120) (1,179) Acquisition of noncontrolling interests (237) (84) Cash flow from sale of subsidiaries and joint ventures (12) — Proceeds from sale of short-term investments 27 61 Bank deposits with maturity more than 3 months (150) — Loans issued — (49) Loans repaid — 31 Net cash used for investing activities (2,975) (5,141)

TNK-BP Annual review 2009 > 79

OUR FINANCIAL PERFORMANCE

14.8: Condensed Consolidated Statements of Cash Flows (continuation)

expressed in USD million Year ended Year ended 31 December 31 December 2009 2008 FINANCING ACTIVITIES Proceeds from issuance of long-term debt 1,208 260 Cost associated with the issuance of debt (12) (6) Repayment of long-term debt (1,659) (1,357) Proceeds from issuance of short-term debt 574 1,030 Repayment of short-term debt (1,092) (452) Issue of shares in subsidiaries to noncontrolling interest shareholders 13 — Dividends paid to noncontrolling interest shareholders (157) (101) Dividends paid to group shareholders (3,312) (4,280) Net cash used for financing activities (4,437) (4,906) Effect of exchange rate changes on cash and cash equivalents (26) (61) Cash and cash equivalents reclassified to assets held for sale 2 18 Net change in cash and cash equivalents (855) (1,479) Cash and cash equivalents at beginning of period 1,745 3,224 Cash and cash equivalents at end of period 890 1,745

The information in the condensed consolidated financial statements shown on pages 76 through 79, corresponds to the information in the Consolidated Financial Statements of TNK-BP International Lim- ited as of and for the years ended 31 December 2009 and 31 Decem- ber 2009. For complete consolidated financial statements, including notes, please refer to the company’s website www.tnk-bp.com >> > 80 People, technology, efficiency 14

14.9: Summary Accounting Policies TNK-BP International Limited and its subsidiaries (jointly Proved oil and gas properties and long-lived assets are referred to as “the Group”) conduct exploration and development assessed for possible impairment. Long-lived assets with activities and produce oil and gas primarily in the Russian Federa- recorded values that are not expected to be recovered through tion, operate petroleum refineries and market oil and petroleum future cash flows are written down to current fair value. Fair products in the Russian Federation, Ukraine and internationally. value is generally determined by estimating discounted future In preparing the consolidated financial statements in con- net cash flows to be generated by the assets. formity with US GAAP, management makes estimates and The Group incurs retirement obligations for its upstream assumptions that affect the reported amounts of assets and assets. The fair values of these obligations are recorded as liabilities, revenues and expenses and the disclosure of con- liabilities on a discounted basis, which is typically at the time the tingent assets and liabilities. Actual results could differ from assets are installed. The costs associated with these liabilities such estimates. are capitalized as part of the related assets and depleted as the The US dollar (USD) is the reporting currency for the purposes reserves are produced. Over time, the liabilities are accreted for of financial reporting under US GAAP. the change in present value. Asset retirement obligations are The consolidated financial statements include the operations not recorded for downstream facilities, because such potential of all entities in which the Group directly or indirectly owns or obligations cannot be measured since it is not possible to esti- controls more than 50% of the voting stock and variable interest mate the settlement dates. entities in which the Group is the primary beneficiary. Joint ven- Liabilities for environmental remediation are recorded when it tures and investments in which the Group has voting ownership is probable that obligations have been incurred and the amounts interests between 20% and 50% and where the Group exerts can be reasonably estimated. Environmental remediation liabilities significant influence are accounted for using the equity method. are not discounted for the time value of future expected pay- Investments in other companies are accounted for at cost and ments. Environmental expenditures that have future benefit are subject to regular tests for potential impairment. capitalized. The Group follows the successful efforts method of account- Revenues from the production and sale of crude oil and ing for its oil and gas properties whereby property acquisitions, petroleum products are recognized when title has transferred successful exploratory wells, all development costs (including and collectability is reasonably assured. Purchases and sales development dry holes), and support equipment and facilities of inventory with the same counterparty that are entered into are capitalized. Depreciation, depletion and amortization of in contemplation of one another are combined, considered as capitalized costs of proved oil and gas properties and equipment a single arrangement and netted against each other on the con- is calculated using the unit-of-production method for each field solidated statements of income. When companies of the Group based on proved reserves for property acquisitions and proved act as an agent for purchases and sales of inventory, they are developed reserves for exploration and development costs. In also reported on a net basis. both cases, the proved reserves data used is estimated on A variety of claims have been made against certain sub- a life-of-field basis as management believes it will continue to sidiaries of the Group in a number of pending lawsuits and tax be successful in the renewal of its oil and gas licenses. disputes. For further information on contingencies see Note 22 to the Consolidated Financial Statements in the Financial Reporting section of the company’s website www.tnk-bp.com.

