?--I 3-F7 Cxa!!Z of UKRAINE

OFFERING CIRCULAR

NATIONAL JOINT-STOCK COMPANY -?--I 3-F7 cxa!!z OF UKRAINE

Loan Participation Notes due 2009 issued by, but without recourse to, Standard Bank London Holdings PLC for the purpose of financing a loan by Standard Bunk London Limited to NJSC Naftogaz of Ukraine (incorporated in Ukraine) Issue Price: 100%

Standard Bank Landon Holdings PLC (“SBLH PLC” or the “Issuer”) is issuing an aggregate principal amount of U.S.S5~,0W,oM)Loan Participation Noles due 2009 (the “Notes”). The proceeds of the issue 01 the Soles nil1 be used for the sole purpose of financing n lo38 (the ‘SBL ban”) h) SBLH PLC to Standard Bank London Limited (“SBL”) pursuant to a loan agreement dated 29 September 2004 (phe “SBL Loan Agreement”) ktween SBLH PLC and SBL The proceeds from the SBL Loan will be used for the sole purpose of tinancinp an os-loan (thc “Nafropnz Loan” and. meether with the SBL Loan. the “Loans”) by SBL to NJSC Naftogaz of Ukraine (“NJSC Naftogaz” or the “Company”) pursuant to a loan agreement datcd 29 Scptcmkr 2004 (the “Naftogaz Loan Agreement” and, together with the SBL Loan Agreement. the “Loan Agreements”) between SBL and NJSC Naftopaz. SBLH PLC: will charpe. by way of fist fmed charpe as securiry for its payment obligations in respecl of lhe Notes. its riphts and inlercsls as lender under the SBL Loon Agreement. and SBL will chitree. hy way of Ikst lixed charge curil) for Ihc pvmcnt i,hlipalioni of SBLH PLC in respect of the Notes. its righu and intcrests as lender under the Naftogaz Loan Agreement, to The Bank of New York, acting through its London hrdnch. Irustec (thc “Trustee”). for the henelit of the holders of the Nntes (the “Noteholders”) and SRLH PLC :ind SBL will awpn thrir rcsptctlve admimtrative righu under the Loan Agreements to the Trustee (the “Loan Administration Assignment”). In each case where amounts of principal, interest and additional amounts (if any) arc statcd to be payablc in respect of the Notes, the obligation of SBLH PLC to make any such payment shall constitute an obligation only to acwunt to the Noteholders, on each date upon which such amounll of principal, interest and additional amounts (if any) are due in respect of the Notes, for an amount equivalent to all principal, interest and additional amounls (if any) aclually received bv or lor ihe account ol SULH PLC pursuant IO the SBL Loan Agreement. SBLH F’LC will have no ollier linancial obligation under the Notes. Noteholders will be deemed to hmve accepted and agreed tblt tbey will be relying solely Mdexdurively on lhe credit and Gnancirl standing OF NJSC Ndtogu in rcspecl of the Gnurial 6tnld.g of the Notes. Interest on the Notes will be payable semi-annually in mear in equal instahents on 30 March and 30 Scprember in each year commencing on 30 March 2005 as dcseribcd undcr “Terms and Conditions of thc Notes - Interest”. SBLH PLC shall account to Noteholders for an amount equivalctlt to amounts of interest actually received by or for the acwunt of SBLH PLC pursuant to the SBL Loan Agreement, which interest undcr thc SBL Loan is qual to 8.125 per cent. per annum. Except ar set forth hcrcin (xc “Terms and Conditions of thc Not-Taxation”), payments in respcct of the Notes will be made without any deduction or withholding for or on amount of taxes of the United Kingdom or Ukraine. The Naftogaz Loan may bc prepaid at its principal amount. together with aunued interest, at the option of NJSC Naftogaz upon NJSC Naftogaz or SBLH PLC being required to dcduct or withhold any taxes of the United Kingdom or Ukraine from payments to bc made by hem in rcspxt of the Notes or pursuant to the Naftogaz Loan Agreement, or following enforcement of the security created in the Trust Decd and upon NJSC Naftogaz or the Trustee king required to deduct or withhold any taxes of ULrame. the United Kingdom or the jurisdiction in which the Trustee is then resident. The Naftogaz Loan may also bc prepaid in whole (but not in pan) if it kcomcs unlawful for thc Naftogaz Laan or thc Notes to remain outstanding, as set out in thc tcrms of thc Naftogaz Loan Agrccment. Upon prepamcut of each Loan in amrdauce with the terms of the Loan Agreements (subject to the receipt of the relevant funds from NJSC Naftogaz) the principal amount of all oulsmnding Notes will be prepaid by SBLH PLC. together with accrued interest. On the Occurrence of either a Change of Control or a Cessation of Operalions (both as defined in the Naftogaz Loan Apreement). each Noleholder shall have the option to give notice or procure that notim h given for the prepayment of the applicable amount of the SBL Loan and in turn the Naftogaz Laan. To the extent such ~flountis actually received by SBL from Naftogaz. each Note held by the relevant Notcholder shall bc redeemed on the Put Settlement Date las dclined in C‘ondilion 7(3) (PUIOption)) at its principal amount topelher with accrued interest (ir am). See ”Terms and Conditions of the Notes - Redemption and Repurchase - Put Option”. An investment in tk Not- involva a Ugh dcgret of rlst Set “Risk Facton” beginning OB pap 16. THE NOTES AND THE LOANS (COLLEClTVELY, THE “SECURITIES”) HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE US. SECURIl7F.S AmOF 1933, AS AMENDED (THE“SECURITIES ACT”) AND, SUBJEm TO CERTAIN EXCEPIIONS, THE SECURlTIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEPINED IN REGULATION S UNDER THE SECURTnES ACT (“REGULATIONS’)). Application habeen made to list the Notes on the Luxembourg Stock Exchange. The Notes will be issued in karer form in the denomination of U.S.S1oO,ooO.with coupons for the payment of interest attached. The Notes ariu initially be represented by a temporary global note (the “Temporary Global Note”), without interest coupons, which will bc depited with a common depositary for Euroclear Bank S.A./N.V. as qxrator of the Euroclear System (“Euroclear”). and Clemtream Banking, sociktd anonyme (“Clearstream, Luxcmhurg”) on or about 30 September 2W.The Temporary Global Note will be exchangeable for interc818 in a permanent global note (the “Permanent Global Note” and, togcthcrwiththeTcmporaryGlobalNotc.the“GlobalNotes”).withoutinterestcoupons,onorahcradate whichiscxpectcdtok 10Novcmbcr2004 upon certification as to nun4J.S. heneticial ownership. The Permsnenl Cilohal Note will only hc: exchangeahlo fur Notrs in definitive form in the limited circumstances desnibcd under “Summary of the Provisions relating IO the Notes in Global Form”. Lead Manager ABN AMRO Co-Lead Manager Standard Bank London Limited

The date of this Offering Circular is 29 September 2004 NJSC Naftogaz, having made all reasonable enquiries, confrms that (i) this offering circular (the “Offering Circular”) contains all information with respect to NJSC Naftogaz and its subsidiaries and afiliates taken as a whole (“Naftogaz”), the Loan Agreements and the Notes that is material in the context of the issue and offering of the Notes; (ii) the statements contained in this Offering Circular relating to Naftogaz are in every material particular true and accurate and not misleading in any material respect; (iii) the opinions, expectations and intentions expressed in this Offering Circular with regard to Naftogaz are honestly held, have been reached after considering all relevant circumstances and are based on reasonable assumptions; (iv) there are no other facts in relation to Naftogaz, the Loan Agreements or the Notes the omission of which would, in the context of the issue and offering of the Notes, make any statement in this Offering Circular misleading in any material respect; and (v) all reasonable enquiries have been made by NJSC Naftogaz to ascertain such facts and to verify the accuracy of all such information and statements. NJSC Naftogaz accepts responsibility accordingly. SBL accepts responsibility for all information contained herein with respect to SBL and SBLH PLC accepts responsibility for all information contained herein with respect to SBLH PLC. SBL has taken all reasonable cure to ensure that the information contained in this Offering Circular with respect to SBL is true and accurate in all material respects and is not misleading in any material respect, and that, in the context of the issue and offering of the Notes, there are no other facts in relation to SBL the omission of which would make any statement regarding SBL in this Offring Circular misleading in any material respect. SBLH PLC has taken all reasonable care to emure that the information contained in this Offering Circular with respect to SBLH PLC is true and accurate in all material respects and is not misleading in any material respect, and that, in the context of the issue and offering of the Notes, there are no other facts in relation to SBLH PLC the omission of which would make any statement regarding SBLH PLC in this Offering Circular misleading in any material respect. The statistical information and other data contained in Appendix A to this Offering Circular entitled “Appendix A-Regulation of the Oil and Gas Industry in Ukraine” has been extracted from publicly available data (such as information contained on oficial websites and in publications of governmental agencies of Ukraine, including the Ministry of Finance, and from other government or mass media sources) and NJSC Naftogaz accepts responsibility for accurately extracting such data but accepts no further responsibility in respect of such information. This Offering Circular does not constitute an offer oJ or an invitation by or on behalf oj NJSC Naftogaz, SBLH PLC, SBL or the Managers (as defined in “Subscription and Sale” herein) to subscribe or purchase any Notes, The distribution of this Offering Circular and the offer or sale of the Notes in certain jurisdictions is restricted by law. Persons into whose possession this Offering Circular may come are required by SBLH PLC, NJSC Nafrosat, SBL and the Managers to inform themselves about and to observe any such restrictions. The Notes have not been registered with the US.Securities and Exchunge Commission, any State securities commission in the United States or any other US.regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Notes or the accuracy or adequacy of this Offering Circular. Any representation to the contrary is a criminal offence in the United States. The Notes will be in bearer form and are subject to United States tax law requirements. In addition, none of SBLH PLC, SBL or the Managers have authorised any issue of Notes to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, as amended (the “Regulations’). The Notes may not lawfully be offered or sold to persons in the United Kingdom except in circumstances that do not result in an offer to the public in the United Kingdom within the meaning of the Regulations or otherwise in compliance with all other applicable provisions of the Regulations. Further information with regard to restrictions on offers and sales of the Notes and the distribution of this Offering Circular is set out under “Subscription and Sale”. The Notes are subject to United States tax law requirements and may not be offered, sold, or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by United States tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code of 1986, as amended, and regulations thereunder. No person has been authorised in connection with the ofJering of the Notes to give any information or make any representation regarding NJSC Naftogaz. SBL, SBLH PLC, the Trustee, the Managers, or the Notes other than as contained in this Offering Circular. Any such representation or information must not be relied upon as having been authorised by SBL, SBLH PLC, the Trustee, NJSC Naftogaz or the Managers. The delivery of this Oflering Circular at any time does not imply that the information contained in it is correct as at any time subsequent to its date. This Offering Circular may only be used for the purposes for which it has been published.

2 No representation or warranty, express or implied, is made by the Managers as to the accuracy or completeness of the information set forth in this document, and nothing contained in this document is, or shall be relied upon as, a promise or representation, whether as to the past or the future. None of the Managers assumes any respomibility for the accuracy or completeness of the information set forth in thir document. Each person contemplating making an investment in the Notes must make its own investigation and analysis of the creditworthiness of NJSC Naftogar, SBL and SBLH PLC and its own determination of the suitabiliry of any such investment, with particular reference to its own investment objectives and experience, and any other factors which may be relevant to it in connection with such investment. None of NJSC Naftogaz, SBL, SBLH PLC, the Managers, the Trlrstee or any of their respective representatives is making any representation to any offeree or purchaser of the Notes regarding the legality of an investment by such offeree or purchaser under appropriate legal investment or similar laws. Each investor should consult with his own advisers as to the legal, tax, business, financial and related aspects of a purchase of the Notes. This Offering Circular contains conversions of certain amounts into U.S. dollars at specified rates solely for the convenience of the reader. No representation is made that the Ukrainian hryvnia or US.dollar amounts referred to herein could have been or could be converted into Ukrainian hryvnia or US.dollars, ILT the cme may be, at these rates, at any particular rate or at all. IN CONNECTION WITH THIS ISSUE, ABN AMKO BANK N.V. (OR ANY PERSON ACTING ON ITS BEHALF) MAY OVER-ALLOT OR EFFECT TRANSACIIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL FOR A LIMITED PERIOD. HOWEVER, THERE MAY BE NO OBLIGATION ON ABN AMRO BANK N.V. (OR ANY PERSON ACTING ON lTS BEHALF) TO DO THIS. SUCH STABILISING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME, AND MUST BE BROUGHT TO AN END AFTER A LIMITED PERIOD. SUCH STABILISING SHALL BE IN COMPLIANCE WITH ALL APPLICABLE LAWS, REGULATIONS AND RULES.

3 TABLE OF CONTENTS

Page INCORPORATION BY REFERENCE...... 5 INDUSTRY INFORMATION ...... 5 MARKET. RANKING AND OTHER DATA ...... 5 FORWARD-LOOKING STATEMENTS ...... 6 ENFORCEABILITY OF JUDGMENTS ...... 6 PRESENTATION OF FINANCIAL AND OTER INFORMATION...... 7 SUMMARY ...... 9 SUMMARY OF THE OF+ERING ...... 11 DESCRIPTION OF TH€ TRANSACTION ...... 14 RISK FACTORS ...... 16 USE OF PROCEEDS ...... 39 EXCHANGE RATES ...... 40 CAPITALISATION ...... 41 SELECTED FINANCIAL AND OPERATING INFORMATION...... 42 SELECTED FINANCIAL REVIEW ...... 45 RECENT DEVELOPMENTS ...... 57 BUSINESS ...... 58 MANAGEMENT ...... 102 RELATED PARTY TRANSACTIONS...... 106 STANDARD BANK LONDON HOLDINGS PLC ...... 107 STANDARD BANK LONDON LIMITED...... 108 TERMS AND CONDITIONS OF THE NOTES ...... 109 NAFTOGAZ LOAN AGREEMENT ...... 124 TAXATION ...... 153 SUBSCRIPTION AND SALE...... 156 GENERAL INFORMATION ...... 158 CONSOLIDATED FINANCIAL STATEMENTS OF NJSC NAFTOGAZ...... F-1 NON-CONSOLIDATED FINANCIAL STATEMENTS OF NJSC NAFTOGAZ ...... G-1 APPENDIX A - REGULATION OF THE OIL AND GAS INDUSTRY IN UKRAINE...... A-1 APPENDIX B - COVERING LETTER TO MILLER AND LENTS RESERVES REPORT .... B-1 APPENDIX C - LETTER OF SUPPORT FROM THE MINISTRY OF FUEL AND ENERGY ...... c-1

4 INCORPORATION BY REFERENCE

The complete report of Miller and Lents, Ltd. (“Miller and Lents”) dated 22 June 2004 (including all of the exhibits to that report) (the “Miller and Lents Reserves Report”), the covering letter to which is set out in Appendix B to this Offering Circular, is incorporated in this Offering Circular by reference. A copy of the Miller and Lents Reserves Report is available without charge upon request at the specified affice of the Paying Agent for the time being in Luxembourg, as described in “General Information” below,

INDUSTRY INFORMATION

In this Offering Circular, Naftogaz relies on and refers to information regarding the Ukrainian oil and gas industry, its segments and its participants from market research reports, analyst reports and other publicly available information. Although Naftogaz believes that this information is reliable, it cannot guarantee the accuracy and completeness of the information and it has not independently verified it. Naftogaz accepts responsibility for the information contained in this Offering Circular other than the country and industry information described in the sections entitled “Business” and “Regulation of the of the Oil and Gas Industry in Ukraine“ (except where it relates specifically to Naftogaz), in respect of which Naftogaz takes responsibility for the correct extraction of that industry information from the relevant sources.

MARKET, RANKING AND OTHER DATA

The data included in this Offering Circular regarding markets and ranking, including the position of Naftogaz and its competitors within these markets, are based on independent industry publications, reports of government agencies or other published industry sources and the estimates of NJSC Naftogaz based on its management’s knowledge and experience in the markets in which Naftogaz operates. NJSC Naftogaz’s estimates have been based on information obtained from customers, suppliers, trade and business organisations and other contacts in the markets in which Naftogaz operates. NJSC Naftogaz believes these estimates to be accurate in all material respects as of the date of this Offering Circular. However, this information may prove to be inaccurate because of the method by which NJSC Naftogaz obtained some of the data for these estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other inherent limitations and uncertainties.

5 FORWARD-LOOKING STATEMENTS

Some statements in this Offering Circular as well as written and oral statements of NJSC Naftogaz or its representatives made from time to time in reports, filings, news releases. confercnces. teleconfercnces. web postings or otherwise, may be deemed to be “forward-looking statements”. Forward-looking statements include statements concerning NJSC Naftogaz’s plans, objectives, goals, strategies and future operations and performance and the assumptions underlying these forward-looking statements. NJSC Naftogaz uses the words “anticipates”, “estimates”, “expects”, “believes”, “intends”, “plans”, “may”, “will”, “should” and any similar expressions to identify forward-looking statements. These forward- looking statements are contained in the sections “Summary”, “Risk Factors”, “Selected Financial Review”, “Business” and other sections of this Offering Circular. NJSC Naftogaz has based these forward-looking statements on the current view of its management with respect to future events and financial performance. Thcse views reflect thc best judgment of NJSC Naftogaz‘s management but involve uncertainties and are subject to certain risks the occurrence of which could cause actual results to differ materially from those predicted in NJSC Naftogaz’s forward-looking statements and from past results, performance or achievements. Although NJSC Naftogaz believes that the estimates and the projections reflected in its forward-looking statements are reasonable. if one or more of thc risks or uncertainties materialise or occur. including thosc which NJSC Naftogaz has identified in this Offering Circular, or if any of NJSC Naftogaz’s underlying assumptions prove to be incomplete or incorrect, NJSC Naftogaz’s actual results of operations may vary from those expected, estimated or projected. These forward-looking statements are made only as of the date of this Offering Circular. Except to the extent required by law, NJSC Naftogaz is not obliged to, and does not intend to, update or revise any forward-looking statements made in this Offering Circular whether as a result of new information, future events or otherwise. All subsequent written or oral forward-looking statements attributable to NJSC Naftosaz, or persons acting on NJSC Naftogaz’s bchalf. are expressly qualified in their entirety by the cautionary statements contained throughout this Offering Circular. As a result of these risks, uncertainties and assumptions, a prospective purchaser of the Notes should not place undue reliance on these forward-looking statements.

ENFORCEABILITY OF JUDGMENTS

Ukrainian courts will not recognise andlor enforce any judgment obtained in a court established in a country other than Ukraine unless such enforcement is envisaged by an international treaty to which Ukraine is a party or by an “ad hoc” treaty in effect between such country and Ukraine providing for enforcement of such judgments on a reciprocal basis and only in accordance with the terms of such treaty. There is no such treaty in effect between Ukraine and the United Kingdom. Ukraine is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). Consequently, a foreign arbitral award obtained in a state which is party to that convention should be recognised and enforced by a Ukrainian court (under the terms of the convention). Since the Naftogaz Loan Agreement contains a provision allowing for arbitration of disputes, respective arbitral awards may be enforced in Ukraine under provisions of the New York Convention. In addition, Naftogaz is subject to a temporary moratorium on enforcement against its fixed assets introduced by Ukrainian law in 2001. By virtue of the moratorium, enforcement against the fixed assets of Naftogaz arising in connection with, inter alia, (a) court judgments and arbitration awards or (b) bankruptcy proceedings, is currently prohibited. As a result, creditors of Naftogaz who seek to satisfy a judgment against the fixed assets of Naftogaz may not be able to do so.

6 PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Annual Financial Information The financial information of NJSC Naftoyaz set forth hercin. has. unless othcrwise indicated. been derived from its audited consolidated balance sheets, statements of changes in equity and income and cash flow statements as at and for the years ended 31 December 2003, 2002 and 2001 (the “Financial Statements”), prepared in accordance with International Financial Reporting Standards (“IFRS”), formerly referred to as International Accounting Standards (“IAS”). The Financial Statements have been audited by NJSCNaftogaz’s independent auditors, BDO Balance-Audit Ltd. (“BDO”) located at 26, Lesi Ukrayinki Boulevard, 1st Floor, Kyiv 01133, Ukraine, in accordance with International Standards on Auditing. Thc Financial Statements. including thc qualified audit opinions of BDO, are set forth elsewhere in this Offering Circular. See “Risk Factors-Risks Relating to Naftogaz-Qualified Audit Opinion”. NJSC Naftogaz also prepares financial statements in accordance with Ukrainian accounting standards. The financial data contained in this Offering Circular that is stated in US. dollars has been converted by NJSC Naftogaz from Ukrainian hryvnia at the rate of UAH 5.33 to U.S.$l.OO, which was the official rate set by the National Bank of Ukraine (the “NBU”) on 31 December 2003. These translations should not be construed as representations that Ukrainian hryvnia amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated as of the date mentioned in this Offering Circular or at all.

Currency In this Offering Circular, the following currency terms are used: + “U.S. dollar”, “Dollar”, “U.S.D”, or ‘‘US.$’’ means the lawful currency of the United States;

0 “UAH”, “Ukrainian hryvnia” or “Hryvnia” means the lawful currency of Ukraine; and

0 “EUR”, “Euro”, or “€” means the lawful currency of the member states of the European Union that adopted the single currency in accordance with the Treaty of Rome establishing the European Economic Community, as amended from time to time.

Oil and Gas Reserves Data At the request of Naftogaz, Miller and Lents, independent petroleum engineers, have estimated the oil, condensate, and natural gas reserves and projected future net revenues therefrom as of 31 December, 2003 for 124 fields controlled by Naftogaz and operatcd by its subsidiary companies SC Chornomomaftogaz (“Chornomornaftogaz”), SC Ukrgazvydobuvannya (“Ukrgazvydobuvannya”) and JSC Ukrnafta (“Ukmafta”). Miller and Lents presented the results of their evaluation in a reserves report. The covering letter to the Miller and Lents Reserves Report is included elsewhere in this Offering Circular as Appendix B based upon the authority of Miller and Lents as experts with respect to such matters. This Offering Circular contains information on such reserves as at 31 December 2003, which has been extracted without material adjustment from the Miller and Lents Reserves Report. Miller and Lents conducted its review of Naftogaz’s fields using U.S. Society of Petroleum Engineers. Inc. (”SPE International Standards”) and World Petroleum Congrcss (**WPC”)reserves classifications and methodologies.

Terms used to describe quantities of oil and gas 0 Bbl - One stock tank barrel, or 42 U.S. gallons liquid volume, of crude oil or other liquid hydrocarbon.

0 Bcf- One billion cubic feet of natural gas.

0 MMBbls - One million Bbls of oil or other liquid hydrocarbons. + Reference Unit - one thousand cubic metres of gas or one tonne of oil.

Conversion of Production, Refining and Reserves Data Naftogaz maintains its internal records relating to its production and rcfining operations in metric tonnes or cubic metres, as applicable. This Offering Circular contains conversions of certain volumes from tonnes or cubic metres into barrels. Such metric data has been converted into barrels at the rate of one

7 tonne = 7.30 barrels (for crude oil) and one tonne = 8.00 barrels (for gas condensate). In addition, with respect to natural gas, 1,OOO cubic metres = 35,315 cubic feet.

Rounding Some numerical figures Included in this Offering Circular have been subject to rounding adjustments. Accordingly. numerical figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that preceded them.

8 SUMMARY

Naftogaz Overview Naftogaz is a vertically integrated oil and gas company. It is wholly-owned by the state of Ukraine and it is the largest company in Ukraine in terms of assets. Naftogaz is primarily involved in, and generates revenues from, the following activities:

0 Exploration, production and refining: oil and natural gas exploration. devclopment and production; and the processing and refinement of natural gas. gas condensate and oil.

0 Transportation and storage: transportation and storage of natural gas and oil.

0 Sales: sales of natural gas and oil to domestic consumers and exports of natural gas. Naftogaz’s other activities comprise both activities which support its core business segments, such as research and development, maintenance services for industrial facilities and construction as well as other unrclated businesscs such as ncwspapers. insurance. finance and banking, some of which it is planning to divest. Naftogaz does not own but is the sole operator of the oil and gas transportation systems in Ukraine, which are comprised of approximately 37,500 kilometres of gas pipelines, approximately 4,600 kilometres of oil pipelines, 13 underground gas storage facilities and 80 oil tanks. The networks of gas pipelines operated by Naftogaz transport a substantial amount of the total natural gas exports of OJSC Gazprom (“Gazprom”) to western, central and eastern Europe. These networks are connected to the main gas pipelines of all neighbouring countries. During 2003, 224.2 billion cubic metres of gas were transported through Ukraine, to various domestic and foreign destinations, including 112.4 billion cubic metres to Europe and 16.8 billion cubic metres to CIS countries. For the year ended 31 December 2003, Naftogaz had total assets of UAH 76,967.2 million (U.S.$14,440.4 million), total equity capital of UAH 37,615.3 million (U.S.$7,057.3million) and income of UAH 33,267.4 million (U.S.$6,241.5 million). Of this amount, sales (consisting predominantly of gas sales) comprised UAH 17,094.0 million (U.S.$3,207.1 million), transportation and storage comprised UAH 11,260.4 million. (U.S.$Z,112.7 million), production and refining (which principally includes oil, gas condensate and refined production and sale of approximately 10 per cent. of Naftogaz produced gas) comprised UAH 4,806.0 million (U.S.$901.7 million) and other activities comprised UAH 106.8 million (U.S.$ZO.O million). Production and refining income in 2003 included UAH 1.918.6 million (U.S.$36O.O million) for production and refining of gas and UAH 2.887.4 million (U.S.$S41.7 million) for production and refining of oil. Transportation and storage income in 2003 included UAH 10,260.5 million (U.S.$1,925.0million) for transportation and storage of gas and UAH 1,OOO.l million (U.S.$187.6million) for transportation and storage of oil.

9 gas drilling and production equipment. gradually expanding gas and oil production at existing fields and intensifying offshore oil and gas drilling operations in the Black Sea and the Sea of Azov. Increasing gas prices. Naftogaz intends to continue negotiations with the National Commission on Regulation of the Power Industry of Ukraine (the “NCRP”) to continue increasing natural gas prices for industrial consumers and to begin increasing these prices for other consumers in Ukraine. Selectively seeking acquisition opportunities outside of Ukraine. Although NJSC Naftogaz’s management believes that Naftogaz’s future growth will mostly be driven organically, management is currently considering selective strategic acquisitions and will continue to do so in the future as opportunities arise in its core business areas. The potential acquisitions Naftogaz is currently considering are:

0 Exploration, production and development. As part of Naftogaz’s strategy to increase its reserves and production, Naftogaz is also considering pursuing opportunities to acquire reserves outside of Ukraine in order to expand its exploration and production activities. The opportunities Naftogaz is currently considering include several prospective gas and oil ficlds in Russia and Libya. respectively. There can be no assurance, however, that Naftogaz will acquire these or any other assets.

0 Transportation and storage. Naftogaz intends to expand its core transportation and storage business by pursuing selective acquisitions outside of Ukraine. Naftogaz is participating in the tender for the purchase of certain interests in MOL Hungarian Oil and Gas Rt.’s subsidiaries involved in the transportation, storage and sale of natural gas in order to synchronise its natural gas distribution systems with those of Hungary and expand its operations into central Europe. On 26 August 2004 Naftogaz submitted a bid to MOL. However, it is not certain whether it will be successful. Increusing sales and exports. Naftogaz intends to increase its purchase of gas from Central Asia and increase its hydrocarbon production in order to expand its sales to industrial consumers in Ukraine and increase export volumes. If necessary, this potentially includes putting forth proposals to the Ukrainian Government for the increase of the export quotas for natural gas exported from Ukraine, which are set by annual inter-governmental protocols between Ukraine and Russia. For 2003, 2004 and 2005, all natural gas exported from Ukraine over a limit of 6 billion cubic metres per year is subject to a duty of U.S.$lOO per 1,000 cubic metres. However, Naftogaz currently anticipates that, upon agreement with Gazprom and pursuant to the relevant protocols, export quotas may be increased as required from 1 January 2006. See “Business-Exports”. Focus on core business segments. Naftogaz also plans to focus on its core business segments and to divest non-core assets, which principally comprise of shareholdings in unrelated businesses that Naftogaz inherited from its predecessor, Ukrgazprom. In order to optimise Naftogaz’s structure, Naftogaz has decided to divest by the end of 2005 its ownership interests in a number of non-core companies from which Naftogaz docs not derive a profit and/or over which Naftogaz does not have sufficient control. See “Business-Non-Core Businesses”. NJSC Naftogaz’s rcgistcrcd officc is at 6. B Khmelnitskogo Strect, Kyiv, 01001. Its telephone number is +380 44 4612537.

10 SUMMARY OF THE OFFERING

This summary may not contain all the information that may be important to prospective purchasers of the Notes. Investors are cautioned to read this entire Offering Circular, including the terms of the Naftogaz Loan, the more detailed information regarding Naftogaz’s business and operatiom and the Financial Statements included elsewhere in this Offering Circular. Investing in the Notes involves a high degree of risk. The information set forth under “Rkk Factors” should be carefully considered. Certain statements in this Offering Circular include forward-looking statements that also involve risks and uncertainties, as described under “Forward-Looking Statements”. The OffeG U.S.$5OO,oM),oM)8.125 per cent. Loan Participation Notes due 2009. Issuer of the Notes and Standard Bank London Holdings PLC. See “Standard Bank London Lender under the SBL Loan: Holdings PLC”. Lender under the Naftogaz Standard Bank London Limited. See “Standard Bank London Loan and Borrower under the Limited”. SBL Loan: NJSC Naftogaz, as Borrower NJSC Naftogaz of Ukraine, with its registered office and business under the Naftogaz Loan: headquarters at 6, B Khmelnitskogo Street, Kyiv, 01001, Ukraine. Trustee: The Bank of New York, acting through its London branch. Principal Paying Agent: The Bank of New York, acting through its London branch. Luxembourg Paying Agent: The Bank of New York (Luxembourg) S.A. Issue Price: 100 per cent. of the principal amount of the Notes. Maturity Date: 30 September 2009. Use of Proceeds: The net proceeds from the offering of the Notes after deduction of underwriting fees and commissions, which net proceeds are expected to amount to approximately U.S.$494,000,000,will be used by SBLH PLC for the sole purpose of financing the SBL Loan. The net proceeds from the Naftogaz Loan, which is being funded in full by the SBL Loan, will bc used by NJSC Naftogaz for financinp capital expenditures, the reduction of short-term debt (see “Selected Financial Review - Liquidity and Capital Resources”), certain potential strategic acquisitions (which may include the acquisition of certain interest in MOL Hungarian Oil and Gas plc’s gas subsidiaries if NJSC Naftogaz’s tender is successful and acquisition of rights to develop natural gas and oil fields in Russia or Libya). the purchase of natural gas and other general corporate purposes. Interest: The Notes will bear interest from 30 September 2004 at a rate of 8.125 per cent. per annum payable semi-annually in arrear in equal instalments on 30 March and 30 September in each year commencing on 30 March 2005. Limited Recourse: The Notes will constitute the obligation of SBLH PLC to apply an amount equal to the net proceeds from the issue of the Notes solely for the purpose of financing the SRI., Loan pursuant to the terms of the SBL Loan Agreement which will be used solely for the purpose of financing the Naftogaz Loan. SBLH PLC will only account to the holders of the Notes for all amounts equivalent to those (if any) received from SBL under the SBL Loan Agreement and SBL is obliged under the SBL Loan Agreement only to account to SBLH PLC for all amounts equivalent to those received from Naftogaz pursuant to the Naftogaz Loan Agreement, less amounts in respect of the Reserved Rights (as defined in the Terms and Conditions of the Notes).

11 Form: The Notes will be issued in bearer form in the denomination of U.S.$lOo,O00,with coupons for the payment of interest attached. The Notes will initially be represented by the Temporary Global Note, without interest coupons, which will be deposited with a common depositary for Euroclear, and Clearstream Luxembourg on or about 30 September 2004. The Temporary Global Note will be exchangeable for interests in the Permanent Global Note, without interest coupons, on or after a date which is expected to be 10 November 2004 upon certification as to non-U.S. beneficial ownership. The Permanent Global Note will only be exchangeable for Notes in definitive form in the limited circumstances described under “Summary of the Provisions relating to the Notes in Global Form”. Negative Pledge and Other Clause 14.1 of the Naftogaz Loan Agreement contains a negative pledge Covenants: in relation to Liens (other than Permitted Liens) (each as defined in thc Naftogaz Loan Agreement) by NJSC Naftogaz and its subsidiaries. Rating: The Notes have been rated B+ by Fitch Ratings Ltd. and B2 by Moody’s Investors Services Limited.

A rating is not a recommendation tQ buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation Withholding Tax or Increased In the event that any payments to be made by NJSC Naftogaz under the Costs; Gross-up: Naftogaz Loan Agreement become subject to any withholding tax imposed by Ukraine, the United Kingdom or any taxing authority thereof, or certain other circumstancesresult in SBL incurring increased cost associated with the Naftogaz Loan, NJSC Naftogaz will (save in certain circumstances and subject to the enforceability of such provisions) be required to pay any additional amount necessary to compensate SBL for the tax withheld or the increased cost to SBL. See “The Naftogaz Loan Agreement”. Tax Redemption: In the event that any payments to be made by SBL under the SBL Loan Agreement become subject to any withholding tax imposed by the United Kingdom or any taxing authority thereof, NJSC Naftogaz may, subject to the satisfaction of certain conditions, be obliged to prepay the Naftogaz Loan. See “The Naftogaz Loan Agreement”. In the event that NJSC Naftogaz is required to pay additional amounts under the Naftogaz Loan Agreement as a result of tax imposed by any taxing authority in the United Kingdom, NJSC Naftogaz will have the right to prepay the Naftogaz Loan, upon not less than 30 business days’ notice to SBL, in whole (but not in part) at any time. See “The Naftogaz Loan Agreement”. In such circumstances, SBL will exercise its tight to prepay the SBL Loan and SBLH PLC will exercise its right to redeem the Notes. See “Terms and Conditions of the Notes”. Early Redemption at the The Notes may be redeemed at the option of the Noteholders at their Option of the Noteholders principal amount together with accrued interest to the date of redemption if a Put Event (as defined in Condition 6 of the Terms and Conditions of the Notes) occurs. Listing: Application has been made for the Notes to be listed on the Luxembourg Stock Exchange.

12 Selling Restrictions: The Notes have not been and will not be registered under the Securities Act and, subject to certain exceptions, may not be offered or sold within the United States. The Notes may be sold in other jurisdictions only in compliance with the applicable laws and regulations. The Notes have not been registered in Ukraine and may not be offered or sold in Ukraine without prior registration in Ukraine. The offer and sale of the Notes may also be restricted in other jurisdictions. See “Subscription and Sale”. Governing Law: The Notes, the Loan Agreements and the Trust Deed will be governed by English law. Risk Factors: An investment in the Notes involves a high degree of risk. See “Risk Factors”. Security Codes: ISIN:XS0202078688 Common Code: 020207868 DESCRIPTION OF THE TRANSACIION

The following summary contains basic information about the Notes and the Naftogaz Loan and the SBL Loan and should be read in conjunction with, and is qualiBed in its enrirery by, the information set forth under “Terms and Conditions of the Notes” and “The Naftogaz Loan Agreement” appearing elsewhere in this Offering Circular.

interest I I

Principal and Interest on the Naftogaz

The transaction will be structured as a loan to NJSC Naftogaz by SBL (the “Naftogaz Loan”). SBLH PLC will issue the Notes which will be limited recourse loan participation notes issued for the sole purpose of financing a loan by SBLH PLC to SBL (the “SBL Loan”). SBL will usc the proceeds of the SBL Loan for the sole purpose of financing the Naftogaz Loan. The Notcs will be constituted by, subject to. and have the benefit of. a trust deed to be entered into by SBLH PLC, SBL and thc Trustee (the “Trust Deed”). The obligations of SBLH PLC to make payments under the Notes shall constitute an obligation only to pay to the Noteholders an amount equal to and in the same currency as sums of principal, interest and/or additional amounts (if any) actually received by or for the account of SBLH PLC pursuant to the SBL Loan Agreement. As provided in the Trust Deed. SBL will charge in favour of the Trustee for the benefit of the Noteholders as security for the payment obligations of SBLH PLC in respect of the Notes (a) its rights to principal, interest and additional amounts (if any) as lender under the Naftogaz Loan Agreement, (b) its right to receive all sums payable by NJSC Naftogaz under any claim, award or judgment relating to the Naftogaz Loan Agreement and (c) amounts received pursuant to the Naftogaz Loan Agreement in an account with The Bank of New York in the name of SBL, together with the debt represented thereby (the “SBL Account”), in each case other than certain amounts in respect of certain Reserved Rights (as defined in the Trust Deed). SBL will assign certain administrative rights under the Naftogaz Loan Agreement to the Trustee. NJSC Naftogaz will be obliged to make payments under the Naftogaz Loan to SBL in accordance with the terms of the Naftogaz Loan Agreement to the SBL Account. In addition. as provided in the Trust Deed, SBLH YLC will charge in favour of the Trustee for the benefit of the Noteholders as security for its payment obligations in respect of the Notes (a) its rights to principal, interest and additional amounts (if any) as lender under the SBL Loan Agreement, (b) its right to receive all sums payable by SBL under any claim, award or judgment relating to the SBL Loan Agreement and (c) amounts received pursuant to the SBL Loan Agreement in an account with The Bank of New York, in the name of SBLH PLC, together with the debt represented thereby (the “SBLH PLC Account” and, together with the SBL Account, the “Accounts”). SBLH PLC will assign certain administrative rights under the SBL Loan Agreement to the Trustee. SBL’s obligation to make payments under the SBL Loan will be deemed to be satisfied to the extent that paymcnts are made to thc SBLH PLC Account by SBL in amounts equal to those received into the SBL Account by SBL from NJSC Naftogaz pursuant to the Naftogaz Loan Agreement. Each of SBL and SBLH PLC will covenant not to agree to any amendments to or any modification or waiver of, or authorise any breach or potential breach of, the terms of the Loan Agreements unless the Trustee has given its prior written consent (except in relation to the Reserved Rights). Neither SBL nor

14 SBLH PLC (save as expressly provided in the Trust Deed and the Loan Agreements or with the consent of the Trustee) shall pledgc. charge or othcrwise deal with the Loans or thc Chargcd Property (as dcfined in the Trust Deed) or any right or benefit either present or future arising under or in respect of the Loan Agreements or the Accounts or any part thereof or any interest therein or purport to do so. Any amendments, modifications. waivers or authorisations made with the Trustee’s consent shall be notified to the Noteholders in accordance with Condition 15 (Notices) of the Terms and Conditions of the Notes and will be binding on the Noteholders. The security under the Trust Deed will become enforceable upon the occurrence of a Relevant Event, as further described in the Terms and Conditions of the Notes. Payments in respect of the Notes will be made without any deduction or withholding for or on account of taxes of the United Kingdom except as required by law. See “Terms and Conditions of Notes-Taxation”. In that event, SBLH PLC will only be required to pay additional amounts to the extent that it receives corresponding amounts under the SBL Loan Agreement and SBL receives corresponding amounts under the Naftogaz Loan Agreement. The Naftogaz Loan Agreement provides for NJSC Naftogaz to pay such corresponding amounts in these circumstances. In addition, payments under the Naftogaz Loan Agreement will be made without any deduction or withholding for or on account of Ukrainian taxes, except as required by law, in which event NJSC Naftogaz will be obliged to increase the amounts payable under the Naftogaz Loan Agreement (save in certain circumstances). In certain circumstances, the Naftogaz Loan may be prepaid at its principal amount, together with accrued interest, at the option of NJSC Naftogaz in the event NJSC Naftogaz is required to increase the amount payable or to pay additional amounts on account of taxes in Ukraine or the United Kingdom pursuant to the Loan Agreements or required to pay additional amounts on account of certain costs incurred by SBL. SBL may (at its own discretion) require the Naftogaz Loan to be prepaid if it becomes unlawful for the Naftogaz Loan, the SBL Loan or the Notes to remain outstanding, as set out in the Naftogaz Loan Agreement. In each case (to the extent that SBL has actually received the relevant funds from NJSC Naftogaz) the payment amount of the relevant Notes (or in the case of a prepayment for tax reasons or illegality, all outstanding Notes) will be prepaid by SBLH PLC together with accrued interest. See “Risk Factors-Risks Relating to the Notes”, “The Naftogaz Loan Agreement - Prepayment -

Prepayment in the event of Taxes” and “- Prepayment in the event of Illegality” and “Terms and Conditions of the Notes - Redemption and Purchase”. On the occurrence of either a Change of Control or a Cessation of Operations (both as defined in the Naftogaz Loan Agreement). each Noteholder shall have the option to give notice or procure that notice is given for the prepayment of the applicable amount of the SBL Loan and in turn the Naftogaz Loan. To the extent such amount is actually received by SBL from Naftogaz, each Note held by the relevant Noteholder shall be redeemed on the Put Settlement Date (as dcfined in Condition 6(3)(Put Option)) at its principal amount together with accrued interest (if any). See “Terms and Conditions of the Notes - Redemption and Repurchase - Put Option”.

15 RISK FACTORS

Investment in the Notes involves a high degree of risk. Potential investors should carefully review this entire Ofiering Circular and, in particular, should consider all the risks inherent in making such an investment, including the risk factors set forth below, before making a decision to invest. These risks, individually or together, could have a material adverse effect on Nuftogaz’s business, operations and financial condition andor the rights under the Notes of the holders of the Notes.

Risks Relating to Naftogaz QualGed Audit Opinion; Pipeline Assets BDO. the Company’s auditors, have audited and rendered qualified audit reports on thc consolidated financial statements of Naftogaz for the two years ended 31 December 2003 and 2002. These financial statements and audit reports are included elsewhcre in this Offering Circular. The qualifications to BDO’s audits as enumerated in their audit reports relate to, among other things, the following: In the 1990s. Ukraine experienced periods of high inflation. As a result. due to a lack of information as to the correct fixed asset valuation. BDO was not able to account for Naftogaz’s fixed assets in its audit in accordance with IAS 16 for the year ended 31 December 2002. For the year ended 31 December 2003, Naftogaz engaged independent experts to perform a valuation of its fixed assets. As a result. it is possible that in the financial statcments, the recorded depreciation in 2003 is lower than it would have been had an independcnt valuation of Kaftogaz’s fixed assets been performed by the end of 2002. BDO has been unable to locate any supporting documentation regarding certain accounts payable that the Company allegedly owes to the Ministry of Finance of Ukraine incurred in 1995 and transferred to the Company upon its establishment. The amount of this indebtedness is purported to be UAH 625.4 million (U .S .$ 117.3 million). Naftogaz‘s consolidated financial statements include NJSC Naftogaz and 10 of its subsidiaries that together comprise approximately 90 per cent. of the total assets and total turnover of Naftogaz. The consolidation does not include, however, all companies controlled by Naftogaz, as required by IAS 27. It is possible that Naftogaz’s consolidated results of operation would be different if consolidation procedures had been performed in accordance with IFRS requirements. While not a qualification to the auditors’ report. anothcr matter of which potential investors should be aware, is that Naftogaz’s Financial Statements include the oil and gas transportation systems and storage facilities. which Naftogaz operates as fixed assets despite these assets not being owned by Naftogaz, and certain other qualifications are also made by the auditors in their report as at and for the year ended 31 December 2002. Prospective investors should read both auditors’ reports included on pages F-3 to F-5 and F-54to F-56 of this Offering Circular.

Limited Availability of Financial and Other Information The reporting and accounting practices applicable to Ukrainian companies differ from those applicable to similar companies in European countries in significant respects. In addition, less publicly available information and information of a different scope or form may be available to investors in securities issued by Ukrainian companies than from that available to investors issued by companies incorporated in more developed countries. Historically, Naftogaz has not been and is currently not required under Ukrainian law, to prepare financial statements auditcd by an independent public accountant. While Naftogaz’s financial statements are the responsibility of Naftogaz’s management, the Financial Statements that are included in this Offering Circular have been audited by BDO. Only a small number of Ukrainian companies have published IFRS accounts, including Naftogaz. Consequently, the familiarity of Ukrainian companies with IFRS is limited. NJSC Naftogaz does not publish interim financial statements. No financial statements prepared in accordance with IFRS are available to prospective investors for Naftogaz in relation to any period since 31 December 2003. Accordingly, there can be assurance that the current business, results of operations or financial condition of Naftogaz is not materially worse than as presented in the Financial Statements included in this document.

16 Financial and accounting advisers should be consulted with respect to all considerations relating to the contents or adequacy of the financial statements. other financial information, statistical data and other quantitative information included in this Offering Circular.

Govemment Directed Natural Gas Deliven’es at Mandated Prices Naftogaz is a regulated monopoly. In Ukraine, natural gas prices paid by end-consumers are subject to control by government authorities and are significantly lower than the prices Naftogaz charges to European off-takers even after netting back export and customs duties and transportation costs. Moreover, the prices at which residential consumers. organisations financed from the State and local budgets such as schools and hospitals (“State Financed Entities”) and regional heating companies, purchase natural gas are currently significantly less than the prices for industrial end-users. Since 1999, the prices for the first three categories of customers have not changed. While Ukraine experienced hyperinflation during thc 1990s. this ceased in 2000, and sincc 2001, the exceptionally low natural gas prices for such customers can no longer be explained by reference to such hyper-inflation. In 7004 prices for industrial customers increased for the first time sincc 2001. See “Business-Natural Gas Distribution and Sales and Tariffs”. Naftogaz is the sole supplier of gas for the first three categories of customers. Although Naftogaz is currently negotiating the increase of these prices with the governmental regulatory authorities, there can be no assurance that these negotiations will be successful and no assurance can be given that natural gas tariffs in Ukraine will increase or that the regulation of natural gas tariffs will be relaxed. If the Government decides to keep natural gas tariffs at artificially low levels, there is a risk that Naftogaz will not generate sufficient revenues to proceed with investments in the development of certain natural gas fields or to continue to improve pipelines. or that Naftogaz will be able to take these steps only through outside financing beyond anticipated requirements. As a result, Naftogaz’s inability to directly control its prices to customers could have an adverse effect on its financial position and results of operations. Up to 80 per cent. of the natural gas sold by Naftogaz is purchased by Naftogaz from Turkemnneftegas based on contracts executed pursuant to an inter-governmental agreement between Ukraine and Turkmenistan and obtained from Gazprom as payment for gas transit under a contract executed pursuant to an inter-governmental agreement between Ukraine and Russia. The prices at which Naftogaz can obtain gas from Turkmenistan are set annually. The price of the gas that Naftogaz receives as in-kind payment from Gazprom and the transit fee rate charged by Naftogaz for transporting Russian gas is also negotiated annually between Ukraine and Russia. If the price at which Naftogaz obtains Turkmenistan natural gas increases or if Gazprom increases the price at which it provides gas to Naftogaz as payment in-kind for transit services and Naftogaz is not able to make corresponding increases to natural gas transit fees, there can be no assurance that Naftogaz will be able to agree corresponding increases in domestic prices of gas with the Government. Such a development could have an adverse effect on the Company’s financial position and results of operations. See “Business-Natural Gas Transmission and Storage-Transportation Contracts-Russia” and ‘‘-Gas Purchase-Turkmenistan.”

State Ownemhip of and Restricted Enfomement against its Fixed Asrets Because transportation, storage and distribution of oil and natural gas is considered strategic for Ukraine, Ukrainian law restricts NJSC Naftogaz’s rights over the Ukrainian oil and gas transportation systems and storage facilities. Directly, or through its subsidiaries, NJSC Naftogaz operates but does not omthese systems and does not have the right to sell. dispose of or otherwise alienate these fixed assets in any way without the prior consent of the Cabinet of Ministers, including for the purpose of satisfying a judgment. NJSC Naftogaz uses these fixed assets pursuant to an agreement with the State Property Fund of Ukraine (the “SPFU”) dated 4 February 1999. Although this agreement is extended automatically each year, unless terminated by notice by either party, and is binding for legal successors of each party, it may be terminated in case these fixed assets cease to be State property, or if a court decides that a breach of the terms and conditions of the agreement had occurred. Pursuant to the agreement, NJSC Naftogaz is required, among other things. to maintain and rcconstruct the fixed assets that constitute State property. As a result. if the fixed assets are not in good working order, this could constitute a breach of the terms of the agreement. NJSC Naftogaz is also required, pursuant to this agreement, to ensure that its subsidiaries that operate this transportion system and the storage facilities, keep separate accounting in respect of the State’s property and thc profits they receive from its exploitation and also, to insure the State’s property to the extent required under Ukraine legislation. Naftogaz is also not allowed to transfer or pledge the State’s property to third parties. See “Business-Properties-State Property”.

17 Pursuant to the agreement by which NJSC Naftogaz operates the oil and gas transportation systems, NJSC Naftogaz is able to retain 50 per cent. of the net profits generated from the operation of these systems, which includes the extensive pipeline network and the attached installations. The remaining 50 per cent. belongs to the State, although it may be invested by Naftogaz for reconstruction and maintenance of the systems. Details of the division of profits are not provided in the agreement. Since the date of the agreement, no further details have been agreed, and the Government has not requested receipt of a portion of the protits guaranteed from the operation of the gas and oil transportation systems. While Naftogaz has been investing a portion of the profits derived from the operation of the pas and oil transportation systems into repair and maintenance of the systems, it has not made any payments to the State as provided in the agreement. There is no assurance that in the future the Government will not require Naftogaz to make these payments directly to the Government. In addition, as of 1 January 2004, the new Economic Code of Ukraine came into force. Under this code, the concept of “operative management”, which regulates Naftogafs use of the fixed assets set out under the State Property Agreement, was redefined. State property under “operative management” may now only be used for non-commercial purposes as opposed to State property under “economic management”, which allows for State property to be used for commercial purposes. While new laws cannot be applied retroactively under Ukrainian legislation, there can be no assurance that the new code will not have an adverse effect on the State Property Agreement. Naftogaz is subject to a temporaq moratorium on enforcement against its fixed assets introduced by Ukrainian law in 2001. By virtue of this moratorium, enforcement against the fixed assets of Naftogaz arising in connection with, inter alia, (a) court judgments and arbitration awards or (b) bankruptcy proceedings, is currently prohibited. As a result, creditors of Naftogaz who seek to satisfy a judgment against the fixed asscts of Naftogaz may not bc able to do so.

