ANNUAL REPORT 2007 • Energy Security • Technological Advancement • Continuous Growth • Sustainable Development • Transparency Rosneft _ Annual Report 2007 Contents 5 Message from the Chairman 7 Message from the President 10 Key Events in 2007 13 Company Profile 14 Company History 16 General Information about Rosneft 18 Rosneft Structure 20 Rosneft Today 22 Key Production and Financial Indicators 24 Rosneft Development and Strategy Outlook 27 Performance Review 28 Major Acquisitions 31 Exploration 36 Reserves 37 Licensing 39 Production 47 Refining, Petrochemicals and Gas Processing 55 Marketing 60 Key Financial Results 73 Research and Innovation 74 Managing Research and Development 75 Technology Development Trends 76 Innovative Development 79 Information Support 81 Social Responsibility 82 Personnel 86 Social Policy and Charity 92 Health, Safety and Environmental Protection 95 Corporate Governance 96 Corporate Governance 97 Board of Directors 101 Board of Directors' Activity in 2007 102 Management Board 104 Committees of the Board of Directors 106 Authorized Capital 110 Dividend Policy 111 Information Disclosure 112 Code of Corporate Governance 112 Internal Control 118 Appendix 1 Rosneft Consolidated Financial Statements for 2007 under US GAAP 171 Appendix 2 Rosneft Non-Consolidated Financial Statements for 2007 under RAS 193 Appendix 3 Risk Analysis 199 Appendix 4 Information on Observation of Rosneft Corporate Governance Code 219 Appendix 5 Major Related-Party Transactions in 2007 252 Appendix 6 Taxation of Dividends and Capital Gains 260 Contact Information 2 3 Rosneft _ Annual Report 2007 Rosneft _ Annual Report 2007 Regions of Rosneft Operation LEGEND Exploration and production Refineries Marine terminals Arkhangelsk Belokamenka Rosneft headquarters Vankorneft Polar Lights Oil pipelines Moscow Severnaya Neft Krasnodarneftegaz Komsomolsk Udmurtneft West Kamchatka Shelf Samara Tuapse Yuganskneftegaz Samaraneftegaz Grozneftegaz Stavropolneftegaz Sakhalin-1, 3, 4, 5 Purneftegaz Achinsk Verkhnechonskneftegaz Tomskneft Angarsk Sakhalinmorneftegaz De-Kastri East Siberian Oil and Gas Company Nakhodka 4 Rosneft _ Annual Report 2007 Rosneft’s superb performance in 2007 is particularly gratifying as it dispels the common lack of confidence in a positive outlook for enterprises with majority state ownership IGOR SECHIN Chairman of Rosneft Board of Directors 5 Rosneft _ Annual Report 2007 Message from the Chairman Dear Shareholder, In 2007, Rosneft gained the lead in the Russian fuel As the leading national oil company, Rosneft is now and energy industry in terms of crude output, added better positioned to foster cooperation with major hydrocarbon reserves, unit operating costs and capi- players in the international petroleum market and tal expenditures, as well as other key performance in- provide a more significant contribution to the world’s dicators. Furthermore, Rosneft has gradually evolved energy supply. I have every confidence that Rosneft into a most dynamic global oil and gas company. will sustain its leadership in the national oil indus- try, and intensify efforts to deliver greater value to The acquisition of new strategic assets and all its numerous shareholders. In particular, this can comprehensive exploration and development be made possible due to continuous cost reduction, activities at major upstream enterprises enabled improved operating efficiency, higher quality of petro- Rosneft to hit a record 100 mln tonne crude output leum products and services, as well as ongoing intro- (over two mln barrels per day). Steadily growing duction of innovative technology. production at Yuganskneftegaz and Sakhalin-1 was also largely conducive to achieving this milestone. I am convinced that all these measures will enable Rosneft to deliver on its key strategic objectives, Due to streamlined integration of new downstream and which include supporting Russia’s long-term eco- upstream assets, the Company has become the larg- nomic development and social stability, environmen- est national oil producer operating in 50 regions of the tal protection, and efficient development of subsur- Russian Federation, and managed to better align its face resources. production and refining business segments. Rosneft’s superb performance in 2007 is particularly gratifying as it dispels the common lack of confidence in a positive outlook for enterprises with majority state ownership. Taking the Company public in 2006 allowed us to further extend Rosneft’s development potential. As a result of the IPO, almost 200,000 companies and individuals became Rosneft shareholders. As a public company, we can build on more diverse fundraising options that ensure timely implementation of capital- intensive projects, and take advantage of stronger