TNK-BP Annual review 2009 > 81

OUR FINANCIAL PERFORMANCE

14.10: EBITDA Reconciliation EBITDA for the year ended 31 December 2009 and 31 December 2008 is reconciled to income before income taxes as follows:

For the year ended For the year ended 31 December 31 December 2009 2008 EBITDA 9,007 10,542 Depreciation, depletion and amortization (1,803) (1,564) Interest expense (261) (500) Exchange loss, net (180) (229) Non-recoverable VAT — (87) Other differences 41 (194) Income before income taxes 6,804 7,968

14.11: Segment information by geographical area

As of and for the year ended As of and for the year ended 31 December 2009 31 December 2008 Revenues Long-lived Revenues Long-lived assets assets excluding excluding deferred tax deferred tax assets ssets Russian 32,464 21,830 48,463 21,270 Federation Ukraine 2,289 296 3,423 256 Consolidated 34,753 22,126 51,886 21,526

>> > 82 People, technology, efficiency 14

14.12: Summary Consolidated Balance Sheet for the Last Five Years

USD million 2009 2008 2007 2006 2005 ASSETS Cash and cash equivalents 901 1,751 3,230 1,753 1,341 Bank deposits with maturity more than 150 — — — — 3 months Trade and other receivables 3,966 3,553 5,520 5,938 5,213 Other current assets 2,213 1,693 2,366 1,067 1,056 Total current assets 7,230 6,997 11,116 8,758 7,610 Property, plant and equipment 17,800 17,188 14,678 12,339 11,721 Other long-term assets 4,418 4,522 3,545 2,671 2,293 Total assets 29,448 28,707 29,339 23,768 21,624 LIABILITIES AND EQUITY Short-term debt 1,425 1,898 1,624 2,093 767 Other current liabilities 3,678 3,657 4,634 4,142 6,656 Total current liabilities 5,103 5,555 6,258 6,235 7,423 Long-term debt 5,593 6,094 6,924 4,841 2,876 Other long-term liabilities 2,321 2,269 2,298 1,735 2,029 Total liabilities 13,017 13,918 15,480 12,811 12,328 Group shareholders’ equity 15,313 13,683 12,803 10,106 8,414 Noncontrolling interest 1,118 1,106 1,056 851 882 Total equity 16,431 14,789 13,859 10,957 9,296 Total liabilities and equity 29,448 28,707 29,339 23,768 21,624

TNK-BP Annual review 2009 > 83

OUR FINANCIAL PERFORMANCE

14.13: Summary Consolidated Income Statement for the Last Five Years

USD million 2009 2008 2007 2006 2005 Revenues 34,753 51,886 38,926 35,725 30,180 Export duties (8,360) (15,974) (10,196) (10,087) (7,874) Taxes other than income tax (6,043) (11,182) (7,821) (7,461) (5,543) Operating expenses and other costs (11,720) (14,792) (11,788) (10,350) (9,203) Depreciation, depletion and amortization (1,803) (1,564) (1,414) (1,249) (1,215) Total costs and other deductions (27,926) (43,512) (31,219) (29,147) (23,835) Earnings from equity investments 26 278 309 507 823 Interest expense (261) (500) (546) (350) (227) Gain on disposal of subsidiaries 212 60 135 2,921 766 Other income and expenses – (244) 140 171 54 Income before income taxes 6,804 7,968 7,745 9,827 7,761 Income taxes (1,534) (2,323) (1,993) (2,722) (2,917) Net income 5,270 5,645 5,752 7,105 4,844 Less net income attributable to (297) (361) (410) (427) (60) noncontrolling interest Net income attributable to Group share- 4,973 5,284 5,342 6,678 4,784 holders People, technology, efficiency Notes

TNK-BP Annual review 2009 Notes

>> annual review and Summary Financial Statements tnk-bp.com 2009