Relationship with Gazprom and Dependence on Transportation of Russian Oil and Gas The Ukrainian gas transportation system operated by Naftogaz is the principal transit corridor for Russian natural gas to Europe. A majority of the gas transited by Naftogaz through Ukraine is owned by Gazprom. Relations between Naftogaz and Gazprom are regulated on the basis of a number of inter- governmental agreements between Ukraine and Russia. Based on a 2001 inter-governmental agreement, Naftogaz and Gazprom entered into a long-term contract for the transit of gas through Ukraine for the period 2003-2013. Gazprom pays for transit services partially in cash and partially in-kind payments in the form of natural gas. In 2003, Naftogaz received up to 10 per cent. of the transit payment in cash and the remainder in gas, which, for 2003 and 2004 is valued at U.S.$50 per 1,000 cubic metres. As a result, in 2003, Naftogaz received for transit services from Gazprom, 26 billion cubic metres of gas and U.S.$96.2 million in cash. Total fees for natural gas transit received from Gazprom (including cash and in-kind payment of gas) accounted for 35.2 per cent., 35.5 per cent. and 23.8 per cent. of Naftogaz’s consolidated income for 2001,2002 and 2003, respectively. Naftogaz also transports Russian oil through Ukraine as well as to oil refinerics in Ukraine in accordance with an inter-governmental agreement between Ukraine and Russia signed in 1994 and annual protocols thereto. In September 2001, Russia began transporting oil via a pipeline that bypasses Ukraine, resulting in an estimated annual loss of U.S.$60 million to Naftogaz. At the end of 2002, Gazprom completed construction of a gas pipeline with a capacity of 16 billion cubic metres through the Black Sea bed from Russia to Turkey, which was seen as an alternative to gas transportation through Ukraine, Romania and Bulgaria. However. significant volumes of gas have not yet been transported via this pipeline and therefore it has not had a material effect on Naftogaz’s operations. There can be no assurance, however, that, in the future, Gazprom will not transport greater volumes of gas via this pipeline. which could have an adverse effect on Naftogaz’s financial condition and results of operations. At the beginning of 2002, the Russian government discussed the construction of an alternate gas pipeline through Belarus and Poland, bypassing Ukraine, which would also be capable of annually transporting 30 billion cubic metres of gas. In the past, the Russian government has also discussed using the Belorussian pipeline system, which would allow Russia to transport natural gas to Europe bypassing Ukraine.. However, as in 2001, Russia and Ukraine entered into a long-term agreement to ensure the transit of Russian natural gas through Ukraine, and in 2002 Naftogaz and Gazprom entered into an agreement to establish a consortium (the “Consortium”) in order to cooperate with respect to gas transport through Ukraine. Naftogaz does not believe the construction of such pipeline is a significant threat to Naftogaz’s gas transit operations. However, there can be no assurance that Russia will continue to maintain strong

18 commercial gas relations with Ukraine. The reduction in the amount of Russian gas transported through Ukraine could have a materially adverse effect on Naftogaz and its operations. In addition, an inter-governmental protocol between Ukraine and Russia sets export quotas for natural gas exported from Ukraine for 2003 and 2004 at 6 billion cubic metres per year. See “Busines+ Exports”.

Settlement of Gazprom Debt Naftogaz had, in the past, accumulated payment arrears in respect of purchases of gas from Gazprom, the exact amounts of which have been in dispute. In October 2001, Russia and Ukraine sought to resolve a dispute relating to, inter alia, the alleged arrears for Russian natural gas received from Gazprom but unpaid. While a settlement was proposed by Ukraine and Russia, the dispute was not resolved. Naftogaz has recently concluded certain transactions with Gazprom for the settlement of its indebtedness with Gazprom. However, as the mechanism for the settlement of the debt falls outside the intergovernmental agreement entered into between Russia and LJkrainc, there can be no assurance that such settlement with respect to the debt will finally resolve this issue as it is not clear whether the settlement needs to be approved by the Russian Government. However, the Cabinet of Ministers of Ukraine passed a resolution sanctioning the terms of the settlement. Furthermore, as a result of the settlement, Naftogaz accepted a prepayment of transit fees from Gazprom amounting to U.S.$l.Z billion (equal to U.S.$250 million per annum) for certain transit services between 2005 and 2009 (inclusive). As this prepayment will be accounted for in 2004, investors should be aware that Naftogaz will not be receiving U.S.$250 million of revenues in each year between 2005 and 2009 (inclusive) which it would have otherwise received had Naftogaz not accepted the prepayment and applied it towards the settlement of its indebtedness with Gazprom. See “Selected Financial Review - Liquidity and Capital Resources”.

Reliance on Material Contracts A significant portion of Naftogsz’s oil and gas transporr revenues (including gas received as payment in- kind) is generated from Naftogaz’s gas transit contract with Gazprom. See “-Relationship with Gazprom and Dependence on Transportation of Russian Oil and Gas”. Naftogaz also purchases a significant portion of the gas it sells from Turkmenneftcgas. Furthermore. Naftogaz relies on the services of transportation operators in order to transit purchased gas from Turkmenistan to Ukraine. Currently this service is provided through sale and purchase contracts with Eural Trans Gas (“ETG”). However, as of 1 January 2005 Naftogaz will cease to purchase Turkmen gas with the assistance of ETG, and RosUkreEnergo (“RUE”) wiU become the sole supplier and transporter of Turkmen gas to Naftogaz. See “Business-Gas Purchase-Turkmenistan”. Each of these contracts has a confidentiality clause and thercfore the priccs and key terms of these material contracts cannot be disclosed. If Naftogaz should stop receiving gas from Gazprom, RUE or Turkmenneftegas or if Naftogaz should be unable to transport gas from Turkmenistan at a reasonable price or at all. Naftogaz’s current business, future prospects. financial condition or operating results could be materially adversely affected.

Sole Shareholder The State, represented by the Cabinet of Ministers of Ukraine, currently owns all of Naftogaz’s shares. The Government influences NJSC Naftogaz’s conduct of its affairs at two levels: (i) it exerts direct influence over NJSC Naftogaz’s management and policies in its capacity as sole shareholder through NJSC Naftogaz’s Supervisory Board and by appointing members to the Management Board, and (ii) in its capacity as regulator, it monitors Naftogaz’s compliance with the Ukrainian regulatory regime for the oil and gas market. Although Naftogaz. as a strategic Ukrainian enterprise, has significant influence over the Government’s policies which impact its operations, and the Chairman of the Management Board of NJSC Naftogaz is also the First Deputy Minister of Fuel and Energy in Ukraine, there can be no assurance that the Government will not change its policies concerning Naftogaz or the conduct of its business, or replace Naftogaz’s management. The Government has previously required Ukrainian companies, including Naftogaz, to take actions, such as the undertaking of projects and the supply of goods and services to customers, that may not be in the best interests of such companies or their shareholders. For example, the Government sets the prices for domestic gas delivered by Naftogaz at a low level. See ‘‘-Government Directed Natural Gas Deliveries”. Pursuant to its charter, Naftogaz was formed with a view to, among other things, secure the effective functioning and development of the Ukrainian oil and gas infrastructure

. . and satisfy customer demand for raw materials and fuel-energy resources. To the extent that the Government permits or requires these functions to override profit-maximising dccision-making, Naftogaz’s financial condition may be adversely affected. Ukrainian law mandates the Government to identify companies in strategic industry sectors, and prohibits the privatisation of such companies. Although NJSC Naftogaz and most of its subsidiaries are currently identified as such companies, this could change based on the privatisation programme which is approved periodically by Parliament after consultation with the Government, and there can be no assurance that the Government would not privatise NJSC Naftogaz and its subsidiaries, in whole or in part, at any time.

Contribution of Nuftogaz Income to the State Amendments to the State Budget for 2004, which were adopted in June 2004, provide that, in 2004, Naftogaz is to contribute at least 20 per cent. (and possibly more) of its income to a special State Treasury account in order to ensure the discharging of mandatory payments, such as taxes and royalties. The Cabinet of Ministers has been charged with developing the details of this procedure. Naftogaz will take part, together with the Cabinet of Ministers, in setting up the payment mechanism and the operation of the account. Although Naftogaz has not been subject to similar requirements previously, it is currently uncertain whether or when this procedure will be developed, when the contribution will occur, whether Naftogaz will have access to the account nor whether or when Naftogaz can withdraw excess funds from the account.

Company Smcture and Possible Rerum of Subsidiaries and Fixed Assets to the State NJSC Naftogaz is a vertically integrated holding company whose principal assets are the capital stock of its subsidiaries. In addition to the revenue NJSC Naftogaz obtains from payments from Gazprom for natural gas transit, from natural gas export and from supplying goods and services to Turkmenistan, NJSC Naftogaz relies on contractual payments from its subsidiaries to meet its obligations to creditors and to pay corporate expenses. NJSC Naftogaz owns a controlling interest in Ukrnafta (50 per cent. plus one share), a subsidiary involved in oil and gas exploration and production. Naftogaz may therefore need to obtain the approval of othcr shareholders for major transactions, charter amendments or profit distribution involving this subsidiary. There can be no assurance that other shareholders will give any necessary approvals, and accordingly, NJSC Naftogaz’s ability to realise its future plans may be impaired. Moreover, in 1998, in accordance with Resolution of the Cabinet of Ministers of Ukraine No. 747 “On Establishment of National Joint-stock Company Naftogaz of Ukraine’’ dated 25 May 1998 (“Resolution 747’9, the State contributed certain joint-stock companies established by the State to Naftogaz’s statutory fund, together with the Ukrainian oil and gas transportation systems and storage facilities. These joint-stock companies include Ukrtransnafta, Ukrspetstransgaz, Chomomornaftogaz, Ukmafta and 54 gas distribution companies. The Govemment may transfer ownership or control of all or part of Naftogaz’s equity interests in such joint-stock companies or the Ukrainian oil and gas transportation systems and storage facilities to other Government agencies or instrumentalities. In March 2004, NJSC Naftogaz’s subsidiary, OJSC Azmol, a joint-stock company established by the State and contributed to Naftogaz’s statutory fund by the State in 1998, was transferred back to the State for further privatisation. Naftogaz is currently negotiating with the Government of Ukraine for the receipt, in exchange for Azmol, of another State asset that will be more closely related to Naftogaz’s core activities. Howcver. thc State is not required by law to compensate Naftogaz for the loss. Although this was the first time a subsidiary or other asset of NJSC Naftogaz was returned to the State, no assurance can be given that the Government will not request the return of further subsidiaries or the Ukrainian oil and gas transportation systems and storage facilities, which could have a material adverse effect on Naftogaz’s business and results of operations. See also ‘L- Confusion over the Potential Transfer of Ukmafta out of Naftogaz Group; Possible Reduction in Assets and Revenues of Naftogaz”.

Confusion over the Potential Tramfer of Ukmafta out of Naftogaz Group; Possible Reduction in Ass& and Revenues of Naftogaz In July 2004, Ukrainian President Leonid Kuchma issued a presidential decree (the “First Decree”) affecting, among other things, Naftogaz’s shareholding in Ukmafta. According to Ukrainian law, certain Presidential decrees, including the First Decree, are not required to be made public. Based on its investigation, however, Naftogaz believes that the First Decree ordered the Cabinet of Ministers to

20 increase the statutory fund of Ukrnafta by transferring to Ukmafta the State’s shareholdings in JSC Ukrtatnafta representing approximately 43 per cent. of the statutory fund of Ukrtatnafta and 25 per cent. of the statutory fund of OJSC Galychyna. The First Decree provided that the State should retain its indirect 50 per cent. plus one share interest in Ukmafta by way of its ownership of Naftogaz. Subsequently, an instruction (the “First Instruction”) was given by the President which stated that substantially all of Naftogaz’s shares in Ukmafta were meant to be transferred to the SPFU. The First Instruction provided that the State would continue to hold a 50 per cent. plus one share interest in Ukmafta through SPFU’s and Naftogaz’s shareholdings. Subsequent to the First Instruction, a further instruction (the “Second Instruction”) was given by the President. The Second Instruction, among other things, rescinded in part the First Instruction and provided that the Cabinet of Ministers and the SPFU should ensure that Naftogaz retain not less than 50 per cent. plus one share of Ukmafta’s share capital. Pursuant to the First Decree, the First Instruction and the Second Instruction, on 8 September 2004 the Cabinet of Ministers of Ukraine adopted a resolution which instructed the SPFU to transfer its 43 per cent. shareholding in Ukrtatnafta and 25 per cent. shareholding in Galychyna to Naftogaz. Naftogaz is instructed to further transfer such shareholdings into the statutory fund of Ukmafta, having ensured that Naftogaz retains a shareholding of at least 50 per cent. plus one share. Subsequent to this resolution of the Cabinet of Ministers, a further decree was issued (the “Second Decree”) by the President amending the First Decree. The effect of the Second Decree is that the President, among other things, has ordered the Cabinet of Ministers to increase the statutory fund of NJSC Naftogaz by transferring to it the State’s shareholdings in JSC Ukrtatnafta and OJSC Galychyna but does not give any order for these shareholdings to be transferred from NJSC Naftogaz to Ukmafta. As head of the state of Ukraine, the President has the authority to make such decrees and give such instructions (although, for such a decree and implementing instructions to be binding on Naftogaz, a resolution of the Cabinet nf Ministers must first be passed to this effect). In addition. according to Resolution 747 of the Cabinet of Ministers establishing NJSC Naftogaz in 1998, the Cabinet of Ministers may request that a company that was contributed to NJSC Naftogaz’s statutory fund at the time of its creation (which would include Ukmafta), be returned to the State. See ‘I- Company Structure and Possible Return of Subsidiaries to the State”. As at the date of this Offering Circular, while it would appear that Naftogaz will retain its controlling holding in Ukrnafta for the time being, no assurance can be given that Naftogaz will continue to do so in the future. There can also be no assurance that all relevant presidential decrees, instructions or resolutions conceming Ukmafta and Naftogaz generally have been made public as at the date of this Offering Circular. The failure to make a decree, instruction or resolution public does not affect its validity provided that such decrees, instructions or resolutions are not required to be made public as a matter of

Ukrainian law. See also “Risks Relating to Ukraine Political Considerations”; “- Developing Legal

System” and “- Uncertainties Related to the Judicial System”. In light of the Second Decree, until the Cabinet of Ministers passes the necessary resolution implementing this decree, it is unclear whether the relevant shareholdings in JSC Ukrtatnafta and OJSC Galychyna are to be transferred from NJSC Naftogaz to Ukrnafta. There also can be no assurance that any such transfers will be able to be discharged in the near future as on 9 September 2004, the Ukrainian Parliament adopted a new law pursuant to which trans€ers of state-owned shareholdings to the statutory fund of any entity are prohibited until the relevant privatisation programme has been adopted. In order for such law to come into force it requires Presidential approval. It is not certain whether the President will sign this law. While management believes that there is currently no intention on the part of the President or the Government to require Naftogaz to transfer its controlling interest in Ukmafta, no assurance can be given that this will continue to be the case and if so, whether and to what extent NJSC Naftogaz would receive any consideration for such transfer. As at, and for the year ended, 31 December 2003 Ukmafta accounted for 9.7 per cent. of Naftogaz’s consolidated assets, 8.7 per cent. of its consolidated revenues and 23.0 per cent. of its profits from operations. Accordingly. any such transfer could have a significant adverse effect on Naftogaz’s results of operations. financial position and business prospects.

21 ABN AMRO May Have a Conflict of Interest ABN AMRO,which is the Lead Manager in the offering of the Notes, is also a creditor of NJSC Naftogaz pursuant to a U.S.%200million facility entered into in April 2004. NJSC Naftogaz intends to use a portion of the proceeds from the Naftogaz Loan to pay off this facility. As a consequence, it may be viewed that ABN AMRO has a strong interest in ensuring the Notes are issued so that a portion of the proceeds of such issuance will be used by Naftogaz to repay the outstanding amount owed to ABN AMRO.

SBL’s Rights under the Naftogaz Loan may be Effectively Subordinated to Creditors of NJSC Naftogaz’s Subsidiaries. A significant proportion of Naftogaz‘s business is carried out, and assets are held by. NJSC Naftogaz’s subsidiaries. NJSC Naftogaz will have to rely upon payments arising from certain of its subsidiaries, and dividends and other payments from its subsidiaries, to provide the funds necessary to pay the principal of, and interest on, the Naftogaz Loan. NJSC Naftogaz’s subsidiaries have no obligations to pay amounts due pursuant to the Naftogaz Loan or to make funds available for these payments whether in the form of loans, dividends or otherwise. NJSC Naftogaz’s subsidiaries have not guaranteed the Notes. SBL’s right to receive payments under the Naftogaz Loan will be effectively subordinated to liabilities of NJSC Naftogaz’s subsidiaries. In the event of a bankruptcy, insolvency, dissolution, liquidation, reorganisation or similar proceeding relating to a subsidiary of NJSC Naftogaz, SBL’s right to participate in any distribution of the assets of such subsidiary will rank behind such subsidiary’s creditors (including trade creditors) and preference shareholders (if any), except to the extent that NJSC Naftogaz might have claims against such subsidiary.

In-Kind Payments and Intra-Segment Sales Aflect Results of Operations and Income Naftogaz’s results of operations are affected, among other things, by the in-kind payments in Naftogaz’s contracts arid hy significant intra-segment sales. In particular. a majority of the payment Naftogaz obtains from Gazprom for transit services of natural gas is in the form of natural gas, which is valued at U.S.SS0 per 1,000 cubic metres. The natural gas is then sold internally within the Naftogaz group from the transportation segment to the sales segment, which results in a high profit for the transportation segment and high costs for the sales segment. Naftogaz pays for gas it purchases from Turkmenistan half in cash and half in goods and services. As a result, the purchase price of gas from Turkmenistan depends on the price at which Naftogaz is able to obtain the goods and services it delivers as payment in-kind and the price at which these goods and services are valued for the purposes of such payment. In addition, prospective investors should be aware that Naftogaz’s total income and cost of sales are significantly affected by in-kind payments. Under arrangements with Turkmeneftegas. Naftogaz purchases gas from Turkmenistan at a price which is paid, in part, in U.S. dollars and, in part, in goods and services. Naftogaz’s purchase of these goods from third parties is accounted for as a cost of sales while the sale of these goods to Turkmeneftegas is accounted for as income. Naftogaz then applies this income to the purchase of gas from Turkmeneftegas, which is accounted for as a cost of sales, and then Naftogaz eventually sells this gas to customers which is accounted for as income. For instance, for the year ended 31 December 2003, Naftogaz had income of UAH33.3 billion. However, of this amount, the Company estimates that approximately UAH4.5 billion, or approximately 13.5 per cent., was as a result of sales of goods and services to Turkmenistan in connection with Naftogaz’s purchase of gas. A company similarly situated to Naftogaz, paying solely cash for Turkmen gas, would have recorded, for the year ended 31 December 2003, lower consolidated income (for the amount equal to the income from the sales of goods to Turkmenistan) and lower consolidated cost of sales (for the amount equal to the cost of goods supplied to Turkmenistan).

Results of operations for Naftogaz’s business segmcnts arc also affcctcd by significant intra-segment transactions. See “Related Party Transactions”.

Foreign Acquisitions One of the proposed uses of the proceeds of the Naftogaz Loan by Naftogaz is, in line with its investment strategy, to invest in certain potential strategic acquisitions outside of Ukraine. Such aquisitions may entail significant investment. as well as increased operating costs. There is no guarantee Naftogaz will achicve a positive return on any such investment. Achieving the benefits of any such acquisition will

22 depend. in part. on the integration of the respective businesses in an efficient manner. Naftogaz cannot ensure prospective investors that such integration will happen or that it will happen in a timely manner. ‘The integration of any businesses Naftogaz may acquire will require significant time and effort from Naftogaz’s senior management, who are also responsible for managing Naftogaz’s existing operations. Integration of such businesscs may bc difficult. as Naftogaz’s culture may differ from the cultures of the businesses it acquires. unpopular cost cutting measures may be required and control over cash flows may be difficult to establish. Any difficulties encountered in the transition and integration procoss could have a material adverse effect on the revenues, levels of expenses and operating results of the combined companies. Naftogaz cannot assure prospective investors that it will be successful in realising any of the anticipated benefits of any acquisition it makes. If Naftogaz does not realise these benefits its operating performance could suffer.

Fluctuations in International Oil and Gas Prices The level of international oil and gas prices is one of the factors influencing the profitability of Naftogaz and its ability to finance the capital expenditures necessary to promote future profitability. The prices at which Naftogaz can obtain gas from Turkmenistan are set annually. The price of the gas that Naftogaz receives as in-kind payment from Gazprom and the transit fee rate charged by Naftogaz for transporting Russian gas is also negotiated annually between Ukraine and Russia. If the price at which Naftogaz obtains Turkmenistan natural gas increases or if Gazprom increases the price at which it provides gas to Naftogaz as payment in-kind for transit services and Naftogaz is not able to make corresponding increases to natural gas transit fees, there can be no assurance that Naftogaz will be able to agree corresponding increases in domestic prices of gas with the Government. See “BusineseNatural Gas Transmission and Storage-Transportation Contracts-Russia” and “-Gas Purchase- Turkmenistan”. In addition to govcmment-regulated sales of natural gas, Naftogaz sells oil and rcfincd products in the Ukrainian market. Prices for oil and refined products have historically fluctuated widely in response to changes in many factors, over which Naftogaz does not and will not have control. These factors include:

0 global and regional economic and political developments in resource-producing regions, particularly in the Middle East; global and regional supply and demand and expectations regarding future supply and demand; the ability of the Organisation of Petroleum Exporting Countries and other producing nations to influence global production levels and. hence, prices:

0 governmental regulations and actions, including voluntary export restrictions and taxes;

0 global economic conditions;

0 price and availability of new technology; and weather conditions. Naftogaz also depends on sales prices of oil and natural gas. A decrease in sales prices of oil and natural gas may lead to a reduction of net income. If prices remain low for longer periods of time, this could have a negative effect on exploration and production, could lead to decreased oil and gas available for sale and processing and ultimately may negatively affect Naftogaz’s ability to carry out its contractual obligations.

Payment Collection and Non-Cmh Settled Tramactions Tight money supply, the persistence of certain elements of the command economy and high taxes have resulted in some entities in Ukraine being unable to make payment for goods or services in cash. In the past, Naftogaz was not able to collect all amounts due to it. Although Ukrainian law is unclear as to whether Naftogaz is required to supply natural gas to residential customers, State Financed Entities and regional heating companies notwithstanding their inability to pay for the natural gas supplied, Naftogaz’s policy of limiting natural gas supply to these customer groups as a result of non-payment has led to increases in payment collection. As recently as 2000, Naftogaz collected only 77 per cent. of the total payments owed to it domestically for natural gas sales. Recently collection rates have improved and the overall collection rate in 2003 was 91.4 per cent. However, there can be no assurance that amounts owed to Naftogaz by its customers in Ukraine will be paid in full.

23 In addition. a significant source of Naftogaz’s revenues is fees for the transit of gas through Ukraine under a contract with Gazprom, for which a portion is paid in-kind, in the form of natural gas. In 2003, Naftogaz received approximately 90 per cent. of the payment for gas transit from Gazprom in-kind. Although such transactions allow Naftogaz to obtain natural gas at prices lower than it could purchase natural gas in the market, such transactions are less efficient than cash settlements as they cannot be used to fund certain expenditures required to be made in cash and may have an adverse effect on Naftogaz’s ability to make tax and other mandatory payments. Ukrainian companies may face significant problems with liquidity and long-term funding due to a limited supply of domestic savings, scarcity of foreign sources of finance. limited lending by the banking sector to the industrial sector and other factors.

Operational Risks Naftogaz’s oil and gas exploration, production and transportation operations may be adversely affected by many factors, including the breakdown or failure of equipment or processes, performance below cxpected levels of output or efficiency. labour disputes, natural disasters. weather conditions. terrorist attacks or sabotage to the extensive transportation system. Naftogaz has only limited insurance in relation to its assets and operations and, therefore, the financial effect of any such factors would generaliy have to be satisfied out of its cash flow. See “Business-Insurance”. Naftogaz operates Ukraine’s oil and gas transportation systems and storage facilities. This extensive network of pipelines and compressor installations has been largely developed during the 1970s and 1980s. Many of thc pipelines are over 10 years old with a significant percentage over 15 years and approximately 17 per cent. over 30 years old, where the average life expectancy of the pipelines under the Soviet system was 33 years. Certain sums of money are required each year to maintain the system. Although there have bccn no significant delays or curtailments of the supply of natural gas or oil to Naftogaz’s customers, no assurance can be given that such delays or curtailments will not occur in the future due to the stress and corrosion of pipelines, defective construction of compressor stations, problems associated with climatic conditions or thc insufficient maintenance or refurbishment of thc network. Naftogaz plans to expand its transport capacity and to diversify its transport routes through additional capital investments in its oil and gas transportation systems, including through further development of the Ukrainian part of the Eurasian oil transport corridor for the transport of Caspian Oil through Azerbaijan, Georgia and Turkmenistan to Ukraine, and further on to other European countries (the “Eurasian Oil Transport Corridor”), as well as the Consortium with Russia. See “Business-Joint Ventures, Co- operative Agreements and Investment Activity”. It is possible, however, that these plans will be affected by, among other things, difficulties related to localised planning and construction processes and its ability to obtain external financing on acceptable terms. No assurance can be given that Naftogaz will be able to meet its construction targets. Naftogaz’s drilling and production operations are subject to all the risks and hazards typically associated with the drilling and production of oil and gas. The risks and hazards include fire, explosion. blowouts, cratering and oil spills, each of which could result in substantial damage to oil and natural gas wells, producing facilities, other property and the environment or in personal injury. Naftogaz is not fully insured against all of those risks, nor are all of those risks insurable. Although liability insurance is maintained in amounts which are considered adequate, the nature of those risks is such that liabilities could exceed policy limits, in which event significant costs could be incurred which could havc a material adverse effect upon Naftogaz’s financial condition. Naftogaz’s production operations are also subject to all the risks typically associated with those operations, including premature decline of reservoirs and the invasion of water into producing formations.

Capital Requircm en ts Naftogaz’s business requires significant capital expenditures. including in exploration and development. production, refining and marketing. and to meet its obligations under cnvironmental laws and regulations. Naftogaz plans to make capital expenditures of approximately UAH 5,318 million in 2004, UAH 5,725 million in 7,005 and UAH 6,449 million in 2006. Naftogaz cxpccts to finance a substantial portion of thcse capital expenditures out of cash flows from its operating activities. If Naftogaz. for any reason. is unable to generate the operating cash flow it requires for thc implementation of its capital expenditure programme, these capital expenditures will have to be revised accordingly or other sources of financing may be requircd if projected capital expcnditures arc to bc maintained. If feasible, such financing may be arranged through bank borrowings and may be unsecured or secured by Naftogaz’s proceeds from natural

24 gas export or sale contracts or by pledges over natural gas to the extent permitted under the Naftogaz Loan Agreement. Nonetheless, no assurance can be given that Naftogaz will be able or willing to raise the financing required for its projected capital expenditures. In such circumstances. any such reduction in capital expenditures could adversely affect its ability to expand its business, and if the reductions are severe enough, could adversely affect its ability to maintain its operations at current levels.

Uncertainty of Demand Ukraine is heavily dependent on oil and gas. Together, oil and gas account for approximately 60 per cent. of Ukrainian primary energy consumption. However, Ukrainian demand for natural gas has declined steadily since independence in 1991, when Ukraine’s consumption of 118.1 billion cubic metres made it the world’s third biggest consumer of gas, behind the United States and Russia. Ukrainian gas consumption has decreased by more than one-third over the past decade due, principally to a reduction in Ukraine’s industrial output. Total domestic demand for gas in 2002 was estimated at 69.7 billion cubic metres and in 2003 was estimated at 76.3 billion cubic metres. Total domestic demand for oil has been approximately 23 million tonnes per annum, which is substantially less than the consumption of similar sized countries in western Europe. In addition, a significant percentage of Naftogaz’s business is the transportation of oil and gas. The volume of oil and gas transported depends on a variety of factors, many of which are beyond the control of Naftogaz. In particular, a variety of factors could affect the demand for oil and natural gas in the markets that Naftogaz’s pipeline system serves such as economic conditions, fuel conservation measures and competition from alternative energy sources. Naftogaz cannot predict whether these or other factors will have an adverse effect on demand for use of the pipeline systcm or domestic demand and how significant that adverse effect could be.

Naffoguz’s licences The licensing regime in Ukraine for the exploration and production of oil and gas is administered primarily by the State Committee of Natural Resources of Ukraine. NJSC Naftogaz’s subsidiaries involved in extraction and production currently conduct operations under multiple exploration and production licences. In general, Naftogaz’s exploration licences are issued for 3-5 years and production licences for 14-20 years. NJSC Naftogaz ensures that its respective subsidiaries maintain the appropriate licences for oil and gas transportation and the supply and storage of natural gas as required by Ukrainian legislation. In accordance with general requirements of Ukrainian legislation, most of Naftogaz’s licences provide that they may be suspended if the licence holder fails to comply with the licence requirements, systematically fails to provide geological information, there is a direct danger to its employees or the public as a result of its activities or repeatedly fails to comply with environmental standards. Licences may be terminated if a court determines that there was a violation in the issuing procedure, in the event of a failure to eliminate circumstances which led to suspension of a licence or in the event of the improper use of a licence. Although Naftogaz’s licences have not been terminated and Naftogaz believes it is currently in material compliance with the requirements of its licences, there can be no assurance that Naftogaz will remain in compliance with some or all of these requirements in the future and that the Government will continue to renew its licences. If Naftogaz fails to fulfil the specific terms of any of its licences or if Naftogaz operates in the licence areas in a manner that violates Ukrainian law, Government regulators may impose fines on Naftogaz or suspend or terminate its licences. Any suspension, amendment or termination of Naftogaz’s material licences or the failure to obtain the licences in the future, could have an adverse effect on its operations, financial position or the value of its assets. In addition, Naftogaz is required to obtain and maintain permits or approvals to develop its fields and retain its licences. If Naftogaz fails to obtain or maintain these permits and authorizations, it may be required to delay its investment programme, or its licences could be terminated, and this may reduce its cash flows and adversely affect its business.

Exploration and Development of Black Sea and Sea of Azov Reserves One of Naftogaz’s priorities is the accelerated study and development of the recently discovered oil and gas fields in the Black Sea and Sea of Azov, as well as thc entire Ukrainian part of the southern oil and gas-bearing basin of the Black Sea. Naftogaz estimates there are significant potential reserves in the

25 Ukrainian part of the Black and Azov Seas, however, only three to four per cent. of the currently estimated reserves have been explored. There can be no assurance that such reserves will be proven, and that if proven, such reserves are capable of being exploited, exploited at a reasonable cost or will be exploited to produce the amounts projected by Naftogaz. See “Business-Oil and Gas Exploration and Production”.

Uncertainties in Estimates of Crude Oil and Gas Reserves and Production Costs There are numerous uncertainties inherent in estimating quantities of proven reserves and in projecting future rates of production and the timing of development expenditures, including many factors beyond the control of Naftogaz. Estimating oil and gas reserves is a subjective process and estimates made by differcnt engineers often vary significantly. In addition. results of drilling, testing and production subsequent to the date of an estimate generally result in revisions to that estimate. Accordingly, reserve estimates may be materially different from the quantities of oil and gas that are ultimately recovered and, if recovered, the revenue therefrom could be less than, and the costs related thereto could be greater than, the estimated amounts. The significance of such estimates is highly dependent upon thc accuracy of the assumptions on which they are based, the quality of the information available and the ability to venfy such information against industry standards. The reserves evaluations carried out by Miller and Lents were based on production data, prices, costs, ownership, geological and engineering data, and other information assembled by Naftogaz and accepted without independent verification. The Miller and Lents Reserves Report assumes, among other things, that the future development of Naftogaz’s oil and gas fields and the future marketability of Naftognz’s oil and gas will be similar to past development and marketability. These economic assumptions may prove to be incorrect. In particular, Ukraine’s economy is more unstable and subject to more significant and sudden changes than the economics of many other countries. Undue reliance should not be placed on the forward-looking statements contained in this Offering Circular concerning Naftogaz’s reserves or on comparisons of similar reports concerning companies established in places with more stable economic conditions. See “Business-Oil and Gas Exploration and Production-Oil and Natural Gas Reserves”. In addition, to the extent that the reserves data set forth in this Offering Circular are based on Soviet standards rather than international standards, this will, by international standards, overstate the amount of reserves rccoverable. For an explanation of haw the Soviet classification system for oil and gas reserves differs from international standards, see “Business-Oil and Gas Exploration and Production-Oil and Natural Gas Reserves”.

Exploratory Drilling Involves Numerous Risks Naftogaz is exploring for oil and gas in various geographical regions that may be characterised by their relative remoteness from population centres, challenging environmental conditions in relation to offshore drilling and high costs. The cost of drilling, completing and operating wells is often uncertain. As a result, Naftogaz may incur cost overruns or may be required to curtail, delay or cancel drilling operations because of a variety of factors, including unexpected drilling conditions, pressure or irregularities in geological formations, equipment failures or accidents, adverse weather conditions, compliance with governmental requirements and shortages or delays in the availability of drilling rigs and the delivery of equipment. Naftogaz’s overall drilling activity or drilling activity in particular project areas may be unsuccessful in that Naftogaz may not find commercially productive tcservoirs.

Relining Activities Naftogaz’s refining operations are subject to inhercnt risks including fires, floods, accidents and explosions. As a result, Naftogaz’s refining operations could experience significant interruption if the refinery or the distribution systems that it utilises experienced a fire, flood, major accident, shutdown or equipment failure, or if it were damaged by severe weather or other natural disaster. The main participants in the Ukrainian refining sector are the major Russian oil companies such as LUKoil and TNK-BP. While Naftogaz expects to increase its share of the domestic market by developing its refineries and expanding its range of refined products, no assurance can be given that Naftogaz will be able to compete effectively with such companies.

Naturul Gas and Pctrol Refuelling Stations NJSC Naftogaz, through its subsidiaries, owns and operates 91 natural gas vehicle-refuelling stations and it owns 163 petrol stations in Ukraine and operates an additional 132.

26 Russian oil companies such as LUKoil and TNK-BP have a substantial presence in the retail market in Ukraine. As a result, to increase its market share in this sector, Naftogaz must continue to be able to retain, as well as identify and acquire, retail sites on reasonable commercial terms in strategically located areas! for which other distribution companies may also compete. Such competition could impede Naftogaz from expanding its retail network as planned and thereby adversely affect its ability to increase its sales volume and throughput in this sector. In addition, Naftogaz’s natural gas and petrol refuelling operations are subject to the inherent risks associated with such operations, including pipeline ruptures. explosions, release of toxic substances. fires and other hazards, each of which could result in damage to or destruction of Naftogaz’s natural gas and petrol refuelling stations.

Insurance NJSC Naftogaz and its subsidiaries maintain all mandatory insurance polices required by Ukrainian law as well as voluntary insurance policies. However, the insurance industry is not yet well developed in Ukraine, and many forms of insurance protection common in more economically developed countries, are not yet available in Ukraine on comparable terms. For example, Naftogaz does not carry insurance for business interruption or against terrorist activities. In addition, it does not carry separate insurance for the oil and gas transportation systems. See “Business-Insurance”. In July 2003, Naftogaz introduced a centralised policy with respect to its insurance. While Naftogaz maintains insurance against many operational risks, it cannot fully insure against all risks. Accordingly, if a significant event occurs, Naftogaz may be uninsured or insufficiently covered by its insurance and its business, financial condition and results of operations could be materially adversely affected by such an event.

Additional Financing In order to satisfy future capital investment commitments and liquidity needs with respect to Naftogaz and its ongoing operations, Naftogaz may require additional debt financing. Naftoyaz’s ability to arrange financing and the cost of financing dcpcnds upon niany factors. including: economic and capital markets conditions generally, and in particular the non-investment grade debt market; investor confidcnce in the oil and gas industry, in Ukraine and in Naftogaz:

0 credit availability from banks and other lenders; and

0 provisions of tax and securities laws that are conducive to raising capital. The terms and conditions on which future funding or financing may be made available may not be acceptable or funding or financing may not be available at all. If Naftogaz decides to raise additional funds by incurring debt, Naftogaz may become more leveraged and subject to additional or more restrictive financial covenants and ratios. Naftogaz’s inability to procure sufficient financing for thesc purposes could adversely affect Naftogaz’s ability to implement its business strategy.

Nuftogaz’s Indebtedness Naftogaz’s total consolidated financial liabilities at 31 December 2003 were UAH 3,096.4 million, of which UAH 1.138.0 million constituted short-term financial liabilities (including the current portion of its long-term financial liabilities). Naftogaz’s indebtedness could have important consequences. For example, it could:

0 make it more difficult for Naftogaz to repay the Naftogaz Loan, which in turn could prevent the Issuer from satisfying its financial obligations under the Notcs: or

0 rcquire Naftogaz to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness. thereby reducing the availahility of Naftogaz’s cash flow to fund working capital, capital expenditures and other general corporate purposes. Naftogaz‘s ability to repay or refinance its debt and ta meet its debt service obligations in the future will depend on its successful financial and operating performance and on its ability to successfully implement its business strategy. Naftogaz’s financial and operational performance depends upon a number of factors, including factors that are beyond Naftogaz’s control. These factors include:

27 0 fluctuations in oil and gas prices. exchange rates and interest rates:

0 volatility in refining and marketing margins:

0 the success of Naftogaz’s exploration, development and production programmes;

0 any opcrating difficulties. increased operating costs or pricing pressurcs Naftogaz may experience:

0 the passage of legislation, changes in oil and gas pricing policies or other regulatory developments that may adversely affect Naftogaz;

0 any delays in implementing strategic projects; and

0 general political, social, economic and business conditions in Ukraine and the region. It is not certain that Naftogaz’s cash flow will be sufficient to make its debt service payments. to repay its debt and make necessary capital expenditures. If Naftogaz is unable to generate sufficient cash flow in thc futurc, it may bc forced to reduce or delay its capital expenditures, to refinancc all or a portion of its cxisting debt, including the Notes. to sell some of its assets or to obtain additional financing. It is not certain that any refinancing would be possible or that Naftogaz could obtain additional financing.

Restrictions and Covenants in Naftogaz’s Debt Agreements If Naftogaz were unable to comply with the restrictions and covenants in its current or future debt and other agreements, there would be a default under the terms of these agreements. In particular, Naftogaz’s ability to meet its financial ratios and other covenants contained in various loan agreements may be affected by events beyond its control. It is not certain that Naftogaz will be able to meet these tests. In the event of a default under these agreements, the parties could terminate their commitments to lend to Naftogaz or accelerate the loans and declare all amounts borrowed due and payable or terminate the agreements as the case may be. Agreements that contain cross-acceleration or cross-default provisions may be accelerated and become due and payable. If any of these events occur, Naftogaz cannot assure that its assets would be sufficient to repay in full all of its indebtedness. including Naftogaz’s indebtedness to SBL. or that Naftogaz would be able to find alternative financing. Even if Naftogaz could obtain alternative financing, Naftogaz cannot assure that it would be on terms that arc favourable or acccptable to Naftogaz.

Dependence on the Domestic Bank Loan and Debt Markets Naftogaz funds a portion of its debt financing requiremcnts with short-tcrm. hryvnia-dcnominated debt. and thus is dependent on access to short-term domestic financing. This includes access by Naftogaz to the domestic hryvnia denominated bank loan market as well as access by two of its wholly-owned subsidiaries, NJSC Chornomomaftogaz (“Chomomornaftogaz”) and SC Ukrtransgaz (“Ukrtransgaz”) to the growing domestic market for short- to medium-term, hryvnia-denominated bonds. Naftogaz’s ability to continue to access the domestic debt markets in amounts sufficient to meet its financing needs could be adversely affected by a number of factors, including economic conditions in Ukraine, the health of the Ukrainian banking and financial system in general and the extent of the exposure of individual Ukrainian banks and other investors in the domestic debt market to Naftogaz risk. If Naftogaz is unable to continue to access the short-term domestic bank loan and debt markets as requircd. its financial condition and results of operations could be materially and adversely affected.

Foreign Erchange Risk Between 1991 and 2000, Ukrainc experienced hyperinflation. A significant portion of Naftogaz’s debt is denominated in U.S. dollars. However, Naftogaz’s revenues from domestic sales are generated in Hryvnia. Gazprom has in the past paid the cash portion of its transit fees to Naftogaz in Russian rubles and in U.S. dollars. Although, since 2001, the HryMlia-U.S. dollar exchange rate has been relatively stable, Naftogaz cannot assure prospective investors that Hryvnia will continue to be freely exchangeable into U.S. dollars or that Naftogaz will he able to exchange sufficient amounts of Hryvnia to pay interest on and principal of the Notes or meet its foreign currency obligations.

Competition In 2003, Naftogaz had approximately 98 per cent. of the industrial customer market, up from approximately 60 per cent. in 2002, when Itera International Energy L.L.C. (“Itera”) was a competitor in the supply of natural gas to industrial customers. When the management of Naftogaz decided to stop employing the services of Itera for transporting Naftogaz’s gas purchased from Turkemnneftegas and

28 commenced contracting with ETG for its gas transport from Turkmenistan, it effectively removed Itera as a competitor for industrial consumers. However, as of 1 January 2005, Naftogaz will cease to purchase Turkmen gas with the assistance of ETG and RUE will commence supplying Turkmen gas to Naftogaz on similar terms. RUE will not be able to independently sell Turkmen gas to Ukraine. However, there can be no assurance that Naftogaz will continue to control such a large portion of the industrial customer base. Additionally, in 2002, Naftogaz started exporting natural gas to western Europe. However, Naftogaz’s share in the export market remains low and Naftogaz faces significant competition from larger foreign distribution companies. Pursuant to the gas transit contracts with Gazprom, Naftogaz is prohibited from exporting gas which it receives from Gazprom as payment in-kind for transit services. However, Naftogaz may export Turkmen gas and gas which it extracts. Furthermore, Ukraine has agreed to export quotas for natural gas in an inter-governmental protocol between Ukraine and Russia. See “Business - Exports”.

Environmental Risks Naftogaz’s operations are subject to the environmental risks inherent in the oil and gas exploration, production. refining, transportation and retail distribution industries. Although the level of pollution and potential clean up is difficult to assess, Naftogaz. like most other oil and gas companies operating in the CIS, is burdened with a Soviet-era legacy of environmental mismanagement. There are problems relating to the maturity of fields at past production sites. Poor environmental awareness in the past allowed a number of incidents of oil leakage and pipeline fractures to occur. The legal framework for environmental liability is not yet fully developed in Ukraine, but stricter environmental requirements may be adopted in the near future and the authorities responsible for environmental regulation may move toward more stringent enforcement of existing legislation. Accordingly, Naftogaz is unable to accurately predict the extent of any potential environmental liabilities under current legislation, or the effect of any additional laws or regulations that may be adopted in the future, including whether and to what extent such laws or regulations would increase Naftogaz’s environmental costs. Although measures taken by Naftogaz in relation to environmental regulations have not had a material adverse effect on Naftogaz’s financial condition or results of operations to date. there can be no assurance that the costs of such measures in the future and liabilities due to environmental damage caused by or attributable to Naftogaz will not be material.

Litigation Claims Naftogaz is frequently a party to litigation in Ukraine, both in its own right and as the result of claims inherited from its predecessor, Ukrgazprom. From 1 February 2000 to 11 March 2004, Naftogaz paid UAH 419 million (approximately U.SS78.6 million) in satisfaction of adverse judgments. Of this, approximately UAH 260 million (approximately U.S.$48.8 million) was paid by Naftogaz in satisfaction of judgments obtained against it by its subsidiaries. The statute of limitations for most claims in Ukraine, including claims for bad debts and tort claims, is three years. As a result, most claims inherited from Ukrgazprom expired at the end of 2001.

Dependence on Key Management Naftogaz is dependent on its senior management for the implementation of its strategy and operation of its day-to-day activities. In addition, personal connections and relationships of members of senior management of Naftogaz are important to the conduct of its business. If Naftogaz is unable to retain key members of its senior management and cannot hire new qualified personnel in a timely manner, its business and results of operations would be adversely affected.

Risks Relating to Ukraine General Since independence in 1991, Ukraine has undergone a substantial political transformation from a constituent republic of the former Soviet Union to an independent sovereign democracy. Concurrently with this transformation, Ukraine is slowly changing from a centrally planned economy to a market economy. Although some progress has been made since independence in reforming Ukraine’s economy and its political and judicial systems, to a large extent Ukraine still lacks the necessary legal infrastructure and regulatory framework that is essential to support market institutions, the effective transition to a market economy and broad-based social and economic reforms. Set forth below is a brief description of some of the risks incurred by investing in Ukraine, although the list is not an exhaustive one.

29 Risks Associated with Emqing Markets Investors in emerging markets such as Ukraine should be aware that these markets are subject to greater risk than more developed markets, including in some cases significant political. economic and legal risks. Investors should also note that emerging economies such as Ukraine’s are subject to rapid change and that the information set out in this Offering Circular may become outdated relatively quickly. Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in cmerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved, and investors are urged to consult with their own legal and financial advisors before making an investment in the Notes.

Of/icial Statistics Official statistics and other data published by Ukrainian state authorities may not be as complete or reliable as those of more developed countries. Official statistics and other data may also he produced on different bases than those used in more developed countries. NJSC Naftogaz has not independently verified such official statistics, including statistics on gas. oil and gas condensatc reserves and other data, and any discussion of matters relating to Ukraine in this Offering Circular is, therefore, subject to uncertainty due to questions regarding the completeness or reliability of such information. Specifically, investors should be aware that certain statistical information and other data contained in this Offering Circular has been extracted from official governmental sources in Ukraine and was not prepared in connection with the preparation of this Offering Circular. NJSC Naftogaz only accepts responsibility for the correct extraction and reproduction of the information contained in such subsection.

Political Considerations Historically, a lack of political consensus in the Verkhovna Rada (Parliament) has made it consistently difficult for the Ukrainian Government to secure the support necessary to implement a series of policies intended to foster liberalisation. privatisation and financial stability. Since independence in 1991, governmental instability has been a feature of the Ukrainian political scene and, as a result, Ukraine has had nine different prime ministers. The various state authorities, and the relations between them, as well as the Ukrainian Government’s policies and the political leaders who formulate and implement them, are subject to rapid change. For example, allegations have been made against President Kuchma regarding abuse of power. In addition, the recent proposals for constitutional reform being considered by Parliament would turn Ukraine into a parliamentary republic. On 23 June 2004, draft constitutional amendments were preliminarily agreed by Parliament and submitted to the Constitutional Court for review. The amendments give Parliament the power to appoint the Prime Minister, the Minister of Foreign Affairs, the Minister of Defence and the Head of the Security Service of Ukraine upon nomination by the President. Under the amendments, the President has the power to nominate all other Ministers (subject to the approval of Parliament). Parliament and the President would each have the power to appoint half of the members of the Constitutional Court. The amendments also provide for the election of the President by Parliament rather than by direct election, the extension of terms of Parliament for up to five years and allow members of Parliament to hold ministerial positions. There can be no certainty as to whether any of such constitutional reforms will be adopted, nor can there be any assurance as to the timing of such reforms or that such reforms, if adopted, would not create or foster further political instability in Ukraine. Furthermore, structural reforms envisaged by the Parliament and the Government will be difficult to implement in view of the presidential elections to take place in October 2004 and the small majority that the current coalition Government enjoys in the Parliament. Continued reform will also depend in part on presidential support. President Kuchma has served two terms in office and on 25 December 2003 the Constitutional Court of Ukraine ruled that President Kuchma is not barred by the Constitution from running for a third consecutive term in office. However. President Kuchma has repeatedly indicated that he is not planning to run again in the October 2004 presidential elections. Recently, Mr. Yanukovich, the Prime Minister, was nominated by the parliamentary majority coalition as a single candidate for the October 2004 presidential elections. As of the date of this Offering Circular, several other political leaders have been registered as candidates for the 2004 presidential elections, including Mr. Viktor Yushchenko, the leader of “Nasha Ukraina” bloc, Mr. Petro Simonenko, the leader of the Communist

30 Party of Ukraine, Mr. Anatoly Kinakh, the leader of the Ukrainian Party of Entrepreneurs and Industrialists and Mr. Olexander Moroz, the leader of the Socialist Party of Ukraine. The Council of Europe has been monitoring the recent developments in Parliament relating to consideration of constitutional changes in the term and mode of elections and has in response issued certain cautionary resolutions expressing concerns about these developments. In particular, the Council of Europe has urged Parliament to ensure that the next presidential elections be held as scheduled and for the term prescribed in the current Constitution. Any major changes in the political climate in Ukraine, including the suspension of presidential elections in October 2004 or a significant change in Government policies as a result of a change in power following the elections or any other changes affecting the stability of the Ukrainian Government or involving a rejection or reversal of reform policies favouring privatisation, industrial restructuring and administrative reform, may have negative effects on the economy and thus on the business of Naftogaz.

Relationships with Western Govemmmts and Institutions Ukraine continues to pursue the objectives of a closer relationship with NATO, joining the World Trade Osganisation and becoming an associate member of the European Union and has recently dispatched troops to Iraq in support of the US.hacked coalition in Iraq. However, the rccent ratification by Ukraine of the September 2003 agreement between Ukraine, Russia, Kazakhstan and Belarus for the purpose of creating a single “free trade” economic zone between the parties has caused some concern as to whether Ukraine intends to integrate with Western institutions in the near future. Any major changes in Ukraine’s relations with Western governments and institutions, in particular any such changes adversely affecting the ability of Ukrainian manufacturers to access world export markets, may have negative effects on the economy and thus on the business of Naftogaz.

Regional Relationships Ukraine’s economy depends heavily on its trade flows with Russia and the rest of the CIS. largely because Ukrainc imports a significant proportion of its energy requirements from this region. especially from Russia. Transit charges for oil and gas from Russia comprise a large share of Ukraine’s export revenues. In recent years, bilateral relations between Ukraine and Russia have improved, due in part to the conclusion in May 1997 of the Friendship and Coopcration Treaty (which confirmed Ukrainian territorial integrity), the conclusion in December 2000 of two inter-governmental agreements on the transit and supply of Russian natural gas, the conclusion in October 2001 of an agreement to ensure natural gas transit for the period 2003-2013, and the recent ratification and signing of the September 2003 agreement with Russia, Kazakhstan and Belarus to create a “free trade” economic zone. In October 2002, Ukraine and Russia also agreed to establish an international consortium in order to provide for a safe and stable Ukrainian gas transit system, to create new gas transit facilities in Ukraine and to attract investment for the modernisation and development of the Ukrainian gas transit system. Lastly, a recent dispute between Ukraine and Russia over the Sea of Azov and Kerch Strait (a shipping gateway to the Black Sea) has been resolved through the signing on 24 December 2003 of the Agreement on Cooperation in Usage of the Sea of Azov by the two nations. This agreement, together with a new land border agreement between Russia and Ukraine. was ratified by both Ukraine and Russia. Any major changes in Ukraine’s relations with Russia, in particular any such changes adversely affecting energy supplies from Russia to Ukraine andor Ukraine’s export revenues derived from transit charges for Russian oil and gas, may have negative effects on the economy and on the business of Naftogaz.