corporate culture, which is crucial to promoting com- munication with foreign partners. Sustained development of upstream operations is fur- ther supported by a comprehensive exploration port- folio in the regions that will soon grow to replace tradi- tional areas of hydrocarbon production. The Company is implementing a number of promising projects in East Siberia that has a truly remarkable hydrocarbon potential, and several strategic shelf projects in the Far East, including West Kamchatka shelf. Some of these developments are being carried out in close collabora- IGOR SECHIN tion with the largest global oil and gas companies. Chairman of Rosneft Board of Directors 6 Rosneft _ Annual Report 2007 The combination of state and private ownership is a solid basis for Rosneft’s further business growth. 2007 clearly demonstrated that Rosneft’s development strategy is effective and robust SERGEY BOGDANCHIKOV President of Rosneft 7 Rosneft _ Annual Report 2007 Message from the President Dear Shareholder, almost USD 100 per barrel by year-end 2007. Due to a time lag between Russian export duties and inter- In 2007, Rosneft distinguished itself as the leading national crude oil prices, net export price (excluding national oil company, posting the best operating and export duty and mineral extraction tax) increased by financial performance since its establishment. We more than 20%. Refining margins in Russia, being a continued to implement a coordinated strategy for function of export duties for crude oil and petroleum sustainable business growth, with the primary focus products, were also exceptionally high. Coupled with shifting to major asset base expansion to strengthen Rosneft’s massive progress throughout our core op- our future prospects. erations, this led to a further strengthening of the Company’s financial position. Last year, Rosneft acquired major upstream assets in various regions of Russia with total proved reserves of In 2007, Rosneft’s net income adjusted for extraordi- about 1.5 bln barrels of oil equivalent and an output nary items reached USD 6,483 mln – almost a twofold of more than 300 thousand barrels of oil per day. The growth compared to 2006. Return on average capital Company also acquired five new refineries, thus in- employed (ROACE) in the review period increased to creasing its aggregate refining capacity to more than 18.6% from 18.1% in the previous year, while the Com- 1.1 mln barrels per day. In addition, Rosneft managed pany’s adjusted EBITDA grew to USD 14,459 mln. to extend its retail network from 684 to 1,695 filling stations. Constantly striving to optimize consolidated reporting and information disclosure, in 2007, we completed Thanks to the expertise and cooperative effort of all a comprehensive fast-close reporting project, RosA, Rosneft employees, we successfully integrated newly that now covers more than 300 of the Company’s acquired assets into the Company’s operating struc- business units. RosA allows preparation of unaudited ture, which resulted in major synergies and positively consolidated management accounts under US GAAP affected our consolidated results. Rosneft currently and RAS on the 30th calendar day after the end of a enjoys a more balanced asset portfolio and greater reporting period, which gives Rosneft a strong com- flexibility in operating and strategic planning. We petitive advantage over our national rivals. Thanks to are now able to deliver even better performance as well-planned and targeted implementation of the RosA the Company is particularly well placed to build on a project, which was launched in June 2006, we can now streamlined group structure. benefit from improved management decision-making, higher transparency and investor appeal, and compli- Rosneft achieved impressive organic growth in 2007. ance with global best practices in information disclo- Organic increase in our hydrocarbon production sure. The new fast-close system takes Rosneft to a amounted to 6.6%, which is well above the average of new level of international recognition, and significantly our domestic and international peers. Organic reserve contributes to enhanced strategic planning. replacement ratio was 111%, while total reserve re- placement ratio exceeded 300%. Furthermore, we Global economic downturn resulted in highly volatile significantly increased throughput at our Tuapse and prices of Rosneft shares in 2007. However, modest Komsomolsk refineries. annual growth in share prices does not adequately re- flect our strong operating and financial performance. The continued favorable price environment in 2007 I am confident that the Company has vast potential to became another major contributing factor to Ros- further drive shareholder value, and we will continue neft’s performance.