Extemal Debt In 2000, Ukraine undertook a comprehensive debt restructuring exercise to alleviate its rising external debt burden resulting from the accumulation of large payments on external debt coming due in 2000 and 2001. Since the conclusion of this debt restructuring exercise, the ratio of external debt servicing (including principal and interest but excluding debt owed to the International Monetary Fund (the “IMF”)) to gross domestic product (“GDP”) has risen from approximately 1.9 per cent. as at 31 December 2001 to approximately 2.3 per cent. as at 31 December 2002 and approximately 2.9 per cent. as at 31 December 2003. based on official Ukrainian Government sources, causing a significant burden on the Ukrainian economy. Total Government external debt servicing (excluding payments to the IMF) was approximately U.S.$1.4 billion in 2003 and is estimated to be the same in 2004 bascd on official Government sources.

31 On 29 March 2004, the Board of Directors of the IMF approved a new precautionary stand-by arrangement for Ukraine providing the Ukrainian Government with 12-month precautionary stand-by arrangement of approximately U.S.$605 million. This is Ukraine's first such credit arrangement with the IMF since the expiration of Ukraine's 1998 Extended Fund Facility in September 2002. Although Ukraine has been able to access international capital markets for approximately U.S.$l billion in new financing in 2003 and U.S.$1.1 billion in 2004 as at the date of this Offering Circular and its credit rating was upgraded from B to B+ by Fitch, in June 2003, from B2 to B1 by Moody's in November 2003 and B to B-t by S%P in July 2004, the absence of a strong and liquid market for domestic treasury obligations means that Ukraine remains vulnerable should access to international capital markets not be possible for any reason in the future. Under such circumstances, any failure of Ukraine to receive support from official creditors and international financial institutions (such as the IMF and thc World Bank) could adversely affect the financing of the budget deficit. the level of inflation andlor the eschanye value of the Hryvnia, which could in turn, have a negative effect on the business of Naftogaz.

Economic Considerations In recent years, the Ukrainian economy has continued to experience a number of factors which could lead to economic instability, including: a relatively weak banking system, providing limited liquidity to Ukrainian enterprises; widespread tax evasion;

0 capital flight: high levels of corruption and the penetration of organised crime into the economy; and

0 low wages for a large portion of the Ukrainian population. Although the Ukrainian Government has generally been committed to economic reform, the implementation of reform has consistently been impeded by lack of political consensus, controversies over privatisation (including privatisation of land in the agricultural sector), the restructuring of the energy sector, the removal of exemptions and privileges for certain state-owned enterprises or for certain industry sectors: and the limited extent of cooperation with international financial institutions. Whereas the Ukrainian economy has improved in a number of areas since 1999, there has historically been no clear consensus between the President and the Parliament as to the scope, pace and content of economic and political reform. No assurance can be given that current reform policies favouring privatisation, industrial restructuring and tax reform will continue to be implemented and, even if implemented, that those policies will be successful, or that the economy in Ukraine will continue to improve. While Ukraine has made significant recent gains in increasing its GDP. decreasing inflation, stabilising its currency, increasing real wages, and improving its trade balance and current account surplus, there can be no assurance that these recent trends in the Ukrainian economy will continue or will not be halted or reversed.

Fluchrations in the Global Economy Ukraine's economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. In addition, because Ukraine is a major producer and exporter of metal and agricultural products, the Ukrainian economy is especially vulnerable to world commodity prices and/or the imposition of import tariffs by the United States, the European Union or by other major export markets. Any such developments may have negative effects on the economy of Ukraine and thus on the business of Naftogaz.

Lack of Continued Access to Foreign Trade and Investment Notwithstanding the recent improvements in the Ukrainian economy, cumulative foreign direct investment remains low for a country the size of Ukraine. As has happened in the past, an increase in the perceived risks associated with investing in Ukraine could dampen foreign direct investment in Ukraine and adversely affect the Ukrainian economy. No assurance can be given that Ukraine will remain attractive to foreign trade and investment. Any deterioration in the climate for foreign direct investment in Ukraine could have a material adverse effect on the economy of Ukraine and thus on the business of Naftogaz.

32 Comption and Money Laundedng Issues External analysts have identified corruption and money laundering as problems in Ukraine. A new anti- money laundering law came into force in June 7OU3 in Ukraine that requircs thc NBU and financial institutions to more closely monitor certain financial transactions for evidence of money laundering. As a result of the passage of this new law, the Financial Action Task Force on Money Laundering (“FA,”) recommended lifting sanctions against Ukraine for these efforts to address money laundering. The FATF is an inter-governmental body whose purpose is the development and promotion of policies to combat money laundering. In addition, Ukraine was removed from the FATF’s list of non-cooperative countries and territories in February 2004. However, any future allegations of corruption in Ukraine or evidence of money laundering could have a negative effect on the ability of Ukraine to attract foreign investment and thus have a negative effect on the economy of Ukraine and thus on the business of Naftogaz.

Developing Legal System Risks associated with the Ukrainian legal system include:

0 inconsistencies between and among Ukraine’s constitution, laws, presidential decrees, and Ukrainian governmental, ministerial and local orders, decisions, resolutions and other acts; provisions in the laws and regulations that are ambiguously worded or lack specificity and thcreby raise difficulties when implemented or interpreted:

0 the lack of judicial and administrative guidance on the interpretation of Ukrainian legislation, including the complicated mechanism by which the Constitutional Court of Ukraine exercises constitutional jurisdiction; general inconsistencies in the judicial interpretation of Ukrainian legislation in the same or similar cases; and

0 corruption within the judiciary. Furthermore, several fundamental Ukrainian laws either have only recently become effective or are still pending hearing or adoption by Parliament. For example, with effect from 1 January 2004, Ukraine adopted a new civil code. a new commercial code, new mortgage finance laws, and a new law on personal income tax. The recent origin of much of Ukrainian legislation, the lack of consensus about the scope, content and pace of economic and political reform and the rapid evolution of the Ukrainian legal system in ways that may not always coincide with market developments place the enforceability and underlying constitutionality of laws in doubt, and result in ambiguities, inconsistencies and anomalies. In addition, Ukrainian legislation often contemplates implementing regulations. Often such implementing regulations have either not yet been promulgated, leaving substantial gaps in the regulatoq infrastructure, or have been promulgated with substantial deviation from the principal rules and conditions imposed by the respective legislation, which results in a lack of clarity and growing conflicts between companies and regulatory authorities. These weaknesses in the Ukrainian lcgal system could make it difficult for Naftogaz to implement its policies or could lead to conflicts between the Ukrainian Government and Naftogaz, which would have a negative effect on the business of Naftogaz.

Unctrtainties Relating to the Judicial System Thc independence of thc judicial systcm and its immunity from economic and political influcncts in Ukraine remains largely untested. Although the Constitutional Court of Ukraine is the only body authorised to exercise constitutional jurisdiction and has mostly proven its impartiality, the system of constitutional jurisdiction itself remains too complicated to ensure smooth and effective removal of discrepancies between the Constitution of Ukraine and applicable Ukrainian legislation on the one hand and among various laws of Ukraine on the other hand. The system of general and specialised courts is understaffed and under funded. Judicial precedents under Ukrainian law have no binding effect on subsequent decisions. Not all Ukrainian legislation is readily available to the public or organised in a manner that facilitates understanding. Court decisions are not open to public access and, therefore, may not serve as guidelines in interpreting applicable Ukrainian legislation to the public at large. Moreover, courts themselves are not bound by earlier decisions taken under the same or similar circumstances, which results in the inconsistent application of Ukrainian legislation to resolve the same or similar disputes. The Ukrainian judicial system has become more complicated and hierarchical as a result of the recently introduced judicial reform. The expected result of the judicial refom is that the Ukrainian judicial system will become even slower than before. All of these

33 factors make judicial decisions in Ukraine difficult to predict and effective redress uncertain. In addition, court claims are often used in furtherance of political aims. Naftogaz may be subject to such claims and may not be able to receive a fair hearing. Finally, court orders are not always enforced or followed by law enforcement institutions. Any uncertainties relating to the judicial system could have a negative effect on the economy and thus on the business of Naftogaz.

Uncertain Implications of the Tar System Ukraine currently has a number of laws related to various taxes imposed by both central and regional governmental authorities. Applicable taxes include value added tax, corporate incomc tax (profits tax), customs duties, a number of turnover based taxes, payroll (social) taxes and other taxes. These tax laws have not been in force for significant periods of time. compared to more developcd markct economies, often resulting in unclear or non-existent implementing regulations. For example, with effect from 1 January 2004. personal incomc tax has been reformed by the introduction of a new flat tax of 13 per cent. (to be increased to 15 per cent. from 1January 2007) for all levels of income. In addition, with effect from 1 January 2004, the rate of corporate income tax was reduced from 30 per cent. to 25 per cent. A new tax of 5 per cent. on interest accrued on private deposits held by individuals in Ukrainian commercial banks will be withheld starting from 1 January 2005. Differing opinions regarding legal interpretation often exist both among and within governmental ministries and organisations, including the tax administration, creating uncertainties and areas of conflict. Tax declarations/retums, together with other legal compliance areas (for example, customs and currency control matters), are subject to review and investigation by a number of authorities, which are authorised by law to impose extrcmcly severe fines, penalties and interest charges. These circumstances create tax risks in Ukraine substantially more significant than typically found in countries with more developed tax systems. Generally, tax declarations/retums in Ukraine remain open and subject to inspection for a three- year period of time. However, this term may not be observed or may be extended in certain circumstances. Moreover, the fact that a period has been reviewed does not exempt that period, or any tax declarationlreturn applicable to that period, from further review. In 2001, Naftogaz was the subject of an adverse tax ruling which, prior to it being overturned, assessed Naftogaz’s tax liability at approximately U.S.$570 million. See “Business-Taxes”. In addition, in 2004, Naftogaz was requested to contribute 20 per cent. of its income to a special State account to ensure payment of taxes. See “-Risks Relating to Naftogaz-Contribution of Naftogaz Income to the State”. While NJSC Naftogaz believes that it is currently in compliance with the tax laws affecting its operations, it is possible that relevant authorities could take differing positions with regard to interpretative issues, which may result in a material adverse effect on NJSC Naftogaz‘s results of operations and financial condition. See “Business-Taxes”.

Disclosure and Reporting Requirements and Fiduciary Duties Disclosure and reporting requirements have only recently been enacted in Ukraine. The anti-fraud legislation has only recently been adapted to the requirements of the free market economy and remains largely untested. Most Ukrainian companies do not have corporate governance procedures that are in line with U.S. or European standards, including the standards set forth in the U.S. Sarbanes-Oxley Act of 2002. Thc concept of fiduciary duties of management or members of the board to their companies or shareholders remains unknown in Ukraine. Violations of disclosure and reporting requirements or breaches of fiduciary duties by NJSC Naftogaz’s directors or to NJSC Naftogaz’s sharcholder could significantly affect the receipt of material information or result in inappropriate management decisions, materially adversely affecting the value of the investment in the Notes.

Risks Relating to the Notes Ukrainian Bankruptcy Law Ukrainian bankruptcy law differs from bankruptcy laws of England and is subject to varying interpretations. In the event of NJSC Naftogaz’s bankruptcy, NJSC Naftogaz’s obligations to SBL would be subordinated to the following obligations: obligations secured by pledges of NJSC Naftogaz’s assets; w severance pay;

a expenditures associated with the conduct of the bankruptcy proceedings and expenses of the liquidator;

34 0 obligations arising as a result of inflicting harm to the life or health of individuals: and

0 employment related obligations. In the event of bankruptcy, Ukrainian bankruptcy law may materially adversely affect NJSC Naftogaz’s ability to make payments to SBL, the Issuer or the Trustee. In addition, Naftogaz is subject to a temporary moratorium on enforcement against its fixed assets introduced by Ukrainian law in 2001. By virtue of the moratorium. enforcement against the fixed asscts of Naftogaz arising in connection with, inter alia, (a) court judgments and arbitration awards or (b) bankruptcy proceedings, is currently prohibited. As a result, creditors of Naftogaz who seek to satisfy a judgment against the ked assets of Naftogaz mav not be able to do so. Notwithstanding the proposed structure of the distribution of the Notes (see “Subscription and Sale” and “Related Party Transactions”), Ukrainian counsel has advised that they believe there is no basis for challenging the validity of the Naftogaz Loan Agreement or any transaction contemplated thereunder as contravening the requirements of Ukrainian legislation, although in view of the risks associated with the Ukrainian legal system as disclosed under “-Risks Relating to Ukraine-Developing Legal System”, no assurance can be given that the courts in Ukraine would interpret this in the same manner.

Interest Payments Under the Naftogaz Loan - Availabiliry of Treuty Relief In general, payments of interest on borrowed funds by a Ukrainian entity to a non-resident legal entity are subject to Ukrainian withholding tax at the rate of 15 per cent., absent reduction or elimination pursuant to the terms of an applicable tax treaty. Based on professional advice it has received, NJSC Naftogaz believes that, under the terms of the double taxation treaty between Ukraine and the United Kingdom (the “Double Tax Treaty”), payments of interest on the Naftogaz Loan will not, under current law, be subject to withholding tax, provided that certain conditions set forth in the Double Tax Treaty and under applicablc Ukrainian law arc duly satisfied. However, therc can be 110 assurance that the exemption from withholding tax under the Double Tax Treaty is or will continue to be available. Specifically. in order for the cxcmption from withholding under the Double Tax Treaty to be applicable, SBL must be the bcneficial owner of the interest payments bcing received in the United Kingdom. While NJSC Naftogaz believes SBL will bc treated as the beneficial owner of the income in question, the notion of beneficial ownership is nut well defincd, either in Ukrainian or in international tax law. As a consequence, different interpretations are possible and the position could be taken that SBL should not be viewed as thc beneficial owner of the interest payments bein? rcceived in thc Unitcd Kingdom. However, NJSC Naftogaz believes that it is unlikely that the Ukrainian authorities will adopt this view. In addition, Article ll(7) of the Double Tax Treaty contains a “main purpose” anti-avoidance provision. While there is no established practice of the Ukrainian tax authorities with respect to the application of this provision, if the Ukrainian tax authorities take a position that one of the main purposes of selecting the United Kingdom, SBL‘s jurisdiction of residence, for this loan transaction was to avail NJSC Naftogaz of the tax benefits provided undcr the Double Tax Treaty. the Ukrainian tax authorities may invoke the anti-avoidance provision of Article ll(7). In such circumstances, there is a risk that payments of interest by NJSC Naftogaz under the Naftogaz Loan would cease to have the benefit of the Double Tax Treaty.

Consequences of Ukminian Withholding If any payments (including payments of interest) under the Naftogaz Loan are subject to any withholding (as a result of which SBL would reduce payments under the SBL Loan by the amount of such withholding and consequently the Issuer would reduce payments under the Notes), NJSC Naftogaz may, in certain circumstances specified in the Naftogaz Loan Agreement and subject to certain exceptions relating to the maintenance by SBL of its residence in a qualifying jurisdiction, become obliged to pay such additional amounts as may be necessary so that the net payments received by SBL will not be less than the amount SBL would have received in the absence of such withholding. While there is doubt as to whether the gross-up clause contained in the Naftogaz Loan Agreement is enforceable under Ukrainian law, a failure by NJSC Naftogaz to pay additional amounts due under the Naftogaz Loan Agreement would constitute a default under the Naftogaz Loan Agreement. Also, in the event that NJSC Naftogaz would become obliged to pay additional amounts, NJSC Naftogaz may prepay the Naftogaz Loan at its principal amount, together with accrued interest, and thereupon (subject to receipt of the relevant funds from NJSC Naftogaz) the SBL Loan would be repaid and all outstanding Notes wiU be prepaid by the Issuer.

35 Withholding Tar Risk - Enfomemcnt of the Security Under the Tmst Deed In the event that the Trustee enforces the security under the Trust Deed, the Trustee will be entitled to payments of principal and interest under the Naftogaz Loan Agreement. Consequently, payments under the Naftogaz Loan Agreement may then cease to have the benefit of thc Double Tax Treaty and consequently may become subject to Ukrainian withholding tax.

Impact of Ukrainian Currency Control Regulations on NJSC Naftogaz’s Ability to Make Payments to SBL or the Trustee under the Naftogaz Loan Agreement The NBU is empowered to regulate and define Ukrainian policy on currency operations in Ukraine, as well as to establish any restrictions on currency operations and repatriation. Ukrainian currency control regulations and practice may be subject to continual change, with the NBU exercising considerable autonomy in interpretation and practice. According to the applicable currency regulations, Naftogaz is required to obtain a licence from the NBU in order to open and maintain a foreign bank account. It is also required to register the Naftogaz Loan with the NBU. There can be no assurance that Naftogaz will be able to obtain such licence and register the Naftogaz Loan with the NBU. However, payments under the Naftogaz Loan to any entity other than SBL would most likely necessitate a change to the registration certificate and possibly a licence from the NBU. If NJSC Naftogaz were not to receive such amended registration certificate or liccnce under such circumstances, therc can be no assurance that NJSC Naftogaz would be able to make payments on the Naftogaz Loan to any entity other than SBL. The NBU recently issued a regulation that establishes a mechanism to assess the fees for services that non-residents provide to residents. Unless a cross-border transaction relating to a non-resident’s work or services is licensed by the NBU, or is subject to an exemption, the state agency monitoring the external markets, operating under the Ministry of Economy, will review any payment of fees by the resident under the relevant agreement with the non-resident if the value of the agreement exceeds 60,000. If the state agency determines that the fees are excessive, the fee payment becomes subject to the NBU’s approval. NJSC Naftogaz believes that its payments of fees under the Naftogaz Loan Agreement are exempt from this requirement.

Foreign Judgments may not be Enforceable against NJSC Naftogaz It may not be possible to effect service of process against Naftogaz in courts outside Ukraine in a jurisdiction to which it has not explicitly submitted. Moreover, it may not be possible to enforce foreign court judgments in the courts of Ukraine that are predicated upon the laws of foreign jurisdictions without a re-examination of the merits of such a judgment in Ukrainian courts. Furthermore, if a foreign judgment were to provide for an enforcement procedure contravening Ukrainian law requirements, a Ukrainian court would likely refuse to recognise and enforce the judgment based on the theory that the judgment is contrary to the public order of Ukraine. Courts in Ukraine will not enforce any judgment rendered by in a court in a country other than Ukraine unless a treaty between such country and Ukraine providing for reciprocal enforcement of judgments is in effect, and then only in accordance with the terms of such treaty. There is no treaty providing for the reciprocal enforcement of judgments between Ukraine and the United Kingdom. An arbitration award would, however, be enforceable in Ukraine as Ukraine is a party to the New York Convention, subject to the terms of the New York Convention. There is a risk that a claimant will not be able to enforce a court judgment against certain assets of Naftogaz in certain jurisdictions (including the imposition of any arrest order or attachment or seizure of such assets and their subsequent sale) without Naftogaz having specifically consented to such enforcement at the time it is sought. In addition, Naftogaz is subject to a temporary moratorium on enforcement against its fixed assets introduced by Ukrainian law in 2001. By virtue of the moratorium, enforcement against the fixed assets of Naftogaz arising in connection with, inter alia, (a) court judgments and arbitration awards or (b) bankruptcy proceedings, is currently prohibited. As a result, creditors of Naftogaz who seek to satisfy a judgment against the fixed assets of Naftogaz may not be ablc to do so.

36 No direct ncoum of the Noteholden to Naftogaz Except as otherwise expressly provided in the Terms and Conditions and in the Trust Deed, the Noteholders do not have any proprietary or other direct interest in the Issuer’s or SBL‘s rights under or in respect of the Naftogaz Loan Agreement or the SBL Loan Agreement or the Loans. Subject to the terms of the Trust Deed, no Noteholder will have any entitlement to enforce any of the provisions of the Naftogaz Loan Agreement or the SBL Loan Agreement or have direct recourse to Naftogaz except through action by the Trustee under the Charges (as dcfined in the Terms and conditions of the Notes). In addition Noteholders should be aware that none of the Issuer, SBL nor the Trustee accept any responsibility €or the performance by Naftogaz of its obligations under the Naftogaz Loan Agreement or the SBL Loan Agreement. See “Terms and Conditions of the Notes - Status and Limited Recourse”.

Payments under the Notes Limited to the Amount of Certain payments Received by SBLH PLC in respect of the SEL Loan In each case where amounts of principal, interest and additional amounts (if any) under the Terms and Conditions of the Notes or the Trust Deed are to be paid by SBLH PLC in respect of the Notes, the obligations of SBLH PLC to make any such payment shall constitute an obligation only to account to the Noteholders on each date upon which such amounts of principal, interest and additional amounts (if any) are due in respect of the Notes, for an amount equivalent to sums of principal, interest and additional amounts (if any) actually received by or for the account of SBLH PLC pursuant to the SBL Loan Agreement. SBL is obliged under the SBL Loan Agreement only to account to SBLH PLC on each date upon which payments are due under the SBL Loan for an amount equivalent to sums of principal, interest and additional amounts (if any) received by or for the account of SBL, pursuant to the Naftogaz Loan. Consequently, the failure of Naftogaz to meet its payment obligations under the Naftogaz Loan in full would result in the Noteholders receiving less than the scheduled amount of principal or interest or other amounts (if any) on the relevant due date.

Additional Credit Risk Under the Naftogaz Loan Agreement, Naftogaz is required to make payments of principal and interest in respect of the Naftogaz Loan to the SBL Account two business days before the date for payment is due on the Notes. Any such payment so made will discharge pro tunto Naftogaz’s obligation to make the relevant payment under the Naftogaz Loan Agreement. SBL is obliged under the SBL Loan Agreement to account to SBLH PLC on each date upon which payments are due under the SBL Loan for an amount equivalent to the amount received by SBL from Naftogaz, pursuant to the Naftogaz Loan Agreement. SBLH PLC has directed The Bank of New York, acting through its London branch, as Principal Paying Agent, to make payments of principal and interest in respect of the Notes from amounts received into the SBLH PLC Account. Thus Noteholders will be exposed to the credit risk on The Bank of New York for any period during which amounts are credited to the SBL Account and the SBLH PLC Account and the Noteholders shall have recourse only to The Bank of New York for any amounts in such accounts and not the Issuer, SBL or Naftogaz. See “Terms and Conditions of the Notes - Status and Limited Recourse”.

Lack of a Public Market for the Notes There may not be an existing market for the Notes at the time they are issued. Although application has been made to list the Notes on the Luxembourg Stock Exchange, there can be no assurance that a liquid market will develop for the Notes, that holders of the Notes will be able to sell their Notes, or that such holders will be able to sell their Notes for a price that reflects their value.

The Market Rice of the Notes may be Volatile The market price of the Notes could be subject to significant fluctuations in response to actual or anticipated variations in NJSC Naftogaz’s own and NJSC Naftogaz’s competitors’ operating results, adverse business developments, changes to the regulatory environment in which NJSC Naftogaz operates, changes in financial estimates by securities analysts. and the actual or expected sale of a large number of Notes, as well as other factors, including the trading market for notes issued by or on behalf of Ukraine as a sovereign borrower. In addition. in recent years the global financial markets have experienced significant price and volume fluctuations which. if repeated in the future, could adversely affect the market price of the Notes without regard to NJSC Naftogaz’s results of operations, prospects or financial condition.

37 Financial Turmoil in Emerging Markets could cause the Price of the Notes to Suffcr The marker price of thc Notes is influenced by economic and market conditions in Ukraine and, to a varying degree, economic and market conditions in other CIS, eastern European and emerging markets generally. Financial turmoil in Ukraine and other emerging markets in 1997 and 1998 adversely affected market prices in the world’s securities markets for companies that operate in those developing economies. Even if the Ukrainian economy remains relatively stable. financial turmoil in these countries could materially adversely affect the market price of the Notes.

Any Negative Change in Ukraine’s or NJSC Naftogaz’s Own Credit Rating Could Adversely Afiect the Market Price of the Notes Ukraine sovereign bonds are rated “B+ (stable outlook)” by Standard & Poor’s Rating Services, a division of the McGraw-Hill Companies, Inc., “B+ (stable outlook)” by Fitch Ratings Ltd. and “B1 (positive outlook)” by Moody’s Investors Services Limited. NJSC Naftogaz has received a credit rating of B+ by Fitch Ratings Ltd. and B2 by Moody’s Investors Services Limited. Any negative change in Ukraine’s or NJSC Naftogaz’s own credit rating could materially adversely affect the trading price for the Notes. A negative change in the credit rating of one or more corporate Ukrianian borrowers could also adversely affect the trading price of the Notes. A bond rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organisation.

38 USE OF PROCEEDS

The net proceeds from the offering of the Notes after deduction of underwriting fees and commissions, which net proceeds are expected to amount to approximately U.S.$494,000,000, will be used by SBLH PLC for the sole purpose of financing the SBL Loan. The net proceeds from the Naftogaz Loan. which is being funded in full by the SBL Loan. will be used by KJSC Naftogaz for financing capital expenditures, the reduction of short-term debt (see “Selected Financial Review - Liquidity and Capital Resources”), certain potential strategic acquisitions (which may include the acquisition of certain interests in MOL Hungarian Oil and Gas plc’s gas subsidiaries if NJSC Naftogaz’s tender is successful and acquisition of rights to develop natural gas and oil fields in Russia or Libya). the purchase of natural gas and other general corporate purposes.

39 EXCHANGE RATES

The currency of Ukraine, the Hryvnia, was introduced in 1996. In 1997, the NBU implemented a "currencv band'' for the Hryvnia allowing it to float within the range of UAH1.7-1.9=U.S.$l.O0. As part of its measures to stablize the currency, the NBU extended the currency band to UAH 2.5-3.5=U.S.$1.00 and further to UAH 3.50-4.60=U.S.$1.00, effective until the end of 1999, at which point the NBU withdrew most of the currency exchange restrictions. In 2001, the average exchange rate appreciated by 1.3 per cent. againt the U.S.dollar due to a favourable trade balance and policies adopted by the NBU. In 2002, the average exchange rate appreciated by 0.8 per cent. against the U.S. dollar and in 2003, the Hryvnia further strengthened against the U.S. dollar by 0.02 per cent. From 1 January 2004 through to 23 July 2004, the Hryvnia strengthened against the U.S. dollar by 0.2 per cent. In 2003, the NBU liberalised its foreign exchange policies by, inter alia, eliminating the formal currency band and permitting commercial banks to grant loans for Ukrainian resident customers in foreign currency. In 2004, the NBU further liberalised its foreign exchange policies by simplifying certain noms governing the movement of currency through Ukrainian customs by natural persons and allowing foreign banks to purchase Hryvnia from Ukrainian banks. The NRU continues to follow a floating exchange rate policy, intervening only to smooth out sharp downward fluctuations of the exchange rate. According to a decision of thc NBU Council dated 19 March 2004. the Hryvnia exchange rate will fluctuate between UAH 5.33 and 5.3X=U.S.$1.00 in 2004 and between UAH 5.29 and 5.35=U.S.$1.00 in 2005. The following table sets forth. for the periods indicatcd, the averagc and period-end official rates set by the NBU, in each case for the purchase of Ukrainian hryvnia, all expressed in Ukrainian hryvnia per U.S. dollar.

hW Average Period End (UAH per U.S. dollar) 2004 (through 8 September) ...... 5.33 5.31 5.33 5.31 2003 ...... 5.33 5.33 5.33 5.33 2002 ...... 5.33 5.30 5.33 5.33 2001...... 5.43 5.27 5.37 5.30 2000 ...... 5.60 5.22 5.44 5.43 1999...... 5.28 3.43 4.13 5.22 1998...... 3.43 1.90 2.45 3.43

Sourcc: mu

40 CAPlTALISATION

As of the date of this Offering Circular, NJSC Naftogaz’s total authorised share capital was UAH 5,564,714 ordinary shares of par value UAH 1,OOO each of which all have been issued and fully paid at par, and are owned by the State, represented by the Cabinet of Ministers. The following table sets forth (i) NJSC Naftogaz’s capitalisation at 31 December 2003 and (ii) such capitalisation as adjusted to reflect KJSC Naftogaz’s borrowing under thc Naftogaz Loan Agreement (as if such borrowing had occurred at 31 December 2003). This information should be read in conjunction with “Use of Proceeds”, “Selected Financial Review” and the Financial Statements included elsewhere in this Offering Circular. At 31 December 2003 Actual As Adjusted (UAH milliom) A. Current liabilities Accounts payable and other indebtedness ...... 16,190.5 16,190.5 Accounts payable to related parties ...... 322.3 322.3 Tax liabilities ...... 6,487.8 6,487.8 Financial liabilities ...... 1,138.0 1,138.0 Other current liabilities ...... 2,540.2 2,540.2 Total current liabilities ...... 26,678.6 26,678.6

B. Long-term liabilities Provision for abandonment of wells ...... 415.8 415.8 Government grants ...... 0.0 0.0 Deferred tax ...... 6,650.9 6,650.9 Other long-term financial liabilities...... 1.958.4 4,623.4 Total long-term liabilities...... 9,025.2 11,6902 Total liabilities ...... 35,703.8 38368.8 Minority interest ...... 3,648.1 3,648.1

Stockholder’s equity Statutory capital ...... 6,848.3 6,848.3 Accumulated profit ...... (4.460.5) (4,460.5) Reserves ...... 35,227.5 35,227.5

Total equity capital ...... 37,6153 37,6153 Total liabilities and equity capital ...... 76,9673 79,6322

Except as set forth above, there has been no material change in NJSC Naftogaz’s capitalisation (as so adjusted) since 31 December 2003.

41 SELECTED FINANCIAL AND OPERATING INFORMATION

The following tables present selccted financial infrmnation which has been extracted without material adjustment from the Financial Statements . The following data should be read in conjunction with the Financial Statements and the notes thereto included elsewhere in this Offering Circular as well as the section entitled “Selected Financial Review” . Year Ended 31 December 2003 2001 (UAH millions) Income Income from sales of oil. gas. transportation. etc...... 33,267.4 24,716.4 21,653.3 Expenses Cost of sales ...... (25,006.1) (18,864.9) (17,192.0) Gross profit ...... 8,261.3 5. 8515 4. 4613 Other operating income ...... 379.5 526.2 2,490.6 Administration expenses and sales related expenses ...... (944.3) (884.4) (790.4) Other operating expenses ...... (2,301.2) (1,832.7) (2,816.4) Provision for doubtful debts ...... (180.5) (1,430.6) (4,459.6) Profit (loss) from operations ...... 5,2 147 2,229.9 (lJl4.6) Other non-operating income ...... 764.0 167.1 44.5 Other non-operating expenses ...... (411.8) (709.8) (658.5) Losses from impairment of assets ...... (2,973.0) 0 .0 (7.4) Profit (loss) from operating activities ...... 2,593.9 1. 6872 (1,736.0) Income tax ...... (1,158.3) (1,463.4) (1,135.3) Profit after taxation ...... 1,435.5 2238 (2. 87W Minority interest ...... (67.5) (159.7) (391.8) Net profit (loss) from operating activities ...... 1,368.0 64.1 (3,263.1) Extraordinary expenses ...... (10.3) (0.6) (4.9) Net profit ...... 1,357.7 63.6 (3,268.0)

42 Ytar Ended 31 December m3 2002 2001 (UAH millions) ASSETS Current Assets Cash and cash equivalents ...... 400.2 538.0 313.7 Accounts receivable and promissory notes, net ...... 5,177.5 3,398.0 6,619.3 Accounts receivable from related parties, net ...... 4,340.6 5,649.3 2,375.2 Inventories, net ...... 3,873.1 5,005.6 3,490.4 Other current assets ...... 2,867.4 2,993.8 3,295.2 Total current assets ...... 16,658.8 17,584.7 16,093.8

Non-current assets Long-term accounts receivable and promissory notes. net ...... 342.7 766.7 1,419.3 Long-term financial investments ...... 1,355.4 751.8 320.1 Fixed assets, depreciated value ...... 58,610.3 24,948.2 24,369.4 Deferred tax assets ...... 0.0 2,258.5 2,424.1 Total noa-current assets ...... 60,308.4 28,725.2 28332.9 Total assets ...... 76,967.2 46,309.9 44,626.6 ..

Year Ended 31 December 2003 m2 ulol (UAH millions) LIABILITIES AND EQUlTY CAPITAL Current liabilities Accounts payable and other indebtedness ...... 16,190.5 17,236.0 18,008.1 Accounts payable to related parties ...... 322.3 2,297.2 910.4 Tax liabilities...... 6,487.8 7,002.5 4,056.7 Financial liabilities ...... 1,138.0 696.9 457.8 Other current liabilities ...... 2,540.2 2,374.3 3,351.8 Total current liabilities ...... 26,678.6 29,606.8 26,784.7

Long-term liabilities Provision for abandonment of wells ...... 415.8 387.8 359.2 Government grants ...... 0.0 7.3 32.7 Deferred tax ...... 6,650.9 0.0 0.0 Other long-term financial liabilities...... 1,958.4 1.242.8 3.218.1 Total long-term liabilities...... 9,025.2 1,637.9 3,609.9 Total liabhties...... 35,703.8 31,244.7 30694.6 Minority interest ...... 3,648.1 1,481.0 1304.1 Equity capital Statutory capita1 ...... 6,848.3 6,848.3 6,848.3 Accumulated profit ...... (4,460.5) (5,905.9) (6,944.4) Reserves ...... 35,227.5 12,641.8 13,024.1 Total equity capital ...... 37,615.3 13,584.2 12,928.0 Total liabilities and equity capital ...... 76,967.2 46,309.9 44,626.6

43 Year Ended 31 December

~ 2003 2002 2001 (UAH millionr) OTHER FINANCIAL DATA Depreciation(’)...... 1,702.3 1,659.4 1,714.3 EBITDA‘~)...... 4,371.6 3,359.5 (248.3) EBIT(3) ...... 2,649.3 1,700.2 (1,962.7)

“Depreciation” is included in the income statement in the line items “cost of sales” and “administrative expenses and sales related expenses”.

“EBITDA” is defined as earnings belore interest. taxes. depreciation and amortisaiion. EBITDA is not a measure of financial perromiance under generally accepted accounting principles and should not he considered as an alternative to cash flow from operating aciivities or as a measure of liquidity or an alternative to net income as indicators of NJSC Naftogaz’s operating performance or any other measures of performance derived in accordance with generally accepted accounting principles. EBITDA is presented as additional information because NJSC Naftogaz understands that it is one measure used by cerlain investors to determine its operaline cash flow and historical ability to meet debt service and capital expendiiure requirements. However, other companies may present EBlTDA in a different manner &om NJSC Naftogaz.

“EBIT* is delincd as earnings before interest and taxes. EBlT is not a measure oC financial psrformance under generally accepted accounting principles and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of NJSC Naftogaz’s operating performance or any other measures of performance derived in accordance with generally accepted accounting principles. EBlT is presented as additional information because NJSC Naftogaz understands that it is one measure used by certain investors to determine its operating cash flow and historical ability to meet debt service and capital expenditure requirements. However, other companies may present EBIT in a different manner from NJSC Naftogaz.

44 SELECTED FINANCIAL REYIEW

The following discussion should be read in conjunction with the “Selected Financial and Operating Information” and the Financial Statements included elsewhere in this Offering Circular, which have been prepared in accordance with IFRS. This discussion includes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in the forward-looking statements as a result of numerow factors, including the rish discussed in “Risk Factors” appearing elsewhere in this Onering Circular.

Background Naftogaz is a vertically integrated oil and gas company. Through its subsidiaries, Naftogaz is primarily involved in, and generates revenues from, the following:

0 Exploration. production and rctining: oil and gas exploration. development and production operations and processing and refining of natural gas. gas condensate and crude oil.

0 Transportation and storage: transportation and storage of oil and natural gas.

0 Sales: sales of natural gas and oil to domestic consumers and export of natural gas. Naftogaz’s other activities comprise both activities which support its core business segments, such as research and development, maintenance services for industrial facilities and construction as well as other unrelated businesses such as newspapers. insurance, finance and banking. Based on the consolidatcd Financial Statements, revenues from production and refining, transportation, sales (consisting principally of gas sales) and other consolidated activities, including banking services, accounted for 14.5 per cent., 33.9 per cent., 51.4 per cent. and 0.3 per cent., respectively of total income in 2003. The Financial Statements include the consolidated results of 11 companies, including NJSC Naftogaz. Ukrgazvydobuvannya, Ukrtransgaz, JSC Ukrtransnafta (“Ukrtransnafta”), SC Gas of Ukraine, Chomomornaftogaz, Ukrnafta, JSC Dniepropetrovskgas (“Dniepropetrovskgas”), JSC Zaporizhgas (“Zaporizhgas”), JSC Luganskgas (“Luganskgas”) and JSC Mikolayivgas (“Mikolayivgas”). Companies not included in the consolidated financial statements comprise less than 10 per cent. of the consolidated balance sheet of NJSC Naftogaz.

Certain Factors Affecting Naftogaz’s Results Of Operations The results of Naftogaz’s operations and thc period to pcriod comparability of thc financial results are affected by various external factors. Because Naftogaz’s exploration. production. refining. transport and sales operations are located in Ukraine, certain of these factors are attributable to the special characteristics of this country. Such factors include the political climate, the economy, including interest rates, and taxation rates. In addition. Naftogaz is affected by general business and industry specific conditions.

Regulation of Domestic Natural Gas Prices, Oil Prices and Transportation Tarifss As a State owned company and a natural monopoly in the oil and gas industry in Ukraine, the principal activities of Naftogaz are regulated by various Ukrainian state authorities, including the Cabinet of Ministers, the Ministry of Economy, the Ministry of Fuel and Energy, which regulate State policy in the energy sector, and the NCRP. The NCRP regulates domestic prices for natural gas sales and tariffs for natural gas transportation as well as domestic tariffs for oil transportation. Gas prices do not currently fluctuatc based on supply and demand and natural gas prices in Ukraine did not change for a majority of consumers between 1999 and 2003. While Naftogaz has agreed with the NCRP a gradual increase of approximately 19 per cent. for industrial consumers in 2004 the prices for natural gas that Naftogaz charges certain customers are below the contract price at which Naftogaz is able to purchase gas (although this is mitigated by the fact that Naftogaz obtains a significant portion of its gas as payment in- kind from Gazprom for gas transportation services). Naftogaz continues to negotiate with the NCRP gas price increases for residential consumers, State Financed Entities and regional heating companies, although there is no certainty that the NCRP will agree such increases.

45 Non-Cash Settlements Historically, in common with other Ukrainian companies, Naftogaz has entered into agreements to settle a number of transactions by the transfer of goods and services as opposed to cash. In particular, and as discussed below, a significant source of revenues is fees for transit of natural gas through Likrainc under contract with Gazprom, for which Naftogaz receives a significant portion of the payment in-kind. in the form of natural gas. In 2003, approximately 90 per cent. of the payment was received in the form of natural gas. The gas was valued at its contract price of U.S.$50 per 1,000 cubic metres. Naftogaz’s total income and cost of sales are significantly affected by in-kind payments. Under arrangements with Turkmeneftegas, Naftogaz purchases gas from Turkmenistan at a price which is paid, in part, in U.S.dollars and, in part, in goods and services. Naftogaz’s purchase of these goods from third parties is accounted for as a cost of sales while the sale of these goods to Turkmeneftegas is accounted for as income. Naftogaz then applies this income to the purchase of gas from Turkmeneftegas, which is accounted for as a cost of sales, and then Naftogaz eventually sells this gas to customers which is accounted for as income. For instance, for the year ended 31 December 2003, Naftogaz had income of UAH 33.3 billion. However, of this amount, the Company estimates that approximately UAH 4.5 billion, or approximately 13.5 per cent., was as a result of sales of goods and services to Turkmenistan in connection with Naftogaz’s purchase of gas. A company similarly situated to Naftogaz, paying solely cash for Turkmen gas, would have recorded, for the year ended 31 December 2003, lower consolidated income (for the amount equal to the income from the sales of goods to Turkmenistan) and lower consolidated cost of sales (for the amount equal to the cost of goods supplied to Turkmenistan). .. The purchase price of gas from Turkmenistan depends on the price at which Naftogaz is able to obtain the goods and services it delivers as payment in-kind.

Relationship with Gazprom Naftogaz has derived a significant portion of its revenues from fees for the transit of Gazprom’s gas through Ukraine. The transit of Gazprom’s gas through Ukraine is governed by a contract between Naftogaz and Gazprom signed pursuant to an inter-governmental agreement between Ukraine and Russia signed on 4 October, 2001. In 2002, Naftogaz signed a long-term contract with Gazprom on volumes and terms of transit of Russian natural gas for the period 2003-2013. See “Business-Natural Gas Transmission and Storage-Transportation Contracts”. Fees for the transit of gas through Ukraine received from Gazprom (including cash payments and payment in-kind in natural gas valued at U.S.$50 per 1,000 cubic metres) amounted to U.S.$1,430.4 million in 2001, U.S.$1,647.2 million in 2002 and U.S.$1,482.5 million in 2003. Fees for natural gas transit received from Gazprom accounted for 35.2 per cent., 35.5 per cent. and 23.8 per cent. of Naftogaz consolidated income for 2001, 2002 and 2003, respectively. In 2001, Naftogaz recorded charges and penalties in its Financial Statements of UAH 1,951 million of which more than 95 per cent. was in connection with indebtedness to Gazprom. As part of the settlement of arrears owed by Naftogaz to Gazprom, Naftogaz accepted a prepayment of transit fees of U.S.$l.25 billion (equal to U.S.$250 million per annum) for certain transit services between 2005 and 2009 (inclusive). These transit fees will be accounted for in 2004 but, as a result of this prepayment, investors should be aware that Naftogaz will not be receiving U.S.$250 million of revenues in each year between 2005 and 2009 (inclusive) which it would have otherwise received had Naftogaz not accepted the prepayment and applied it towards the settlement of its indebtedness with Gazprom.

Relationship with Turkmenneftegar Naftogaz currently purchases approximately 35 per cent. of its natural gas needs from Turkmenneftegas, the national oil and gas company of Turkmenistan. Purchases of gas from Turkmenistan are governed by an inter-state agreement between Ukraine and Turkmenistan signed in May 2001, as well as a contract between Naftogaz and Turkmenneftegas, pursuant to which Naftogaz can purchase up to 250 billion cubic meters of gas between 2002 and 2006. Naftogaz obtains favourable prices on this gas, in part due to its ability to partially settle its payment obligations with Turkmenneftegas through payments in-kind.

Taxation/Royalties and Fees Naftogaz is subject to various taxes. Naftogaz’s tax liabilities include corporate income tax, VAT (although Naftogaz is exempted from VAT payments in certain circumstances), export duties, and social insurance payments.

46 In addition, Naftogaz is required to make certain royalty payments for the extraction and transportation of oil, natural gas and gas condensate through the pipelines in Ukraine, payments for geological surveys conducted at the expense of the State budgets. subsoil payments and excise on retinin9 of oil products. See “Business-Fees and Royalties”. In tho past. Naftogaz had also incurred fincs and forfeit charges with respect to untimely tax payments. In 2003, these penalty charges for overdue tax amounted to UAH 179.7 million, as compared to UAH 92.2 million in 2002 and UAH 1.8 million in 2001. In addition, legislation and regulations regarding taxation continues to evolve as the Government manages the transformation bom a planned to a market-oriented economy. The legislation and regulations are not always clearly written and their interpretation may be subject to the opinion of the tax inspectors. In 2001, Naftogaz was the subject of an adverse tax ruling which was subsequently overturned on appeal. In January 2004, corporate income tax was reduced in Ukraine from 30 per cent. to 25 per cent. In 2004, Naftogaz has been required to contribute at least 20 per cent. of its income to a special State Treasury account in order to ensure the discharging of mandatory payments, such as taxes and royalties. See “Risk Factors-Risks Relating to Naftogaz-Contribution of Naftogaz Income to the State”.

Revaluation of Fixed Assets As at 31 December 2003. Naftogaz revalued its fixed assets as a result of which the value of fixed assets more than doubled. Because this revaluation is presented only as at the end of 2003, the effect of the revaluation on the Financial Statements presented in this Offering Circular can be seen only in the balance sheet and not in the income statements. You should be aware that, as a result of this revaluation, the Company will have significantly increased depreciation charges going forward to depreciate higher valucd fixcd assets.

Agreement with the State A’aftopz uses its fixcd assets pursuant to an agreement with the SPFU dated 4 February 1999. Pursuant to the agreement. NJSC Naftocgaz is able to retain SO per cent. of the net profits generated from the operation of the gas and oil transportation system, which includes the extensive pipeline network and the attached installations. The remaining 50 per cent. belongs to the State, although it may be invested by NJSC Naftogaz for reconstruction and maintcnitnce of thc system. Details of the division of profits are not provided in the agreement. Since the date of the agreement, no further details have been agreed, and the Government has not requcsted receipt of a portion of thc profits generaled from thc operation of the gas and oil transportation system. As a result, Naftogaz has not made any cash payments to the State as provided in the agrcemcnt and while it has been investing a portion of the profits derived from the operation of the gas and oil transportation systems into repair and maintenance of the systems, and there can be no assurance that in the future the Government will not require Naftogaz to make these payments directly to the Government.

Economic Environment Ukraine has undergone significant political transformation since its independence in 1991. Concurrent with this transformation, Ukraine is slowly progressing from a centrally planned economy to a market economy. As a result, Naftogaz operates in an uncertain economic and political environment. Political factors, such as Ukraine’s relations with its neighbours, in particular with Russia, and economic factors such as exchange rates, interest rates and taxation, which are beyond Naftogaz’s control can have an impact on its results of operations. See “Risk Factors-Risks Relating to Ukraine”.

Interest Rates Naftogaz has short-term and long-term debt obligations with both fixed and variable interest rates. Fluctuations in interest rates therefore affect its financial results. Naftogaz does not have any significant hedging arrangements to mitigate interest ratc risks resulting from its financial activities.

Inter-segment Sales Results of operations for Naftogaz business segments are affected by significant inter-segment transactions. See “Related Party Transactions”.

47 Results of Operations for the Year Ending 31 December, 2003,2002 and 2001 Income Naftogaz generates income from its oil and gas exploration. production and retininy operations. transportation and storage of oil and gas and sales of natural gas to domestic consumers and abroad and sales of oil and gas condensate domestically. It also generates income from the sale of goods and services to Turkmenistan in connection with the purchase of natural gas. Income increased by 34.6 per cent. to UAH 33,267.4 million in 2003 from UAH 24,716.4 million in 2002 largely due to a significant increase in sales income and. to a lesser extent. an increase in production and refining income. Income increased by 14.1 per cent. in 2002 from UAH 21.653.3 million in 2001, primarily due to an increase in production and refining income and sales income. Below is a discussion of the income for each business segment. Production and refining income increased by 26.9 per cent. to UAH 4.806.0 million in 2003 from UAH 3.787.4 million in 2002. largely due to increased production of gas condensate due to new rcfining techniques and the addition of a new unit at the Shebelinsky Gas Refinery. Production and refining income increased by 31.9 per cent, in 2002 from UAH 2,870.9 million in 2001, primarily due to a significant increase in the production and refining of gas as a result of increascd production of gas condensate due to new refining techniques resulting from renovations to the Shebelinsky Gas Refinery. Income generated from production and refining principally includes sale of oil, gas condensate and refined products and salc of approximately 10 per cent. of Naftogaz produced natural gas, which NJSC Naftogaz’s subsidiaries engaged in extraction sell directly to end consumers. These gas sales are made to certain customers of Naftogaz by these subsidiaries instead of being sold through Naftogaz’s principal subsidiary engaged in sales, Gas of Ukraine, because of the customers’ location. In 2003, income generated from production and refining relating to gas represcnted 40.0 per cent. of production and refining income and income generated from production and refining of oil represented 60.0 per cent. Transportation income decreased slightly by 2.3 per cent. to UAI-I 11,260.6 million in 2003 from UAH 11,521.8 million in 2002, primarily due to decreased gas transit fees for Gazprom in 2003, following an increase in gas transit fees charged from Gazprom in the second half of 2002, partially off-set by increased volume for oil transport. Transportation income remained relatively constant in 2002 compared to UAH 11,513.1 million in 2001. Income generated from transportation consists of fees for the transportation and storage of gas and oil, which represented 91.1 per cent. and 8.9 per cent. of transportation income in 2003, respectively. Sales income increased by 84 per cent. to UAH 17,094.0 million in 2003 from UAH 9,292.6 million in 2002, primarily due to an increase in natural gas sales volumes to industrial consumers, increased supply of goods and services to Turkmenneftegas and increased natural gas exports. Income from natural gas exports increased to UAH 2,146.6 million in 2003 from UAH 372.4 million in 2002. Domestic gas volumes sold in Ukraine increased significantly in 2003 primarily as a result of Naftogaz’s sole competitor in sales to domestic industrial customers, Itera, exiting the market. Sales income increased by 29.6 per cent. in 2002 from UAH 7,172.9 million in 2001, primarily due to an increase in supply of goods and services to Turkmenistan. Income from sales consists of sales of natural gas obtained from Turkmenistan and Russia and the sale of approximately 90 per cent. of Naftogaz produced natural gas. Income from sales also includes the difference between the price at which Naftogaz is able to obtain the goods and services provided to Turkmenneftegas as payment in-kind for natural gas and the value given to those goods and services by Turkmenneftegas. 75 per cent. of income generated from sales consists of the domestic sale of natural gas. Income from other activities decreased by 6.8 per cent. to UAH 106.8 million in 2003 from UAH 114.6 million in 2002. Income from other activities increased by 18.9 per cent. in 2002 from UAH 96.4 million in 2001. Other activities represent our non-core assets including social services and farms.

Cost of Sales Cost of sales increased by 32.6 per cent. to UAH 25,006.1 million in 2003 from UAH 18,864.9 million in 2002, primarily due to increased volumes of gas purchased. Cost of sales increased by 9.7 per cent. in 2002 from UAH 17,192.0 million in 2001, primarily due to increased volumes of gas purchased. Cost of sales principally includes the cost of oil and gas sale, the cost of refinery products sold, the cost of oil and gas transportation and cost of other sales. Cost of sales includes costs associated with producing andlor purchasing gas and oil, including payroll expenses for personnel engaged in these activities.

48 Other Operating Income Below is a table showing a breakdown of other operating income for the years indicated: Other operating income 2003 2002 ulol (UAH thousandr) Income from sales of other current assets ...... 20208 (10,707) 87,621 Income from operating lease of assets...... 4,931 4,946 2,524 Income from operating exchange difference ...... (24,060) (6,456) 719,768 Fines, penalties, forfeits received ...... 5,308 25,871 9,093 Income from recovered cost of previously written off assets or from recovered debts previously written off as doubtful ...... 15,497 91,274 2,120 Income from write-off of accounts payable ...... 127,133 177,763 M7,061 Income from received grants and subsidies ...... 122 2,230 25,647 Other income from operating activities ...... 230,318 241,240 996,757 Total ...... 379,457 526,161 2,490,591

Other operating income decreased by 27.9 per cent to UAH 379.5 million in 2003 from UAH 526.2 million in 2002 principally due to a decrease in the income from the recovered cost of previously written off assets or from recovered debts previously written offas doubtful relating to improved collection rates, a decrease in income from write-off of accounts payable due, generally, to the expiration of the statute of limitations on the submission of invoices by trade creditors and an increase in the loss of income from operating exchange differences, which is foreign exchange income. and lower income from fines, penalties and forfeits received. reflecting improved collection rates. These items were partially offset by an increase in income from sales of other current assets, mainly due to sales of non-core assets. Other operating income decreased by 78.9 per cent. in 2002 from UAH 2,490.6 million in 2001, primarily due to a siyificant decrease in income froin operating exchange difference due to the fact that in 2M1 Naftogaz settled with Itera to set-off UAH 542.7 million of past due payments in-kind which, due to the changes in the Ukrainian and Russian economics. were significantly more cxpensive than originally agreed. The set- off was accounted for as an exchange rate difference. The decrease is also related to decreased other incomc from operating activities, principally reflecting writing off in 2001 of fincs and penalties primarily related to overdue taxes from which Naftogaz was released. In addition, in 2001, Naftogaz generated income from operating exchange differences of UAH 719.8 million, compared to a loss of UAH 6.5 million in 2002, mainly as a result of favourable exchange rate difference between the Hryvnia and the U.S.dollar.

49 Administrative Expenses and Sales Related Expenses Below is a table showing a breakdown of administrative expenses and sales related expenses for the years indicated: Administrative and sales expenses 2003 2502 2001 (UAH thousands) Administrative expenses: Payroll expenses ...... 164,401 118,877 78,069 Depreciation ...... 49,905 83,964 70,030 Social security expenses ...... 87,633 66,612 53,348 Expenses on materials ...... 8,917 36,279 12,473 Other administrative expenses ...... 367,545 232,868 226,271 Total administrative expenses ...... 538,591 440,731 Sales expenses: Payroll expenses ...... 6,939 4,541 3,062 Depreciation ...... 2,238 1,914 1,768 Social security expenses ...... 1,122 978 529 Expenses on materials ...... 1,790 1,179 2,250 Gas transportation (by regional distribution companies for Gas of Ukraine) ...... 0 0 296,260 Commission ...... 128,547 246,600 4,126 Transportation services...... 42,098 3,925 0 Customs services ...... 14,215 10,600 10,445 Other sales expenses...... 58,824 76,102 31,267 Total sales expenses ...... 255,918 345,839 349,707 Total ...... 944,319 884,430 790,438

Administrative expenses and sales related expenses increased by 6.8 per cent. to UAH 944.3 million in 2003 from UAH 884.4 million in 2002, principally due to increased payroll expenses resulting from higher wages, increased social security expenses and transportation services principally related to employee business trips, partially offset by lower commission expenses relating to the provision of services (including services of suppliers of goods delivered to Turkmenistan), lower depreciation expenses and lower expenses for materials. Commission expenses relate primarily to commissions paid to intermediaries engaged by Naftogaz in connection with payment in kind of goods and services transferred to Turkmenistan for purchases of natural gas. The increase in 2003 was due to a revision and reduction of commission levels that Naftogaz paid to such intermediaries. Payroll expenses cited in this line item relate solely to payroll for personnel engaged in administrative and sales activities. Other payroll expenses for Naftogaz are shown in “costs of sales”. The most significant increase in administrative expenses in 2003 was other administrative expenses which increased by UAH 367.5 million in 2003 from UAH 232.9 million in 2002. These included, amongst other things, audit and legal fees, bank fees, business trips, vehicle costs and seminar costs. Administrative expenses and sales related expenses increased by 11.9 per cent. in 2002 from UAH 790.4 million in 2001, primarily due to increased payroll expenses mainly as a result of higher wages, as well as higher social security expenses, depreciation and other expenses. In addition, Naftogaz incurred a significant increase in commission expenses related to provision of services (including services of suppliers of goods delivered to Turkmenistan) in 2002, which was offset by lower gas transportation expenses because of the introduction of a system in 2002 which divided prices that consumers paid for natural gas into the gas price which Gas of Ukraine collects and transportation tariffs. Previously, the entire sum was allocated to Gas of Ukraine, who then paid the transportation tariff to regional distribution companies.

50 Other Operating Expenses Below is a table showing a breakdown of other operating expenses for the years indicated Other operating expenses m3 m2 2001 (UAH thousandr) Geological exploring ...... 194,894 249,207 55,860 Provision for impairment of capital investments ...... 21,214 149,051 655 Expenses on development and exploration ...... 76,941 46,797 9,321 Fines, penalties, forfeits recognised ...... 179,133 92,164 1,951,198 Charity ...... 38,235 31,763 17,038 Shortages and expenses from impairment ...... 21,543 2,738 638 Expenses on impairment of inventories ...... (60,3W 19,577 (614) Adjustment to provisions for inventories ...... 3,012 (60,415) (69,455) Write-off of bad debts ...... 390,324 55,350 16,672 Repair of property, plant and equipment ...... 697,847 412,145 0 Other operating expenses ...... 818,850 833,702 835,130 Total ...... 2,301,229 1,832,679 2,816,443

Other operating expenses increased by 25.6 per cent. to UAH 2,301.2 million in 2003 from UAH 1,832.7 million in 2002, principally due to a significant increase in the write-off of bad debts, reflecting changes in Ukrainian legislation which allowed for the writing-off of debts after 90 days of non-payment, and an increase in repair of property, plant and equipment which consists of current repairs not included in capital expenditures. as well as higher fines. penalties and forfeits recognised as a result of UAH 179.1 million in accrued taxes in 2003 which NJSC Naftogaz is required to pay. This was partially offset by lower expenses for geological exploration, lower provisions for impairment of capital investments and lower expense charges on inventory impairments due to improved condition of assets such as pipes and equipment due to capital expenditures incurred in previous years. Other operating expenses decreased by 34.9 per cent. in 2002 from UAH 2,816.4 million in 2001, primarily due to a significant decrease in fines, penalties and forfeits rccognised. This decrease was particularly significant as fines and debts accrued on the debt owed to Gazprom were .recognised, which accounted for more than 95 per cent. of the UAH 1,951.2 million in 2001. This was partially offset by a significant charge for repair of property, plant and equipment as a result of increases in repairs not included in capital expenditures, and, to a lesser extent, an increase in expenses for geological exploration due to increased geological survey activity, and higher impairment charges for capital investments and inventories.

Provision for Doubrful Debts Provision for doubtful debts decreased by 87.4 per cent. to UAH 180.5 million in 2003 from UAH 1,430.6 million in 2W2, principally due to increased collection rates. Provision for doubtful debts decreased by 67.9 per cent. in 2002 from UAH 4,459.6 million in 2001, primarily due to increased collection rates.

Pmjt (Loss) from Operations Profit from operations increased by 133.9 per cent. to UAH 5.214.7 million in 2003 from UAH 2.229.9 million in 2002. primarily due to an increase in protit from operations for production and refining activities and a lower loss incurred on sales activities, partially offsct by a decrease in profit from operations for transportation activities. In 2001, Naftogaz had a loss from operations of UAH 1,114.6 million, primarily due to a decrease in losses from operations for sales activities, partially offset by a decline in profit from operations for production and refining and transportation. Below is a discussion of profit (loss) from operations for each of the principal business segments. Profit from operations for production and refining incrcascd by 78.4 per cent. to UAH 1.577.0 million in 2003 from UAH 884.3 million in 2002. primarily due to increased sales volumes of refined products due to the construction of a new processing unit at the Shebelinsky Gas Refinery. Profit from operations for production and refining decreased by 29.5 pcr cent. in 2002 from UAH 1,254.Y million in 2001, primarily due to increased expenses in 2002 due to construction of thc new unit at the Shebelinsky Gas Refinery. In 2003, profit from operations from production and retining relating to gas represented 11.5 per cent. of production and refining profit from operations and profit from operations from production and refining related to oil represented 88.5 per cent.

51 Profit from operations for oil and gas transport decreased by 6.9 per cent. to UAH 8,608.2 million in 2003 from UAH 9,246.0 million in 2002, primarily due to lower transit fees for Gazprom’s gas and higher wages. Profit from operations for oil and gas transport decreased by 5.4 pcr cent. in 1002 from UAH 9,777.4 million in 2001, primarily due to lower oil transportation volumes due to construction of a bypassing oil pipeline. Loss from operations for sales decreased by 36.9 per cent. to UAH (5,013.7) million in 2003 from UAH (7,946.6) million in 2002, primarily due to an increase in natural gas exports and increase in natural gas sales to industrial consumers. The continuing losses in the sales segment is due to the fact that gas received from Gazprom as payment in-kind for transportation services, is valued at U.S.$50 per 1,OOO cubic metres. The difference between the actual transportation cost to Naftogaz and the value of the gas results in a profit in the transportation segment. Loss from operations for sales decreased by 34.8 per cent. in 2002 from UAH (12,193.2) million in 2001, primarily due to natural gas exports in 2002. Profit from operations for other types of activities decreased by 6.7 pcr cent. to UAH 43.2 million in 2003 from UAH 46.3 million in 2002. Profit from operations for other types of activities remained relatively constant in 2002 compared to UAH 46.3 million in 2001.

Other Non-Operating Income Other non-operating income increased by 357.2 per cent. to UAH 764.0 million in 2003 from UAH 167.1 million in 2002, primarily due to an increase in the market valuc of financial investments and income from the realisation of financial investments. Other non-operating income increased by 275.5 per cent. in 2002 from UAH 44.5 million in 2001, primarily due to income from the realisation of financial investments and increased income from joint venture activities by NJSC Naftogaz’s exploration and production subsidiaries.

Other Nomoperating Expenses Other non-operating expenses decreased by 42 per cent. to UAH (411.8) million in 2003 from UAH 709.8 million in 2002, primarily due to a decrease in the expenses on maintenance of non-operating items and other social arrangements and a decrease in the VAT not recovered from the State budget, which are overdue VAT refunds. Other non-operating expenses increased by 7.8 per cent. in 2002 from UAH 658.4 million in 2001, primarily due to an increase in expenses on maintenance of non-operating items and other social arrangements and an increase in VAT not recovered from the State.

Losses From Impairment Of Assets Losses from impairment of assets were UAH (2,973.0) million in 2003 as compared to no losses in 2002. The principal reason for this is the significant writing-off of non-producing wells as a result of asset revaluations conducted by an international valuer. Losses from impairment of assets decreased in 2002 from UAH (7.4) million in 2001, primarily due to depreciation and writing-off of non-core assets.

Income Tax Income tax decreased by 20.8 per cent. to UAH (1,158.3) million in 2003 from UAH 1,463.4 million in 2002, primarily due to lowcr taxable profit under Ukrainian taxation accounting standards. Income tax increased by 28.9 per cent. in 2002 from UAH 1,135.3 million in 2001, primarily due to an increase in income. The statutory tax rate was 30 per cent., 30 per cent. and 30 per cent. in 2003, 2002 and 2001, respectively.

Minority Interest Minority interest was UAH (67.5) million in 2003 compared to UAH (159.7) million in 2002 primarily due to decreased minority interest in certain entities. Minority interest represents a reduction for the equity interests not owned 100 per cent. by NJSC Naftogaz in its consolidated subsidiaries. Minority interest decreased by 59.3 per cent. in 2002 from UAH (391.8) million in 2001, primarily due to decreased minority interest in certain entities.

Extraomlinary Expenses Extraordinary expenses increased to UAH 10.3 million in 2003 from UAH 0.6 million in 2002, primarily due to minor accidents, out of which the largest one accounted for approximately UAH 1.0 million. Extraordinary expenses decreased by 88.8 per cent. in 2002 from UAH 4.9 million in 2001, primarily due to minor accidents.

52 Net Pro# (Loss) For the reasons discussed above. nct profit increased by 2.034 per cent. to UAH 137.7 million in 2003 from UAH 63.6 million in 2002. In 2001, Naftogaz had a loss of UAH (3,268.0) million.

Liquidity and Capital Resources Naftogaz‘s primary financins source has traditionally been internal cash generation. AS a result. Naftogaz’s policy is to give priority to the efficiency of the rcccivables collection process. TO meet seasonal changes in working capital requirements, Naftogaz’s policy is to use short-term bank loans and longer-term facilities. Foreign currency credits are used to make payments for imports of natural gas, while Ukrainian currency loans provide funds for payments of operating activities with domestic counterparts. Naftogaz’s liquidity requirements arise from carrying out ordinary activities such as purchases of gas, maintenance of the transportation network and accomplishing particular projects. See “-Capital Expenditures” and “Business - Joint Ventures, Co-Operative Agreements and Investment Activity - Investment Activity”. Naftogaz expects to fund its future growth both from internal sources (retained earnings) and external financing. At 31 December. 2003, Naftogaz had total consolidatcd financial liabilities of UAH 3,096.2 million, including UAH 1,138.0 million in short-tcrm financial liabilities (including the current portion of long- term financial liabilities) and UAH 1,958.4 million in long-term financial liabilities. The table below shows Naftogaz borrowings at 31 December 2002 and 2003. 31 December 2002 31 December 2003 Including Induding NJSC NJSC TOM NJSC Naftogaz’s Total NJSC Nnftogaz’s Naftognz Naftogaz subsidiaries Naftqsz Nnftogaz subsidipria

(UAH millions, except for percentages) Short-term financial liabilities (including the current portion of long-term financial liabilities) ...... 696.9 530.6 166.3 1.138.0 967.2 170.8 Short-term share, per cent .... 35.9 42.2 24.4 36.6 42.9 20.4 Long-term financial liabilities (including long-term loans, promissory notes and bonds) ...... 1,242.8 727.1 515.7 1,958.4 1,290.3 668.2 Long-term share, per cent...... M.1 57.8 75.6 63.3 57.1 79.7 Total ...... 1,939.6 1,257.7 6819 3,096.4 2,2573 838.9

Naftogaz estimates that approximately 80 per cent. of its borrowings is in U.S. dollars. Naftogaz does not hedge against this exposure. Loans from foreign banks have generally been obtained for terms from one to two years and are used to fund foreign natural gas purchase contracts. Some of Naftogaz’s borrowings from foreign banks are secured by pledges over its rights to receivables under export contracts and over its natural gas reserves. Naftogaz estimates the total value of pledges (in UAH equivalent) was UAH 962.7 million, UAH 2,139.8 million and UAH 2,072.2 million as at 31 December 2002, 2003 and 31 March 2004, respectively. In April 2004, NJSC Naftogaz signed a six month U.S.$200 million facility with ABN AMRO, with a bullet repayment on the earlier of 29 October, 2004, the offering of the Notes or a pre-export facility arranged by ABN AMRO. Naftogaz expects to pay off the facility with proceeds from the Naftogaz Loan. The facility is guaranteed by Ukrgazvydobuvannya, Gas of Ukraine and Ukrtransgaz. The facility was used to purchase gas from Turkmenistan. On 30 October 2003, NJSC Naftogaz signed a U.S.$lOO million facility agreement with the Bank of Foreign Economic Activity of the USSR, which was assigned to JSB Gazprombank in November 2003. The loan is due on 3 February 2005. This facility was used to purchase natural gas. The outstanding

53 amount under the loan as at 1 September 2004 constitutes approximately U.S.$50.9 million. Naftogaz expects to repay the facility from the proceeds of export contracts. Naftogaz also obtains short-term loans from domestic banks by means of multi-currency renewable credit lines with terms of up to 1 year. These loans are secured by pledges over its property rights and natural gas reserves. In addition, these loans are generally obtained in the summer months to purchase gas and are repaid in the winter months when gas consumption is higher. The funds from domestic banks are obtained to meet working capital requirements, while foreign currency loans are generally used to meet payment obligations under its import contracts. However, the proportion of domestic loans in Naftogaz’s credit portfolio is decreasing due to the high cost of obtaining domestic funding as compared to the cost of obtaining funding from foreign banks. In 2003, Chomomomaftogaz issued UAH 30 million domestic bonds in three tranches. UAH 15 million matured in March 2004, while a further UAH 15 million matured in August 2004. An issue of series D bonds in the aggregate amount of UAH 30 million was made in April 2004 and a further issue of Series E bonds is planned for September 2004, with maturity dates in November 2005 and March 2006, respectively. Also, in 2003, Ukrtransgaz issued UAH 129 million domestic bonds, which mature on 1 September 2006. Naftogaz also obtains short-term loans from domestic banks which are generally either unsecured or secured by the rights to proceeds from natural gas sale contracts and sometimes contain pledges of natural gas. These loans are generally obtained in the summer months to purchase gas and are repaid in the winter months when gas consumption is highest. In October 2001, Russia and Ukraine signed an agreement with respect to, inter diu, alleged arrears for Russian natural gas received from Gazprom but unpaid. On the settlement of that dispute, Ukraine and Russia agreed that Naftogaz would issue eurobonds to Gazprom with maturities staggered in the years 2004-2013. The Parliament ratified the agreement on 15 November 2001. Naftogaz made provisions in its Financial Statements for U.S.$1.6 billion. However, on 9 and 10 August 2004, Naftogaz and Gazprom agreed to settle the alleged arrears owing to Gazprom for Russian natural gas received from Gazprom but unpaid. Pursuant to the terms of the settlement, Gazprom assigned all its claims arising out of the indebtedness (which includes the principal amount of the debt. together with fines, penalties and arbitration fees, in an aggregate amount of approximately U.S.$1.6 billion) to Vnesheconombank. Gazprom also made an advance payment to Naftogaz in the amount of U.S.$1.25 billion for certain transit services in connection with the transit of Russian natural gas though the territory of Ukraine, representing U.S.$250 million for each year between 2005 and 2009 (inclusive). Naftogaz then used the U.S.$1.25 billion advance payment to purchase back all of its indebtedness from Vnesheconombank. Upon completing the transaction, Gazprom confirmed that Naftogaz had fully settled its indebtedness to Gazprom. However, it is not clear whether the settlement needs to be approved by the Russian Government. See “Risk Factors - Settlement of Gazprom Debt”. As a result of this settlement, Naftogaz has cancelled the issuance of eurobonds initially contemplated for the settlement of the debt under the arrangements agreed in October 2001. Investors should be aware that Naftogaz will not be receiving U.S.$250 million of revenues in each year between 2005 and 2009 (inclusive) which it would have otherwise received, had Naftogaz not accepted the prepayment and applied it towards the settlement of its indebtedness with Gazprom. Naftogaz will still be entitled to receive any additional cash fees from Gazprom in excess of U.S.$250 million incurred in any given year between 2005 and 2009 (inclusive).

State Subsidies The State has funded 42.7 per cent. of the cost of the construction of the sea oil terminal at Pivdenny, part of the Odessa-Brody pipeline project. See Note 18 to the Financial Statements for a detailed breakdown for each year of how the funds were used. Thc State provides subsidies and benefits to low income earners to assist them with their payments for the supply of energy. Such subsidies and benefits are annually allocated in prescribed proportions from the State budget to the budgets of local authorities. The local authorities then pay the subsidies to the regional heating companies. Since natural gas accounts for most of the energy consumption and heating services, Naftogaz is ultimately the end-recipient of a significant portion of the subsidies. Naftogaz received as payment from local budgets subsidies and benefits in the amount of UAH 2.44 billion in 2001, UAH 2.12 billion in 2002 and UAH 2.07 billion in 2003. Naftogaz uses this source of income to meet its

54 royalty payments for the transportation of natural gas through Ukraine. In addition, Naftogaz believes that the Government owes Naftogaz a significant amount in state subsides and is currcntly conducting an assessment of the amount owed.

Cash Flow The following table summarises the statements of cash Bows for the years ended 31 December 20O1.2002 and 2003. Other operating income 2003 m2 24x31 (UAH millions) Net cash flow from operating activities ...... 3.005.3 3,297.9 (2,572.9) Ket cash flow from investing activities ...... (3,859.3) (1,627.1) (638.2) Net cash flow from financing activities ...... 1,716.4 (1.446.3) 3,066.4 Net change in cash and cash equivalents ...... (137.9) 224.3 (123.9)

Net Cash provided by Operating Activities Net cash provided by operating activities amounted to UAH 3,005.3 million in 2003 compared to UAH 3,297.9 million in 2002. Although operating profit before changes in working capital increased to UAH 6,768.1 million in 2003, from UAH 4,780.2 million in 2002, operating cash decreased, principally a result of trade loans and other liabilities of UAH (2,854.6) million in 2003, compared to UAH (362.7) million in 2002. Net cash provided by operating activities increased in 2002 from UAH (2,572.9) million in 2001, primarily due to profit tax and other taxes reccived in 2002 amounting to UAH 1.647.9 million compared to UAH (5,236.9) dionin 2001.

Net Cmh from Investing Activities Net cash from investing activities amounted to UAH (4,859.3) million in 2003 compared to UAH (1,627.1) million in 2002. Investing activities primarily related to acquisition of non-current assets of UAH (5,080.5) million in 2003 which includes capital expenditures spent on investment activities. Net cash from investing activities decreased in 2002 from UAH (638.2) million in 2001, primarily due to acquisition of non-current assets of UAH (1,882.4) million in 2002 from UAH (1,082.3) million in 2001.

Net Cash Flows from Financing Activities Net cash flows from financing activitics amounted to UAH 1,716.4 million in 2003 cumparcd to UAH (1,446.3)million in 2002. The increase was due to higher inflows from lending activities which rose to UAH 1,156.8 million in 3003 as comparcd to an outflow of UAH (1,736.2) million in 2002 primarily due to a reduction of liabilities. Net cash flows from financing activities decreased in 2002 from UAH 3,066.4 million in 2001. primarily due to a decrensc in inflows from lending activitics. which fell from UAH 1,998.9 million in 2001.

Capital Expenditures The table below details Naftogaz's capital expenditures and has been prepared in accordance with IFRS. It includes such expenditure from its own funds and other sources, such as the State Budget, for the years 2001-2003. m 2003 I (UAH millions) Total Naftogaz capital investments, including(') ...... 5,000.1 2,926.7 4,642.2 Oil exploration and production ...... 871.9 714.4 1,340.4 Gas exploration and production ...... 849.7 770.9 1,301.1 Oil transportation ...... 633.5 319.5 557.8 Gas transportation ...... 2,521.1 990.8 1,343.5 Gas sales ...... 123.9 131.1 99 A

(1) Proceeds from the sale of fixed assets have not been deducted as these are considered IO be immaterial

55 The following table sets forth sources of Naftogaz’s capital expenditures in percentage terms. 2001 2002 too3 (per cenf.) Internal funds ...... 95.3 99.2 99.8 Interested organizations (l)...... 0.1 0.8 0.2 Budgetary funds...... 4.6 0.0 0.1 Total ...... 100.0 100.0 100.0

(1) Companies in which Naftogaz has a minority interest, including joint venture activities and joint venture companies. Naftogaz’s investment activity is approved by its Investment Committee. See “Business - Joint Ventures, Co-Operative Agreements and Investment Activity - Investment Activity”. The table below sets out a Government Oil and Gas of Ukraine through 2010 Programme schedule adopted in 2001, which established, among other things, non-binding recommendations as to the capital expenditures to be used for the maintenance and upgrade of the oil and gas transportation systems. 2001 2002 2003 2ow 2005 2006 2007 2008 u109 2010

---_I---__-- (milliotw of US.dollars) Maintenance...... 36.2 82.4 101.7 114.8 82.6 90.2 85.5 70.6 43.6 220 UpgradeExtension...... 85.8 101.3 117.2 128.9 133.3 1513 160.7 174.9 186.7 219.2 To tnl ...... ------1220 183.7 218.9 243.7 2159 2415 2462 2453 2303 2413 These capital expenditures may be financed partly by Naftogaz and partly by the State. although the programme does not indicate the amount of State contribution. Between 2001 and 2003, Naftogaz has spent in excess of the recommended capital expenditure. See table above for oil transportation and gas transportation expenditures for 2001, 3002 and 2003. Although until now Naftogaz has financed a majority of the capital expenditures, the State funded 22 per cent. of the Odessa-Brody project completed in 2001. Naftogaz received in total UAH 135.3 million from the State over the life of the project.

56 RECENT DEVELOPMENTS

On 9 and 10 August 2004, Naftogaz and Gazprom agreed to settle the alleged arrears owing to Gazprom for Russian natural gas received from Gazprom. Pursuant to the terms of the settlement, Gazprom assigned all its claims arising out of the indebtedness (which includes the principal amount of the debt, together with fines, penalties and arbitration fees. in an aggregate amount of approximately U.S.$1.6 billion) to Vnesheconombank. Gazprom also made an advance payment to Naftogaz in the amount of U.S.$l.25 billion for certain transit services in connection with the transit of Russian natural gas through the territory of Ukraine, representing U.S.$250 million for each year between 2005 and 2009 (inclusive). Naftogaz then used the U.S.$l.25 billion advance payment to purchase back all of its indebtedness from Vnesheconombank. Upon completing the transaction, Naftogaz settled its indebtedness to Gazprom. However, it is not clear whether the settlement needs to be approved by the Russian Government. See “Risk Factors - Settlement of Gazprom Debt”. As a result of this settlement, Naftogaz has cancelled the issuance of the eurobonds initially contemplated for the settlement of the debt. Naftogaz believes that the resolution of this dispute after several years of negotiation is a significant achievement and has had, and will have. a positive impact 011 its relationship with Gazprom. See also “Selected Financial Review - Liquidity and Capital Resources”.

57 BUSINESS Overview Naftogaz is a vertically integrated oil and gas company. It is wholly-owned by the state of Ukraine and it is the largest company in Ukraine in terms of assets. Naftogaz is primarily involved in, and generates revenues from, the following activities:

0 Exploration. production and refining: oil and natural gas exploration. development and production: and the processins and refinement of natural gas. gas condensate and oil.

0 Transportation and storage: transportation and storage of natural gas and oil.

0 Sales: sales of natural gas and oil to domestic consumers and exports of natural gas. Naftogaz’s other activities comprise both activities which support its core business segments, such as research and development, maintenance services for industrial facilities and construction as well as other unrelated businesses such as newspapers, insurance, finance and banking, somc of which it is planning to divest. Naftogaz does not own but is the sole operator of the oil and gas transportation systems in Ukraine which are comprised of approximately, 37,500 kilometres of gas pipelines, approximately 4,600 kilometres of oil pipelines, 13 underground gas storage facilities and 80 oil tanks. The networks of gas pipelines operated by Naftogaz transport a substantial amount of the total natural gas exports of Gazprom to western, central and eastern Europe. These networks are connected to the main gas pipelines of all neighbouring countries. During 2003, 224.2 billion cubic metres of gas were transported through Ukraine to various domestic and foreign destinations, including 112.4 billion cubic metres to Europe and 16.8 billion cubic metres to CIS countries. For the year ended 31 December 2003, Naftogaz had total assets of UAH 76,967.2 million (U.S.$14,440.4 million), total equity capital of UAH 37,615.3 million (U.S.$7,057.3 million) and income of UAH 33,267.4 million (U.S.$6,241.5 million). Of this amount, sales (consisting predominantly of gas sales) comprised UAH 17,094.0 million (U.S.$3,207.1 million), transportation and storage comprised UAH 11,260.6 million (U.S.$2.112.7 million). production and rcfining (which principally includes oil, gas condensate and refined production and sale of approximately 10 per cent. of Naftogaz produced gas) comprised UAH 4,806.0 million (U.S.$901.7 million) and other activities comprised UAH 106.8 million (U.S.$20.0 million). Production and refining income in 2003 included UAH 1.918.6 million (U.S.$%O.O million) for production and refining of gas and UAH 3.887.4 million (ll.S.$541.7 million) for production and rcfining of oil. Transportation and storage income in 2003 included UAH 10,260.5 million (U.S.$1,925.0 million) for transportation and storage of gas and UAH 1,OOO.l million (U.S.$187.6 million) for transportation and storage of oil.

Strategy Naftogaz’s strategy is to maintain and strengthen its position as a vertically-integrated oil and gas company. To achieve this objective, Naftogaz plans to focus on the following key areas: Increasing Naftogaz ’s transportation volumes. To further increase transportation, Naftogaz plans on modernking and extending the pipeline systems for gas and oil transportation. A part of this effort is the planned extension of the Odessa-Brody oil pipeline to Plotsk and Gdafisk in Poland as well as the planned Novopskov-Uzhgorod gas pipeline to be constructed and operated by an international consortium established by Gazprom and Naftogaz. Expanding Naftogaz’s oil and gas exploration and increasing hydrocarbon production in Ukraine. Naftoyaz plans on increasing domestic hydrocarbon reserves by widcninp thu scope and efficiency of seismic studies and exploratory drilling at prospective oil and gas fields, renewing and upgrading oil and gas drilling and production equipment, gradually expanding gas and oil production at existing fields and intensifying offshore oil and gas drilling operations in the Black Sea and the Sea of Azov. Increasing gas prices. Naftogaz intends to continue negotiations with the NCRP to continue increasing natural gas prices for industrial consumers and to begin increasing these prices for other consumers in Ukraine. Selectively seeking acquisition opportunities outside of Ukraine. Although NJSC Naftogaz’s management believes that Naftogaz’s future growth will mostly be driven organically, management is currently considering selective strategic acquisitions and will continue to do so in the future as opportunities arise in its core business areas. The potential acquisitions Naftogaz is currently considering are:

58 0 Exploration, production and development. As part of Naftogaz’s strategy to increase its reserves and production, Naftogaz is also considering pursuing opportunities to acquire reserves outside of Ukraine in order to expand its exploration and production activities the opportunities Naftogaz is currently considering include several prospectivc gas and oil ficlds in Russia and Libya. respectivuly. There can be no assurance, however, that Naftogaz will acquire these or any other assets. Transportation and storage. Naftogaz intends to expand its core transportation and storage business by pursuing selective acquisitions outside of Ukraine. Naftogaz is participating in the tender for the purchase of certain interests in MOL Hungarian Oil and Gas Rt.’s subsidiaries involved in the transportation, storage and sale of natural gas in order to synchronise its natural gas distribution systems with those of Hungary and expand its operations into central Europe. On 26 August 2004 Naftogaz submitted a bid to MOL.However, it is not certain whether it will be successful. Increasing sales and exports. Naftogaz intends to increase its purchase of gas from Central Asia and increase its hydrocarbon production in order to expand its sales to industrial consumers in Ukraine and increase export volumes. If necessary, this potentially includes putting forth proposals to the Ukranian Government for the increase of the export quotas for natural gas exported from Ukraine, which are set by annual inter-governmental protocols between Ukraine and Russia. For 2003, 2004 and 2005, all natural gas exported from Ukraine over a limit of 6 billion cubic metres per year is subject to a duty of U.S.$lOO per 1,000 cubic metres. However, Naftogaz currently anticipates that, upon agreement with Gazprom and pursuant to the relevant protocols, export quotas may be increased as required from 1 January 2006. See “Business - Exports”. Foclrs on core business segments. Naftogaz also plans to focus on its core business segments and to divest non-core assets which principally comprise of shareholdings in unrelated businesses that Naftogaz inherited from its predecessor, Ukrgazprom. In order to optimise Naftogaz’s structure, Naftogaz has decided to divest by the end of 2005 its ownership interests in a number of non-core companies from which Naftogaz does not derive a profit andlor over which Naftogaz does not have sufficicnt control. See “Business-Non-Core Businesses”. Key Competitive Advantages Naftogaz’s management believes that Naftogaz enjoys the following key competitive advantages: Favourable geographic location and considerable size of the oil and gas transportation and storage systems Nafiogaz operates. Naftogaz operates an extensive oil and gas transportation and gas storage network. Naftogaz’s geographic location between the major oil and gas producing regions to the east of Ukraine and European customers to the west, enables Naftogaz to have a strategic role in delivering oil and gas to Europe. The existing infrastructure in Ukraine enables Naftogaz to provide a wide range of services to Gazprom, one of the world’s largest gas producers located in Russia, as it delivers gas to Europe, including delivery of gas to different gas-measuring stations and storage of substantial volumes of gas in underground storage facilities in order to satisfy peak demand for gas. Based on an inter-governmental agreement between Ukraine and Russia, Naftogaz signed long-term contracts with Gazprom for storage, as well as the transit of natural gas through Ukraine between 2003 and 2013. The transit contract provides for a considerable majority of the transit fees to be paid in gas deliveries to Naftogaz, ensuring that Naftogaz has a consistent supply of natural gas. Monopoly in oil and gas tramportation in Ukraine and market leadership in the sale of natural gas in Ukraine. Naftogaz is the sole operator of the oil and gas transportation, distribution and storage network in Ukraine. Pursuant to Ukrainian law, Naftogaz also supplies 100 per cent. of the gas consumed by residential customers, State Financed Entities and regional heating companies in Ukraine. Furthermore, due to its monopoly in gas transport as well as its ability to establish direct contacts with large industrial customers, Naftogaz was able to achieve a 98 per cent. market share in natural gas sales to industrial customers in Ukraine in 2003, up from approximately 60 per cent. in 2002. See “Competition”. Favourable gas prices from Turkmenistan. Naftogaz currently purchases natural gas from Turkmenneftegas based on an inter-governmental agreement between Ukraine and Turkmenistan signed in 2001. Pursuant to the agreement, Turkmenneftegas will deliver to Naftogaz up to 250 billion cubic metres of natural gas between 2002 and 2006. Naftogaz pays for such gas purchases half in cash and half in goods and services. Prices for the natural gas are set pursuant to annual inter-governmental agreements. The availability of additional volumes of Turkmen gas gave Naftogaz an opportunity to increase its market share in the sale of natural gas to industrial consumers and to begin exporting natural gas for the first time in 2002.

59 Control over a majoriiy of oil and gas resources in Ukraine. Naftogaz currently holds exploration and cxploitation licences for a majority of the oil and gas fields in Ukraine. Naftopaz currently produces gas and oil and gas condensate at a price lower than the cost of sale. One of Naftogaz’s priorities is the accelcrated study and development of the recently discovercd oil and pas fields in the Black and Azov Seas. A Stute-owned company in Ukraine’s strategically important sector. Naftogaz’s position as a State-owned company in a strategically important sector of, and represcnting a significant portion of. the Ukrainian economy means that Kaftogaz is able to have certain political and regulatory influence. including the ability to submit proposals and draft regulations to the Cabinet of Ministers of Ukraine. As a State monopoly, it enjoys good relations with the State regulatory authorities. Furthermore, a considerable number of its contracts, including those with Gazprom and Turkmenneftegas, are based on inter- governmental agreements, which are negotiated by Ukraine.

History and Industry Overview Ukraine is heavily dependent on oil and gas. Together, oil and gas account for approximately 60 per cent. of Ukrainian primary energy consumption. However, Ukrainian demand for natural gas has declined steadily since independence in 1991, when Ukraine’s consumption of 118.1 billion cubic metres made it the world’s third biggest consumer of gas, behind the United States and Russia. Ukrainian gas consumption has decreased by more than one-third over the past decade due, principally, to a reduction in Ukraine’s industrial output. Total domestic demand for gas in 2002 was estimated at 69.7 billion cubic metres and in 2003 was estimated at 76.3 billion cubic metres. Total domestic demand for oil has been approximately 23 million tonnes per annum, which is substantially less than the consumption of similar sized countries in western Europe. Whilst Ukraine has significant proven and probable gas deposits both onshore and offshore. as a result of Ukraine’s gas-intensive economy (gas consumption has accounted for approximately 41 to 43 per cent. of primary energy consumption in Ukraine in recent years), doniestic production of gas is insufficient to meet demand. Currently, only 20-25 per cent. of domestic natural gas demand is met by domestic natural gas production. Ukraine produced approximately 18.8 billion cubic metres of gas for both 2002 and 2003. In 2003, Ukraine imported 64.1 billion cubic metres of gas, including 26.0 billion cubic metres as payment in-kind from Gazprom for use of the Ukrainian gas transit system. Until 1996, Ukrgazprom (a State-owned company) was the sole importer of gas in Ukraine. Ukrgazprom was also the main domestic gas producer and operated Ukraine’s gas storage facilities. In addition to Ukrgazprom, approximately 50 regional and city-based distribution companies were responsible for the operation and maintenance of the oil and gas distribution network in Ukraine. Ukrgaz, an association of gas distribution companies, was responsible for managing State-owned shares in such distribution companies. The distribution pipelines were not owned by the distribution companies as a result of a parliamentary decision in 1994 banning the privatisation of Ukraine’s gas distribution infrastructure. Instead, distribution pipelines were held by the SPFU on behalf of the state of Ukraine. By the mid-19905, the Ukrainian gas industry faced a number of significant problems. Continuing dcclines in domestic gas production, non- or partial payment by domestic consumers and highly subsidised domestic gas prices led to rapid accumulation of payment arrears between 1992 and 1994. As a result, the Government commenced a programme to reform the oil and gas industry in Ukraine in 1995. Thc first phase in the reform was intended to address the problem of declining gas production. Substantial investment in exploration and production was required to increase production. However, Ukraine lacked the financial and technical resources to commence such a significant investment programme without private investment. To attract foreign investment, the State Geology Committee began to award exploration and production licences to private (mostly foreign) companies in 1995. The second phase was intended to address payment arrears. Despite raising gas prices for industrial consumers in line with import costs in 1995, the State continued to accumulate external payment arrears due to continued non-payment by domestic customers and reluctance by State-owned distribution companies to cut gas supplies to non-paying customers. In 1996, as part of the reform programme, the Government implemented measures aimed at separating import and supply from transmission and distribution by ceasing to issue sovereign guarantees for gas imports and allowing private traders exclusive rights to import and sell gas to all consumers in specific regions (oblasts) assigned to them by the Cabinet of Ministers.

60 Despite the reforms implemented between 1995 and 1996, the oil and gas industry in Ukraine continued to face problems. Anticipated foreign investment from multi-national oil and gas companies did not materialise, while non-payment among households, regional heating companies and power plants continued and importers’ external arrears continued to rise, in certain cases due to pressure on private traders from central and local government to maintain supplies to certain non-paying customers. Following a change of Government in 1997, the newly-formed Cabinet of Ministers announced that the gas market would bu divided into two segments in thc following ycar. The first scgmcnt, comprising import and supply of gas to industrial consumers, would be assigned to private gas traders without any restrictions on service areas or prices. The second segment, comprising the supply of gas to households and district heating companies, would be assigned to gas distribution companies selling Ukrgazprom’s domestically produced and transit-fee gas at prices fixed by the Ministry of Economy. In 1998 more than 20 gas traders were authorised by the Ministry of Fuel and Energy to import and sell gas to industrial consumers at freely negotiated prices. At the same time, the SPFU sold the majority of its shares in several gas distribution companies to company managers, employees and local investors. Despite these reforms. Ukrgazprom’s financial situation continued to deteriorate as payment collections from households and district heating companies remained low. Supply to industrial consumers was also at risk as few private traders had the financial resources to import the volume of gas rcquired to meet industrial consumption. In early 1998, supporters of a vertically integrated structure focused their efforts on establishing a State- owned company whose assets would include the State-owned assets in the oil and gas industry. As a result, Presidential Decree No. 151 of 25 February, 1998 “On Reform of the Oil and Gas Complex of Ukraine” (“Decree 151”) was passed. Whilst the intention of Decree 151 was to achieve a vertically integrated structure, it also sought to implement certain organisational steps to separate gas production, transmission and supply functions, although such separation was expected to occur within the framework of Naftogaz. NJSC Naftogaz was created as a National Joint-stock Company in accordance with Resolution 747 pursuant to Decree 151. Resolution 747 provides that 100 per cent. of the shares in NJSC Naftogaz are to be retained by the State represented by the Cabinet of Ministers until such time as an appropriate decision is adopted to privatise NJSC Naftogaz. Parliament has identified companies in strategic industry sectors that may not currently he privatised as set out in Law No. 847-XIV. NJSC Naftogaz and most of its subsidiaries are on this list, with the exception of Ukrnafta and 54 regional gas distribution companies in which NJSC Naftogaz holds an equity interest. See the organisational chart of Naftogaz below. Under Ukrainian law, a joint-stock company is a company whose charter capital is divided into a number of shares certifying the rights and obligations of shareholders of the company. Generally, shareholders are not liable for the obligations of the joint-stock company and such shareholders bear the risk cf losses related to the activities of the company only to the extent of the value of shares owned by them. Pursuant to Article 3 of Naftogaz’s charter, it was established for the purpose of e assisting with the structural reorganisation of the Ukrainian oil industry and. gas and oil refining industries; e improving State energy security;

0 providing efficient functioning and development of the Ukrainian oil and gas infrastructure;

0 satisfying consumer demand for raw materials and fuel-energy resources; and e receiving profits from its conimcrcial activities.

Corporate Structure As at 1 September 2004, Naftogaz held the following shares and participatory interests: all of the shares of Ukrtransnafta, Chornomornaftogaz and Ukrspetstransgas;

0 10 wholly-owned subsidiaries;

0 50 per cent. plus 1 share of Ukmafta;

61 a more than 50 per cent. of the shares in 19 companies and under 50 per cent. of the shares in 35 open joint-stock companies involved in the supply and distribution of gas to end users; a between 0.5 per cent. of the shares and 50 per cent. of the shares in 13 companies mainly involved in various servicing and non-core business activities; and

e between 0.2 per cent. of the shares and 80 per cent. of the shares in 24 companies, designated by Naftogaz as non-core assets, including 9 banking institutions. NJSC Naftogaz’s principal subsidiaries include wholly-owned subsidiaries established by NJSC Naftogaz following its formation in 1998, as well as the joint stock companies established by the State and contributed to Naftogaz’s statutory fund by the State. These joint-stock companies include Ukrtransnafta, Ukrspetstransgaz, Chomomomaftogaz, Ukmafta and 54 gas distribution companies. Each joint-stock company has a Management Board (board of directors) and a Supervisory Board, while the wholly- owned subsidiaries of Naftogaz are managed by a general director who reports directly to the Management Board of NJSC Naftogaz. There is some risk that the State may request any of the joint-stock companies established by the State and contributed to Naftogaz’s statutory fund by the State in accordance with Resolution 747 (as mentioned above) to be transferred back to the State. In March 2004, &mol, a joint-stock company established by the State which was contributed to Naftogaz’s statutory fund by the State in 1998, was returned to the State for privatisation. Azmol was the first joint-stock company which Naftogaz was required to transfer to the State. As at the date of this Offering Circular, Naftogaz’s statutory fund had not been decreased by the Cabinet of Ministers, Naftogaz’s sole shareholder, as a result of the return of Azmol. The management of Naftogaz is negotiating with the State the receipt of interest in another State asset which is likely to be more closely related to its core activities in return for Azmol. However, the State is not legally required to compensate Naftogaz for the loss of Azmol. See “Risk Factors-Risks Relating to Naftogaz-Company Structure and Possible Return of Subsidiaries to the State”. In 1998, in accordance with Resolution 747, the Ukrainian oil and gas transportation systems and storage facilties were transferred to Naftogaz for exploitation. Naftogaz operates the oil and gas transportation systems, and storage facilities pursuant to an agreement with the State. See “Properties-State Property”. In accordance with Ukrainian law, the transportation system and storage facilities remain State property and any change of ownership of the companies operating the transportation system and these storage facilities is prohibited. Ukrtransgaz, which operates the gas transportation system in Ukraine, was transferred to Naftogaz’s statutory fund pursuant to Resolution 747. However, it was subsequently reorganised and reincorporated as a wholly-owned subsidiary of Naftogaz. Accordingly, while the State cannot request Ukrtransgaz to be transferred back to the State, the gas transportation system, which it operates, remains State property. See “Risk Factors-State Ownership and Restricted Enforcement Against its Fixed Assets”.

62 Significant Subsidides The following chart sets out the principal NJSC Naftogaz subsidiaries engaged in the production and exploration, transportation or sale of oil and gas or in providing support services to these core businesses, as well as the gas supply and distribution companies as at 1 September 2004.

NJSC NAFTOGAZ OF I UKRAINE

and wholly-owned by contributed to

Uktgamydobuvannya

UGas of bine Ukfspetsmsgaz

Ulcrtransgaz L Chomomornaftogaz -I Lknaftogazkompletkt Ukmafia

4-lNaftogazobslugovuvannya 54 Gas distribution companies (majority and minority Sale Production and interests)

i Budivelnyk -I Naftogazbezpeka i Gas Teplo

(1) In 1998, in accordance with Remlution 747, the Ukranian oil and gas transportation systems and storage fadties were transfeerred to Naftogaz for exploitation.

63 Tmnsportation and Storage of Natural Gas Ukrtransgaz Ukrtransgm is a wholly-owned subsidiary of NJSC Naftogaz and carries out a full range of operations relating to natural gas transportation and storage within Ukraine (in Crimea such functions are also discharged by Chomomornaftogaz), gas deliveries to customers, transit of Russian and central Asian gas to Europe and the CIS, as well as overseeing gas transport infrastructure maintenance and construction. In 1998, Ukrtansgaz was transferred to Naftogaz’s statutory fund pursuant to Resolution 747. However, it was subsequently reorganised and reincorporated as a wholly-owned subsidiary of Naftogm on 25 August 1998, pursuant to Cabinet of Ministers of Ukraine Resolution No. 1173 dated 24 July 1998, entitled “On Division of Functions of Extraction, Transportation, Storage and Sale of Natural Gas” (“Resolution 1173’’). Its registered office is at 9/l Klovskiy Uzviz. Kyiv. Ukraine. The issued share capital of Ukrtansgaz is UAH 1,494,612,000 and all of the shares are fully paid up. Ukrtansgaz did not distribute dividends in 2003. Ukrtransgaz owns and operates the network of natural gas vehicle refuelling stations of NJSC Naftogaz. As of 1 January 2003, Ukrtransgaz owned a total of 87 such stations in 66 cities and towns, with a total annual capacity of 690 million cubic metres of compressed gas, (which is equivalent of approximately 640,000 tonnes of petrol) allowing the network to serve 70,000 cars per year.

Transportation and Storage of Oil Ukrtransnafta Ukrtransnafta is a wholly-owned subsidiary of Naftogaz responsible for oil deliveries to Ukrainian refineries and the transit of Russian and Central Asian oil exported to Europcaii countries. Ukrtransnafta was created by an Order of the Cabinet of Ministers of Ukraine No. 256, dated 23 July 2001 (“Order No. 256”), through the consolidation of SC Prydniprovsky Oil Trunk Pipelines and SJSC Druzhba Oil Pipelines. These pipeline companies were merged in an attempt to ease transportation tariffs by having onc oil transportation company in Ukraine. Its registered office is at 60. Artema Street, Kyiv, Ukraine. The issued share capital of Ukrtransnafta is UAH 460,227,000 and all of the shares are fully paid up. Ukrtransnafta did not distribute dividends in 2003. Thc Prydniprovsky pipline system is used for oil deliveries to refineries in eastern Ukraine and for the transit of oil through Ukraine. Thc Druzhba pipline system is used for oil deliveries to refineries in western Ukraine and for transporting oil for export. The oil transportation system operated by Ukrtransnafta includes 18 oil pipelines with a total length of approximately 4,600 kilometres, 51 oil- transfer stations and 11 storage plants, comprising 80 oil storage tanks.

Exploration and Production of 011 and Gas Ukrgazvydobuvannya Ukrgazvydobuvannya is a wholly-owned subsidiary of NJSC Naftogaz conducting prospecting and production drilling, and is the main producer of natural gas and gas condensate in Ukraine. Ukrgazvydobuvannya was established on 25 August 1998, pursuant to Resolution 1173. Its registered office is at 26/28 Kudryavska Street. Kyiv. Ukraine. The issued share capital of Ukrgazvydobuvannya is UAH 2,794,935,000 and all the shares are fully paid up. Ukrgazvydobuvannya did not distribute dividends in 2003. Ukrgazvydobuvannya is comprised of four merged natural gas exploration and production enterprises (Poltavagazvydobuvannya, Shebelinkagazvydobuvannya, Kharkovgazvydobuvannya and Lvivgazvydobuvannya), one well drilling company (Ukrburgaz) and a gas and gas condensate processing department comprising three processing units (Yablunivsky, Shebelinsky and Seleshinsky). Ukrgazvydobuvannya is also the main company in thc structure of Naftogaz producing liquefied petroleum gas (“LPG”) and light oil. As of 1January 2004 Ukrgazvydobuvannya had 2,136 wells, including 123 oil wells and 2,013 gas wells. In 2003 Ukrgazvydobuvannya produced 72 per cent. of all natural gas extracted in Ukraine, 59 per cent. of all Ukrainian gas condensate, and 4 per cent. of all Ukrainian oil.

Ukrnufta NJSC Naftogaz owns 50 per cent. plus one share of the share capital of Open Joint-Stock Company Ukrnafta, which was established on 31 March 1994, and is the largest oil producing company in Ukraine.

64 Its registered office is at 3/5 Nestorivskyi Lane, Kviv. Ukraine. The issued share capital of Ukrnafta is UAH 1,010,972,000 and all the shares are fully paid up. In addition to Naftogaz, the SPFU owns 0.03 per cent of Ukrnafta’s shares, and the remaining shares are owned by numerous legal entities and physical persons. The amount of dividends paid by Ukmafta to Naftogaz for the year ended 31 December 2003 was UAH 584,ooO. Ukrnafta is composed of 30 production and maintenance units, including six oil and gas production units (Dolynanaftogaz, Nadvyrnanaftogaz and Boryslavnaftogas in western Ukraine and Poltavanaftogaz, Tchernihivnaftogaz and Okhtyrkanaftogaz in eastern Ukraine), six well drilling enterprises and three gas processing plants (Hnidyntsivsky, Dolinsky and Kachanivsky). As of I January 2004 Ukrnafta operated 99 oil and gas fields containing 2.4% wells in the western and eastern oil and gas producing regions of Ukraine, including 2,220 oil wells and 239 gas wells. In 2003, Ukrnafta produced 91 per cent. of all oil produced in Ukraine, 28 per cent. of all Ukrainian gas condensate. and 17 per cent. of all Ukrainian natural gas. Ukrnafta also refines $as condensate and produces LPG and stable gasoline.

Chornomornnaftogaz NJSC Naftogaz owns 100 per cent. of the shares of the National Joint-stock Company Chomomomaftogaz, which carries out oil and gas exploration and production in the Crimea, the Black Sea and the Sea of Azov, and transportation and storage of natural gas in the Autonomous Republic of Crimea. Chomomomaftogaz supplies natural gas to all residential consumers and most industrial enterprises and organizations in the Autonomous Republic of Crimea. Chornomornaftogaz has facilities for offshore work including a specialised port at Chornomorsk, an engineering fleet of 12 vesscls, 9 offshorc gas production stationary platforms. 2 jack-up floating drilling rigs (Syvash and Tavrida) capable of drilling production and exploratory wells to depths of up to 5,OOO metres in waters up to 80 metres deep. The gas transportation system of Crimea is a part of the gas transport system of Ukraine and includes over 1,200 kilometres of gas trunk pipelines (including 282 kilometres of offshore trunk pipelines), an underground storage facility, 43 gas distribution stations and 2 gas vehicle refuelling stations. Chornomornaftogaz owns 14 ficlds. 7 of which are presently bcing developed.

Natural Gas Sa Ies Gm of Ukraine Gas of Ukraine is a wholly-owned subsidiary of NJSC Naftogaz and is responsible for marketing natural gas to industrial and domestic customers. Gas of Ukraine was established by Naftogaz on 26 December 2000, and further consolidated on 18 January 2001 by means of a reorganisation and merger of Golovpobutgas (a subdivision of Ukrtransgaz). Since 2002,90 per cent. of NJSC Naftogaz’s gas sale have been madc through Gas of Ukraine. Its registered oftice is 45. Uritskogo Street. Kyiv, Ukraine. The issued share capital of Gas of Ukraine is UAH 721,000 and all the shares are fully paid up. Gas of Ukraine did not distribute dividends in 2003.

Production and Sale Enterprise “Naftogaz ” (“PSE Naftogaz”) PSE Naftogaz is a wholly-owned subsidiary of NJSC Naftogaz, which was established on 15 July 1999. It sells LPG and oil products in Ukraine and since 2002 it has been responsible for the development and roll-out of petrol stations operating under the Naftogaz brand.

SC Gas-Teplo (“Gas-Teplo”) Gas-Teplo is a wholly-owned subsidiary of NJSC Naftogaz responsible for the management and development of regional heating companies which supply electric and central heating to consumers.

LPG Transportation SJSC Ukrspetstransgaz (“Ukrspetstransgaz ”) Ukrspetstransgaz is a wholly-owned subsidiary of NJSC Naftogaz that specialises in transporting LPG by rail. Ukrspetstransgaz operates 2,000 gas rail transportation tanks with a total capacity of over 700,000 tomes per year, transporting LPG from Ukrnafta processing units at Hnidyntsy and Dolyna, from the processing unit of Ukrgazvydobuvannya, and from the processing units of other companies.

.... . Maintenance and Servicing SC Ukmaftogazkomplekt (“ Ukmaftogazkomplekt”) Ukmaftogazkomplekt is a wholly-owned subsidiary of NJSC Naftogaz responsible for the supply of spare parts and equipment for, and the maintenance and servicing of, industrial facilities. Ukrnaftogazkomplekt was established on 2 September 1998. Ukmaftogazkomplekt is responsible for providing Naftogaz with material and technical resources, purchasing equipment for oil and gas extraction, and introducing new technology for the extraction, storage and transportation of oil and gas.

Regional Gas Supply and Distribution ,. Naftogaz also owns equity interests in the 54 regional gas distribution companies, and holds controlling interests in 19 of them. Dniepropetrovskgas, Zaporizhgas, Luganskgas, Mykolayivgas are included into NJSC Naftogaz’s consolidated Financial Statements. These are regional gas distribution companies that transport natural gas through their respective regions: Dniepropetrovsk region, Zaporizhzhya region, Lugansk region and Mikolayiv region. Naftogaz owns equity interest of 50 per cent. plus 1 share in these open joint-stock companies.

Other Support Services SC Budivelnyk (“Budivelnyk”) Budivelnyk is a wholly-owned subsidiary of NJSC Naftogaz conducting feasibility studies, exploratory works, general building and construction, construction of trunk pipelines, and building communication and energy supply lines.

SC Naftogazbespeka (“Naftogazbespeka”) Naftogazbespeka is a wholly-owned subsidiary of NJSC Naftogaz responsible for providing security services for the gas-transporting infrastructure and safeguarding the security of information by maintaining restricted access.

SC Naftogasobslugovuvannya (“Naftogasobslugovuvannya”) Naftogasobslugovuvannya is a wholly-owned subsidiary of NJSC Naftogaz providing transportation, renovation, repairs and maintenance services to Naftogaz companies.

Business Areas Natural Gas Transmission and Storage Ukrtransgaz and Chornomomaftogaz, bath wholly-owned by NJSC Naftogaz, together with regional gas distribution companies, perform all natural gas transportation operations via a network of trunk and distribution pipelines in Ukraine. Ukrtransgaz and Chomomornaftogaz operate, but do not own, Ukraine’s gas trunk distribution transportation network. Various regional distribution companies operate the low pressure gas distribution networks, pursuant to an agreement with Gas of Ukraine and, together with Ukrtransgaz, transport natural gas to most Ukrainian consumers and through Ukraine to Europe and the CIS. Chomomomaftogaz supplies natural gas to the majority of consumers in the Crimea, although Ukrtransgaz and some regional distribution companies also supply some natural gas to end users in the Crimea. The 54 regional gas distribution companies, in which NJSC Naftogaz owns majority and minority interests, transport natural gas from the main trunk pipelines to end-users. The Ukrainian gas transportation system, operated by Naftogaz, is geographically located between major gas producing regions to the east of Ukraine and European consumers to the west of Ukraine. The extensive transportation network is connected to the Russian, Belorussiaa, Moldavian, Romanian, Hungarian, Slovakian and Polish gas pipeline networks, and through them to the whole of Europe. Ukraine also has the second largest underground gas storage facilities in Europe in terms of storage volume. See “-Underground Gas Storage”. Ukraine has an extensive gas transportation system, which consists of approximately 37,500 kilometres of pipelines. Pipe sizes range from 100 millimetres to 1,400 millimetres. Of the total, approximately 13,800 kilometres of pipelines have a diameter of between 1,OOO and 1,400 millimetres.

66 The network includes 72 compressor stations, 13 underground gas storage facilities, 112 compressor shops with 706 gas compressor units with a total capacity of 5,400 megawatts that transport gas through the system and inject it into underground gas storage facilities. The following table sets forth information on the main trunk pipelines used for natural gas transportation through Ukraine. Projected capaaly (billion cubic mcrrcs) Dolyna-Uzhgorod-State Border (DUG - 11) (direction east-west) ...... 23.0 Orenburg-westem State Border (“Soyuz”) (direction east-west) ...... 26.0 Urengoy-Uzhgorod (direction east-west) ...... 28.5 Yambourg-western State Border (“Progress”) (direction east-west) ...... 28.5 Yelets-Kremenchug (direction north-south) ...... 32.0 Kremenchug-Ananyev (direction north-south) ...... 30.0 Ananyev-Ismail (direction north-south) ...... 20.0

In addition to the trunk pipelines in the above table, the KZU-1, Ivatsevichi-Dolyna (2 lines), Torzhok- Dolyna and Shebelinka-Dnipropetrovsk-Kriviy Rig-Ismail distribution pipelines are primarily used for transporting gas to Ukrainian consumers. Naftogaz exports its natural gas mainly through the Progress, Soyuz, Urengoy-Uzhgorod, Yelets- Kremenchoug-Ananyev-Ismail and Dolyna-Uzhgorod pipelines. Additionally, certain pipelines are used for transporting gas from the main trunk pipelines to the measuring stations at the Ukrainian border, these include the branch pipeline Komarno-Drozdovychy to

The maximum annual input capacity of the network is 290 billion cubic metres per year. The maximum output capacity is currently 175 billion cubic metres per year.

67 The following table shows the total amount of gas transported through Ukraine and its destination for each of the years 2000-2003: Injected into underground TO Ulaahiu~ To European To CIS Total”’ storage fndlitics nrstomers countries COunlTia (billion cubic metres) 2000...... 212.2 14.9 73.4 112.3 11.3 2001 ...... 206.9 11.3 70.5 105.3 19.1 2002 ...... 209.7 17.9 69.8 106.1 15.2 2003...... 224.2 18.2 76.3 112.4 16.8

(1) Total may not add up due to spillage and some gas remaining in the pipelines.

Transportation Contracts Natural gas is both transported to domestic consumers and across the temtory of Ukraine in transit for third parties. Typically, Naftogaz assumes responsibility for gas transported up to the station of acceptance. With respect to gas transited through Ukraine, Naftogaz accepts responsibility for the gas to the metering station on Ukraine’s border. Upon acceptance, the responsibility is transferred to the offtaker.

Russia The gas transportation system of Ukraine is the principal transit corridor for export of Russian natural gas to European countries. Relations between Naftogaz and Gazprom are regulated on the basis of a number of agreements between the governments of Ukraine and Russia. The inter-governmental Agreement on Additional Measures on Ensuring Transit of Russian Natural Gas Through the Territory of Ukraine was signed on 4 October 2001 between Ukraine and Russia. Pursuant to the agreement, in 2002, Naftogaz signed a long-term contract with Gazprom establishing the volume and terms of transit of natural gas through the territory of Ukraine for the period 2003-2013. The contract provides for the transit of at least 110 billion cubic metres of natural gas through Ukraine to Europe annually. Additionally, within the framework of the contract, Naftogaz provides gas transit services to Gazprom whereby gas from Kazakhstan, Uzbekistan and Turkmenistan is transited through Ukraine. In 2003, the transit volume of such gas amounted to 4.2 billion cubic metres. Gazprom pays the fees for the transit services provided by Naftogaz in cash and in-kind, in the form of natural gas. Annual inter-governmental protocols set out the total volume of gas to be transited and the fee rates for such transit, including total volume and price of the natural gas to be delivered by Gazprom as in-kind payment for the transit services. In 2003, up to 10 per cent. of the cost of the services for the transportation of Russian natural gas through Ukraine was paid in cash, with the remainder paid in-kind by delivery of Russian gas to Ukraine for domestic consumption. The price of natural gas supplied as payment for transit services in 2003 and 2004 was set at U.S.$50 per 1,OOO cubic metres. As a result, for 121.4 billion cubic metres of Russian gas transported in 2003, Naftogaz received 26 billion cubic metres of gas and U.S.$96.2 million as cash payment. For 2004, Naftogaz agreed with Gazprom to transport approximately 128 billion cubic metres of natural gas. As part of the settlement of arrears owed by Naftogaz to Gazprom, Naftogaz accepted a prepayment of transit fees of U.S.$1.25 billion (equal to U.S.$250 million per annum) for certain transit services between 2005 and 2009 (inclusive). These transit fees will be accounted for in 2004 but, as a result of this prepayment, investors should be aware that Naftogaz will not be receiving U.S.$250 million of revenues in each year between 2005 and 2009 (inclusive) which it would have otherwise received had Naftogaz not accepted the prepayment and applied it towards the settlement of its indebtedness with Gazprom. See “Selected Financial Review - Liquidity and Capital Resources”.

68 The following table shows the amount of gas transported through Ukraine pursuant to the contract with Gazprom, and its destination for each of the years 2000-2003: To European To CLS Total countries counlTie3 (billion cubic metres) 2000 ...... 119.9 109.3 10.6 2001...... 122.8 104.3 18.5 2002...... 119.4 104.3 15.1 2003...... 121.4 104.8 16.6

Naftogaz also transports gas for ETG to Naftogaz’s gas storage facilities. See “-Gas Purchase-Turkmenistan”. Until 2003, Naftogaz transported in Ukraine gas for Itera, a company which, until 2003, transported gas for Naftogaz from Turkmenistan to Ukraine. Naftogaz transported 0.6 billion cubic metres, 0.2 billion cubic metres and 0.3 billion cubic metres for Itera in 2001, 2002 and 2003, respectively. The management of Naftogaz decided to stop transporting gas for Itera when it began contracting with ETG for its gas transport from Turkmenistan. However, on 29 July 2004, Naftogaz entered into an agreement with RUE for the purpose of supplying Turkmenistan gas to Naftogaz. See ‘I- Gas Purchase - Turkmenistan”. Accordingly, as of 1 January 2005, Naftogaz will cease to purchase and transport Turkmen gas with the assistance of ETG and RUE will become the sole supplier and transporter of Turkmen gas to Naftogaz. In addition, Ukrtransgaz contracts with Ukrainian companies for gas transport. In 2002 and 2003. revenues from such transport amounted to UAH 1.7 billion and UAH 1.5 billion respectively (exclusive of VAT).

Underground Gas Storage Ukraine’s underground gas storage network, which Naftogaz, through its subsidiaries, operates but does not own, includes 13 underground storage facilities in four complexes: west-Ukraine (Transkarpatsky), Kyiv, Donetsk and south-Ukraine. The total working capacity is 34.0 billion cubic metres, accounting for 21.3 per cent. of European gas storage working capacity and making the storage network the second largest in Europe behind Russia’s network. Ukrtransgaz operates 12 of the 13 underground gas storage facilities with an active capacity of 32.5 billion cubic metres. Chornomomaftogaz operates one underground storage facility with an active capacity of 1.5 billion cubic metres. The facilities are connected to a network of pipelines and are used to regulate daily and seasonal peak flows as well as for storage by customcrs. At maximum storage rates, Ukraine’s storage facilities have output capacity of up to 240 million cubic metres of natural gas per day. The storage tanks are approximately 20 years old and are generally considered to be in good condition. No leakage or failure has been reported in the last 10 years. The following table provides certain information with respect to Naftogaz’s storage facilities for the years 2001,2002 and 2003.

voiomea of gps 2Ml 2002 m3 (billion cubic metres) Injected into underground storage facilities ...... 11.3 17.9 18.2 Withdrawn from underground storage facilities...... 15.5 11.4 17.2 Total net volume at year-end ...... 8.0 7.1 8.1

Storage Contracts In addition to the long-term contract entered into between Naftogaz and Gazprom in 2002 for gas transit services, Naftogaz and Gazprom also entered into a long-term contract for the storage of Gazprom’s natural gas in Naftogaz’s underground storage facilities. Volumes to be transported, injected, stored and withdrawn, together with the storage prices, are agreed annually pursuant to supplemental agreements. Up to a maximum of 10 billion cubic metres of gas can be injected annually.

69 In 2002, Naftogaz received from Gazprom 1.3 billion cubic metres of gas for injection into the underground storage facilities. while in 2003 this fipure grew to 4.5 billion cubic metres. Naftogaz also stores natural gas for ETG in its underground storage facilities pursuant to the sale and purchase contracts with ETG. See “Gas Purchase-Turkmenistan”.

Maintenance The gas pipeline system was constructed mainly during the 1970s and 1980s. As a result, 21.2 per cent. of the pipelines are more than 33 years old; 65.8 per cent. are 33 to 10 years old, and 13.0 per cent. are under 10 years old. Each of the pipelines constructed during the Soviet era had a certificated lifetime of 33 years. Naftogaz conducts regular in-tube and external diagnostics of the pipelines to monitor their condition and performs regular capital and routine repairs. The system is currently fully operational and Naftogaz has historically not expericnced any significant problems with such system. Naftogaz is currently implementing a programme to maintain, reconstruct and extend pipelines, and to technically re-equip compressor stations, and gas regulating and metering stations, including through the introduction of increased efficiency gas turbine engines. gas compressor units and controls. Over the last 10 years, approximately 5,000 kilometres of gas pipeline and 9 compressor stations have been added to the network. Naftogaz plans to enhance the accuracy of its gas metering by reconstructing gas-measuring stations which are located near the Ukrainian borders in order to more accurately measure gas as it exits Ukraine. Existing gas measuring stations will be modernised and new stations will be constructed. The cost of this project is expected to be approximately U.S.$20 million, and will be financed by Naftogaz’s subsidiary. Ukrtransgaz, from profits earned hy Ukrtransgaz and NJSC Naftogaz. In addition, Naftogaz has started to create a uniform system of gas metering at entry points into Ukraine, which will result in capital expenditure of approximately U.S.$50 million. It is anticipated that the project will be completed in 2010. While these ongoing projects are currently being financed from internal sources, Naftogaz managcinent may consider alternative sources of finance from forcign financial institutions. Ukrtransgaz performs annual diagnostics and maintenance of the gas pipelines. As a result of these efforts, leakage of gas has decreased by 1billion cubic metres annually. Actual capital expenditure for the gas transportation system in 2002 and 2003 was UAH 990.8 million (U.S.$185.9 million) and UAH 1,343.5 million (U.S.$252.1 million), correspondingly. These amounts are derived in accordance with IFRS.

Inveshnents Pursuant to an inter-governmental agreement between Ukraine and Russia dated 7 October 2002, the Consortium was established by Naftogaz and Gazprom. The Consortium agreed that it would build and operate the new Novopskov-Uzhgorod gas pipeline. The first part of this pipeline will be approximately 239 kilometres long (with a diameter of 1,420 millimetres) from Bogorodchany (Ivano-Frankivsk region) to Uzhgorod (Ukrainian-Slovak border), which is expected to increase capacity of the Ukrainian gas transportation system by 5 billion cubic metres in 2005 and up to 19 billion cubic metres by 2010, resulting in an increase in the volume of Russian gas transited through Ukraine. Since the project is in the early stages of preparation, the level of capital expenditure has not yet been determined and financing has not been agreed. See “Joint Ventures and Co-Operative Agreements”. In addition, Naftogaz is a party to a joint venture called Gaztransit (“Gaztransit”). The joint venture was established in November 1997 to increase the transit capacity of Ukraine’s gas transportation systems in the direction of the Balkan countries. See “Joint Ventures and Co-Operative Agreements”.

Oil Transportation and Storage Ukraine’s oil pipeline system is operated by Ukrtransnafta, which is wholly-owned by NJSC Naftogaz.

Ukrtransnafta operates, but does not own, Ukraine’s oil pipeline systems. The oil pipeline system has a + total length of approximately 4,600 kilometres and includes 18 oil pipelines with a diameter of up to 1,220 millimetres, 51 oil transfer stations and 11 storage plants. Operation of the oil transportation system is serviced and activated by 178 pumps which have total volume capacity of 12,500 cubic metres and electric motors which have total capacity of 357,200 kilowatts. The annual input capacity of the system is 100 million tonnes, and annual output is 70 million tonnes.

70 Ukraine’s main oil pipeline system is comprised of the Prydniprovsky pipelines and Druzhba pipelines . The Prydniprovsky pipelines are 2. 362 kilometres in length and are used to deliver Russian oil and Ukrainian oil extracted in casfern regions of Ukraine to oil refineries in eastcrn and southern Ukraine . to the Odessa terminal for export and to Tikhoretsk and Novorossiysk where the oil is transferred into tankers . The Druzhba pipelines are 2. 206 kilometres in length and are used mostly to transport Russian and Kazakh oil to central and eastern Europcan countries and to supply oil to the refincries located in western Ukraine . The table below sets forth the main oil pipelines within the Prydniprovsky and Druzhba pipeline systems.

Projected Capaaty 2003 Volume (million tonncs) Prydniprovsky pipelines Michurynsk .Kremenchuk ...... 18 7.5 Samara .Lisichansk ...... 90 25.6 Lisichansk .oil refineries located in Lisichansk ...... 2.5 7.1 Lisichansk .Tyhorestsk ...... 34.2 2.3 Lisichansk - Kremenchuck ...... 48 16.9 Kremenchuck - Snigurivka ...... 2s 18.7 Snigurivka - Kherson oil refinery ...... 8 3.4 Snigurivka - Odesa ...... 18 13.2 Snigurivka - Pivdenny sea oil terminal ...... 15.3

Druzhba pipelines Pivdenny .Brody ...... 14.5 4.7 Brody .Pivdenny sea oil terminal (reverse pumping) ...... 21.4 - Mozyr - Brody ...... 34 21.5 Brody - Ukrainian State border with Hungary and Slovakia...... 25 17.4 Oriv - Drogobych ...... 1.2 0.03 Dolyna - Drogobych ...... 1.6 0.1 Boryslav - Drogobych ...... 0.23 0.03

71 The following is a map of the oil transportation system in Ukraine:

......

PDClR RUSSIA

-8. oil pumping stations ’ .L- manne terminal ‘oawssa-. ‘Pivdenny‘ WE - gas pipelines projedea gas pipelines

; compressor stabons gas fields gas metering stations

Since 1993, oil transport levels have been maintained at between 48 and 69 million tomes per year, with 64.1 million tonnes in 2001, 48.0 million tonnes in 2002 and 56.7 million tonnes in 2003. In 2001, of the total, 48.6 million tonnes were transited to Europe, while 14.9 million tonnes were delivered to domestic refineries. Of the 2002 total, 27.4 million tonnes were transported to Europe, while 20.6 million tonnes were used for domestic consumption. In 2003, of the total 56.7 million tonnes of oil transported, 37.4 million tonnes was sent to Europe and 23.5 million tonnes was sent to Ukrainian refineries. In 2004, transportation of oil through Ukraine is expected to amount to 55.2 million tonnes, out of which approximately 23.4 million tonnes will be sent to Ukrainian refineries, while approximately 31.8 million tonnes will be transported to Europe through Ukraine. Ukraine is currently negotiating long-term inter- governmental agreements for oil transport with Russia and Kazakhstan. See “-Transportation Contracts”. The following table shows Naftogaz’s oil transportation volumes for the years ended 31 December 2000, 2001,2002 and 2003: m mx m2 2003 (thousand tomes) Total oil transportation for Naftogaz ...... 64,109.3 63>79.7 48,013.6 56,682.9 Transit ...... 56,468.9 48,635.6 27,403.1 32,410.0 Naftogaz’s export ...... - - - 784.4 Domestic consumption(’) ...... 7,640.4 14,944.1 20,610.5 23,477.5 Consumption by Naftogaz ...... - - - 11.0 Including: Druzhba Trunk Pipelines ...... 17,833.1 18,101.3 18,519.5 23,783.7 Transit ...... 17,507.0 16,635.8 16,407.0 20,555.0 Naftogaz’s export ...... - - - 784.4 Domestic consumption(’) ...... 326.1 1,465.5 2,112.5 2,433.3 Consumption by Naftogaz ...... - - - 11.0 Prydniprovsky Trunk Pipelines...... 46,2762 45,418.4 29,494.1 32,899.2 Transit ...... 38,961.9 31,999.8 10,996.1 11,855.0 Domestic consumption(’) ...... 7,314.3 13,478.6 18,498.0 21,044.2

(1) Transport to oil refineries in Ukraine.

72 On 26 September 2001, Russia began transporting oil via the Sukhodolnaya-Rodionovka oil pipeline, which bypasses Ukraine. resulting in a significant decrease in the amount of oil transported through the Lisichansk-Lugansk pipeline (which is a section of the Lisichansk - Tyhorestek pipeline, forming part of the Prydniprovsky pipeline system in the direction of Novorossiysk. Russia constructed the Sukhodolnaya-Rodionovka pipeline in order to diversify its oil transportation routes. In the fourth quarter of 2001, following the opening of the bypass pipeline, 10,OOO - 15,000 tonnes of oil per day were sent through the Lisichansk-Lugansk pipeline, compared with 70,000-80,000 tonnes of oil per day in the third quarter of 2001. During full-year 2001, 20.8 million tomes of oil were transported through the Lisichansk-Lugansk pipeline, down from 28.2 million tonnes in 2000. By 2003, this amount had decreased to 2.3 million tonnes. This decrease results in an estimated annual loss of U.S.$60 million to Naftogaz.

Transportation Contracts Naftogaz transports Russian oil through Ukraine as wcll as to oil refineries in Ukraine owned by Russian companies in accordance with the inter-governmental agreement between Ukraine and Russia signed in 1994 and the annual protocols thereto. The inter-governmental protocols determine the volumes of oil to be transported. Based on the protocols, Naftogaz signs transport contracts for various terms (ranging from one to five years) with certain Russian companies. In particular. thew contracts set out thc terms of delivery, the fees and list the designated end-points. For 2003, 18 million tonnes of Russian oil were envisaged for transmission to Ukrainian oil rcfineries by Ukrtransnafta. whilc for 2004 this volume increased to 22 million tonnes. In 2003, Naftogaz actually transported 23.5 million tonnes of Russian oil. In addition. in 2003. 1.1 million tonnes of Kazakh oil was transported to oil refineries in Ukraine not owned by Naftogaz and 7.8 million tonnes of Kazakh oil was transited through the territory of Ukraine, pursuant to the contract between Ukrtransnafta and KazTransOil. In addition, the Ukrainian and Russian governments have recently signed a 15 year agreement on oil transportation through Ukraine which ensures increased volumes of oil transportation. To further increase volumes of oil transportation via the Ukrainian oil transporting network, Ukraine is negotiating a proposed 5 year agreement with Kazakhstan on the transportation of Kazakh oil. Under both inter- governmental agreements, it is proposed that Ukrtransnafta will be the transportation operator in Ukraine.

Oil Storage The total capacity of the oil tanks forming part of the oil transportation system is currently 1,010 thousand cubic metres, including 44 oil tanks (430,000 cubic metres) used in connection with the Druzhba pipelines and 36 oil tanks (580,000cubic metres) used in connection with the Prydniprovsky pipelines. Russian oil of the Urals blend is supplied through the main pipeline (Snegurivka-Odessa, 52 kilometres long) to the Pivdenny terminal reservoirs where it is stored and then loaded at Pivdenny onto tankers with a deadweight of up to 100,OOO tonnes. Oil of different origin, such as oil from Kazakhstan and Azerbaijan (which differs in quality from the Urals oil) is unloaded from tankers at Pivdenny and is moved to the Pivdenny reservoirs, before being pumped into the main Odessa-Brody oil pipeline. The oil terminal has capacity of 14 million tonnes of oil. The first stage of the construction of the Pivdenny terminal has been completed. This includes a reservoir park with total nominal capacity of 200,000 cubic metres, consisting of 10 reservoirs each with a capacity of 20 thousand cubic metres. See “-Joint Ventures, Co-Operative Agreements and Investment Activity-Investment Activity” The Pivdenny storage facilities are all in good working condition.

Oil Storage Contracts Currently, Naftogaz has not entered into any long term storage contracts with third parties.

Maintenance Ukrtransnafta actively maintains and upgrades the Ukrainian oil transportation system, drawing up plans at the beginning of each year, and submitting them regularly to State technical monitoring and certification. Naftogaz, together with Ukrtransnafta. annually develops a programme for diagnostics. repair works, modernisation and reconstruction of trunk pipelines. Naftogaz has developed a draft programme which defines the main direction of activities and scopc of its financing up to 2010. In 2001- 2003, capital expenditures for oil transportation amounted to UAH 633.5 million (approximately

73 U.S.$118.8 million), UAH 319.5 million (approximately U.S.$59.9 million) and UAH 557.8 million (approximately U.S.$104.6 million) respectively. These amounts are derived in accordance with IFRS. Approximately 17 per cent. of the pipelines have exceeded their estimated 33 year life expectancy while 30 per cent. of the pipelines are 15-23 years old, and the remainder are less than 15 years old. Consequently, Naftogaz plans to focus future capital investments on repairs and reconstruction of the oil pipelines. Maintenance and upgrade expenses are financed through profits earned by Ukrtransnafta. See “Financial Review-Capital Expenditures” for State recommendations with respect to the maintenance and upgrade of the oil and gas pipelines.

Investments Druzhba-Adria Ukraine signed an inter-governmental agreement in December 2002 with Belarus, Slovakia, Hungary, Croatia and Russia for the integration of the Druzhba pipeline (located in Ukraine and some parts of Belarus, Slovakia and Hungary) with the Adria pipeline (located in Hungary and Croatia). The aim of the project is to create an export route for Russian and CIS countries to transfer oil to world markets through the port of Omishal in Croatia. The project is divided into 3 stages which are expected to be completed between 206 and 2010. The agreement envisages stage-by-stage increases in oil transportation volumes from 5 to 15 million tonnes annually. The estimated total cost of the project to be funded by all the parties is U.S.$89.8 million over a period of years with the majority of the costs incurred towards the end of the project. No further agreements have yet been concluded and work has not commenced. See “-Joint Ventures, Co-Operative Agreements and Investment Activity- Investment Activity”.

Eurasian Oil Transport Corridor / Odessa-Brody In 2001, the construction of the Ukrainian part of the Eurasian Oil Transport Corridor was completed. See “-Joint Ventures, Co-Operative Agreements and Investment Activity-Investment Activity- Eurasian Oil Transport Corridor”. This corridor may be used for transporting Caspian oil to Ukraine and other European countries. The project included the construction of a modem Pivdenny sea oil terminal in the port of Yuzhniy near Odessa (with a current reservoir capacity of 200,000 cubic metres), and construction of the 674 kilometre Odessa-Brody oil pipeline. The total cost of the construction of the Ukrainian part of the Eurasian Oil Transport Corridor was UAH 975 million, of which 78 per cent. was financed by baftogaz and the remainder was financed by the State. See “-Joint Ventures. Co-Operative Agreements and Investment Activity-Investment Activity”. On 14 January 2004, the governments of Ukraine and Poland signed an inter-governmental agreement for the future integration of the Polish pipeline system and the Odessa-Brody pipeline system. See “-Joint Ventures, Co-Operative Agreements and Investment Activity-Joint Ventures and Co- operative Agreements”.

Oil and Gas Exploration and Production Oil, gas condensate and natural gas are produced by NJSC Naftogaz’s subsidiaries Ukrgazvydobuvannya, Ukmafta and Chomomomaftogaz. Naftogaz’s estimates that these three companies have provided 96 per cent. of all domestically produced natural gas in 2003, as well as 97 per cent. of all domestically produced oil and gas condensate. As of 1 January 2004, NJSC Naftogaz’s subsidiaries operated 220 oil and gas fields. In operation on these fields are 2,388 producing oil wells, 2,338 producing gas wells and 336 injection wells out of which 310 are oil injection wells and 26 are gas injection wells. Many of the fields have reached their final stage of commercial production. and many are affected by low permeability, high water encroachment and high levels of viscosity. As at 1 January 2004, based on Naftogaz internal estimates and official Ukrainian estimates, the principal oil fields (those with reserves greater than five million tonncs) are 83 per cent. depleted. while principal natural gas fields (those with reserves greater than 30 billion cubic metres) are 73.6 per cent. depleted. At 1 January 2004. of Naftogaz’s 112 active fields producing natural gas. 39 contain recoverable reserves of less than one billion cubic metres pcr field. Generally, Ukrainian natural gas production has been declining since 1975, when 68.3 billion cubic metres of natural gas were produced. Between 1994 and 2003, Ukrainian natural gas production levels began to stabilise at a level of 18.0 to 19.4 billion cubic metres per year. Of this, between 94 and 100 per cent. was produced by Naftogaz and its predecessor companies. Oil and condensate production in Ukraine has also declined from a high of 14.5 million tonnes in 1972, and stabilised between 1994 and 2003 at levels of 3.8 to 4.2 million tonnes per year. Of this, Naftogaz and its predecessor companies have produced approximately 100 per cent. in 1972 and 94 per cent. in 2003. The stabilisation of falling production levels

74 was made possible by implementing measures aimed at improving resource base production and the development of new fields, including the introduction of secondary and tertiary production techniques.

Working Licences As of 1 January 2004, Naftogaz held a total of 349 licences for subsoil use in Ukraine, comprising 165 exploration licences and 184 production licences. These licences are held by NJSC Naftogaz’s subsidiaries Ukrgazvydobuvannya (115 exploration licences, 89 production licences), Ukrnafta (38 exploration licences, 89 production licences) and Chomomornaftogaz (12 exploration licences, 6 production licences), and cover 245 ficlds in three major producing regions of Ukraine (the east, west and south). In general, these licences were obtained between 1999 and 2003, and issued for 3-5 years for exploration and 14-20 years for production. Out of 12 licences due for extension in 2004, Naftogaz has received extensions for 11 and the extension of the remaining licence has been approved by the Cabinet of Ministers of Ukraine. However, as of the date of this Offering Circular, the licence has not yet been issued. Management believes that the delay with respect to such licence is as a result of the recent reorganisation of the state regulatory authority responsible for issuing licences and does not view this licence as material. In addition, NJSC Naftogaz ensures that its respective subsidiaries maintain the appropriate licences for oil and gas transportation and the supply and storage of natural gas as required by Ukrainian legislation. The State Committee of Natural Resources of Ukraine, established in February 2004, performs geological surveys. oversees the efficient use of subsoil and issues exploration and production licences. Naftogaz has not experienced significant problems in its relations with the committee or its predeccssors and none of Naftogaz’s licences have been terminated prior to their expiry. Most of Naftogaz’s licences provide that it must undertake complete geological surveys of the licensed subsoil, ensure that environmental and safety standards are adhered to, provide compensation for any damage resulting from the use of the subsoil and generally adhere to applicable Ukrainian laws and regulations. In addition, most of Naftogaz’s licences also provide that they may be terminated if Naftogaz fails to comply with the licence requirements, if there is a direct danger to its employees or the public as a result of Naftogaz activities or if Naftogaz repeatedly fails to comply with environmental standards. If Naftogaz fails to fulfil the spccific terms of any of its licences or if Naftogaz operates in the licence areas in a manner that violates Ukrainian law. Government rcgulators may impose fines on Naftogaz or suspend or terminate its licences. As at the date of this Offering Circular no licences have been suspended or terminated.

Oil and Natural Gas Reserves Naftogaz’s reserves are held through the following three subsidiaries: Ukrgazvydobuvannya, Ukmafta and Chomomomaftogaz. Naftogaz owns 50 per cent. plus one share in Ukmafta, and accordingly holds rights to 50 pcr cent of Ukrnafta’s reservcs, which is reflcctcd in the reserves estimates contained in Miller and Lents Reserves Report. However, Naftogaz’s internal reserves estimates include 100 per cent. of Ukmafta’s reserves and, accordingly, its accounts do not reflect the reserve amount in proportion to its actual shareholding in Ukmafta. All of Naftogaz’s oil and gas reserves are located in Ukraine. Historically, Naftogaz estimated its reserves in accordance with Soviet classifications and methodologies which were adopted as the Ukrainian system and which differ materially from accepted international practices, in particular, with respect to the manner in which and the extent to which economic assumptions are taken into account in calculating reserves. Reserve calculations performed using different methodologies cannot be accurately reconciled. Naftogaz engaged Miller and Lents, independent petroleum engineers, to prepare an independent assessment of its oil and gas reserves in accordance with Intemational Standards as at 31 December 2003 by evaluating its principal oil and psfields. Scc “Presentation of Financial and Other Information-Oil and Gas Reserves Data”. It should be noted that proved oil and gas reserves cannot be measured precisely and, accordingly, the reserve data presented in the following tables represent only estimates. Reserve estimates are based on many factors related to reservoir performance which require evaluation by engineers interpreting the available data, as well as price and other economic factors. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the production performance of the reservoirs as well as extensive engineering judgment. Consequently, reserve estimates are subject to revision as additional data become available during the production life of a reservoir. When a commercial reservoir is discovered, proved reserves are initially determined based on limited data from the first well or wells. Subsequent data may better define the extent of the reservoir and additional

75 production performance. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of that estimate upwards or downwards.

Ukrainian Reserves System under the old Soviet, and now Ukrainian, classification systems. reserves are subdivided depending on their degree of substantiation into the following categories: explored reserves represented by categories A, B and C1; preliminary estimated reserves represented by category C2 and prospective resources are represented by category C3; and forecast resources represented by categories D1 and D2. Soviet reserves calculations have historically not used economic assumptions in calculating reserves estimates. Generally, Soviet methodologies classify oil and gas deposits as reserves if such deposits are technically recoverable, even if the recovery of a portion of such reserves using currently available technology is uneconomic. In contrast, internationally accepted methodology classifies oil and gas deposits as reserves only if such deposits are economically extractable on the basis of existing technology, prices and costs.

ClaWi6cPtion Scope of Classitidion Cbamcterislic Event A Producing Development wells have been completed and the reserves are being Reserves produced. B Certified Reserves Development wells are being drilled but reserves are not yet being produced (transition category). c1 Delivered “Delineation” wells have been drilled and an exploration plan has Reserves been prepared. c2 Discovery A discovery well has been drilled and hydrocarbons discovered but no further drilling has occurred. c3 Prospective Exploratory activities sufficient to delincate oil and gas bearing areas have occurred, and the deep drilling of traps is prepared. D1 Basin Some exploratory activities have occurred and data has been obtained, such as seismic, gravimetric or magnetic data from an appraisal well, indicating the possible presence of hydrocarbons. D2 Basin A geologist has formed an opinion that a basin exists that shares characteristics of other basins known to contain hydrocarbons.

SPE International Standards Under the Ukrainian classification system. reserves are estimated based on the probability of physical presence of hydrocarbons in geological formations. However, SPE International Standards differ in certain material respects. Namely, the standards are based on the probability that hydrocarbons are physically present in a given geological formation and also on the economic viability of recovering the reserves, such as, exploration and drilling costs and ongoing transportation costs. Under the SPE International Standards, reserves are classified as “proven,” ”probable” and “possiblc,“ based on both geological and commercial factors. Proved reserves are those reserves which by analysis of geological and engineering data, arc confirmed with a high degree of certainty. Proved reserves are those that, based on the available evidence and taking into account technical and economic conditions, have a better than 90 per cent. chance of being economically recoverable. Probable reserves are those reserves in which hydrocarbons have been located within the geological structure with a lesser degree of certainty because fewer wells have been drilled andor definitive tests have not been conducted. Probable reserves are those reserves that, on the available evidence and taking into account technical and economic conditions, have a better than 50 per cent. chance of being recoverable. Possible reserves are those reserves which, based on analysis of geological and engineering data, are less likely to be recoverable than probable reserves. Possible reserves are those reserves that have a better than 10 per cent. chance of being recoverable.

Naftogaz’s Reserves Naftogaz estimates, based on preliminary data available as of 31 December 2003 and based on the Ukrainian classification system. its oil and gas condensate A+B+C1 reserves (calculated as 100 per cent. of the reserves of Ukrgazvydobuvannya, Ukrnafta and Chomomornaftogaz. although Naftogaz owns

76 only 50 per cent. plus 1 share in Ukmafta), at approximately 158 million tonnes (92 million tonnes of oil and 66 million tonoes of gas condensate), and its natural gas reserves (A+B+Cl) at 971 billion cubic metres. At current annual extraction rates. Naftogaz believes its oil and gas condensate fields have 40 years of production life remaining. while its natural gas ficlds havc 50 ycars of production lifc rcmaining. According to Naftogaz, approximately 50 per cent. of its reserves are A+B and 50 per cent. are C1. Naftogaz’s main A+B+C1 natural gas reserves are concentrated in the 20 largest fields owned by Naftogaz, of which the largest ones in terms of reserves are Shebelynske, Yablunivske, and Zakhidno- Khrestyschenske. The 7 largest fields comprise 30 per cent. of Naftogaz’s A+B+C1 gas reserves, based on Naftogaz’s internal estimates. The main oil reserves arc concentrated in 16 fields comprising 44 per cent. of Naftogaz’s A+B+Cl reserves, based on Naftogaz’s internal estimates. The largest ones in terms of A+B+Cl oil reserves are the Bugruvativske (Sumska region) and Glynsko-Rozbyshivske (Poltavska region) ficlds. which comprise 30 per cent. of Naftogaz’s oil reserves in these categories. Naftogaz’s main A+B+Cl gas condensate reserves are concentrated in the Poltavska, Kharkivska and Sumska rcgions. whcrc its main fields contain reserves amounting to 29 million tonnes, which comprise 44 per cent. of Naftogaz’s gas condensate reserves in these categories, based on Naftogaz’s internal estimates. The following table, derived from Naftogaz’s internal estimates, sets forth the oil, condensate and natural gas A+B+C1 and C2 reserves based on the Ukrainian classification system as at 31 December 2003: Reeerves A+B+Cl cz GM GaS Gas (lkee) (dissolved) Oil Condensate Gas (free) (dissolved) Oil Condensrtt (thousand cubic metres) (thousand tonnes) (thouand cubic metres) (thousund tomes) Ukrgazvydobuvannya ..... 727.740 994 9,078 38,357 164,676 408 6,377 7,005 Chomomornaftogaz ,...,,.. 54,566 2 278 1,401 M),211 - 14 579 Ukmafta“’...... 165,356 21.545 83,161 26,206 40,798 5,349 14,870 3,67l Total“’ ...... 947,662 22,541 92317 65,964 265,685 5,79 21J6X -1

(1) Including 100 per cent. of Ukma€ta reserves, although Naftogaz only owns SO per cent. plus one share of Ukmafta. At the request of Naftogaz, Miller and Lents, independent petroleum engineers, estimated the oil, condensate, and natural gas reserves and projected future net revenues therefrom as of 31 December, 2003 for 12-1fields controlled by Naftogaz. Naftogaz’s management believes that Miller and Lents audited approximately 80 per cent. of its reserves and operated by Comomornaftogaz, Ukrgazrydobuvannya and Ukmafta. The following oil and gas reserves data is extracted without material adjustment from the Miller and Lents Reserves Report, unless otherwise indicated. As a result, while Naftogaz maintains its intcrnal records relating to its production and refining operations in metric tonnes or cubic metres. as applicable, the following tables contain conversions of certain volumes from tonnes or cubic metres into barrels. Such metric data has been converted into barrels at the rate of one tonne = 7.30 barrels (for crude oil) and one tonne = 8.00 barrels (forgas condensate). In addition, with respect to natural gas, 1,000 cubic metres = 35,315 cubic feet. See Appendix B of this Offering Circular for the cover letter to the Miller and Lents Reserves Report. The probable and possible reserve volumes and the estimated future net revenues therefrom have not (for crude oil) been adjusted for certain elements of uncertainty in the Miller and Lents Reserves Report, as further identified therein. None of thc proved. probable, or possible reserve volumes or the revenues projected therefrom should be combined with either of the other without adjustment for uncertainty. Furthermore, estimates of future net revenues and discounted future net revenues do not represent fair market values for the estimated revenues. Future costs of abandoning facilities and wells and any future costs of restoration of producing properties to satisfy environmental standards were not deducted from total revenues.

77 The following table shows net reserves of Naftogaz as of 31 December 2003 on a consolidated basis, as adjusted to reflect Naftogaz's limited shareholding in Ukmafta, derived from the Miller and Lents Reserves Report. Net Reserves Future Net Revenues(" Oil mud Discounted at cwdensnte GSX Undismunted 10% Per Year (MMBbls) fBcn fMM$) (MW Proved Developed Producing...... 163.2 6,629.5 4,633.4 2,313.8 Proved Developed Nonproducing ...... 14.1 280.9 176.4 102.3 Proved Undeveloped ...... 10.5 574.8 385.5 165.0 Future Additional Capital ...... - - (391.4) (307.4) Total Proved ...... 187.8 7,485.2 4,803.9 2,273.7 Probable ...... 2.6 360.9 277.5 83.0 Possible ...... 0.3 337.0 245.9 31.3

(1) In preparing these projections, Miller and Lents used product prices set by the NCRP and the applicable subsidiaries of Naftogaz, without future escalation, and a currency exchange rate of 5.3315 Hryvnia per U.S.dollar. the prevailing exchange rate at year-end 2003. The following table shows the net reserves for Chornomomaftogaz as of 31 December 2003, derived from the Miller and Lents Reserves Report. Net Resewen Future Net Revenues") Oil and Discounted at Condensate G*s Undiscounted 10% Per Year (MMBbLr) (BcJ (MW (MM$) Proved Developed Producing...... 3.1 387.0 497.4 255.5 Proved Developed Nonproducing ...... - - - - Proved Undeveloped ...... 0.3 265.2 214.5 73.2 Future Additional Capital ...... - - (85.4) (65.2) Total Proved ...... 3.4 652.2 6265 263.4 Probable ...... 0.8 325.3 238.7 56.4 Possible ...... - 305.2 232.2 23.4

(1) In preparing these projections, Miller and Lents used product prices set by the NCRP and the applicable subsidiaries of Naftogaz, without future escalation, and a currency exchange rate of 5.3315 HryMla per U.S. dollar, the prevailing exchange rate at year-end 2003. The following table shows the net reserves for Ukrgazvydobuvannya as of 31 December 2003, derived from the Miller and Lents Reserves Report. Net Resrtnes Future Net Revenues(') OU and DkOUtcd 8t Condensate GM Undiscounted 10%PerYm (MMBbls) (BcJ (MM%) WM$) Proved Developed Producing...... 60.2 5,471.6 2,546.6 1,221.6 Proved Developed Nonproducing ...... 0.2 222.1 65.6 30.8 Proved Undeveloped ...... 2.7 270.0 112.3 69.7 Future Additional Capital ...... - - (139.6) (127.8) Total Proved ...... 63.1 5,963.8 2,584.9 5194.3 Probable ...... 1.7 35.5 38.8 26.6 Possible ...... 0.3 31.8 13.7 7.9

78 The following tahlc shows thc net reserves for Llkrnafta as of 31 December 2003. as adjusted to rcflect Naftogaz's limited shareholding in Ukmafta, derived from the Miller and Lents Reserves Report: Net Rcsenes Future Net Reveaud'l Oil and Discounted st Condensate GaO UndiseDunted 10% Per Year (MMBbLr) (Ben (MW Proved Developed Producing ...... 99.8 770.8 1,589.4 836.8 Proved Developed Nonproducing ...... 13.9 58.8 110.8 71.5 Proved Undeveloped ...... 7.5 39.6 58.7 22.2 Future Additional Capital ...... - - (166.5) (114.4) Total Proved ...... 1212 8693 1,592.5 816.0 Probable(') ...... Possible(2) ......

(1) In preparing these projections. Mer and Lents used product prices set by the NCRP and the applicable subsidiaries of Naftogaz, without future escalation, and a currency exchange rate of 5.3315 khyvma per U.S. dollar, the prevailing exchange rate at year-end 2003.

(2) Miller and Lents was unahle IO provide estimates of probable and podie reserves due 10 insuh$m available information.

Oil and Gas Production Oil and gas is produced by Ukrgazvydobuvannya, Chomomornaftogaz and Ukmafta. In this section all production results include 100 per cent. of Ukmafta although Naftogaz owns 50 per cent. plus one share of Ukrnafta, as applicable. The following table sets forth the total amount of natural gas produced by NJSC Naftogaz's operating subsidiaries and other Ukrainian companies for the years ended 31 December 2000,2001,2002,2003 and 2004 (planned): 2ow 2000 2001 2002 m3 (Planned) (million cubic metres) Ukrgazvy dobuvanny a ...... 13,421.7 13,585.4 13,714.6 14,038.9 14,350.0 Ukmafta (1) ...... 3,306.1 3,292.6 3,254.8 3,274.6 3,350.0 Chornomornaftogaz ...... 764.4 786.4 817.5 903.8 1,110.0 Naftogaz total(')...... 17,492.2 17,664.4 17,786.9 18,2173 18,810.0 Other Ukrainian companies ...... 559.7 683.8 1,013.7 1,238.7 0 Ukraine Total"' ...... 18,051.9 18,3482 18,800.6 19,456.0 18,810.0

(1) Includes 100 per cent. of Ukmafta although Naftogaz owns SO per cent. plus one share of Ukmafta. The following table sets forth the total amount of oil and gas condensate produced by NJSC Naftogaz's operating subsidiaries and by other Ukrainian companies for the years ended 31 December 2000, 2001, 2002 and 2003, and 2004 (planned): zow zoo0 W01 2002 m3 (Plnnned) (thawand tomes) Ukrgazvydobuvannya ...... 638.3 687.3 702.1 787.2 730.0 Ukrnafta (1) ...... 2,864.6 2,811.4 2,812.1 2,895.4 3,000.0 Chornomomaftogaz ...... 65.1 72.9 91.8 86.0 74.0 Naftogaz total"' ...... 3,568.0 3371.6 3,606.0 3,768.6 3,804.0 Other Ukrainian companies ...... 128.3 137.1 141.5 206.6 0.0 Ukraine Total"' ...... 3,696.3 3,708.7 3,7475 3,9752 3,804.0

(1) Includes 100 per cent. of Ukrnafta although Naftogaz owns 50 per cent plus one share of Ukmafta.

79 Naftogaz’s largest natural gas fields in terms of production in 2003 were Shebelynske, Yablunivske, Zakhidno-Khrestyshynske and Melykhovske ficlds. Thew fields accounted for 11.5 per cent., 5.1 per cent., 5.1 per cent. and 4.7 per cent, respectively of Naftogaz’s total natural gas production for the year ended 31 December 2003. Naftogaz’s largest oil fields in terms of production in 2003 were the Bugruvativske. Anastasiyivske, Dolynske, Korzhyvske and Skorohodivske fields. These fields accounted for 8.9 per cent.. 8.2 per cent.. 6.8 per cent., 4.9 per cent. and 3.7 per cent., respectively, of Naftogaz’s total oil production for the year ended 31 December 2003. The largest gas condensate fields in terms of production in 2003 were the Tymofiyivske, Kotelivske and Yablynivskc fields. The fields accounted for 17.7 per cent., 7.1 pcr ccnt. and 7.0 per cent.. respectively, of Naftogaz’s total gas condensate production for the year ended 31 December 2003.

Production Costs The table below gives a breakdown of costs associated with Naftogaz gas production for the years indicated. 2501 2402 m3 (UAH per 1.W cubic metres) Ukrnafta (1) ...... 75.9 94.2 97.7 Ukrgazvydobuvannya ...... 39.2 54.4 65.0 Chomomornaftogaz ...... 78.4 94.4 119.2

(1) Includes 100 per cent. of Ukrnafta although Naftogaz owns 50 per cent. plus one share of Ukmafta. The table below gives a breakdown of costs associated with Naftogaz’s oil and gas condensate production for the years indicated. 2001 2002 m3 (UAH per tonne) Ukmafta“’ ...... 157.2 185.4 221.1 Ukrgazvydobuvannya ...... 180.3 328.5 434.1 Chornomomaftogaz ...... 175.0 223.0 289.0

(1) Includes 1M) per cent. of Ukmafta although Naftogaz owns 50 per cent. plus one share of Ukmafta. Chornomornaftogaz exploration, development and production costs are generally higher due to the fact that in addition to on-shore fields, Chornomornaftogaz develops off-shore fields, requiring additional expenditure, including flcet services and floating rigs. The general trend in increasing costs is mainly attributed to increased amortisation and higher saiaries as well as an increase in the number of employees.

Existing Wells The following table shows the number of Naftogaz’s wells per category as at 31 December 2003:

wurlu.-v -(I’ h~lONnOpr Ndlep. Ted’ ------00 Gu ToW OU Gu Tral OU Gu To-1 OS Gr Tom! General fund ...... 132 2228 u60 3274 351 3625 55 99 15.I 3441 2678 6139 Including txplollation fund Producing web...... 123 mi3 2136 m 239 2459 45 86 131 2388 2338 4726 Opcrationsl ...... 88 lW1 1929 1943 191 2134 43 14 117 21174 2106 4180 Not h operation ...... 30 159 189 265 43 308 1 10 11 2% 212 508 Under mnamaion ..... 5 13 18 12 5 17 1 2 3 18 20 38 In “enation ...... 7 42 49 33 4 37 3 6 9 43 52 95 Exploratory ...... 1 n 73 518 &5 S83 4 2 6 523 139 662 Injection ...... 1 26 27 3M 0 306 3 0 3 310 26 336 Other (e.&, water) ...... 0 s2 s2 119 0 119 0 5 5 119 57 176 Awaiting liquidstim ...... 0 23 23 I8 43 121 0 0 0 78 66 146

(1) Includes 1M1 per cent. of Ukmafta although Naftogaz owns 50 per cent. plus one share of Ukmafta.

80 Exploratory Operatiom and Drilling Exploratory drilling by Naftogaz and its predecessor companies stood at 83,100 metres drilled in 1994, falling to 44,900 metres in 1995, before rising steadily to 183,500 metres in 2001 and 197,700 metres in 2003. In 2002. Naftogaz added 19.0 million Refercncc Units (defined as 1 thousand cubic nictrcs of gas or 1 tonne of oil) to its hydrocarbon reserves. Naftogaz’s hydrocarbon reserves are calculated as 100 per cent. of Ukrgazvydobuvannya, Ukrnafta and Chornomornaftogaz, although Naftogaz owns 50 plus one share of Ukmafta. Naftogaz achieved production increases by increasing the number of wells in operation, by adding new hydrocarbon fields. drilling new wells and reducing the number of inactive wells. as well as introducing secondary and tertiary oil and condensate recovery methods.

The following table sets forth Naftogaz’s exploration drilling success ratio for the years indicated. UHlO 2501 m2 2003 (number of welLs) Total(’) ...... 38 52 54 56 Successful ...... 19 25 25 32 Dry”’ ...... 19 27 29 24 Completedproductive well ratio ...... 0.50 0.48 0.46 0.57

(1) lncludes 1M1 per cent. of Ukmafta although Naftogaz owns 50 per cent. plus one share of Ukmafta.

(2) Dry wells are defined as wells incapable of production.

The following table sets forth Naftogaz’s production drilling success ratio for the years indicated. too0 2001 2002 2003 (number of wells) Total(1) ...... 1W 113 96 91 Successful ...... 115 111 91 91 Dry(’) ...... 0 2 5 0 Completedlproductive well ratio ...... 1.00 0.98 0.95 1.00

(1) Includes 1133per cent. of Ukmafta although Naftogaz owns 50 per cent. plus one share of Ukmafta. (2) Dry wells are defined as wells incapable of production. NJSC Naftogaz, through its subsidiaries, owns almost all of the drilling rigs it uses. Ukrnafta owns 58 drilling rigs, Ukrgazvydobuvannya owns 71 and Chomomomaftogaz owns 2. As at 1 June 2004, NJSC Naftogaz, through its subsidiaries, was in the process of drilling 138 wells (of which one was temporarily suspended). Presently, Naftogaz is not conducting seam pressure maintenance operations on any of its gas fields, 27 oil fields are developed with maintaining seam pressure by water-flooding, and 3 gas condensate fields are developed with seam pressure maintenance by gas injection (cyclins process). In order to achieve an increase in oil and gas production, Naftogaz intends to increase the volumes of both exploratory and prospect drilling. Actual exploratory and production drilling for 2003 and plans for 2004 and 2005 are given in the tables below. Exploratory drilling 2003 2004 m5 (thousand metres) Naftogad” ...... 198 226 301 of which: Ukrgazvydobuvannya ...... 177 170 210 Ukrnafta(’)...... 19 50 75 Chornomomaftogaz ...... 2 6 16

(1) Includes lo0 per cent. of Ukrnafta although Naftogaz owns 50 per cent. plus one share of Ukmafta. 2003 2004 2005 (thowand metres)

Naftogad’ ) ...... 262 322 322 of which: Ukrgazvydobuvannya ...... 93 130 140 Ukmafta( ‘f...... 166 185 175 Chornomornaftogaz ...... 3 7 7

(1) Includes 1M) per cent. of Ukmafta although Naftogaz owns 50 per cent plus one share of Ukmafta. In 2001 Naftogaz spent UAH 496.7 million on geological surveys in order to allocate new reserves. These costs increased to UAH 525.8 million and UAH 629.3 million in 2002 and 2003. respectively. The figures include 100 per cent. of Ukmafta although Naftogaz owns 50 per cent. plus one share of Ukmafta. Naftogaz applies a wide variety of methods for the treatment of bottomhole zones, which increases the level of oil and gas collection. Such methods may be divided into the following main groups:

0 Physical: heat treatment, treatment by wave effect.

0 Chemical: acid treatment with application of surface-active solutions, thermo-chemical treatment with the application of soda-acid solutions of surface-active substances (“SAS”), directive acid treatment with the application of biopolymers, selective gas-acid treatment, acid treatment on the basis of phosphoric acid, deep treatment by means of consecutive injection of SAS solutions and thickened froth substances, soda-polymer treatment, treatment with microemulsions, treatment with carbohydrate SAS solutions.

0 Physiochemical: implosion and delanthanium well shooting.

0 Hydrodynamic: blast treatment, powerful formation hydroseparation, activities on limiting waterway with usage of polymer composites. In order to maximise the oil production capacities of the fields. Naftogaz uses various types of water- flooding (contour water-flooding, perimeter water-flooding. nun-stationary flooding. water-flooding with SAS application), forccd withdrawal, altering seepage directions. fire-flooding, hot water injection. Naftogaz employs new technologies aimed at increasing the recovery of reserves, including technologies developed by in-house research institutes. In order to increase the recovery of gas condensate, Naftogaz uses a technology of reverse injection of conditioned and dried gas into the seam with a high condensate content of natural gas. called a cycling process. Naftogaz was the first company within the former Soviet Union to develop, and one of the few companies, to implement, the cycling processes. Cycling technology is covered by a set of patents. Naftogaz applies new technologies not only in development and production, but also in transportation, storage and reprocessing. For example, Naftogaz recently began operating a combined cycle compressor unit at the Stavyshenska compressor station which is 43 per cent. more efficient as a result of Naftogaz’s know-how.

Fields in the Black Sea and Sea of Azov One of Naftogaz’s priorities is the accelerated study and development of the recently discovered oil and ?as fields in the Black Sea and Sea of Azov, as well as in the entire southern oil and gas bearing basin. According to Naftogaz, the potential reserves of the Ukrainian part of the Black Sea and Sea of Azov exceed 1.5 billion Reference Units, however, only 3 to 4 per cent. of the currently estimated reserves have been explored. In accordance with the Government’s Oil and Gas of Ukraine through 2010 Programme, which established, among other things, non-binding recommendations with respect to investments for the development of the Black Sea and Sea of Azov reserves, investments exceeding UAH 2.5 billion (approximately U.S.$469 million) are estimated to be recommended for developing such reserves over the next 6 years. Naftogaz will determine the capital expenditure required to develop these resources once the current geological surveys have been completed. The cost of extraction is estimated to be highar due to the increased costs of drilling off-shore, as well as the greater depth of the reserves. Chomomornaftogaz is conducting exploration and extraction of the oil and gas resources in the southern oil and gas-bearing basin. exploiting five shelf fields (Golitsynske, Shtormove and Arkhangelske in the Black Sea; and Striletske and Skhidno-Kazantipske in the Sea of Azov) and threc on-shore fields

82 (Djankoy and Semenivske oil fields and Zadornenske :as field). Chornomornaftogaz began commercial exploitation of the Skhidno-Kazantipskc ficld in August 2002 in the southcrn part of the Sea of Azov. As of 1 June 2004. 131.1 million cubic metres of gas was produced from thz field in 2004. while the total volume of natural gas produced from the beginning of the exploration of the Skhidno-Kazantipskc field is 422 million cubic metres. Development of this field is currently in the first stage programme to realize the southern Azov reserves. The programme is currently being developed and there is no expected completion date.

Production Prospects Although Naftogaz is not planning to increase or diversify the structure of its exploration and production division, it is planning increased capital expenditures to increase oil and gas extraction. The table below shows total capital expenditure allocated by Naftogaz for oil and gas exploration and production, and give a breakdown by types of activities, into which investments have been made in 2002 and 2003. 2002 m3 (UAH million) Gas exploration and production ...... 1,464.0 1,883.7 Oil exploration and production ...... 596.2 1,475.9 Total“’ ...... 2,0603 3359.6

(1) Includes 100 per cent. of Ukrnafta although Naftogaz owns 50 per cent. plus one share of Ukmafta.

Gas Purchase In order to satisfy its gas delivery commitments, Naftogaz relies principally on a combination of its own production, on gas received from Gazprom as payment in-kind and on gas purchased from Turkmenistan, to satisfy its delivery commitments. NaftoFaz’s long-term financial condition is dependent on its continued ability to purchase competitively priced natural gas. Currently, Naftogaz relies on Ukraine’s gas purchase agreement with Turkmenistan (effective until the end of 2006) and gas transport agreement with Russia (effective until the end of 2013), to provide sufficient volumes of natural gas to covcr domestic consumption and export commitments.

The table below sets out the origin of natural gas sold by Naftogaz domestically in the years indicated: 2501 2402 m3 (billion cubic metres) Own production ...... 11.1 13.4 22.2 In-kind payment from Gazprom received for transit services ...... 25.6 25.5 23.7 Central Asian including: 17.3 15.9 24.5 Turkmen gas ...... 17.3 15.7 23.1 Uzbek gas ...... - - 1.4 Kazakh gas ...... - 0.2 - Total“’ ...... 54.0 54.8 70.4

(1) The total amounts do not include intercompany sales of natural gas required for servicing the gas transportation system. In addition, in 2002 Naftogaz exported 1.8 billion cubic metres of gas and in 2003, 5.9 billion. Naftogaz exports gas that it purchases from Turkmenistan and the gas that it produces. See “-Exports”.

Turkmenistan Naftogaz currently purchases gas from Turkmenistan in accordance with an inter-state agreement between Ukraine and Turkmenistan for the purchase of gas signed in May 2001. Pursuant to the agreement, Naftogaz can purchase up to 250 billion cubic metres of gas from Turkmenneftegas, the Turkmenistan oil and gas company, between 2002 and 2006. As a result, in 2001 Naftogaz entered into a contract with Turkmenneftegas, specifying the terms of purchase. The purchase price for the gas is set pursuant to annual supplemental agreements to the contract between Naftogaz and Turkmenneftegas.

83 In 2002, Naftogaz purchased 32 billion cubic metres of gas for U.S.$42 per thousand cubic metres, for which a portion of the purchase price made in U.S. dollars and the rest in goods and services. On 1 October 2002, the Ukrainian party signed a number of supplemental agreements to the agreement signed in 2001 with Turkmenistan which provided that Naftogaz could purchase up to 36 billion cubic metres of gas in 2003. As a result of the agreement, Naftogaz purchased 32.2 billion cubic metres of gas in 2003, for which part of the purchase price was paid in dollars and part in goods and services. The goods and services Naftogaz provides consist principally of machinery and equipment which Naftogaz purchases and provides to Turkmenneftegas. See “Selected Financial Review - Non-Cash Settlements”. The purchased gas must be delivered from Turkmenistan, through Kazakhstan, Uzbekistan and Russia, to Ukraine. Naftogaz sells the purchased gas to ETG, at the Turkmenistan-Kazakhstan and/or the Turkmenistan-Uzbekistan borders and purchases a portion of it back at the Russia-Ukraine border. The remainder is left by ETG in Naftogaz’s storage facilities. Naftogaz has a first-priority right to purchase this gas and has done so in the past during the winter months, when the demand for natural gas is high in Ukraine. The risk of loss and leakage during transport is transferred to ETG. Management believes these arrangements with ETG result in Naftogaz achieving economical transported rates for Turkmen gas transported through Kazakhstan, Uzbekistan and Russia. On 29 July 2004, Naftogaz entered into an agreement with RUE,recently established by Gazprom and Raiffeisen for the purpose of supplying Turkmenistan gas to Naftogaz. Naftogaz will continue to purchase Turkmen gas through ETG until 1 January 2005 after which RUE will become the sole supplier of Turkmen gas to Naftogaz. In accordance with an intergovernmental agreement between Turkmenistan and Ukraine, Naftogaz expects to purchase up to 44 billion cubic metres of Turkmen gas from Turkmenneftegas through RUE annually up to 2006. RUE will transport the Turkmen gas from Turkmenistan to the Russia-Ukraine border. In addition, Naftogaz and RUE concluded an agreement on 29 July 2004 pursuant to which Naftogaz may purchase up to an additional 7 billion cubic metres of Turkmen gas directly from RUE in 2005 and up to 10 billion cubic metres of Turkmen gas in 2006. From 2007 up to 2028, Naftogaz will be able to purchase up to 60 billion cubic metres of Turkmen gas directly from RUE and will cease to purchase gas directly from Turkmenneftegas. As at the date of this Offering Circular, no arrangements have been agreed for the utilisation of the additional volumes of Turkmen gas that Naftogaz anticipates purchasing. Management believes these arrangements with RUE will secure the transportation of Turkmen gas through the territory of Russia at favourable transport rates, which have been contractually agreed until 2028. It also allows Naftogaz to purchase additional volumes of Turkmen gas, which it was unable to do under its arrangements with ETG.

Domestic Gas Distribution and Sales Naftogaz supplies natural gas to 14.9 million households in Ukraine. Domestic consumption has generally been decreasing from 118.1 billion cubic metres in 1991 to 69.7 billion cubic metres in 2002 mainly due to declining industrial production, the introduction of energy conserving technologies, the installation of domestic gas meters and the implementation of measures aimed at promoting gas consumption discipline. Pursuant to a Resolution of the Cabinet of Ministers, Naftogaz sells natural gas domestically to all residential consumers, State Financed Entities and regional heating companies (of which there are approximately 1,600). Naftogaz also sells natural gas domestically to industrial customers and for the technological needs of gas distributing and producing companies. In 2003, Naftogaz is estimated to have had approximately 98 per cent. of the industrial customer market up from approximately 40 per cent. in 2002, when Itera was selling natural gas to industrial consumers in Ukraine. See “Competition”. Residential consumers in Ukraine consist of approximately 11.4 million households, 6.9 million of which are in multi-block apartment buildings and 4.5 million of which are in stand-alone houses. Central heating and hot water is provided to approximately 5.5 million households in the multi-block apartment buildings by the regional heating companies. Gas is only directly supplied by Naftogaz to 5.4 million households only for the purposes of cooking. A further 1.5 million households are provided with central heating from the regional heating companies but not hot water. Regional heating companies also provide central heating and hot water to State Financed Entities such as schools and hospitals, although some State Financed Entities are supplied with gas directly. Currently, of the 11.4 million households in Ukraine, only 4.4 million have meters installed to measure the gas supplied directly to such households. Over the next 2 to 3 years, Naftogaz intends to install a further 2.3 million meters so that 80% of the stand-alone households in Ukraine will have meters installed. The following table provides a breakdown (by sector) of natural gas sold by Naftogaz domestically for the years ended 31 December 2001 and 2002 and 2003: Consumer Category 2001 2002 2003 (billion cubic (billion cubic (billion cubic merres) % metres) % merres) %

Industrial consumers ...... 18.2 33.3 16.8 30.2 29.4 41.3 Residential consumers ...... 17.3 31.5 17.1 30.7 18.0 25.3 State Financed Entities ...... 1.0 1.7 1.o 1.7 1.1 1.54 Regional heating companies 10.8 19.6 12.8 22.9 14.5 20.3 Technological needs (of gas- distributing companies) .. 0.6 1.2 0.7 1.2 0.8 1.1 Technological needs (of gas- transporting and gas- producing companies) ..... 7.0 12.7 7.4 13.3 7.5 10.5 Total ...... 54.8 100.0 55.6 100.0 71.2 100.0

In addition, Naftogaz sells natural gas held in its underground storage facilities to traders and industrial consumers, amounting to 0.5 billion cubic metres and 3.7 billion cubic metres in 2002 and 2003, respectively. Such natural gas, once sold, can remain stored in Naftogaz’s storage facilities, with the owner paying storage fees to Naftogaz. For a discussion of tariffs and collection rates, see “-Tariffs”. NJSC Naftogaz’s subsidiary, Gas of Ukraine, markets natural gas in Ukraine. As at 1 January 2004, there were 54 regional distribution companies supplying natural gas to end-users in Ukraine, 42 of which contract with Gas of Ukraine. The remaining 15 regional distribution companies contract directly with Ukrgazvydobuvannya, Ukrnafta and Chornomomaftogaz. Naftogaz holds equity interests in all 54 regional gas distribution companies, and holds controlling interests in 19 of them. Naftogaz intends to purchase controlling stakes on the secondary market in all 54 regional gas distribution companics in an effort to improve management efficiency and increase payment collection rates. This plan is in the formative stages and Naftogaz has not yet prepared capital expenditure projections. Naftogaz expects to fund these purchases from funds obtained through the sale of 18 of its non-core assets, which are expected to be sold through the end of 2005.

Crude Oil Sales Pursuant to a Resolution of the Cabinet of Ministers of Ukraine dated 4 April 2000, auctions for the sale of crude oil were introduced as of 1 May 2000. According to the Resolution, Ukmafta is obligated to sell its entire oil production at monthly auctions organised and facilitated by the Ukrainian Interbank Currency Exchange. Prices are determined freely depending on the delivery terms and the quality characteristics of the product proposed for sale at each auction. However, such prices may not be lower than the average sale price for a particular product set at the previous auction. The Resolution does not impose any significant restrictions with respect to buyers except that they must bc legal entities incorporated in Ukraine and not in liquidation or bankruptcy proceedings. For a discussion on refincd product sales, sec “-Refining. Processing and Petrochemical Businesses; Refuelling Stations-Refined Product Sales”.

Exports Pursuant to the contract with Gazprom for gas transit, Naftogaz is prohibited from re-exporting the gas it receives from Gazprom as payment in-kind. As a result, Naftogaz exports natural gas purchased from Turkmenistan and its own produced gas. NJSC Naftogaz began exporting gas in 2002, when it sold 1.8 billion cubic metres of gas, all of it to Wintershall Erdgas Handelshaus Zug AG (“Wintershall”). In May 2003, Naftogaz entered into an export agreement with Zarubezhgas Management und Beteiligungsgesellshaft GmbH (“Zarubezhgas”) for deliveries of natural gas. This agreement is effective until 31 December 2004. In addition, in March 2004, Naftogaz entered into a medium term gas purchase agreement with Wintershall for deliveries of natural

85 gas from 2004 until September 2007. The contract is renewable for a further 5 year term. In 2003, NJSC Naftogaz exported 5.9 billion cubic metres of gas mostly to Wintershall and Zarubezhgas and it estimates that in 2004 it will export approximately 6 billion cubic metres of gas to these customers. In July 2004, Naftogaz entered into an agreement with Zarubezhgas to export a total of 20 billion cubic metres of natural gas up to 2009. The State Budget for 2004 established an export duty of U.S.$lO per thousand cubic metres on the export of natural gas from Ukraine, unless higher rates are applicable under international agreements entered into by Ukraine. Pursuant to an amendment to the 2004 State Budget in June 2004, the above duty is also applicable to gas condensate. In addition, based on proposals made by Naftogaz and Gazprom, annual inter-governmental protocols signed between Ukraine and Russia set export quotas for natural gas exported from Ukraine for 2003,2004 and 2005 at 6 billion cubic metres a year. All natural gas exported from Ukraine over this limit is subject to a duty of U.S.$100 per 1,000 cubic metres. Although the protocol has not been ratified by the Ukrainian parliament and therefore it is not binding under Ukrainian law, Naftogaz intends to remain within the export quota imposed by the protocol. Naftogaz currently anticipates that, upon agreement with Gazprom and pursuant to the relevant protocols, export quotas may be increased as required from 1 January 2006. However, there can be no assurance that the export quotas will be increased or similar export quotas will not be imposed by future inter-governmental protocols. Currently there are no other quantitative restrictions on oil and gas exports imposed by Ukrainian legislation.

Refining, Processing and Petrochemical Businesses; Refuelling Stations Naftogaz’s refining operations are carried out by six wholly-owned refining facilities which process and refine natural gas. gas condensate and crude oil. Ukrgazvydobuvannya owns and operates the Shcbelinksky and Yablunivsky gas refineries and the Seleshynsky Condensate Stabilization Plant. Ukrnafta owns and operates the Dolynsky. Kachanivsky and Hnidyntsivsky gas refineries. These are located in Ukraine and specialise in the processing of LPG and stable gasoline. Naftogaz’s subsidiaries process and refine natural gas. oil and _cas condersatc, predominantly from its production. The refineries also refine for customers who provide their own raw materials. In 2001. 2002 and 2003, the total processing and refining volumes for Naftogaz’s refinerics wcrc 4.929 million cubic metres of gas and 2,745 thousand tonnes of oil and condensate; 4,733 million cubic metres of gas and 2,762 thousand tonnes of oil and condensate; 4,503 million cubic metres of gas and 3,132 thousand tonnes of oil and condensate, respectively.

86 Ukrgazvydobuvannya's refineries represent 60.4 per cent. (for gas) and 56 per cent. (for oil and condensate) of the total production capacity of Naftogaz's refineries. The following table provides a breakdown of the key products which each plant produced for the years 2001, 2002 and 2003: 2001 2002 m3 (thousand tonnes or million cubic metres, as applicable) Shebelinsky Gm Refinev Stable gas condensate and oil processing (including processing on commission) ...... 706 73 1 764 Production: Automobile gasoline ...... 360 398 324 Diesel fuel ...... 223 221 266 White-spirit ...... 14 11 7 Black oil ...... 59 51 42 Bitumen ...... 0 1 1 LPG ...... 14 12 10 Selcshynsky Condensate Stabilization Plant Unstable gas condensate and oil processing ...... 506 537 614 Production: Stable gas condensate ...... 406 406 453 LPG ...... 42 57 81 Stable gas petrol ...... 40 53 62 Yublunivsky Gas Refinery Unstripped gas processing (million cubic metres) ...... 1,537 1,SO4 1,448 Production: Residue natural gas (million cubic metres) ...... 1,036 992 953 LPG ...... 67 75 60 Stable natural gasoline ...... 13 14 10

The Shebelinsky Gas Refinery is Naftogaz's most technologically sophisticated and efficicnt refinery, with an annual capacity of 800 thousand tonnes of gas condensate and oil. The various units of the plant came on-stream in 1960, 1970, 1998 and 2002 respectively. The plant produces high-octane motor gasoline brands A-76, A-92. A-95. A-98. diesel fuel L-0.2-40,white-spirit, black oil. roofing asphalt. resine-bitumen mastic and industrial-grade LPG (propane butane). In addition, Ukrgazvydobuvannya is implementing new technology licensed from UOP LLC, a US technology company, relating to the isomerization of light gasoline fractions, the by-product of which is stabilised oil. Ukrnafta's rchneries represent 39.6 per cent. (for gas) and 44 per cent. (for oil) of the total production capacity of Naftogaz's refineries. The following tables provides a breakdown of the key products which each plant produced for the years 2001,2002 and 2003: 2001 UHn m3

(thourand tonnes) Hnidynrsivsky Gm Refinery Treated gas processing (million cubic metres) ...... 1,448 1,439 1,381 Production: LPG ...... 108 108 99 Stable gasoline ...... 99 106 103 Kachanivsky Gas Refinery Treated gas processing (million cubic metres) ...... 2,125 1,994 1,943 Production: LPG ...... 17 19 10 Stable gasoline ...... 51 61 52 Engine fuel ...... 1 0.1 12 Dolynsky Gas Refircry Stripped gas processing (million cubic metres) ...... 248 253 248 Production: LPG ...... 11 11 13 Stable gasoline ...... 5 5 5

87 Refinery Processing Costs The following table sets out the processing costs for the key products produced by Ukgazvydobuvannya’s refineries:

2001 zoo2 2003

(UAHper tonne) Petrols ...... 633.6 757.9 826.3 Diesel fuel ...... 566.3 690.6 759.0 LPG ...... 424.1 453.2 473.2 White spirit ...... 566.3 690.6 759.0 Black oil ...... 249.0 299.8 335.7 Stable gasoline ...... 598.0 609.0 629.0

The following table sets out the processing costs for the key products produced by Ukrnafta’s refineries:

Zoo1 2002 2m3 (UAH per tonne) LP G ...... 478.9 442.2 505.8 Stable gasoline ...... 779.1 703.0 560.6

Refinery Maintenance Naftogaz continues to improve processing and refining methods at its refineries and to increase its refining capacity. Accordingly, in 2004, it has budgeted UAH 120 to 125 million for the reconstruction of its refineries and UAH 66 million for repairs. These amounts do not include the estimated capital expenditure which Ukrnafta plans for the refurbishment of its Hlynsko-Rozbyshevsky and Pasichnyanskiy refineries. The cost of such refurbishment will be determined based on feasibility studies to be undertaken. It is anticipated that the refurbishment will be completed within the next two years.

Refined Product Sales Naftogaz’s refineries process and refine natural gas oil and gas condensate, predominantly of its own production. Naftogaz sells the refined products principally on the domestic wholesale and retail market. In 2003, Naftogaz began selling refined products through petrol refueling stations owned or operated by Naftogaz. See “-Natural Gas and Petrol Refueling Stations”. Kaftoyaz plans to increase its refining throughputs and sell the incremental production of refined products through its retail outlets. Naftogaz’s income from the sale of refined products was 1.596.8 million in 2003, as compared to 978.2 million in 2002 and 1,082.8 million in 2001.

Natural Gas and Petrol Refuelling Statiom NJSC Naftogaz, through its subsidiaries, owns and operates 91 natural gas vehicle refuelling stations (“NGVRS”)located in 69 Ukrainian cities, towns and along major highways, to service vehicles which use compressed natural gas as motor fuel. Ukrtransgaz owns 89 of the NGVRS and Chornomomaftogaz owns the remaining two. All of the NGVRS are situated along the trunk pipelines and, accordingly, are classified as State property. The NGVRS have a total capacity of 690 million cubic metres of compresscd gas, allowing the network to serve 70,000 vehicles per year. In addition, as at 31 December 2003, Ukmafta owned 163 petrol stations in 10 different regions of Ukraine, mainly in the Kharkiv (57) and Kyiv (27) regions. In addition, Ukrgazvydobuvannya owns 9 petrol stations and operates a further 123 stations in Ukraine. Ukrgazvydobuvannya enters into dealer agreements with the owners of these stations, pursuant to which it provides the Naftogaz brand name and supplies the petrol. Ukrgasvydobuvannya’s petrol stations sell the refined petrol mainly produced by the Shebelinsky processing plant operated by Ukrgazvydobuvannya. Naftogaz plans to increase its retail network in order to benefit from better margins at the retail level. Accordingly, by mid 2005 it plans to increase the number of petrol stations it owns and to further substantially expand its retail network. Management believes that the increased expansion costs will be predominantly met by any increased profits as a result of the development of the dealer network and revenues from the sale of refined products.

88 TaMs The prices at which Naftogaz must supply its natural gas are regulated by the NCRP. According to an amended Resolution of the Cabinet of Ministers No. 1548 of 25 December 1996, the NCRP determines the following:

0 The maximum retail price of natural gas supplied to residential consumers, State Financed Entities and regional heating companies; Tariffs for the transportation by main pipelines of natural gas, oil and oil products supplied to consumers in Ukraine; Tariffs for the storage of natural gas: Tariffs for transportation of natural gas by distribution networks and its supplies; The maximum price of natural gas supplied to industrial consumers. The NCRP is not responsible for setting tariffs relating to oil sales, prices for natural gas and oil transiting through Ukraine or oil storage, as well as natural gas storage for non-residents of Ukraine.

Consumer Tariffs The price which residential consumers, State Financed Entities and regional heating companies are charged for natural gas is set by the NCRP after consultation with Naftogaz and has not changed since 1999; accordingly, Naftogaz is currently negotiating the increase of these prices with the NCRP. Industrial consumers can purchase natural gas from Gas of Ukraine or other gas suppliers. The prices that industrial consumers pay for natural gas to Naftogaz are also regulated by the NCRP and have remained relatively constant between 1999 and 2003 (there was an increase in 2001 from UAH 234 to UAH 276). The NCRP does not regulate natural gas prices supplied by other gas suppliers. Naftogaz agreed with NCRP to increase prices for industrial consumers in 2004. As a result, Naftogaz has gradually increased these prices since the beginning of the year. By May 2004, natural gas prices for industrial consumers were 11 per cent. higher than at the beginning of the year. As of 1 September 2004 prices increased again, and were 18.8 per cent. higher than at the beginning of the year. NJSC Naftogaz purchases natural gas produced by its subsidiaries Ukrnafta, Ukrgazvydobuvannya and Chornomornaftogaz, obtains natural gas from Gazprom as payment in-kind for transport services and purchases natural gas from Turkmenneftegas. NJSC Naftogaz sells the natural gas to its subsidiary, Gas of Ukraine, who sells it to regional gas distribution companies, who then sell the natural gas to domestic consumers. In addition, Ukmafta, Ukrgazvydobuvannya and Chornomomaftogaz sell a small portion of the natural gas they produce directly to regional gas distribution companies or directly to certain large industrial consumem who are connected to the pipelines of Ukmafta, Ukrgazvydobuvannya and Chornomornaftogaz. A significant majority of the natural gas sold domestically is transported through Ukrtransgaz’s pipelines to the pipelines of regional distribution companies. As a result, the natural gas tariffs paid by the end consumer are then divided into: a natural gas payment (received by Gas of Ukraine) and two natural gas transportation tariffs, one for Ukrtransgaz and one for the gas distribution companies. These transportation tariffs, and the prices paid by end consumers, are regulated by the NCRP. Customers who are connected directly to Ukrtransgaz’s pipelines (such as regional heating companies and certain large industrial companies) do not pay the regional gas distribution companies’ tariffs. The following table provides a breakdown (by sector) of prices charged by Naftogaz (net of tariffs on transportation) for natural gas: Price per tbomand cubic me- m at Consumer Category 1 September #Iw WAW Industrial consumers ...... 327.3 Residential consumers ...... 122.5 State Financed Entities ...... 148.5 Regional heating companies ...... 157.5 Technological needs (of gas distributing companies) ...... 327.3 Technological needs (of gas producing companies) ...... 327.3

89 Calculation and Review of Tarifls The NCRP sets tariffs and prices based on Naftogaz’s cost of production, including exploration, production and transportation and cost of gas purchase. In order to have the tariffs and prices reviewed, Naftogaz must submit its pricing proposals and set out the reasons for the natural gas tariff review, to the NCRP for assessment. As capital expenditures are generally not included in the cost of production, the NCRP does not take into account the necessary capital expenditures, when setting tariffs. As a result, Naftogaz, in the past, had to fund its capital expenditures from its profit. However. Naftogaz expccts that as a result of the increased tariffs for industrial consumers in September 2004 it will be able to allocate a portion of the tariffs and prices for capital expenditures. A Cabinet of Ministers Resolution adopted in December 2003 indicates that it is the Government’s intention to gradually increase prices for natural gas, including natural gas transportation tariffs for all consumer categories. In May 2004, Naftogaz submitted to the NCRP proposals for the increase of these natural prices and tariffs. There can be no assurance however, that, save for the increase in tariffs for industrial consumers, the Govemment will increase the prices for the other consumer categories.

Natural Gas Transportation Tariffs From 2001, the NCRP set tariffs for the transportation of natural gas by trunk pipes and through the distribution network for Ukrainian consumers at UAH 52.5 per thousand cubic metres (including VAT), this includes a weighted average tariff for natural gas transportation by main pipes for Ukrtransgaz at UAH 29.1 per thousand cubic metres, including VAT, and an average tariff for natural gas transportation by the gas distribution companies at UAH 23.4 per thousand cubic metres. Transportation tariffs by trunk pipelines of Chomomomaftogaz is set at a level of UAH 24 per thousand cubic metres, including VAT. In May 2004, natural gas transportation tariffs were increased to a single tariff of UAH 57.0 per thousand cubic metres (including VAT), which includes the unchanged average tariff for natural gas transportation by Ukrtransgaz of UAH 29.1 per thousand cubic metres (including VAT) and an average tariff for natural gas transportation by gas distribution companies at UAH 27.9 per thousand cubic metres (including VAT). Natural gas transportation tariffs by Chornomornaftogaz’s trunk pipelines remained unchanged.

Oil Transportation Tariffs In 2003, the NCRP set the average tariff for oil transportation by the Prydniprovsky oil-pipe system for Ukrainian consumers (principally refineries in Ukraine) at U.S.$0.64 per 1 tonne per 100 kilometres. The transportation tariffs are based upon the quantity of the oil transported, the direction and distance. The average tariff by the Druzhba oil pipelines for Ukrainian customers was estimated at U.S.$0.73 per 1 tonne per 100 kilometres due to the more difficult gcographic conditions and more complex pumping technology required.

Gas Storage Tariffs Gas storage tariffs for domestic customers (generally small Ukrainian companies) are regulated by the NCRP.In 2003, these storage tariffs for domestic customers were: UAH 3 per one thousand cubic metres for injection, UAH 3 per one thousand cubic metres for withdrawal and UAH 6 per one thousand cubic metres for storage. These domestic companies account for approximately 2 to 3 billion cubic metres of stored natural gas annually. Gas storage tariffs for non-Ukrainian customers are not regulated by the NCRP. The tariffs are contractually agreed by Naftogaz and such non-Ukrainian customers.

Payment Collection Rates In the past several years, Naftogaz has introduced strict new policies to recover payments from industrial consumers and regional heating companies. The polices require industrial customers to make a prepayment of 100 per cent. for the natural gas to be supplied in advance of each delivery. Additionally, in 2000, the Govemment abolished its policy of mandatory supply of gas to regional heating companies regardless of whether such entities have met their payment obligations, and allowed Naftogaz to supply natural gas to such regional heating companies in proportion to the amount paid. Naftogaz may also restrict or discontinue the supply of natural gas to industrial consumers in the event of late or non- payment. Traditionally, the collection rates for residential consumers has been high as a result of low tariffs and timely payments by such consumers. In addition, the Government subsidizes such payments. See “Selected Financial Review-Liquidity and Capital Resources-State subsidies”.

90 As a result of these measures. the historically low recovery rates have significantly improved. For the year ended 31 December 2003 collection rates increased to 94.9 per cent. for industrial consumers, 99.7 per cent. for residential consumers, 67.7 per cent. for regional heating companies and 100 per cent. for State Financed Entities. Overall, the total payment collection rate for 2003 was 91.4 per cent. This compares to 88.7 per cent. in 2002, 89.4 per cent. in 2001, 74.7 per cent. in 2000 and 40.8 per cent. in 1999.

Competition Naftogaz is a regulated monopoly under Ukrainian law and faces little or no competition in the various spheres of the oil and gas sector in Ukraine. In addition, its bridge position between oil and gas producing countries to the cast of Ukraine and large customcrs in wcstern Europc means it also has no significant competition in transit services of oil and gas to Europe, For example, about 86 per cent. of all natural gas transmitted by Gazprom is conducted through Ukraine’s gas transportation system operated by Naftogaz. Naftogaz estimates that it has the following market shares in Ukraine in various sub-segments of oil and gas sector as of 1 September 2004: Market Sham Pricing Regime (per cem) Production of natural gas in Ukraine ..... 95 Production of oil and gas condensate in Ukraine ...... 96 Gas transmission through Ukraine ...... 100 Tariffs set by inter-governmental agreements and contracts Oil transmission through Ukraine ...... 100 Tariffs set by inter-governmental agreements and contracts Gas storage ...... 100 Set by NCRP Oil storage ...... 100 Supply of gas to residential customers.... 100 End-prices set by NCRP Supply of gas to State Financed Entities 100 End-prices set by NCRP Supply of gas to regional heating systems 100 End-prices set by NCRP Supply of gas to industrial customers ..... 98 End-prices set by NCRP Gas transportation for Ukrainian consumers ...... 100 Set by NCRP Oil transportation for Ukrainian consumers ...... 100 Set by NCRP

In 2003, Naftogaz had approximately 98 per cent. of the industrial customer market, up from approximately 60 per cent. in 2002, when Itera was a competitor in the supply of natural gas to industrial customers. When the management of Naftogaz decided to stop employing the services of Itera for transporting Naftogaz’s gas purchased from Turkemnneftegas and commenced contracting with ETG for its gas transport from Turkmenistan, it effectively removed Itera as a competitor for industrial consumers. However, as of 1 January 2005 Naftogaz will cease to purchase Turkmen gas with the assistance of ETG and RUE will commence supplying Turkmen gas to Naftogaz on similar terms. RUE may not independently sell Turkmen gas to Ukraine and, accordingly, RUE will not be a competitor in the domestic market. In 2002 Naftogaz started exporting natural gas to western Europe. However, Naftogaz’s share in the export market remains low and Naftogaz faces significant competition from larger foreign distribution companies. Pursuant to the gas transit contracts with Gazprom, Naftogaz is prohibited from exporting the gas which it receives from Gazprom as payment in-kind for transit services. Furthermore, Ukraine has agreed to comply with export quotas for natural gas set pursuant to inter-governmental protocols between Ukraine and Russia. See “-Exports”. Naftogaz currently holds exploration and exploitation licences for 82 per cent. of the oil and gas condensate reserves and 90 per cent. of the gas fields in Ukraine. Thc licences for the remaining rescrvcs are held by approximately 20 Ukrainian companies. Some of these companies are 100 per cent. state owned or are joint ventures in which Naftogaz has an indirect participation through its subsidiaries. Accordingly, Naftogaz faces little competition for exploration and production. The main participants in the Ukrainian refining sector are the major Russian oil companies such as LUKoil and TNK-BP. Naftogaz’s share of the refined product market is not significant and, accordingly,

91 it aims to increase its share of the domestic market by developing its refineries and expanding its range of refined products. In addition, the Russian oil companies have a substantial presence in the retail market in Ukraine. As a result, to increase its market share in this sector, Naftogaz must continue to be able to retain, as well as identify and acquire, retail sites on reasonable commercial terms in strategically located areas, for which other distribution companies may also compete. Research and Development Naftogaz and its operating subsidiaries own over 150 Ukrainian patents, approximately 15 patents in the Russian Federation, 4 Euro-Asian patents, 2 patents in the United States, about 15 Ukrainian patents for utility models and 45 registered copyrighted works (mainly computer programs and databases). Inventions mainly cover industrial devices and methods applied in the exploration, extraction and transportation of natural gas and oil. Scientific and Research Institute of Oil and Gas Industry, a wholly-owned subsidiary of NJSC Naftogaz. conducts research and development for all of Naftogaz. In addition, Naftogaz engages more than 100 research and engineering organisations. These organisations include 17 branch research organisations and approximately 10 institutes of the Ukrainian National Academy of Science. Design works are carried out by design institutes independent of Naftogaz. The implementation of research, engineering and design developments has enabled Naftogaz to:

0 develop 28 oil fields by maintaining in-situ pressure through water injection and increasing the contribution of those fields to 60 per cent. of total Ukrainian oil production: e develop two gas condensate fields based on the cycling method and increase the share of gas condensate obtained from these and other fields to 20 per cent. of total production in Ukraine; e drill wells with horizontal holes in the Dnepro-Donetsk Black Sea depression increasing flows 3 to 5 times;

0 replace gas turbine sets at compressor stations with more efficient models:

4 diagnose compressor stations and transmission lines using state-of-the-art methodologies; and

0 create a multi-level information system for the gas transportation system operational and dispatch controls. Rescarch and development expcnses are financed by Naftogaz from internal sourccs.

Joint Ventures, Co-Operative Agreements and Investment Activity Joint Ventures and Co-Operative Agreements Gaztransit Gaztransit, a Ukrainian (37 per cent.), Russian (37 per cent.) and Turkish (26 per cent.) joint venture was established in November 1997 to increase the transit capacity of Ukraine’s gas transportation system in the direction of the Balkan countries. The Ukrainian partner is Naftogaz, the Russian partner is Gazprom, and the Turkish interest is held by Turusgaz (18 per cent.) and Transbalkan (8 per cent.). The first stage of the project, which was completed in 2001. involved the construction of the Tarutyno 45 megawatt compressor station on the active 189 kilometres (1,200 millimetres in diameter) Ananiiv (Ukraine) - Tiraspol (Moldova) - Izmail (Ukraine) pipeline, which increased the annual capacity of the system from 16 to 20 billion cubic metres. The second stage of the project involves the construction of a second compressor station, in Ananiiv, and the construction of a second line on the Ananiiv-Izmail pipeline, which will be 377 kilometres long. The first part of the second stage of the project was completed in 2003. It has led to greater stability of the system and increased the throughout capacity of the gas trunk pipeline Ananiiv - Tiraspol - Izmail by 1.6 billion cubic metres per year. The first stage of the Gaztransit project required capital expenditure of U.S.$78 million, out of which U.S.$26 million was contributed into the statutory fund by the joint venture partners (U.S.$9.6 million by Naftogaz), and U.S.$52 million was acquired through a nine-year loan facility provided on 21 December 1999 by the European Bank for Reconstruction and Development (the “EBRD”) in the amount of U.S.$40 million and a facility extended by the Black Sea Bank of Trade and Development of U.S.$12 million. As at the date of this Offering Circular a total of U.S.$32.5 million was outstanding under these loan facilities.

92 The first part of the second stage of the project cost U.S.$116 million. and was financed partly throqh a U.S.$97 million loan from a syndicate of banks led by the EBRD maturing in 2009. Following a grace period. the first instalmcnts of the loan repayment and interest payments were niade in September 2001. As at 1 January 2004, U.S.$24 million has been repaid. The remaining funds were obtained by a U.S.$19 million subordinated loan provided by the shareholders of Gaztransit. Gaztransit began the repayment of the subordinated loans in June 2004. As at the date of this Offering Circular, U.S.$6.76 million was outstanding under the subordinated loan owing to Naftogaz. When fully operational, Naftogaz expects the gas pipelines and compressor stations to increase natural gas deliveries to the Balkan countries and Turkey by 12 billion cubic metres per year.

Consortium On 7 October 2002, Ukraine and Russia signed an agreement “On Strategic Cooperation in the Gas Industry”. The main purpose of the agreement is to form a strategic cooperation in the gas sector in order to develop trade and economic relations and bilateral investment between the two countries. As a result of the agreement, Naftogaz and Gazprom have established an international Consortium to provide for a safe and stable Ukrainian gas transit system, to create new gas transit facilities within the territory of Ukraine and to attract investment for the modernisation and development of the Ukrainian gas transit system. The first project to be undertaken by the Consortium is the construction of a new Novopskov-Uzhgorod gas pipeline. The first part of this line will be a 239 kilometre section (with a diameter of 1,420 millimetres) from Bogorodchany (Ivano-Frankivsk region) to Uzhgorod (Ukrainian-Slovak border), which is expected to increase the capacity of the Ukrainian gas transporting system by 5 billion cubic metres per year by 2005 and up to 19 billion cubic metres by 2010, resulting in an increase in the volume of Russian gas transited through Ukraine. At present the Consortium participants have agreed to attract credit funding which shall be secured by independent corporate guarantees provided by the participants. Draft inter-governmental agreements on loan guarantees and construction of the Bogorodchany-Uzhgorod sector were submitted to the governments of Ukraine and Russia for further negotiation. It has recently been agreed that Gazprom and Naftogaz would fund approximately 30 per cent. of the project from internal resources and approximately 70 per cent. from credit funding. In addition, in August 2004 the Russian Government guaranteed in accordance with an intergovernmental agreement between Russia and the Cabinet of Ministers of Ukraine that Gazprom will supply additional volumes of natural gas to be transited through the Bogorodchany-Uzhgorod gas pipeline, in order to utilize the anticipated increased capacity of the system. Naftogaz expects that the transit fees received from Gazprom will be used by the Consortium to repay any credit funding the Consortium may obtain. In addition, Naftogaz and Gazprom have each agreed to make additional contributions of approximately UAH 90 million (in cash and assets) into the statutory fund of the Consortium. Currently, Naftogaz and Gatprom are organising the financing of the project, preparing documentation for the tender on equipment and material purchases and choosing a general contractor. Preliminary estimates for the cost of construction are U.S.$300 million and it is anticipated that the project will be commenced during the fourth quarter of 2004.

Other A number of joint ventures, including Ukrcarpathoil, Kashtan Petroleum Ltd., Borislava Oil Company and Romgas were established primarily by Naftogaz’s subsidiary, Ukmafta, with Canadian, American and British companies. These joint ventures undertake exploratory activities and produce comparatively small volumes of gas and oil. Naftogaz is also involved in joint ventures undertaking geological exploration and hydrocarbon production both in the Dnipro-Donets basin, and in the offshore areas of the Black Sea and Sea of Azov.

In addition to the above, Naftogaz is pursuing strategic alliances with leading European oil and gas * companies to gain additional exposure to European markets. Accordingly, it has signed a memorandum of understanding with leading European oil and gas companies to build a LNG production plant in Ukraine and to jointly market the LNG in European markets. It is anticipated that the production plant will be constructed in the Crimea or Odessa area and the plant will be supplied with Naftogaz’s own natural gas sources. Naftogaz estimates that the total investment required is likely to be approximately U.S.$2 billion, which will be funded by financial investors. It is anticipated that Naftogaz will contribute the site of the proposed construction and natural gas supplies, while the European oil and gas companies will commit to purchasing the LNG produced. It is possible that a joint venture agreement may be

93 executed and the construction of the LNG production plant may be commenced during the life of the Notes.

In vestment A ctiviiy An investment committee was established in August 2003 to regulate issues relating to the investment activity of Naftogaz. The Investment Committee is headed by the Chairman of the Board of Naftogaz. In order to be included in Naftogaz’s investment programme for a particular year, an investment project must be approved by the investment committee. While considering the project, the committee makes a decision based on the predicted cash-flow. internal rate of return net present valuc. possible social effect and conformity and consistency with Naftogaz’s general strategy. If a project is included in the investment project implementation results are subject to annual monitoring and analysis. Priority areas of Naftogaz’s investment strategy are: Oil and gas exploration and production; 0 Oil and gas transportation; 0 Oil, condensate and gas reprocessing and sales of petroleum products: 0 Participation in foreign projects on exploration, extraction, transportation, processing and sales of oil and natural gas; Energy saving; and Ecological protection. Historically, Naftogaz has given preference to internal financing to fund capital investments. However. in the future Naftogaz plans to attract funding from external sources in order to expand its production capabilities in Ukraine.

The table below describes major investment projects completed from 2000 to 2003: Year of Completion Construction of the gas pipeline Ananiiv-Izmail (Ukraine) (2 lines) ...... 2003 Construction of the compressor station Tarutyno ...... 2001 Construction of a sea oil terminal Pivdenny near Odessa ...... 2002 Construction of the oil pipeline Odessa-Brody ...... 2002 Construction of the gas pipeline Djankoy-Feodosiya-Kerch ... :...... 2001 Construction of the Skhidno-Kazantipske gas field ...... 2003 Construction of the Yablunivskiy gas refining plant ...... 200 Re-equipment of the compressor station Uzhgorod ...... 2002 Re-equipment of the compressor station Doha...... 2003

Eurasian Oil Transport Corridor In 2001. Naftogaz finalised construction of the Ukrainian part of the Eurasian Oil Transport Corridor. This corridor may be used for transporting Caspian oil to Ukraine and other European countries. The project included the construction of a modern sea oil terminal Pivdenny in the port of Yuzhnyi near Odessa (with a current reservoir capacity of 200,000 cubic metres), and construction of a 674 kilometres oil pipeline. The total cost of the construction of the Ukrainian portion of the Eurasian Oil Transport Corridor was UAH 975 million, of which 78 per cent. was financed by Naftogaz and the remainder was financed by the State. Naftogaz bclieves the operation of the Odessa-Brody pipeline will provide it with additional annual capacity of 9 to 14 million tonnes. Currently 52 kilometres of the new pipeline is being used for oil transportation. In 2003,2.0 tonnes of oil was transported through this section to the Pivdenny terminal. Naftogaz is currently negotiating with potential customers to secure transport contracts for the full capacity of the Odessa-Brody pipeline and the Pivdenny terminal. On 14 January 2004, the governments of Ukraine and Poland signed an inter-governmental agreement on the integration of the Polish pipeline system and the Odessa-Brody pipeline system. On 16 January 2004, Naftogaz and the Polish oil transportation company Przyjazn signed an agreement in connection with the Eurasian Oil Transport Corridor project, which envisages, among other things, the establishment of a joint venture for the purposes of extending the Odessa-Brody pipeline. On 8 July 2004, Ukrtransnafta adopted a decision to participate in the open joint stock company “International Pipeline Company Sarmatia” (“Sarmatia”), which will be incorporated for the purposes of the joint venture with Przyjazn.

94 Sarmatia will carry out the extension of the Odessa-Brody pipeline to Gdansk, Poland. However, Sarmatia has not bcen incorporated and no timeframe or financial commitments haw bccn agreed for the joint venture. The project provides for the Odessa-Brody oil pipeline to be extended to Plotsk where the largest oil rcfincry in Poland is located and to the Baltic export terminal in Gdansk, Poland, which will make possible the transport of crude oil from hydrocarbon-rich Caspian states to Poland, Germany and other western and northern European countries. Upon completion of the entire Odessa-Brody complex, the technological capacity of the system is expected to increase to 40 million tonnes annually. It is contemplated that prior to the completion of the extension, the pipeline will be used in the direction of Odessa, however. a final decision is yet to be adopted. Naftogaz has not currently allocated additional capital expcnditure for this project but expects any nccessary financing to be provided on a stand-alone basis.

Druzhba-Adria Ukraine signed an inter-governmental agreement in December 2002 with Belarus, Slovakia, Hungary, Croatia and Russia for the integration of the Druzhba pipeline (located in Ukraine and some parts of Belarus, Slovakia and Hungary) with the Adria pipeline (located in Hungary and Croatia). The aim of the project is to create an export route for Russian and CIS countries to transfer oil to world markets through the port of Omishal in Croatia. The project is divided into 3 stages which are expected to be completed between 2006 and 2010. The agreement envisages stage-by-stage increases in oil transportation volumes from 5 to 15 million tonnes annually. Naftogaz currently anticipates that it will be able to transport 5 million tonnes of additional oil annually through the Ukrainian part of the Druzhba pipeline system once the first stage of the project has been completed. The estimated total cost of the project for all parties is U.S.$89.8 million, including U.S.$O.l million for the first stage. U.S.$13.5 million for the second stage and U.S.$76.2 million for the third stage. Capital expenditures required to be made by each party will be detailed in further agreements. Such agreements have not been entered into as of the date of this Offering Circular and therefore the cost of implementing this project is not included in the capital expenditure of Naftogaz. No work on the integration of the Druzhba-Adna pipelines has commenced.

Fees and Royalties Naftogaz is required to pay royalties to the Government to explore, produce and transport oil, natural gas and gas condensate. Payments for geological surveys are based on the type of resources explored and on the location of the exploration activity. Fees for exploration work are paid by NJSC Naftogaz’s subsidiaries Ukrgazvydobuvannya, Ukmafta and Chornomomaftogaz, which conduct exploration work. The figurcs in this section include 100 per cent. of Ukrnafta although Naftogaz owns SO per ccnt. plus one share of Ukrnafta. Such fees are set by the Cabinet of Ministers of Ukraine pursuant to Resolution No.115 dated 29 January 1999. As at 1 January 2004, Ukrgazvydobuvannya owed UAH 342 miL!ion for geological surveys conducted between 2000 and 2002, while as at 1 May 2004 this debt decreased to UAH 242 million. Naftogaz has been making payments on this current liability in 2003 and expects to continue to make payments in 2004. Royalties for the extraction of natural gas, gas condensate and oil are calculated in accordance with Resolution No. 256 dated 22 March 2001. Currcntly the royalties for extraction from all the fields are based on the volume of oil, natural gas and condensate actually extracted and are applied evenly irrespectivc of the condition of the field. Howevcr, pursuant to a law. which will hecomc effective as of 1 January 2005, royalties for extraction will vary depending on the geological conditions which impact output (thereforc royaltics should reflect the depth of thc wcll and the difficulty of the cxtraction). Royalties for the transportation of oil and natural gas are based on the total volume transported. As at 1 January 2004, Naftogaz’s outstanding royalty debt for natural gas transportation amounted to UAH 1,041.3 million. No other royalties are outstanding. Royalties for the transit of natural gas and the transportation of oil by trunk pipeline are set by the Cabinet of Ministers of Ukraine pursuant to Resolution No.1742 dated 29 November 2000 and on the basis of the total volume transported. Ukrtransnafta pays the royalties for the transportation of oil, while NJSC Naftogaz meets the royalties for the transit of natural gas.

95 The following table details the royalty rates for 2001-2004: u)o1 2002 2003 2504 Gas extraction (per thowand cubic metres) UAH 28.9 UAH 28.9 UAH 30.6 UAH 30.6 Oil extraction (per tonne) ...... UAH 17.3 UAH 52.0 UAH 160.0 UAH 160.0 Gas transit (per thousand cubic metres for 100 kilometres) ...... U.S.$ 0.29 UAH 1.7 UAH 1.7 UAH 1.7 Oil transportation (per tonne) ...... U.S.$ 0.7 U.S.$ 0.7 US.$ 0.7 U.S.$ 0.7

In addition, Naftogaz makes payments for subsoil usage in accordance with Ukrainian legislation. These payments are calculated based on the amount of reserves actually extracted. As of 1 July 2004, Naftogaz paid UAH 15.2 million for subsoil usage. Naftogaz also pays excise tax on production, sales and import of certain refining products. As of 1 July 2003. Naftogaz paid UAH 38 million in excise tax on refining products.

Non-Core Businesses In addition to Naftogaz’s principal activities described above, Naftogaz has investments in various other businesses that are not related to its core operations, including various activities which support its principal business, such as services and repairs, security services and construction. Such investments mainly represent equity holdings which Naftogaz received in the course of restructuring of Ukrgazprom. In addition, Naftogaz contributes towards to the development and maintenance of recreation facilities and other social needs of its employees. For example, it owns a sanatorium and other resort therapy spas. Additionally, Naftogaz operates several green houses and production farms, though it plans to reduce its activities in these areas as a result of high costs and poor economic returns. In order to optimise Naftogaz’s structure, Naftogaz made the decision to divest by the end of 2005 its ownership intercsts in a number of non-core companies from which Naftogaz does not derive a profit and/ or over which Naftogaz does not have sufficient control. As a result, Naftogaz expects to divest its intorests in 18 companies which are involved in non-core activities. such as banking and financc, newspapers, insurance and sales of bottled water. Of these companies, Naftogaz holds an 80 per cent. interest in CJSC Center for Promissory Notes and Settlements, a 52 per cent. interest in CJSC OZGAZ and a 50 per cent. interest in CJSC Ukrainian Gas and Energy Company. Naftogaz holds a minority shareholding in the remaining companies. In March 2004, Naftogaz established a tender committee to coordinate the disposals. Naftogaz intends to use the proceeds from the divestitures to purchase remaining outstanding interests in regional gas distribution companies. See “-Domestic Gas Distribution and Sales”.

Insurance Prior to 2002, Naftogaz only maintained insurance policies to cover its administrative headquarters in Kyiv- and its motor vehicles. However, as a result of amendments to Ukrainian legislation, Naftogaz is also required to maintain mandatory insurance policies to insure against environmental damage and property risks associated with its oil and gas activities, including risks arising as a result of accidents, fire and the transportation of hazardous material and substances. The mandatory insurance coverage also includes civil aviation insurance and sea carrier insurance. Naftogaz also maintains several voluntary insurance policies which cover: (i) the insurance of the fixed assets owned or leased by Naftogaz, including non-production buildings, compressor and gas distribution stations, gas processing plants, oil transferring stations, storage facilities, some drilling equipment, operational platforms and offshore and onshore production equipment; (ii) life insurance; (iii) partial insurance for the liability of gas suppliers; (iv) some transportation insurance and (v) insurance to cover costs arising out of, or in connection with, contentious matters. However, Naftogaz does not carry insurance for business interruption or against terrorist activities. In addition, it does not carry insurance for the oil and gas pipelines. In order to manage its insurance coverage more efficiently, Naftogaz introduced a centralised policy with respect to its insurance in July 2003. As a result, NJSC Naftogaz decides on all the insurance coverage to be effected for its subsidiaries. In 2003, Naftogaz spent UAH 54.2 million on insurance. As part of the policy to centralise insurance coverage, NJSC Naftogaz’s management aims to enhance the scope and quality of its insurance coverage. As a result, in 2004, Naftogaz expects to increase its spending on insurance to UAH 81.7 million.

96 Properties Naftogaz owns its principal executivc offices. which arc located in Kpiv. togethcr with the offices of its subsidiaries. Naftogat owns SIX oil and gas rcfinerics. all ot which arc operational. In addition. Naftogar. through its subsidiaries, owns 91 natural gas vehicle refuelling stations and 163 petrol stations. While Naftogaz does not own any land, it has a right to use land obtained in connection with all subsoil licences received by Naftogaz by virtue of the terms of such licences. In addition, it has a right to use the land upon which the facilities it owns or operates are located. No official lease agreement has been signed for land use with respect to Naftogaz’s headquarters.

State ProPerry NJSC Naftogaz, directly or through its subsidiaries, operates and maintains but does not own the oil and gas transportation systems and the oil and gas storage facilities in Ukraine. Resolution 747 lists the assets transferred to NJSC Naftogaz for its use to facilitate the transportation, storage and distribution of oil, oil products and natural gas in Ukraine. The privatisation of these assets is prohibited by legislation. The assets include:

0 trunk oil and gas pipelines and installations thereon; distribution oil and gas pipelines and installations thereon;

0 oil and gas storage facilities; and special transportation infrastructure, including railway storage tanks. In connection with the above, the SPFU and NJSC Naftogaz entered into an agreement dated 4 February 1999 on the use of State property. Respective agreements were then concluded between NJSC Naftogaz and its subsidiaries. In tum, Gas of Ukraine entered into agreements with the regional gas distribution companies on the use of the State property. Although this agreement is extended automatically each year, unless terminated by notice from either party, and is binding on the legal successors of each party. it may be terminated in case these fixed asscts cease to be State property, or if a court decides that a breach of the terms and conditions of the agreement has occurred. Pursuant to the agreement, NJSC Naftogaz is required, among other things, to maintain and reconstruct the fixed assets that constitute Statc property. As a result, if the fixcd assets are not in good working order, this could constitute a breach of the terms of the agreement. NJSC Naftogaz is also required, pursuant to the State Property Agreement, to ensure that its subsidiaries that operate this transportation system and the storage facilitics keep separate accounting of the State property and profits they receive from the exploitation and to insure the State property to the extent required by Ukraine legislation. Naftogaz is also not allowed to transfer or pledge the State property to third parties. Pursuant to the agreement. NJSC Naftogaz is able to retain 50 per cent. of the net profits generated from the operation of the gas and oil transportation system, which includes the extensive pipeline network and the attached installations. The remaining 50 per cent. belongs to the State, although it may be invested by NJSC Naftogaz for reconstruction and maintenance of the system. Details of the division of profits are not provided in the agreement. Since the date of the agreement, no further details have been agreed, and the Government has not requested receipt of a portion of the profits guaranteed from the operation of the gas and oil transportation system. NJSC Naftogaz has been investing a portion of the profits derived from the operation of the gas and oil transportation system into repair and maintanence of the system and has not made any payments to the State as provided in the agreement.

Environmental and Health and Safety Issues Naftogaz has developed and maintains a comprehensive environmental policy in all areas of its operations. In carrying out its policies, Naftogaz seeks to adhere to Ukrainian and international standards for environmental protection and monitors compliance with these principles. In accordance with a Cabinet of Ministers Order from 29 November 2001, Naftogaz is currently implementing “The Programme of Urgent Measures for Prevention of Deterioration of Ecological and Social Situation in Borislav in 2001-2005,” with a total financing cost to Naftogaz of approximately UAH 26.8 million. Article 16 of the Constitution of Ukraine states that the State has the duty to ensure ecological safety and maintain an ecological balance in Ukraine. NJSC Naftogaz works with its operating subsidiaries to implement government regulations and meet safety standards. In accordance with Ukrainian environmental protection law, NJSC Naftogaz has created an integrated system for managing the environmental impact of the consumption of natural resources by all its subsidiaries. Each subsidiary

97 maintains the appropriate environmental protection licences. These licences are subject to approval by local licensing bodies. Under Ukrainian law, payments are levied for the use of natural resources and the discharge of polluting substances into the environment within agreed limits. Such payments are made directly by companies and distributed between local and national budgets. Naftogaz makes mandatory payments every year related to environmental protection. Theses include an annual fee to the governmental environmental agency, capital expenditures related to the environment (including pollution clean up), obligatory payments for the use of natural resources, as well as certain penalties. In 2003, Naftogaz paid a total of UAH 65.0 million, as compared to UAH 48.5 million in 2002.

The following table details Naftogaz’s obligatory payments for the use of natural resources and penalties between 1999 and 2003: 1999 20oo 2001 2002 2003 (UAH thouand) Payment for atmospheric emissions of pollutants ...... 1,197.7 2,224.2 1,473.9 1,453.6 1,998.5 Payment for dumping of waste into water bodies ...... 6.0 13.0 24.6 10.2 6.1 Payment for waste dumping (burial) ...... 224.8 278.5 229 .Q 162.2 236.8 Payment for exceeding allowed emissions, discharge and waste dumping limits ...... 4.5 23.9 59.4 47.2 23.6 Payment for damages resulting from violations of environmental protection legislation, and penalties imposed for such violations(’) ...... 19.8 65.7 21.8 33.2 1,416.6 Total ...... 1,452.8 2,605.3 1,808.8 1,7063 3,6815

(1) In 21M13, Naftogaz was required to pay B UAH 1.1 million fine for dama~eresulting from a rupture on a section of the Druzhba pipeline in September 2W3. Emissions of polluting substances into the environment, and the use of natural resources, are controlled through State statistical surveys. Naftogaz maintains a number of licensed laboratory complexes to assess environmental impact, the technological and environmental condition of equipment and the integrity of technological processes. To resolve environmental problems that arise in the course of its operations, Naftogaz co-operates with Government bodies, including the Ministry of Environmental Protection, the Main State Ecological Inspection and certain non-governmental organisations and research institutes. Naftogaz also co-operates closely with leading gas companies, such as Ruhrgas, Scan, Shell, Gaz de France, Gazprom and others on environmental and resource-saving issues. Naftogaz’s priorities in the area of environmental protection include:

0 establishing an effective system for the management of environmental protection;

I enhancing in-house environmental assessment of projects;

0 implementing measures for improving the existing level of ecological and radiation safety;

0 rationally using natural resources; creating safe conditions for storing chemical agents, fuel and lubricants; introducing drilling without drill-mud storage; developing standards for waste;

0 reducing pollution of the environment;

0 reducing water consumption;

98 e introducing new waste-handling technologies; creating safe, sanitary and hygienic, technical and radiation conditions; and

0 reclaiming land in a timely manner. During 2002-2003,an external and internal audit of the structural units of Ukrtransgaz was conducted. Based on this audit. the company received a certificate of compliance for a system of environmental management of the State Standard of Ukraine ISO-14001-97in the system of UKRSEPRO. IS0 is a widely recognised set of environmental standards developed by the International Organization for Standardization (the “ISO”), a non-governmental body composed of national standard making bodies from over 140 countries.

Employees According to NJSC Naftogaz’s charter, the Chairman of the Management Board, at his sole discretion, approves the list of Naftogaz’s employees as well as the hiring and dismissal of its employees. NJSC Naftogaz and its subsidiaries, consolidated for purposes of the Financial Statements, employed 98,622 people as at 31 December 2003 of which 521 were employed by NJSC Naftogaz. Employees of Naftogaz belong to several trade unions, including oil and gas industry trade unions. There have not been any labour disputes or strikes in recent years that have affected the operation of Naftogaz’s business. Naftogaz considers employee relations to be good.

Relationship with the State Naftogaz was created as a National Joint-Stock Company in accordance with Resolution 747 and pursuant to Decree 151. The oil and gas industry is supervised by two ministries: the Ministry of Fuel and Energy and the Ministry of Environmental Protection. Subsoil usage is controlled by the State Committee on Natural Resources of Ukraine, which also issue5 licences for. among other thin+ exploration and extraction for specific fields. The oil and gas sector in gcneral and Naftogaz in particular are regulated by the NCRP. The main functions of NCRP include regulating the activity of natural monopolies in the power industry and oil and gas sector and determining tariffs in this sector. The Government exercises influence over the activities of Naftoga7 because the State, represented by the Cabinet of Ministcrs of Ukraine. is thc 100 pcr ccnt. shareholder of Naftogaz. The Government influences how Naftogaz conducts its affairs at two levels: (1) it exerts direct influence over Naftogaz’s management and policies in its capacity as sole shareholder; and (2) in its capacity as regulator, it monitors Naftogaz’s compliance with the Ukrainian regulatory regime for the oil and gas market. Resolution 747 provides that 100 per cent. of the shares in Naftogaz are to be retained by the State until such time as an appropriate decision is adopted by the Government to privatise Naftogaz.

Litigation Since it became a joint-stock company, Naftogaz has been involved in a number of litigation matters, including matters inherited from its predecessor, Ukrgazprom. Naftogaz paid approximately UAH 421 million (approximately U.S.$79 million) between 1 February 2000 and 11 March 2004 in satisfaction of adverse judgments against it or Ukrgazprom. Of this, approximately UAH 260 million (approximately U.S.$48.8 million) was paid by NJSC Naftogaz to its subsidiaries. The Ukrainian statute of limitations for many types of claims, including claims for bad debts and tort claims, is three years. As of March 2004, Naftogaz believes that, save as disclosed below, it is not subject to any legal claims or disputes, which, individually or in the aggregate, could have a material adverse effect on the business of Naftogaz or its results of operations.

99 Monde Re Naftogaz was party to litigation with Monaco insurance company, Monegasque de Reassurances S.A.M. (“Monde Re”). Monde Re received an arbitral award from the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (“ICAC”) of more than U.S.$88 million rendered against Naftogaz on 31 May 2000. On 12 September 2000, Monde Re sought confirmation of the arbitral award in the US. District Court for the Southern District of Kew York. On 31 July 2001, the claim was dismissed on the grounds of forum non conveniens. Additional appeals filed by Monde Re have also been dismissed, however, there can be no assurance that the claim will not be refiled in another jurisdiction.

Ukrnafta NJSC Naftogaz is a party to a nunibcr of legal proceedings with Ukrnafta. In 2004. Ukrnafta filed claims in the court of first instance to recover debts in connection with the supply of natural gas to NJSC Naftogaz during 2002 and 2003. The total amount of the claims is assessed at approximately UAH 229 million (approximately U.S.$43 million). which amount includes losses incurred as a result of inflation, financial sanctions and fines. Simultaneously, in 2004 NJSC Naftogaz filed a counterclaim in the court of first instance against Ukrnafta for approximately UAH 353 million (approximately U.S.$66.2 million) for breach of contractual obligations in connection with the supply of natural gas. In a separate dispute between NJSC Naftogaz and Ukrnafta over a UAH 178 million (approximately U.S.$33.4 million) debt for natural gas supplied by Ukmafta, NJSC Naftogaz agreed to pay a reduced amount of UAH 175 million (U.S.$33 million). On 20 May 2003, the City of Kyiv Economic Court approved the settlement reached by the parties, whereby NJSC Naftogaz would repay its debt by supplying natural gas to Ukrnafta.

State Reserves Committee In 2002. the State Comniittee of Ukraine on State Material Reserves filed a claim against Naftogaz for the return of 1.5 billion cubic metres of natural gas and the payment of punitive damages in the amount of approximately UAH 210 million (approximately U.S.$39.4 million). These amounts were owed by Naftogaz’s legal predecessors State Joint-Stock Company “Ukrgaz” and Joint-stock Company “Ukrgazprom”. On 18 February 2004, the City of Kyiv Economic Court ruled that Naftogaz was required to return the 1.5 billion cubic metres of natural gas to the state reserve storage. However, the punitive damap were dismissed as the court found that Naftogaz had satisfied its cash payment obligations by transferring State Treasury bills of exchange to the State Committee. This decision was appealed by Naftogaz at both the Kyiv Appellate Economic Court and Supreme Economic Court of Ukraine. Both courts, however, upheld the initial decision of the City of Kyiv Economic Court. In June 2004. Naftogaz filed an appeal to thc Supreme Court of Ukraine. However. there can be no assurance that the appeal will be accepted for consideration by the Supreme Court or, if accepted, will be successful.

Taxes Changes to the Ukraine State Budget law for 2004, adopted in June 2004, establish that, in 2004, Naftogaz is to contribute 20 per cent. of its income to a special State Treasury account in order to ensure the discharge of mandatory payments, such as taxes. The Cabinet of Ministers has been charged with developing the details of this procedure. It is not currently certain when the contribution is to occur, whether Naftogaz will have access to the account or whether or when Naftogaz can withdraw excess funds from the account. In 2001, Naftogaz was the subject of an adverse tax ruling, which was dismissed by the City of Kyiv Economic Court. Prior to it being overturned, the tax ruling assessed Naftogaz’s tax liability at approximately UAH 3,038.1 million (approximately U.S.$570 million) from the beginning of 1998 through the first half of 2000. The assessment included fines for violations of currency legislation, evasion of profit tax, value-added tax and ccrtain othcr mandatory payments. On 15 January 2004, thc Supreme Court of Ukraine upheld the decision of City of Kyiv Economic Court making the decision final and not subject to further appeal. As at 1 January 2004, Naftogaz owed UAH 4,563.5 million (approximately U.S.$856.2 million) for taxes in arrears. including UAH 1,307.9 million for profit tax and LJAH 1.804.7 million for value-added tax. In 2002 and 2003 Naftogaz signed agreements with the Ukrainian State Tax Administration which restructured their tax debt and established a schedule of payments. Naftogaz has made all scheduled payments and expects to continue to do so.

100 In addition. Eaftogaz believes that thc Government owes Naftogaz a significant amount in state subsidies and is currently conducting an assessment of the amount owed. See “Selected Financial Review-Liquidity and Capital Resources-State Subsidies”. Pursuant to the law passed in 2003, and following completion of an assessment of the total amount owed by the Government to Naftogaz, Naftogas expects to be able to set off unpaid subsidies owed to it against the same amount owed by Naftogaz to the State in overdue taxes. As a result, Naftogaz estimates that, in 2004, it will be able to reduce its accounts receivable by approximately UAH 1 billion in relation to unpaid subsidies and write off its tax arrears by the same amount. The law is to remain in effect until the total amount of approximately UAH 4.5 billion owed by Naftogaz to the State is written-off.

101 MANAGEMENT

NJSC Naftogaz was founded for the purpose of assisting structural reconstruction of oil, gas and oil refining sector of economy of Ukraine, raising the level of energy safety of the state, ensuring the efficient function and development of the oil and gas sector, and to better meet the needs of industrial and household consumers in raw materials and fuel and energy resources. The Company is a legal entity separate from the State and it independently plans its industrial and business activities based on the demand for its products, works and services. All of Naftogaz’s shares are owned by the State represented by the Cabinet of Ministers until a decision on the privatisation of Naftogaz is made in accordance with the procedure set out by Ukrainian legislation. Currently the Cabinet of Ministers is entitled to exercise the rights and duties of a shareholder as contained in Ukrainian legislation and the Charter of the Company. In addition to the regular rights and obligations of a shareholder, which are determined by the legislation of Ukraine and Charter of the Company, the Cabinet of Ministers also approves the composition of the Supervisory Board and Management Board. The Chairman of the Management Board, who is the First Deputy Minister of Fuel and Energy, is appointed by a Presidential decree. The management bodies of the Company, as set out in the charter, are: the General Meeting of Shareholders, Supervisory Board and Management Board. The strategy and general direction of the Company’s activities is determined at the General Meeting of Shareholders, which is the highest administrative body of the Company. At such General Meetings, shareholders also approve work plans and reports; elect and recall the chairman and other members of the supervisory board, chairman and other members of the governing board (which manages the Company’s current activity, and is accountable to the general meeting of shareholders and supervisory board), and chairman and other members of the Inspection Commission; ratify any changes to the statutory funds of the Company; and approve any decision made by the Company regarding its liquidation. Currently the Supervisory Board performs the functions of the shareholders in the General Meetings of Shareholders until a decision on privatization is made. The Supervisory Board is the controlling body responsible for supervising the implementation of decisions made by the General Meeting of Shareholders. In addition, it controls and oversees the Management Board. Until a decision on privatisation is made, the composition of the Supervisory Board is determined by the Cabinet of Ministers. The Management Board is the executive management body with day-to-day control of the Company and is accountable to the General Meeting of Shareholders and the Supervisory Board. In addition, it also prepares proposals for discussion at the General Meeting of Shareholders. The members of the Management Board and the Supervisory Board can be contacted at the registered office of the Company.

102 Set out below are the Management Board and Supervisory Board members as of 1 September 2004:

Supemsory Board Name Position Mikhailo Kovalko Head of the Supervisory Board and the President of Oil and Gas Academy of Ukraine Teymur Bagirov General Director of “Arta Investments” Plc. Sergiy Baulin Deputy Director General of the National Space Agency of Ukraine Yevgen Grygorenko First Deputy Chairman of the State Property Fund of Ukraine Oleh Dubina The President of the National Joint Stock Company “Power Company of Ukraine” Dmytro Yeger First Deputy Director General of “Naukanaftogaz” Georg Ivanenko Chairman of the Management Board of OJSC Kyivgaz Mykhailo Kalchenko Director of the “MASMA”1nstitute Igor Karp Honorary Director of the Institute of Gas at the National Academy of Science of Ukraine Valentyn Kolomeyev First Deputy Director General of Ukrtransgaz Volodymyr Proskurkin Head of the Department for Monitoring and Market Transformations in the Energy Sector of the Economy under the auspices of the Secretariat of the Cabinet of Ministers of Ukraine Svitlana Nifontova Advisor to the Head of the State Committee of Natural Resources of Ukraine Oleksandr Sugoniako President of the Association of Ukrainian Banks Leonid Unigovsky Director General of the Naftogazbudinformatyka Association Mykhailo Chechetov Head of the State Property Fund of Ukraine

103 Management Board The following table sets forth certain information concerning NJSC Naftogaz’s current Management Board. Year Name Podtion Aae Appohted Yuriy Boyko Chairman of the Management Board 45 2002 Volodymyr First Deputy Chairman of the Management 54 2003 Sheludchenko Board Ihor Voronin Deputy Chairman of the Management Board 35 2002 Vadym Ukrayinsky Deputy Chairman of the Management Board 35 2003 Oleksandr Kovalko Deputy Chairman of the Management Board 33 2002 Oleksandr Kiselyov Deputy Chairman of the Management Board 50 2003 Illia Rybchych Deputy Chairman of the Management Board 54 2004 Kostyantyn Frolov Deputy Chairman of the Management Board 46 2002 Vladyslav Tarashevskyy Head of the Department for Investment Activity 55 2000 Ivan Artemchuk Head of the Personnel Department 69 1998 Bohdan Krupskyi Head of the Department of Gas and Oil 49 1998 Resources Grigoriy Kostyukov Head of the Department on Security Issues 47 2002 Yuriy Kolbushkin Head of the Department of Tax Policy and 48 2000 Economic Regulation Anatoly Rudnik General Director of Ukrtransgaz 55 1999 Igor Palytsya Chairman of the Board of Ukmafta 31 2003

Yuriy Boyko, Chairman of the Management Board. He is also the First Deputy of the Ministry of Fuel and Energy. Previously, he was the Chairman of the Board of CJSC “Ukrtatnafta”, Kremenchuk. Mr. Boyko has a degree in chemistry and technology of organic nitrogen compounds from the Moscow Chemical Technology Institute and a degree in economics and business from the Eastern Ukrainian National University. Volodymyr Sheludchenko, First Deputy Chairman of the Management Board. Previously, he was the Chairman of the Board of OJSC “Donetskoblgas”, Donetsk. Mr. Sheludchenko has a degree in mechanical equipment of ferrous metallurgy plants and construction of underground facilities and mines from the Donetsk Polytechnic Institute. Ihor Voronin, Deputy Chairman of the Management Board. Previously, he was the Advisor to the Deputy Prime Minister of Ukraine on industrial policy. Mr. Voronin has a degree in economics from the Kyiv National University. Vadym Ukrayinsky, Deputy Chairman of the Management Board. Previously, he was the Head of the Department of Information and Analytics at NJSC Naftogaz and prior to that, the Commercial Director at LLC “Politraid”, Kyiv. Mr. Ukrayinsky has a degree in atomized control systems from the Kyiv Military Engineering College of Communications, a Bachelor’s degree in management from the Kyiv Business College and a Master’s degree in economics from the Donetsk State Academy of Management. Oleksandr Kovalko, Deputy Chairman of the Management Board. Previously, he was the Deputy Chairman of the Board of Ukmafta, Kyiv. Mr. Kovalko has a degree in technology and complex mechanization for the development of oil and gas fields from the Ivano-Frankovsk Oil and Gas Institute and a degree in law from Kyiv National University. Oleksandr Kiselyov, Deputy Chairman of the Management Board. Previously, he was the General Director of Gas of Ukraine, an affiliated company of NJSC Naftogaz. Mr. Kiselyov has a degree in radiophysics and electronics from Donetsk State University. Illis Rybchych, Deputy Chairman of the Management Board. Previously, he was the Director General of SC “Ukrgazvydobuvannya”. Mr. Rybchych has a degree in oil and gas well drilling from the Drogobych Oil Technical College and a degree in engineering from the Ivano-Frankovsk Oil and Gas Institute.

104 Kostyantyn Frolov, Deputy Chairman of the Management Board. Previously, he was the Deputy Head of the Management Board of Ukmafta, Kremenchuk, responsible for personnel, social welfare and capital construction. Mr. Frolov has a degree in industrial and civil engineering from the Kharkov Institute of Construction Engineering. Vladyslav Tarashevskyy, Head of the Department for Investment Activity. Previously, he was the Deputy Minister of Energy of Ukraine. Mr. Tarashevskyy has a degree in metallurgy of non-ferrous metals from the Zaporizhzhya Industrial Institute. Ivan Artemchuk, Head of the Personnel Department. Previously, he was the Head of the Human Resources and Training Department, Member of the Board of Derzhcomnaftogaz of Ukraine. Mr. Artemchuk was also the Deputy Head of the Personnel Department at JSC “Ukrgazprom. Mr. Artemchuk holds a degree in exploration of oil and gas fields from the Lviv Polytechnic Institute. Bohdan Krupskyi, Head of the Department of Gas and Oil Production. Previously, he was the Head of the Oil and Gas Sector Department at “Derzhnaftogazprom of Ukraine”. Mr. Krupskyi has a degree in geology and exploration of oil and gas fields from the Ivano-Frankovsk Oil and Gas Institute. Grigoriy Kostyukov, Head of the Department on Security Issues. Previously, he was the Deputy Director at a Ukrainian state-owned innovation company in Kyiv. Mr. Kostyukov has a degree in optic-electronic devices from the Leningrad Institute of High-Precision Mechanics and Optics. Yuriy Kolbushkin, Head of the Department for Tax Policy and Economic Regulation. Previously, he was the Head of the Oil and Energy Sector Department and the Head of the Transport Finance, Communications and Services Department of the Ministry of Finance of Ukraine. He has a degree in financing and loans from the Kyiv National Economics University. Anatoly Rudnik, Director General of the SC Ukrtransgaz, Member of the Management Board. Previously, he was the head of the Gas Production and Transportation Department of NJSC Naftogaz. Mr. Rudnick has a degree in thermal power plants from the Lviv Polytechnic Institute. Igor Palytsya, Chairman of the Board of Ukrnafta and a Member of the Management Board. Previously, he was the acting Commercial Director and Chairman of the Board of OJSC “Naftohimik Prykarpattya”. Mr. Palytsya has a degree in history and law from Volin State University.

Compensation and Employment Agreements The Chairman of the Management Board is currently appointed by the President of Ukraine, while the rest of the members of the Management Board, and the members of the Supervisory Board, are appointed by the Cabinet of Ministers of Ukraine. The Chairman of the Management Board entered into an employment agreement with the Supervisory Board to manage and oversee the operations of the Company on behalf of the Supervisory Board, while the Deputy Chairmen of the Management Board directly enter into employment agreements with NJSC Naftogaz. In 2003, the total compensation paid to the Management Board was UAH 930,211 (approximately U.S.$174,523).

105 RELATED PARTY TRANSACTIONS

For the purposes of the Financial Statements, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the othcr party in making financial or operational decisions as defined by IAS 24 “Related Party Disclosures”. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. NJSC Naftogaz enters into related party transactions with its subsidiaries and its subsidiaries enter into related party transactions among themselves in the ordinary course of business. The majority of these related party transactions relate to gas purchases, transportation services, storage services, acquisition of equipment and materials and set-off transactions. These transactions may include terms and prices that differ from those applied in am’s length transactions. The table below provides certain information with respect to the companies consolidated in the Financial Statements as to the quantity of intersegment sales for 2003. Roductlor Produdon and re6nlng and rehg Tr=po*g T-Po-n Coddated Of gM of oil of gm Sllts &ta (UAH thousands) Income: External salcs ...... 1.918.590 2,887,405 10260,467 1.000,173 17,094,016 106,774 hlersegmcnt salcs ...... 1,030,508 79.399 2,320.183 0 20.994.771 Total income ...... 2,949.098 2,966,804 12580,650 1,000,173 38.088.787 106,774 Expenaca: External sals...... (1,737,449) (1.491 563) (2,001,782) (650,650) (22,107,690) (635’2) Intersegment sales ...... (677,448) 0 (2,423.290) 0 (21.324.123) Total income ...... (2,414.897) (1,491568) (4,425,072) (650.650) (43,431,813) (63.572) ProBt (loss) tiom opentlons ...... 181.141 1.395337 8,258.685 349,523 (5,013.674) 43,202

According to NJSC Naftogaz management, there are a number of other related party transactions with and among subsidiaries not included in the consolidated Financial Statements, principally among subsidiaries involved in production and refining and regional gas distribution companies. In 2003, inter-company liabilities for the companies included in the Financial Statements amounted to UAH 19.4 billion. Naftogaz does not generally make provisions for debt arising from related party transactions. Naftogaz is wholly-owned by the Government. In the normal course of business, Naftogaz sells gas to the Government and certain Government owned or controlled entities, The price at which Naftogaz sells gas to these entities is regulated by the NCRP, depending on the category of customer. Naftogaz has also provided loans to employees amounting to UAH 7,276 million and UAH 8,066 million in 2002 and 2003, respectively. In addition, Naftogaz has obtained promissory notes under related party transaction, amounting to UAH 89,973 million and UAH 8,746 million in 2002 and 2003, respectively. Naftogaz is also a party to a number of legal proceedings with its subsidiaries, including with Ukmafta. See “BusinessLitigation-Ukmafta”.

106 STANDARD BANK LONDON HOLDINGS PLC

SBLH PLC was incorporated as a private limited company in England and Wales under the Companies Act 1985 on 10 May 1988, with registered number 2255588. SBLH PLC was subsequently re-registered as a public limited liability company in England and Wales under the Companies Act 1985 on 29 May 2003. Its registered office and principal place of business is at Cannon Bridye House. 25 Dowgate Hill. London EC4R 2SB. Neither SBLH PLC nor any of its affiliates is an affiliate of NJSC Naftogaz. The authorised share capital of SBLH PLC is f 15O,OOO,OOO, comprising 150,000,000 ordinary shares of f1.00 par value each and U.S.$200,000,000, comprising 200,000,000 ordinary shares of U.S.$l.00 par value each ranking pari possu in all respects. The issued and fully paid up share capital of SBLH PLC is L50,OOO comprising 50,000 ordinary shares of f 1.00 par value each and U.S.$158,977,629 comprising 158,977.629 ordinary shares of U.S.$l.00 par value each. The members of the Board of Directors of SBLH PLC are R.A.G. Leith, T.G. Wheeler and D.F. Dugmore. Since SBLH PLC’s sole obligation in respect of the Notes is to make certain payments in relation to the Notes, as and when payments on the Naftogaz Loan and the SBL Loan are received by SBL and SBLH PLC from NJSC Naftogaz and/or SBL, as the case may be, pursuant to the Naftogaz Loan Agreement and the SBL Loan Agreement. respectively. financial information relating to SBLH PLC is not included in this Offering Circular.

107 STANDARD BANK LONDON LIMITED

SBL was incorporated as a private limited company in England and Wales under the Companies Act 1985 on 11 May 1987. with registered number 2130447. Its registered office and principal place of busincss is at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2SB. SBL is an authorised institution under the Banking Act 1987 and is authorised and regulated by The Financial Services Authority. Neither SBL nor any of its affiliates is an affiliate of KJSC Naftogaz. SBL is a wholly-owned subsidiary of SBLH PLC. The authorised share capital of SBL is f300,0o0,OOO,comprising 300,000,000 ordinary shares of f1.00 par value each and U.S.$500,000,001,comprising 500,000,000 ordinary shares and 1 ‘A’ ordinary share of U.S.$l.OO par value each. The issued and fully paid up share capital of SBL is U.S.$424,175,999, comprising 424,175,998 ordinary shares of U.S.$l.OO par value each and 1 ‘A’ ordinary share of U.S.$l.oO par value. The members of the Board of Directors of SBL are: Chairman J.H. Maree Chief Executive R.A.G. Leith Executive Directors M.J. Botha, W.S. Dorson, D. Feld, I.G. Gibson, N.J.Holden, J.M.K. Pearson, T.G. Wheeler and M.J. Wilde Non-Executive Directors D.P.H. Burgess, D.E. Cooper, B.J. Kruger (alt. to M.J.D. Ruck), R.M.Mansell-Jones, M.J.D. Ruck, C.J. Sheridan, T.R.Smeetoa and B.A. Ursell Since SBL‘s sole obligation in respect of the Notes is to make certain payments to SBLH PLC pursuant to the SBL Loan, as and when payments on the Naftogaz Loan are received by SBL from NJSC Naftogaz pursuant to the Naftogaz Loan Agreement, financial information relating to SBL is not included in this Offering Circular.

108 TERMS AND CONDITIONS OF THE NOTES

The following is the text of the Terms and Conditions of the Notes, which contain summaries of certain provisions of the Trust Deed, and which will be attached to the Notes in definitive form,if any, and (subject to the provisions thereon apply to the Global Notes. The U.S.$500,000,0008.125 per cent. Loan Participation Notes due 2009 (the “Notes”, which expression shall in these Terms and Conditions, unless the context otherwise requires, include any further notes issued pursuant to Condition 14 (“Further Issues”) and forming a single series with the Notes) of Standard Bank London Holdings PLC (“SBLH PLC”) are constituted and secured by a trust deed (such trust deed as modified andlor restated and/or suppleniented from time to time. the “Trust Deed“) dated 30 September 2004 between SBLH PLC, Standard Bank London Limited (“SBL”) and The Bank of New York, acting through its London branch, as trustee (in such capacity, the “Trustee”, which expression shall include its successor(s)) for the holders of the Notes (the “Noteholders”) and the holders of the interest coupons appertaining to the Notes (the “Couponholders” and the “Coupons”, respectively). SBLH PLC has authorised the creation. issue and sale of the Notes for the sole purpose of financing a U.S.$500,OOO,Mx)loan (the “SBL Loan”) by SBLH PLC to SBL. SBLH PLC and SBL have recorded the tcrms of the SBL Loan in an agreement (such agreement as modified andlor restated andlor supplemented from time to time, the “SBL Loan Agreement”) dated 29 September 2004 between SBLH PLC and SBL. The proceeds from the SBL Loan will be used for the solc purpose of financing a U.S.$SOO,OOO,OOOon-loan (the “Naftogaz Loan” and, together with the SBL Loan, the “Loans”) by SBL to NJSC Naftogaz of Ukraine (“Naftogaz”). SBL and Naftogaz have recorded the terms of the Naftogaz Loan in an agreement (such agreement as modified andor restated andor supplemented from time to time, the “Naftogaz Loan Agreement” and, together with the SBL Loan Agreement, the “Loan Agreements”) dated 29 September 2004 between SBL and Naftogaz. The statements in these Terms and Conditions include summaries of, and are subject to, the detailed provisions of and definitions in the Trust Deed. Copics of thc Trust Deed and an agency agreement (such agreement as niodified and/or restated and/or supplemented from time to time, the ‘-Agency Agreement”) dated 30 September 2004 between SBLH PLC, SBL, The Bank of New York, acting through its London branch, as principal paying agent (in such capacity, the “Principal Paying Agent”, which expression includes any successor principal paying agent appointed from time to time in connection with the Notes), the other paying agent named therein (together with the Principal Paying Agent, the “Paying Agents”, which expression includes any additional or successor paying agents appointed from time to time in connection with the Notes) and the Trustee are available for inspection during normal business hours at the re_eistered office for the time being of thc Trustec, being at 2Y September 20(.)4 at One Canada Square. London El4 5AL. England. and at the specified office of each Paying Agent. The Noteholders and the Couponholders are entitled to thc benefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust Deed and the Agency Agreement applicable to them.

FORM, DENOMINATION AND TITLE Form and Denomination The Notes are in bearer form, serially numbered, in the denomination of U.S.$100,000each with Coupons attached on issue.

Title Title to the Notes and to the Coupons will pass by delivery.

Holder Absolute 0 wner SBLH PLC, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interest therein) and shall not be required to obtain any proof thereof or as to the identity of such bearer.

109 2. STATUS AND LIMITED RECOURSE (1) status The Notes constitute secured, limited recourse obligations of SBLH PLC. Recourse in respect of the Notes is limited in the manner described in Condition 2(2) (Limited Recourse) below. The Notes are secured in the manner described in Condition 3 (Security) and shall at all times rank pari passu and without any preference amongst themselves.

(2) Limited Recourse The sole purpose of the issue of the Notes is to provide the funds for SBLH PLC to finance the SBL Loan, which in turn will be used for the sole purpose of financing the Naftogaz Loan. In each case where amounts of principal and interest are stated in these Terms and Conditions or in the Trust Deed to be payable in respect of the Notes, the obligation of SBLH PLC to make any such payment shall constitute an obligation only to account to the Noteholders and/or the Couponholders, as the case may be, on each date upon which such amounts of principal and interest are due in respect of the Notes, for an amount equivalent to sums of principal and interest actually received by or for the account of SBLH PLC pursuant to the SBL Loan Agreement less any amounts in respect of the SBLH PLC Reserved Rights (as defined in Condition 3 (Security) below). SBL is obliged under the SBL Loan Agreement only to account to SBLH PLC on each date upon which such amounts of principal and interest are due in respect of the Notes, for an amount equivalent to sums of principal and interest and any amounts in respect of the SBLH PLC Reserved Rights actually received by or for the account of SBL pursuant to the Naftogaz Loan Agreement less any amounts in respect of the SBL Reserved Rights (as defined in Condition 3 (Security) below). If SBLH PLC or SBL receives any amount (a “relevant amount”) under the SBL Loan Agreement or the Naftogaz Loan Agreement, respectively, in a currency other than U.S.dollars, SBLH PLC’s obligation to make any corresponding payment under these Terms and Conditions shall be fully satisfied by paying such sum as SBLH PLC or SBL, as the case may be, receives having converted the relevant amount into U.S. dollars (after deducting any costs of exchange) at the rate or rates of exchange at which SBLH PLC or SBL, as the case may be, may in the ordinary course of business purchase U.S.dollars with the currency so received. Any payment in respect of the Notes equivalent to the sums actually received by or for the account of SBLH PLC by way of principal and/or interest pursuant to the SBL Loan Agreement (less any amounts in respect of the SBLH PLC Reserved Rights) will be made pro rum among all Noteholders and Couponholders (as the case may be), on or as soon as practicable after the date of the receipt of the equivalent payment pursuant to the SBL Loan Agreement. SBLH PLC shall not be liable to make any payment in respect of the Notes other than as expressly provided in these Terms and Conditions and in the Trust Deed. Neither SBLH PLC nor SBL shall be under any obligation to exercise in favour of the Noteholders any rights of set-off or of banker’s lien or to combine accounts or counterclaim that may arise out of other transactions between SBLH PLC and SBL or between SBL and Naftogaz. It is a condition of the Notes that: (i) neither SBLH PLC, SBL nor the Trustee makes any representation or warranty in respect of, and shall at no time have any responsibility for or liability or obligation in respect of, the performance and observance by Naftogaz of its obligations under the Naftogaz Loan Agreement or the recoverability of any sum of principal or interest (or any additional amounts) due or to become due from Naftogaz under the Naftogaz Loan Agreement; (ii) neither SBLH PLC, SBL nor the Trustee shall at any time have any responsibility for, or obligation or liability in respect of, the condition (financial, operational or otherwise), creditworthiness, affairs, status, nature or prospects of Naftogaz; (iii) neither SBLH PLC, SBL nor the Trustee shall at any time be liable for any misrepresentation or breach of warranty or any act, default or omission of Naftogaz under, or in respect of, the Naftogaz Loan Agreement; (iv) neither SBLH PLC, SBL nor the Trustee shall at any time have any responsibility for, or liability or obligation in respect of, the performance and observance by any Paying Agent of its obligations under the Agency Agreement;

110 (v) the financial servicing and performance of the terms of the Notes depend solely and exclusively upon (a) performance by Naftogaz of its obligations under the Naftogaz Loan Agreement and performance by SBL of its obligations under the SBL Loan Agreement, (b) Naftogaz’s and SBL‘s performance of, and compliance with, its covenants and (c) Naftogaz’s credit and financial standing: (vi) SBLH PLC. SBL and the Trustee will rely on self-certification by Kaftogaz and. where applicable. certification by third parties as a means of monitoring whcther Naftogaz is complying with its obligations (other than its obligations to make any payment of principal or interest) under the Naftogaz Loan Agreement and shall not otherwise be responsible for investigating any aspect of Naftogaz’s performance in relation to the Naftogaz Loan Agreement and, subject as further provided in the Trust Deed, neither SBLH PLC nor SBL as lenders, nor the Trustee will be liable for any failure to make any investigation which might be made by a lender or a security holder in relation to the Loans or the property which is the subject of the Charges (as dcfined in Condition 3 (Security)) below) and held by way of security for the Notes, as applicable, and the Trustee shall not be bound to enquire into or be liable for any defect or failure in the right or title of SBLH PLC or SBL to the assigned property or the property which is the subject of the Charges whether such defect or failure was known to the Trustee or might have been discovered upon examination or enquiry and whether capable of remedy or not, nor will it have any liability for the enforceability of the security created by the Security Interests (as defined in Condition 3 (Security) below) whcther or not as a result of any failure. omission or defect in registering or filing or otherwise protecting or perfecting such security and the Trustee will have no responsibility for the value of such security; (vii) neither SBLH PLC nor SBL will be liable for any withholding or deduction or €or any payment on account of tax (not being a tax imposed on the net income of SBLH PLC or SBL, respectively) required to be made by SBLH PLC or SBL on or in relation to any sum received by either of them under the SBL Loan Agreement or the Naftogaz Loan Agreement which will or may affect payments made or to be made by SBL under the SBL Loan Agreement or Naftogaz under the Naftogaz Loan Agreement save to the extent that it has actually received additional amounts under the SBL Loan Agreement or the Naftogaz Loan Agreement, as the case may be, in respect of such withholding or deduction or payment and neither SBLH PLC nor SBL shall, furthermore, be obliged to take any actions or measures as regards such deduction or withholding or payment, other than those set out in Clause 6 of the SBL Loan Agreement, and Clause 8 (Taxes) and Clause 10.4 (Mitigation) of the Naftogaz Loan Agreement, respectively; and (viii) SBLH PLC shall at no time be required to expend or risk its own funds or otherwise incur any financial liability in the performance of its obligations or duties or the exercise of any right, power, authority or discretion pursuant to these Terms and Conditions until it has received the funds from SBL (which depends on SBL receiving such funds from Naftogaz) that are necessary to cover the costs and expenses in connection with such performance or exercise, or has been (in its sole discretion) sufficiently assured that it will receive such funds. Save as otherwise expressly provided in these Terms and Conditions and in the Trust Deed, no proprietary or other direct interest in SBLH PLC’s or SBL’s rights under or in respect of the Loan Agreements or the Loans exists for the benetit of thc Noteholders. Subject to the terms of the Trust Deed, no Noteholder will have any entitlement to enforce any of the provisions in the Loan Agreements or have direct recourse to SBL or Naftogaz except through action by the Trustee pursuant to the Security Interests. Neither SBLH PLC, SBL nor the Trustee shall be required to take proceedings to enforce payment under the Loan Agreements unless it has been indemnified andor secured by the Noteholders to its satisfaction against all liabilities, claims and demands to which it may thereby become liable and all costs, charges and expenses which may be incurred by it in connection therewith. Payments made by Naftogaz under the Naftogaz Loan Agreement to, or to the order of, the Trustee or (subject to the provisions of the Trust Deed) the Principal Paying Agent will satisfy pro ranto the obligations of SBLH PLC in respect of the Notes and SBL in respect of the SBL Loan Agreement. Notwithstanding any other provisions of these Terms and Conditions and the provisions in the Trust Deed, the Trustee and the Noteholders shall have recourse only to the Security Interests and the property the subject of the security created thereby in accordance with Clause 8 (Application of

111 Moneys received by the Trustee) of the Trust Deed. After realisation of the security which has become enforceable and distribution of the proceeds in accordance with Clause 8 (Application of Moneys received by the Trustee) of the Trust Deed, the obligations of SBLH PLC and SBL with respect to the Trustee and SBLH PLC with respect to the Noteholders in respect of the Notes shall be satisfied and none of the foregoing parties may take any further steps against SBLH PLC or SBL to recover any further sums in respect thereof and the right to receive any such sums shall be extinguished. In particular, neither the Trustee nor any Noteholder shall petition or take any other step for the winding-up of SBLH PLC or SBL.

3. SECURITY The obligations of SBLH PLC under the Notes and SBL under the SBL Loan Agreement are secured under the Trust Deed by the following security (together referred to as the “Charges”): a charge by way of first fixed security to the Trustee of all SBLH PLC’s rights to principal, interest and other amounts paid and payable by SBL to SBLH PLC as lender in respect of the SBL Loan under the SBL Loan Agreement; a charge by way of first iixed security to the Trustee of all SBL‘s rights to principal, intercst and other amounts paid and payable by Naftogaz to SBL as lender in respect of the Naftogaz Loan under the Naftogaz Loan Agreement; a charge by way of first fixed security to the Trustee of the right of SBLH PLC to receive all sums which may be paid or be or become payable by SBL under any claim, award or judgment relating to the SBL Loan Agreement: a charge by way of first fixcd security to the Trustee of the right of SBL to receive all sums which may be paid or be or become payable by Naftogaz under any claim, award or judgment relating to the Naftogaz Loan Agreement: a charge by way of first fixed security to the Trustee of all SBLH PLC’s rights, title and interest in and to all sums of money now or in the future deposited in an account in the name of SBLH PLC with The Bank of New York, account number 7843898400 (the “SBLH PLC Account”) together with the debts represented thereby (other than interest from time to time earned thereon); and a charge by way of first fixed security to the Trustee of all SBL‘s rights. title and interest in and to all sums of money now or in the future deposited in an account in the name of SBL with The Bank of New York, account number 7843468400 (the “SBL Account”) together with the debts represented thereby (other than interest from time to time earned thereon) (together with the property the subject of the security referred to in (i) to (v) above but excluding the Reserved Rights (as defined below), the “Charged Property”), provided that there shall be excluded from the subject of the Security Interests (as defined below) (a) SBLH PLC’s Reserved Rights (as defined in the Trust Deed). and (b) SBL’s rights, interests and benefits under the following clauses of the Naftogaz Loan Agreement: Clause 3.2 (Deduction for Fees), Clause 7.4, second sentence thereof (Costs of Prepayment), Clause 8.3(b) (Tax Indemnity and Withholding on Notes or SBL Loans), Clause 8.5 (Tax Credits and Tax Refunds), Clause 10 (Changes in Circumstances), Clause 14.8 (Withholding Tax Exemption), Clause 16.2 (Naftogaz’s Indemnity), Clause 19 (Costs and Expenses) and (to the extent that SBL‘s claim is in respect of one of the aforementioned clauses of the Naftogaz Loan Agreement) Clause 17.2 (Currency Indemnity) and Clause 18 (Payments) (such rights being referred to in these Terms and Conditions as the “SBL Reserved Rights” and, together with the SBLH PLC Reserved Rights, as the “Reserved Rights”). In addition, SBLH PLC and SBL, pursuant to the Trust Deed, with full title guarantee will assign absolutcly to the Trustee for the benefit of itself and the Noteholders and Couponholders (as applicable) all the rights. interests and benefits, both present and future. which have accrued or may accrue to SBLH PLC and SBL, respectively, as lenders under or pursuant to the Loan Agreements (including, without limitation, the right to declare the Loans immediately due and payable and to take proceedings to enforce the obligations of SBL or Naftogaz, as the case may be, thereunder), other than and excluding the Reserved Rights and the rights subject to the charges described in Conditions 3(i) and (ii) above (the “Loan Administration Assignments” and, together with the Charges, the “Security Interests”). In certain circumstances, the Trustee can (subject to its being indemnified andor secured to its satisfaction) be required by Noteholders holding at least one-quarter of the principal amount of the Notes outstanding or by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders to

112 exercise certain of its powers under the Trust Deed (including those arising in connection with the Security Interests).

4. RESTRICTIVE COVENANT As provided in the Trust Deed. so long as any of the Notes remains outstanding (as defincd in the Trust Deed), neither SBLH PLC nor SBL will, without the prior written consent of the Trustee, agree to any amendment to or any modification or waiver of. or authorisc any breach or proposcd breach of. the terms of the Loan Agreements and will act at all times in accordance with any instructions of the Trustee from time to time with respect to the Loan Agreements, except as otherwise expressly provided in the Trust Dccd and the Loan Agreements. Any such amcndmcnt. modification. waivcr or authorisation made with the consent of the Trustee shall be binding on the Noteholders and, unless the Trustee agrees otherwise, any such amendment or modification shall be notified by SBLH PLC to tht: Notcholdcrs in accordance with Condition 15 (Notices).

5. INTEREST The Notes bear interest from and including 30 September 2004 (the “Issue Date”) at the rate of 8.125 per cent. per annum (the “Rate of Interest”), payable semi-annually in arrear on 30 March and 30 September of each year (each, an “Interest Payment Date”). Each Note will cease to bear interest from and including the due date for redemption unless any payment is not made to the Trustee or the Principal Paying Agent on or before the due date, in which case interest will continue to accrue as provided in the Trust Deed. When interest is required to be calculated otherwise than in respect of a full interest period, it shall be calculated on the basis of a 360 day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the actual number of days elapsed on the basis of a month of 30 days.

6. REDEMPTION AND PURCHASE (I) Final redemption Unless previously prepaid pursuant to Clauses 7.1 (prepayment for Tax Reasons) or 7.2 (Prepayment for Reasons of Increased Costs) of the Naftogaz Loan Agreement or purchased and cancelled as provided in Clause 7.6 (Purchase of Notes) or repaid in accordance with Clause 10.3 (Illegality) and Clause 15 (“Events of Default”) of the Naftogaz Loan Agreement or prepaid in whole or in part pursuant to Clause 7.7 (Prepayment upon a Put Event) of the Naftogaz Loan Agreement (and if prepaid in part only the remainder of this Condition(1) will apply to the outstanding part that is still to be repaid but the reference to “all the Notes” shall be read as a reference to those Notes that are still outstanding only), Naftogaz will be required to repay the Naftogaz Loan on its due date as provided in the Naftogaz Loan Agreement and SBL will be required to repay the SBL Loan Agreement on its due date as provided in the SBL Loan Agreement, and, subject to such repayment, all the Notes will be redeemed at their outstanding principal amount on 30 September 2009 or, if such a day is not a business day (as defined in the Naftogaz Loan Agreement), the next succeeding business day (the “Redemption Date”), subject as provided in Condition 7 (Payments).

(2) Mandatory mdemption The Notes will be redeemed in whole, but not in part, at any time, on giving not less than 15 days’ nor more than 60 days’ notice to the Noteholders in accordance with Condition 15 (Notices) (which notice shall be irrevocable) at the outstanding principal amount thereof, together with interest accrued to the date fixed for redemption (which shall be the date fixed for prepayment under Clauses 7.1 and 7.2 of the Naftogaz Loan Agrecment or thc datc fixed for repayment under Clause 10.3 (Illegality) of the Naftogaz Loan Agreement, as the case may be), if, immediately before giving such notice. SBLH PLC satisfies the Trustee that: (a) SBLH PLC has received a notice of prepayment from SBL following receipt of such a notice by SBL from Naftogaz pursuant to Clauses 7.1 and 7.2 of the Naftogaz Loan Agreement; or (b) SBLH PLC has received a notice from SBL to the effect that (i) SBL has delivered a notice to Naftogaz requiring Naftogaz to repay the whole (but not part only) of the Naftogaz Loan in accordance with the provisions of Clause 10.3 (Illegality) of the Naftogaz Loan Agreement and (ii) setting out details of the circumstances contemplated by such provisions.

113 Prior to the publication of any notice of redemption referred to in this Condition 6(2), SBLH PLC shall deliver to the Trustee a certificate signed by two officers of SBLH PLC stating (i) that SBLH PLC is entitled to effect such redemption in accordance with this Condition 6(2), (ii) the text of SBL’s and Naftogaz’s notices of prepayment or details of the circumstances contemplated by Clause 10.3 (Illegality) of the Naftogaz Loan Agreement as set out in the notice received from SBL and (iii) the datc fixed for redemption of the Notcs, and the Trustee shall bc entitled to accept the certificate as sufficient evidence of the satisfaction of the applicable condition set out above. in which event it shall be conclusive and binding on the Noteholders and the Couponholders. Upon the expiry of any such notice as is referred to in this Condition 6(2), SBLH PLC shall be bound to redeem the Notes in accordance with this Condition 6, subject as provided in Condition 7 (Payments).

(3) Put Option If a Put Event (as defined below) occurs. each Notcholder shall have thc option (unless. prior to giving the Put Option Exercise Notice referred to below, SBLH PLC gives notice to the Noteholders under Condition 6(2) above or the SBL Loan and the Naftogaz Loan become due and payable pursuant to Clause 15 (Events of Default) of the Naftogaz Loan Agreement) to give notice or procure that notice is given to SBL pursuant to the SBL Loan Agreement to prepay the SBL Loan in an amount specified in such notice; whereupon SBL shall give notice or procure that notice is given to Naftogaz pursuant to the Naftogaz Loan Agreement to prepay the Naftogaz Loan in an amount specified in such notice. To the extent that such payment is received by SBLH PLC under the SBL Loan Agreement, SBLH PLC shall be required to redeem each Note held by the relevant Noteholder on the Put Settlement Date (as defined below) at its principal amount together with accrued interest (if any) to (but excluding) the Put Settlement Date. Such option shall operate as set out below. Upon SBLH PLC being notified pursuant to the SBL Loan Agreement that a Put Event has occurred, SBLH PLC shall and upon the Trustee becoming so aware (of SBLH PLC having failed to do so) the Trustee may, and, if so requested by the holders of at least one-quarter in principal amount of the Notes then outstanding, shall, give notice (a “Put Event Notice”) to the Noteholders in accordance with Condition 15 (Notices) specifying the nature of the Put Event and the procedure for exercising the option contained in this Condition 6(3). To exercise the right to require the redemption of a Note under this Condition 6(3),the Noteholder must deliver, on any Put Business Day falling within the period (the “Put Period”) of 30 days after the Put Event Notice is given, to the specificd office of any Paying Agent. such Note togcther with a duly signed and completed notice of exercise in the form (for the time being current) obtainable from thc specificd office of any Paying Agent (a “Put Option Exercisc Notice”). The Paying Agent to which such Note and Put Option Exercise Notice is delivered will issue to the Noteholder concerned a non-transferable receipt. Provided that any Note that is the subject of such Put Option Exercise Notice has been delivered to the Principal Paying Agent or other Paying Agent prior to the expiry of the Put Period, SBLH PLC shall redeem each such Note on a date which is the fifteenth Put Business Day immediately following the last day of the Put Period (the “Put Settlement Date”). A Put Option Exercise Notice, once given, shall be irrevocable. In this Condition 6(3): “Capital Stock” means, with respect to any Person, any and all shares or other equivalents (however designated) of corporate stock, partnership interests or any other participation, right, warrant, option or other interest in the nature of an equity interest in such Person, but excluding any debt security convertible or exchangeable into such equity interest; “Cessation of Operations” means a cessation of the right of Naftogaz to use and operate (as provided by the agreement referred to below as at the date of this Agreement) the whole, or substantially the whole, of the assets referred to in the agreement with the State Property Fund of Ukraine dated 4th February, 1999 (provided always that no amendment, restatement, supplement or replacement of such agreement shall of itself constitute a Cessation of Operations provided further that as a result of such amendment, restatement, supplement or replacement Naftogaz does not cease to have the right to use and operate (as provided by such agreement as at the date of this Agreement) the whole or substantially the whole, of the assets referred to in the agreement with the State Property Fund of Ukraine dated 4th February, 1999);

114

. . a “Change of Control” shall be deemed to have occurred at each time (whether or not approved by the board of directors of Naftogaz) that the State of Ukraine (a) ceases to own more than 50 per cent. of the issued or allotted ordinary share capital of Kaftogar or (b) ceases to he the beneficial Owner of more than SO per cent. of the Voting Stock of Kaftogaz or (c) first makcs B fornial public announcement of one or more proposed transactions that would have the effect of (a), andor (b) above; “Put Event” means the occurrence of either a Change of Control or a Cessation of Operations. “Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporafed organisation, government or any agency or political subdivision thereof or any other entity; “Put Business Day” means a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealings in foreign exchange and foreign currency deposits) in New York, London and Kyiv and in the place of presentation; “Voting Stock” means, in relation to any Person, Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.

(4) No other redemption Except where the Naftogaz Loan becomes due and payable pursuant to Clause 15.3 (Default Remedies) of the Naftogaz Loan Agreement, and consequently the SBL Loan Agreement becomes due and payable, SBLH PLC shall not be entitled to redeem the Notes otherwise than as provided in this Condition 6. TOthe extent SBLH PLC receives amounts of principal or interest (other than amounts in respect of the Reserved Rights) following acceleration of the Loans pursuant to Clause 15.3 (Default Remedies) of the Naftogaz Loan Agreement, SBLH PLC shall pay to the Noteholders an amount equal to such amounts, subject as provided in Condition 7.

(5) Purchase SBLH PLC, SBL or Naftogaz or any of their subsidiaries may at any time purchase Notes in the open market or otherwise at any price.

(6) Cancellation All Notes which are purchased by or on behalf of SBLH PLC or any of its subsidiaries may be cancelled or reissued and resold by SBLH PLC and all Notes redeemed by SBLH PLC shall be cancelled. The Naftogaz Loan Agreement provides that Naftogaz may deliver to SBL, and the SBL Loan Agreement provides that SBL may deliver to SBLH PLC, at any time Notes purchased by Naftogaz, SBL or any of their subsidiaries pursuant to Condition 6(5) (provided the aggregate principal amount of such Notes is not less than U.S.$1,OOO,OOO)with instructions that SBLH PLC cancel such Notes. The Loan Agreements each provide that the outstanding amount of the respective Facility (as defined in each respective Loan Agreement) shall be reduced pro tanto with effect from the date of delivery of such Notes by or on behalf of Naftogaz to SBL or by or on behalf of SBL to SBLH PLC, as the case may be.

7. PAYMENTS (I) Payments in nspect of Notes Payments of principal and interest in respect of each Note will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the Note, except that payments of interest due on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only. endorsement) of the relcvant Coupon. in each case at the specified office outside the United States of any of the Payins Agents.

(2) Method of Payment Payments will be made by credit or transfer to an account in U.S. dollars maintained by the payee with or, at the option of the payee, by a cheque in U.S. dollars drawn on, a bank in New York City.

(3) US. Paying Agenrs Notwithstanding the foregoing. payments will be made at the specified office in the United States of any Paying Agent and (if no such appointment is then in effect) SBLW PLC shall, subject to the

115 prior written approval of the Trustee. appoint and maintain a Paying Agent with a specified office in New York City at which payments will be made if (i) SBLH PLC has appointed Paying Agents with specified offices outside the United States with the reasonable expectation that the Paying Agents would be able to make paymcnt at the specified officcs outside thc United Statcs of thc full amount payable with respect to the Notes in the manner provided above when due, (ii) payment of the full amount duc in U.S. dollars at all specified offices of the Paying Agents outside the United States is illegal or effectively precluded by exchange controls or other similar restrictions and (iii) the payment is then permitted under United States law.

(4) Missing Unmatured Coupons Each Note should be presented for payment together with all relative unmatured Coupons, failing which the full amount of any relative missing unmatured Coupon (or, in the case of payment not being made in full, that proportion of the full amount of the missing unmatured Coupon which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner mentioned above against presentation and surrender (or, in the case of part payment only, endorsement) of the relative missing Coupon at any time before the expiry of 10 years after the Relevant Date (as defined in Condition 8 (Taxation)) in respect of the relevant Note (whether or not the Coupon would otherwise have become void pursuant to Condition 9 (Prescription) but not thereafter).

(5) Payments subject to Applicable Laws Payments in respect of principal and interest on the Notes are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 8 (Taxation).

(6) Payment only on a Presentation Date A holder shall be entitled to present a Note or Coupon for payment only on a Presentation Date and shall not, except as provided in Condition 5 (Interest), be entitled to any further interest or other payment if a Presentation Date is after the due date. Presentation Date means a day which (subject to Condition 9 (Prescription)): (i) is or falls after the relevant due date; (ii) is a Business Day in the place of the specified office of the Paying Agcnt at which the Note or Coupon is presented for payment; and

(iii) in the case of payment by credit or transfer to a U.S. dollar account in New York City as referred to above, is a Business Day in New York City. In this Condition, “Business Day” means, in relation to any place, a day on which commercial banks and foreign exchange markets settle payments and are open €or general business (including dealing in foreign exchange and foreign currency deposits) in that place.

(7) Initial Paying Agents The names of the initial Paying Agents and their initial specified oftices are set out at the end of these Terms and Conditions. SBLH PLC reserves the right, subject to the prior written approval of the Trustee, at any time to vary or terminate the appointment of any Paying Agent and to appoint additional or other Paying Agents provided that it will at all times maintain: (i) a Paying Agent in a Member State of the European Union that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council Meeting of 26th-27th November, 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive; (ii) a Paying Agent (which may be the Principal Paying Agent) having its spccified office in a European city approved by the Trustee which, so long as the Notes are listed on the Luxembourg Stock Exchange, shall be Luxembourg; and (iii) a Principal Paying Agent.

116 Notice of any termination or appointment and of any changes in specified offices will be given to the Noteholders promptly by SBLH PLC in accordance with Condition 15 (Notices).

(8) Payment obligations limited The obligations of SBLH PLC to make payments of principal and interest in respect of the Notes shall constitute an obligation only to account to the Noteholders andlor Couponholders on each Interest Payment Date or such other date upon which a payment is due in respect of the Notes for an amount equivalent to sums of principal andor interest actually received by or for the account of SBLH PLC pursuant to the SBL Loan Agreement less any amounts in respect of the SBLH PLC Reserved Rights.

8. TAXATION All payments of principal and interest by or on behalf of SBLH PLC in respect of the Notes or Coupons shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatsoever nature (“Taxes”) imposed or levied by or on behalf of the United Kingdom or Ukraine or any political subdivision or any authority thereof or therein having power to tax, unless the withholding or deduction of the Taxes is required by law. In that case, SBLH PLC shall, subject as provided below, pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes or, as the case may be, Coupons in the absence of the withholding or deduction, except that no additional amounts shall be payable in respect of any Note or Coupon: presented for payment by or on behalf of a holder which is liable to the Taxes in respect of such Note or Coupon by reason of his having some connection with the United Kingdom or Ukraine other than the mere holding of the Note or Coupon; or where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26th-27th November, 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or presented for payment by or on behalf of a holder who would be able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the European Union; or presented for payment more than 30 days after the Relevant Date (as defined below) except to the extent that the relevant holder would have been entitled to additional amounts on presenting the relevant Note or Coupon for payment on the last day of the period of 30 days assuming (whether or not it is in fact the case) that day to have been a Presentation Date. Notwithstanding the foregoing provisions, SBLH PLC shall only make such additional payments to the Noteholders or the Couponholders to the extent and at such time as it shall have actually received an equivalent amount from SBL under the SBL Loan Agreement and SBL will only pay such equivalent amount to SBLH PLC to the extent and at such time as it shall have actually received an equivalent amount from Naftogaz under the Naftogaz Loan Agreement. To the extent that SBLH PLC does not receive from SBL such equivalent amount in full, SBLH PLC shall account to each Noteholder or Couponholder for an additional amount equivalent to a pro ram proportion of such additional amount (if any) as is actually received by, or for the account of, SBLH PLC pursuant to the provisions of the SBL Loan Agreement on or as soon as may be practicable after the date of the receipt of, in the currency of, and subject to any conditions attaching to the payment of, such additional amount to SBLH PLC. In these Conditions. “Relevant Date” means the date on which the payment in question first becomes due except that if the full amount of the money payable has not been received by the Principal Paying Agent or the Trustee on or before the due date, it means the date on which (the full amount of the money having been so received) notice to that effect has been duly given to the Noteholders by SBLH PLC in accordance with Condition 15 (Notices). Any reference in these Conditions to principal or interest (whether payable under either of the Loan Agreements or in respect of the Notes) shall be deemed to include any additional amounts in respect of

117 principal or interest (as the case may be) which may be payable under this Condition or any undertaking given in addition to or in substitution for this Condition pursuant to the Trust Deed or the SBL Loan Agreement. If SBLH PLC, SBL or Naftogaz becomes subject at any time to any taxing jurisdiction other than the United Kingdom or Ukraine, as the case may be, references in these Conditions to the United Kingdom andor Ukraine shall be construed as references to the United Kingdom andlor Ukraine andor such other jurisdiction.

9. PRESCRIPTION Notes and Coupons will become void unless presented for payment within periods of 10 years (in the case of principal) and five years (in the case of interest) from the Relevant Date in respect of the Notes or. as the case may be, the Coupons, subject to the provisions of Condition 7 (Payments).

10. REPLACEMENT OF NOTES AND COUPONS If any Note or Coupon is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified officc of the Principal Paying Agent or the Paying Agent in Luxembourg upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence and indemnity as SBLH PLC may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued.

11. TRUSTEE AND PAYING AGENTS (1) Indemnification of the Trustee The Trust Deed contains provisions for the indemnification of the Trustce and for its relief from rcsponsihility, including provisions relieving it from taking action unless indemnified to its satisfaction.

(2) Trustee Contracting with SBLH PLC, SBL and Naftogaz The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (i) to enter into business transactions with SBLH PLC andlor SBL andor Naftogaz andor any subsidiary of SBLH PLC andlor SBL andor Naftogaz and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, SBLH PLC and/or SBL and/or Naftogaz andlor any subsidiary of SBLH PLC and/or SBL andor Naftogaz, (ii) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as the case may be, any such trusteeship without regard to the interests of, or consequences for, the Noteholders or Couponholders and (iii) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection thercwith.

(3) Trustee to have ngad to Interests of Noteholders as one Class In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including. without limitation, any modification. waiver, authorisation. determination or substitution), the Trustee shall have regard to the general interests of the Noteholders as a class but shall not have regard to any interests arising from circumstances particular to individual Noteholders (whatever their number) and, in particular but without limitation, shall not have regard to the consequences of any such exercise for individual Noteholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub-division thereof and the Trustee shall not be entitled to require, nor shall any Noteholder be entitled to claim, from SBLH PLC, the Trustee or any other person any indemnification or payment in respect of any tax consequence of any such exercise upon individual Noteholders except to the extent already provided for in Condition 8 (Taxation) and/or any undertaking given in addition to, or in substitution for, Condition 8 (Taxation) pursuant to the Trust Deed and/or the Loan Agreements.

(4) Trustee’s Retirement and Removal The Trust Deed contains provisions allowing the Trustee to retire at any time on giving not less than three months notice in writing to the Issuer without giving any reason and without being responsible for any costs occasioned by such retirement. The Noteholders may by Extraordinary Resolution remove any trustee or trustees for the time being of the Notes. In the event of a Trustee giving

118 notice of retirement under the Trust Deed, the Trustee on behalf of the Issuer shall use its best endeavours to procure a new trustee to be appointed. The Trust Deed provides that the retirement or removal of any such trustee shall not become effective unless there remains a trustee hereof (being a trust corporation) in office aftcr such retircincnt or romoval. Notice of any retirement, removal or appointment of a trustee will be given to the Noteholders promptly by the Issuer in accordance with Condition 15 (Notices).

(5) Paying Agents In acting under the Agency Agreement and in connection with the Notes, the Paying Agents act solely as agents of SBLH PLC and (to the extent provided therein) the Trustee and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders or Couponholders.

12. MEETINGS OF NOTEHOLDERR MODIFICATION, WAIVER, AUTHORISATION AND DETERMINATION; SUBSTITUTION (1) Meetings of Noteholders The Trust Deed contains provisions for convening meetings of Noteholders to consider matters affecting their interests, including the modification or abrogation by Extraordinary Resolution of any provision of the Loan Agreements, these Terms and Conditions or the Trust Deed. The quorum at any meeting for passing an Extraordinary Resolution will be one or more persons present holding or representing more than 50 per cent. of the aggregate principal amount of the outstanding Notes or, at any adjourned meeting, one or more persons present being or representing Noteholders whatever the outstanding principal amount of the Notes held or represented; provided, however, that certain matters set out in the Trust Deed (each, a “Reserved Matter”) may only be sanctioned by an Extraordinary Resolution passed at a meeting of Noteholders at which one or more persons present holding or representing not less than three-quarters or, at any adjourned meeting, one- quarter of the aggregate principal amount of the outstanding Notes form a quorum. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the Noteholders, whether present or not, and on all Couponholders.

(2) Modijication The Trustee may, without the consent of the Noteholders, agree to any modification of these Terms and Conditions, the Trust Deed or the Loan Agreements which is, in the opinion of the Trustee, proper to make if, in the opinion of the Trustee. such modification will not be materially prejudicial to the interests of Noteholders or is of a formal, minor or technical nature or is to correct a manifest error or an error which is, in the opinion of the Trustee, proven.

(3) Waiver, Authorisation and Determination In addition, the Trustee may, without the consent of the Noteholders, authorise or waive any breach or proposed breach of these Terms and Conditions or the Trust Deed by SBLH PLC or SBL or the Loan Agreements by SBL or Naftogaz, or determine that (a) any event which would or might otherwise give rise to a right of acceleration under the Loan Agreements or (b) any Relevant Event shall not be treated as such if, in the opinion of the Trustee, the interests of the Noteholders will not be materially prejudiced thereby.

(4) Notijication to Noteholdem Unless the Trustee agrees otherwise, any such modification, waiver or authorisation shall be notified to the Noteholders in accordance with Condition 15 (Notices) as soon as practicable thereafter.

(5) Substitution The Trust Deed contains provisions under which another company may, without the consent of the Noteholders, assume the obligations of SBLH PLC as principal debtor under the Trust Deed and the Notes provided that certain conditions specified in the Trust Deed are fulfilled. These conditions include the preparation of a new offering circular and the giving of notice of the substitution to the Luxembourg Stock Exchange, if required by such exchange.

119 13. ENFORCEMENT (1) Enforcement by the Trustee The Trustee may at any time (subject to the paragraphs below), at its discretion and without notice, institute such proceedings as it thinks fit to enforce its rights under the Trust Dced. the Notes and the Coupons, but it shall not be bound to do so unless:

(i) it has been so requested in writing by the holders of at least one-quarter in principal amount of the outstanding Notes or has been so directed by an Extraordinary Resolution; and (ii) it has been indemnified andor provided with security to its satisfaction against all liabilities, proceedings, claims and demands to which it may thereby become liable and all costs, charges and expenses which may be incurred by it in connection therewith. At any time after an Event of Default (as defined in the Naftogaz Loan Aprecnicnt) has occurred, the Trustee may at its discretion and without notice, and shall if requested to do so by Noteholders holding at least one quarter in principal amount of the Notes outstanding or if directed to do so by an Extraordinary Resolution and. in either case, subject to it being indemnified and/or secured to its satisfaction, declare all amounts payable under the Naftogaz Loan Agreement by Naftogaz to be due and payable and take such action as it may think fit. Upon repayment of the Loans following an Event of Default, the Notes will be redeemed or repaid at their principal amount together with interest accrued to the date fixed for redemption and thereupon shall cease to be outstanding. At any time after a Relevant Event (as defined in the Trust Deed) has occurred. the Trustee may at its discretion and without notice, and shall if requested to do so by Noteholders holding at least one- quarter in principal amount of the Notes outstanding or if directed to do so by an Extraordinary Resolution and, in either case, subject to it bcing indemnified andor secured to its satisfaction. enforce the security created in the Trust Deed in favour of the Noteholders.

(2) Enforcement by the Noteholder No Noteholder or Couponholder may proceed directly against SBLH PLC unless the Trustee, having become bound to do so, fails to do so within a reasonable time and the failure is continuing.

14. FURTHER ISSUES SBLH PLC may from time to time, without the consent of the Noteholders or the Couponholders and in accordance with the Trust Deed, create and issue further notes having the same terms and conditions as the Notes in all respects (or in all respects except for the issue price. issue date and/or first payment of interest on such further notes) so as to be consolidated and form a single series with the Notes. In relation to any such further issue of notes to be consolidated and form a single series with the Notes, SBLH PLC will enter into a loan agreement supplemental to the SBL Loan Agreement with SBL substantially on the same terms as the original SBL Loan Agreement and SBL will enter into a loan agreement supplemental to the Naftogaz Loan Agreement with Naftogaz substantially on the same terms as the original Naftogaz Loan Agreement.

15. NOTICES All notices to the Noteholders will be valid if published in a leading English language daily newspaper published in London or such other English language daily newspaper with general circulation in Europe as the Trustee may approve and, so long as the Notes are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, in one daily newspaper having general circulation published in Luxembourg approved by the Trustee. It is expected that publication will normally be made in the Financial Times and the Luxemburger Wort or the Tugeblurr. SBLH PLC shall also ensure that notices are duly published in a manner which complies with the rules and regulations of any stock exchange or the relevant authority on which the Notes are for the time being listed. Any such notice will be deemed to have been given on the date of the first publication or. where required to be published in more than one newspaper. on the date of the first publication in all required newspapers. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Trustee may approve. Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Noteholden in accordance with this Condition.

120 16. GOYERNXNG LAW The Trust Deed, the Loan Agreements and the Notes are governed by, and shall be construed in accordance with, English law.

17. CONTRAaS (RIGHTS OF THIRD PARTIES) ACT 1999 No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999, but this does not affect any right or remedy of any person which exists or is available apart from that Act.

121 SUMMARY OF THE PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM

The following is a summary of the provisions to be contained in the Trust Deed to constitute the Notes and in the Global Notes which will apply to, and in some cases modifi, the Conditions of the Notes while the Notes are represented by the Global Notes.

1. Exchange The Permanent Global Note will be exchangeable in whole but not in part (free of charge to the holder) for definitive Notes only: (a) upon the happening of any Relevant Event (as defined in the Trust Deed); (b) if either Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days (other than by reason of holiday, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so and no alternative clearing system satisfactory to the Trustee is available; or

(c) if SBLH PLC would suffer a disadvantage as a result of a change in laws or regulations (taxation or otherwise) or as a result of a change in the practice of Euroclear andor Clearstream, Luxembourg which would not be suffered were thc Notes in definitive form and a certificatc to such effect signed by two members of the management board of SBLH PLC is given to the Trustee. Thereupon (in the case of (a) and (b) above) the holder of the Permanent Global Note (acting on the instructions of one or more of the Accountholders (as defined in paragraph 4 below)) or thc Trustee may give notice to SBLH PLC and (in the case of (c) above) SBLH PLC may give notice to the Trustee and the Notcholdcrs. of its intention to exchange the Permancnt Global Note far definitive Notes on or after the Exchange Date (as defined below). On or after the Exchange Date the holder of the Permanent Global Note may or, in the case of (c) above, shall surrender the Permanent Global Note to or to the order of the Principal Paying Agent. In exchange for the Permanent Global Note SBLH PLC will deliver, or procure the delivery of, an equal aggregate principal amount of definitive Kotes (having attached to them all Coupons in respect of interest which has not already been paid on the Permanent Global Note), security printed in accordance with any applicable legal and stock exchange requirements and in or substantially in the form set out in the Trust Deed. On exchange of the Permanent Global Note, SBLH PLC will procure that it is cancelled and, if the holder so requests. returned to the holder togcther with any rclcvant definitivc Notes. For these purposcs. “Exchange Date’’ means a day specified in the notice requiring cxchangc falling not less than 60 days after that on which such notice is given and on which banks are open for general business in the place in which the specified office of the Principal Paying Agcnt is located and, except in the case of exchange pursuant to (b) above, in the place in which the relevant clearing system is located.

2. Payments :r, On and after 10 November 2004, no payment will be made on the Temporary Global Note unless exchange for an interest in the Permanent Global Note is improperly withheld or refused. Payments of principal and interest in respect of Notes represented by a Global Note will, subject as set out below, be made against presentation for endorsement and, if no further payment falls to be made in respect of the Notes, surrender of such Global Note to the order of the Principal Paying Agent or such other Paying Agent as shall have been notified to the Noteholders for such purposes. A record of each payment made will be endorsed on the appropriate part of the schedule to the relevant Global Note by or on behalf of the Principal Paying Agent, which endorsement shall be prima facie evidence that such payment has been made in respect of the Notes. Payments of interest on the Temporary Global Note (if permitted by the first sentence of this paragraph) will be made only upon ccrtification as to nonU.S. beneficial ownership unless such certification has already been made.

3. Notices For so long as all of the Notes are represented by one or both of the Global Notes and such Global Note(s) idare held on behalf of Euroclear andlor Clearstream, Luxembourg, notices to Noteholders may be given by delivery of the relevant notice to Euroclear andlor Clearstream, Luxembourg (as the case may be) for communication to the relative Accountholders rather than by publication as required by Condition 15 (Notices), provided that, so long as the Notes are listed on the Luxembourg Stock Exchange, notice will also be given by publication in a daily newspaper having general circulation

122

. published in Luxembourg if and to the extent that the rules of the Luxembourg Stock Exchange so require. Any such notice shall be deemed to have been given to the Noteholders on the second day after the day on which such notice is delivered to Euroclear andlor Clearstream, Luxembourg (as the case may be) as aforesaid.

4. Accountholders For so long as all of the Notes are represented by one or both of the Global Notes and such Global Note(s) idare held on behalf of Euroclear andor Clearstream, Luxembourg, each person (other than Euroclear or Clearstream, Luxembourg) who is for the time being shown in the records of Euroclear or Clearstream, Luxembourg as the holder of a particular principal amount of such Notes (each an "Accountholder") (in which regard any certificate or other document issued by Euroclear or Clearstream, Luxembourg as to the principal amount of such Notes standing to the account of any person shall be conclusive and binding for all purposes) shall be treated as the holder of such principal amount of such Notes for all purposes (including, but not limited to, for the purposes of any quorum requirements of, or the right to demand a poll at, meetings of the Noteholders) other than with respect to the payment of principal and interest on such principal amount of such Notes, the right to which shall be vested, as against SELH PLC and the Trustee, solely in the bearer of the relevant Global Note in accordance with and subject to its terms and the terms of the Trust Deed. Each Accountholder must look solely to Euroclear or Clearstream, Luxembourg, as the case may be, for its share of each payment made to the bearer of the relevant Global Note.

5. Prescription Claims against SBLH PLC in respect of principal and interest on the Notes represented by a Global Note will bc prescribed after 10 ycars (in the case of principal) and fivc years (in the case of intercst) from the Relevant Date (as defined in Condition 8 (Taxation)).

6. Cancellation Cancellation of any Note represented by a Global Note and required by the Terms and Conditions of the Notes to be cancelled following its redemption or purchase will be effected by endorsement by or on behalf of the Principal Paying Agent of the reduction in the principal amount of the relevant Global Note on the relevant part of the schedule thereto.

7. Put Option For so long as all of the Notes are represented by one or both of the Global Notes and such Global Note(s) islare held on behalf of Euroclear and/or Clearstream, Luxembourg, the option of the Noteholders provided for in Condition 6(3) may be exercised by an Accountholder giving notice to the Principal Paying Agent in accordance with the standard procedures of Euroclear and Clearstream, Luxembourg (which may include notice being given on his instructions by Euroclear or Clearstream, Luxembourg or any common depositary for them to the Principal Paying Agent by electronic means) of the principal amount of the Notes in respect of which such option is exercised and at the same time presenting or procuring the presentation of the relevant Global Note to the Principal Paying Agent for notation accordingly within the time limits set forth in that Condition.

8. Euroclear and Clearstream, Luxembourg References in the Global Notes and this summary to Euroclear andlor Clearstream, Luxembourg shall be deemed to include references to any other clearing system approved by the Trustee.

123 NAJTOGAZ LOAN AGREEMENT THIS AGREEMENT is made on 29 September 2004 BETWEEN. (1) NJSC NAFTOGAZ OF UKRAINE, Joint Stock Company, incorporated in Ukraine with its registered office at 6. B.Khmelnitskogo St., 01001 Kyiv. Ukrainc (Naftogaz); and (2) STANDARD BANK LONDON LIMlTED incorporated in England and Wales with its registered office at Cannon Bridge House. 25 Dowgate Hill. London EC4R 2SB. England (SBL). WHEREAS: SBL has at the request of Naftogaz agreed to make available to Naftogaz a term loan facility in the amount of U.S.$500,000,000on the terms and subject to the conditions of this Agreement.

It is agreed as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions In this Agreement the following terms have the meanings given to them in this Clause 1.1: Account means an account of SBL with The Bank of New York, Account Number 7843468400; Advance means the advance of U.S.$500,Mx),000made (or deemed to be made) by SBL hereunder equal to the amount of the Facility; Advance Date has the meaning set out in Clause 3.1; Affiliate of any specified Pcrson means (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indircct common control with such specified Person. or (ii) any otlicr Person who IS a director or officer (a) of such specified Pcrson, (b) of any Subsidiary of such specified Person or (c) of any person described in clause (i) abovc. For the purpose of this definition. control when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise and the terms controlling and controlled have meanings correlative to the foregoing; Agency means any agency, authority, central bank, department, committee, government, legislature, minister, ministry, official or puhlic or statutory person (whether autonomous or not) of, or of the government of, Ukraine; Agency Agreement means the agency agreement relating to the Notes dated 30 September 2004 between SBL, the Issuer, the Trustee, the Principal Paying Agent and the agents named therein; Authorised Signatory means. in the case of Naftogaz, any of the persons referred to in the certificate listed as item 3 in Schedule 1 (Condition Precedent Documents) hereto and, in the case of SBL, a duly authorised officer of SBL. from time to time: Capital Stock means, with respect to any Person, any and all shares or other equivalents (however designated) of corporate stock, partnership interests or any other participation, right, warrant, option or other interest in the nature of an equity interest in such Person, but excluding any debt security convertible or exchangeable into such equity interest; Central Bank means the National Bank of Ukraine; Cessation of Operations means a cessation of the right of Naftogaz to use and operate (as provided by the agreement referred to below as at the date of this Agreement) the whole, or substantially the whole, of the assets referred to in the agreement with the State Property Fund of Ukraine dated 4th February, 1999 (provided always that no amendment, restatement, supplement or replacement of such agreement shall of itself constitute a Cessation of Operations provided further that as a result of such amendment, restatement, supplement or replacement Naftogaz does not cease to have the right to use and operate (as provided by such agreement as at the date of this Agreement) the whole or substantially the whole, of the assets referred to in the agreement with the State Property Fund of Ukraine dated 4th February, 1999);

124 a Change of Control shall be deemed to have occurred at each time (whether or not approved by the board of directors of Naftogaz) that the State of Ukraine (a) ceases to own more than 50 per cent. of thc issued or allotted ordinary sharc capital of Naftogaz or (b) ceases to he the beneficial owncr of more than SO per cent. of the Voting Stock of Kaftopz or (c) first makes a formal public announcement of one or more proposed transactions that would have the effect of (a) and/or (b) above; Consolidated Indebtedness means, as at any date of determination (and without duplication), all Indebtedness of Naftogaz and any of its Consolidated Subsidiaries outstanding on such date, determined on a consolidated basis in accordance with IFRS, provided that such term shall not include (i) any indebtedness of Naftogaz or any of its Subsidiaries ansing from, pursuant to, or in connection with, the Inter-Governmental Agreement: Consolidated Net Indebtedness means, as at any date of determination, the sum of (i) Consolidated Indebtedness as at such date minus (ii) all cash and cash equivalents held by Naftogaz or any of its Consolidated Subsidiaries as at such date (as shown on the then most recent audited consolidated balance sheet of Naftogaz prepared in accordance with LFRS); Consolidated Net Worth means, as at any date of determination, the total equity capital of Naftogaz as shown on the then most recent audited consolidated balance sheet of Naftogaz prepared in accordance with IFRS; Consolidated Subsidiaries means, at any time, those Subsidiaries of Naftogaz that appear in the most recent consolidated audited accounts of Naftogaz at that time: Default means any event which is, or after notice or passage of time or both would be, an Event of Default; Double Tax Treaty means the Convention between the Government of Ukraine and the Government of the United Kingdom of Great Britain and Northern Ireland for avoidance of double taxation and the prevention of tiscal cvasion with respect to taxes on income and capital gains of 10th February, 1993; Event of Default has the meaning set out in Clause 15 (Events of Default); Export Credit Agency Guaranteed Financing means a credit facility or facilities with funding lent or garanteed by one or more national export credit ayencies and relating to the financing of the purchase of assets by Naftogaz or another member of the Group; Facility means the U.S.$500,000,000 term loan facility granted to Naftogaz by SBL in this Agreement; Fees Letter means a letter dated 29 September 2004 from SBL to, amongst others, Naftogaz, the Issuer, the Trustee, and the Principal Paying Agent, in form and substance satisfactory to such parties setting out fees and expenses in conncction with the Facility and the financing of the Facility: Group means Naftogaz and its Consolidated Subsidiaries from time to time; Guarantee means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods. securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term Guarantee will not include endorsements for collection or deposit in the ordinary course of business. The term Guarantee used as a verb has a corresponding meaning; IFRS means International Financial Reporting Standards, including International Accounting Standards and Interpretations issued by the International Accounting Standards Board; Incur means issue, assume, Guarantee, incur or otherwise become liable for;provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) or is merged into a

125 Subsidiary will be deemed to be incurred or issued by such Subsidiary at the time it becomes or is so merged into a Subsidiary; Indebtedness means any indebtedness, in respect of any Person for, or in respect of, moneys borrowed; any amount raised by acceptance under any acceptance credit facility; any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; any amount raised pursuant to any issue of shares which are expressed to be redeemable; any amount raised under any other transaction (including any forward sale or purchase agreement) having the economic effect of a borrowing; and the amount of any liability in respect of any Guarantee or indemnity for any of the items referred to above, provided that such term shall not include (i) any indebtedness of Naftogaz or any of its Subsidiaries arising from, pursuant to, or in connection with, the Inter-Governmental Agreement and (ii) any indebtedness owed to the state budget or local budget; Interest Payment Date means 30 March and 30 September in each year in which the Facility remains outstanding with the last Interest Payment Date falling on the Repayment Date; Interest Period means any of those periods mentioned in Clause 4 (Interest Periods); Interest Rate means the interest rate specified in Clause 5.1 (Rate of Interest); Interest Rate Protection Agreement means in respect of any Person, any interest rate swap agreement, interest rate option agreement, interest rate cap agreement, interest rate collar agreement, interest rate floor agreement or other similar agreement or arrangement designed to protect such Pcrson against fluctuations in interest rates; Inter-Governmental Agreement means the Agreement between Cabinet Ministers of Ukraine and the Government of Russian Federation on Additional Measures for Ensuring Transit of Russian Natural Gas through the territory of Ukraine of 4th October, 2001, as amended from time to time; Issuer means Standard Bank London Holdings PLC or any entity substituted in place of Standard Bank London Holdings PLC pursuant to clause 17 of the Trust Deed; Lien means any mortgage, pledge, encumbrance, easement, restriction, covenant, servitude, lien, charge or security interest of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof, including a Saleneaseback Transaction); Material Adverse Effect means a material adverse effect on (a) the husincss prospects or financial condition of the Group taken as a whole; (b) Naftogaz’s ability to perfom its obligations under this Agreement or (c) the validity or enforceability of this Agreement or the rights or remedies of SBL hereunder; Material Subsidiary means, at any given time, any Subsidiary of Naftogaz (a) whose total assets or total revenues represent at least 7 per cent. of the consolidated total assets, or, as the case may be, consolidated total revenues of the Group and, for these purposes (i) the total assets and total revenues of such Subsidiary shall be determined by reference to its then most recent audited financial statements (or, if none, its then most recent management accounts): and (ii) the consolidated total assets and consolidated total revenues of the Group shall be determined by reference to Naftogaz’s then most recent audited consolidated financial statements (or, if none, its then most recent management accounts), in each case prepared in accordance with IFRS or (b) to which is transferred the whole or substantially the whole of the undertaking and assets of a Subsidiary of Naftogaz which immediately before the transfer is a Material Subsidiary of Naftogaz. A report by the auditors of Naftogaz that in their opinion a Subsidiary of Naftogaz is or is not or was or was not at any particular time or throughout any specified period a Material Subsidiary of Naftogaz shall, in the absence of manifest error, be conclusive and binding on all parties;

Non-recourse Project Financing means any financing of all or part of the costs of the acquisition, construction or development of any project if the Person or Persons providing such financing expressly agrees to limit their recourse to the project financed and the revenues derived from such project as the principal source of repayment for the moneys advanced; Notes means the U.S.S500,M)(3,0008.125 per cent. loan participation notes due 2009 proposed to be issued by the Issuer pursuant to the Trust Deed for the purpose of financing the Advance; Officers’ Certificate means a certificate substantially in the form of Schedule Three (Form of Officers’ Certificate) hereto signed on behalf of Naftogaz by two officers of Naftogaz at least one of

126 whom shall be the principal executive officer. principal accounting officer or principal financial officer of Naftogaz; Permitted Liens means: Liens existing as at the date of this Agreement; Liens arising or created in connection with any Non-recourse Project Financing; Liens arising or created in connection with any Export Credit Agency Guaranteed Financing; Liens arising or created in connection with any Pre-Export Financing; Liens arising during the ordinary course of business; Liens on any assets securing Indebtedness of Naftogaz or any of its Subsidiaries incurred or assumed for the purpose of financing all or part of the cost of acquiring or purchasing such assets, provided that no such Lien shall extend to any other assets of the Group, the principal amount of the Indebtedness secured by such Lien shall not exceed the cost of acquiring or purchasing such assets and such Lien attached to such assets concurrently with or within 180 days after the acquisitions or purchase thereof; Liens securing Indebtedness of a Person existing at the time that such Person is merged into or consolidated with Naftogaz or a Subsidiary; provided that such Liens were not created in contemplation of such merger or consolidation and do not extend to any assets or property of Naftogaz or any Subsidiary, other than the surviving Person and its Subsidiaries; Liens on assets or property acquired by Naftogaz or any of its Subsidiaries; provided that such Liens do not extend to any other assets or property (other than proceeds of such acquired assets or property); Liens in respect of Interest Rate Protection Agreements; Liens incurred, or pledges and deposits in connection with workers’ compensation, uncniployment insurance and other social security hcncfits, and leases. appeal bonds and other obligations of like nature in the ordinary course of business; Liens imposed by law, including, without limitation, mechanics’, carriers’, warehousemen’s, materialmen’s, suppliers’ and vendors’ Liens in the ordinary course of business; Liens for ad valorem, income or property taxes or assessments and similar charges which either are not delinquent or are being contested in good faith by appropriate proceedings for which Naftogaz has set aside on its books reserves to the extent required by IFRS; easements, rights of way, restrictions (including zoning restrictions), reservations, permits, servitudes, minor defects or irregularities in title and other similar charges or encumbrances, and Liens arising under leases or subleases granted to others, in each case not interfering in any material respect with the business of Naftogaz or any of its Subsidiaries and existing, arising or incurred in the ordinary course of business; (i) bankers’ Liens in respect of deposit accounts, (ii) statutory landlords’ Liens, (iii) deposits to secure the performance of bids, trade contracts, government contracts, leases, statutory obligations, surety and appeal bonds, performance and return-of-money bonds or liabilities to insurance carriers under insurance or self-insurance arrangements and other obligations of like nature (so long as, in each case with respect to items described in sub-paragraphs (i), (ii) and (iii) above of this paragraph G), such Liens (X) do not secure obligations constituting Indebtedness for borrowed money and (Y) are incurred in the ordinary course of business) and (iv) Liens arising from any judgment, decree or other order which does not constitute an Event of Default; any renewal of or substitution for any Lien permitted by any of the preceding paragraphs (a) through (j); provided, however, that, with respect to Liens incurred pursuant to this paragraph (k) the principal amount secured has not increased and the Liens have not been extended to any additional property (other than proceeds of the property in question); provided that the aggregate amount of Indebtedness secured by such Permitted Liens at any time shall not exceed 50 per cent. of Consolidated Net Worth;

127 Person means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organisation, government or any agency or political subdivision thereof or any other entity; Pre-Export Financing means a credit facility or facilities secured by natural gas deliveries (and the proceeds relating thereto) pursuant to an off-take contract in which proceeds from the off-take contract are paid into a pledged collection account; Principal Paying Agent means The Bank of New York, acting through its London branch as principal paying agent under the Notes or any successor thereunder; Put Business Day means a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealings in foreign exchange and foreign currency deposits) in New York, London and Kiev and in the place of presentation; Put Event means the occurrence of either a Change of Control or a Cessation of Operations; Put Event Payment Date means, in respect of a Put Event, the date specified by or on behalf of SBL in the Put Redemption Notice on which any part of the Advance is to be prepaid in accordance with sub-clause 7.7: which date shall be the fifteenth Put Business Day immediately following the last day of the Put Period; Put Period means the period of 30 days after notice is given by the Issuer to the holders of the Notes in accordance with Condition 15 (Notices) of the terms and conditions of the Notes of the occurrence of a Put Event; Put Redemption Notice means, in respect of a Put Event, a notice given by or on behalf of SBL (after receipt by SBL of written confirmation from the Principal Paying Agcnt of the Put Redemption Amount (as defined below)) to Naftogaz specifying (i) the aggregate principal amount of Notes which are to be redeemed (the Put Redemption Amount) as a result of a Put Event and (ii) the Put Event Payment Date; Repayment Date means 30 September 2009: Saleheaseback Transaction means an arrangement relating to property now owned or hereafter acquired whereby Naftogaz or any Subsidiary of Naftogaz transfers such property to a Person and Naftogaz or such Subsidiary leases it from such Person; Same-Day Funds means U.S.dollar funds settled through the New York Clearing House Interbank Payments System or such other funds for payment in U.S.dollars as SBL may at any time determine to be customary for the settlement of international transactions in New York City of the type contemplated hereby; SBL Loan at any time, means an amount equal to the aggregate principal amount of the facility granted by the Issuer pursuant to the SBL Loan Agreement and outstanding at such time; SBL Loan Agreement means a loan agreement dated the date hereof between SBL and the Issuer in a principal amount equal to the Facility; Subscription Agreement means the subscription agreement relating to the Notes dated the date hereof between SBL, the Issuer, Naftogaz and the Managers named in it; Subsidiary means a company or corporation (A): (a) which is controlled, directly or indirectly, by another company or corporation (B);or (b) mow than half the issued share capital of which is beneficially owned, dircctly or indirectly, by B; and, for these purposes, A shall be treated as being controlled by B if B is able to direct A's affairs andlor to control the composition of A's board of directors or equivalent body; Trust Deed means the trust deed relating to the Notes dated 30 September 2004 between SBL,the Issuer and the Trustee; Trustee means The Bank of New York, acting through its London branch, as trustee under the Trust Deed and any successor thereto as provided thereunder; Ukraine means Ukraine and any province or political sub-division thereof or therein; and

128 Voting Stock means, in relation to any Person, Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.

1.2 Interpretation Any reference in this Agreement to: SBL or Naftogaz includes its and any subsequent successors and chargees in accordance with their respective interests and, in the case of SBL, the Trustee pursuant to the Trust Deed; a business day means a day (other than a Saturday or Sunday) on which banks generally are open for business in New York, London and Kiev; the equivalent on any given date in one currency (the first currency) of an amount denominated in another currency (the second currency) is a reference to the amount of the first currency which could be purchased with the amount of the second currency at the spot rate of exchange quoted on the relevant Reuters page or, where the first currency is hryvnia and the second currency is US. dollars (or vice versa), by the Central Bank, at or about 10.00 a.m. (New York City time or, as the case may be. Kiev time) on such date for the purchase of the first currency with the second currency; a month means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next succeeding calendar month save that, where any such period would otherwise end on a day which is not a business day, it shall end on the next succeeding business day, unless that day falls in the next calendar month, in which case it shall end on the immediately preceding business day, provided that, if a period starts on the last business day in a calendar month or if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last business day in that later month (and references to months shall be construed accordingly); repay (or any derivative form thereof), subject to any contrary indication, includes prepay (or, as the case may be, the corresponding derivative form thereof); and VAT means value added tax, including any similar tax which may be imposed in place thereof from time to time.

1.3 Currency References US.$ and U.S. dollars denote the lawful currency of the United States of America and hryvnia denotes the lawful currency of Ukraine.

1.4 Statutes Any reference in this Agreement to a statute shall be construed as a reference to such statute as the same may have been, or may from time to time be, amended or re-enacted.

1.5 Headings Clause and Schedule headings are for ease of reference only.

1.6 Amended Documents Save where the contrary is indicated, any reference in this Agreement to this Agreement, the Fees Letter or any other agreement or document shall be construed as a reference to this Agreement, the Fees Letter or, as the case may be, such other agreement or document as the same may have been, or may from time to time be, amended, varied, novated or supplemented.

2. THEFACILITY 2.1 Grant of the Facility SBL grants to Naftogaz, upon the terms and subject to the conditions hereof, a single disbursement term loan facility in the amount of U.S.$500,000,000.

2.2 Purpose and Application The Facility is intended to be used by Naftogaz for certain strategic acquisitions, the reduction of short-term debt and other general corporate purposes and, without affecting the obligations of Naftogaz in any way, SBL shall not be obliged to concern itself with such application.

129 3. AVAILABILITY OF THE FACILITY 3.1 Drawdown The Facility will be available by way of a single Advance (less the amount referred to in Clause 3.2 below) which will be made by SBL to Naftogaz, and Naftogaz will draw down the Advance (less the amount referred to in Clause 3.2 below), on 30 September 2004 (or such later date as may otherwise be agreed by the parties to this Agreement) (the Advance Date) by payment of the Advance (less the amount referred to in Clause 3.2 below) in accordance with the following payment instructions: Joint-stock Commercial Industrial & Investment Bank (PROMINVESTBANK) (12, Lane Shevchenko, Kiev, 01001, Ukraine), account number: 260053012609, GOU Prominvestbank, Kyiv, MFO 300012 bank code 00039002, SWIFT. UPIB UA UX, Correspondent Banks: Bank of New York USA, New York, SWIFT: IRVT US 3N, Acc: 890-0060-077, Deutsche Bank Trust Company Americas USA, New York, SWIFT; BKTR US 33, Acc: 04-182-382, for the account of NJSC Naftogaz Ukraine; if: (1) SBL has confirmed to Naftogaz that it has received all of the documents listed in Schedule 1 (Condition Precedent Documents) hereto and that each is in form and substance satisfactory to SBL,save as SBL may otherwise agree; (2) the Issuer has received the full amount of the subscription moneys for the Notes pursuant to the Subscription Agreement; and (3) (i) no event has occurred or circumstance has arisen which would constitute a Default or Event of Default, (ii) the representations and warranties set out in Clause 11 (Representations and Warranties of Naftogaz) are true on the Advance Date with respect to the facts then subsisting and (iii) the Borrower shall be in full compliance with all its obligations under this Agreement and the Fees Letter. For the avoidance of doubt and without in any way limiting (1)to (3) above, this Agreement will not come into force until Naftogaz has obtained the Central Bank certificate of registration of this Agreement.

3.2 Deduction for Fees Naftogaz agrees that an amount equal to all such amounts required to be paid by Naftogaz pursuant to and in accordance with the Fees Letter shall be deducted from the amount of the Advance paid by SBL to it. For the avoidance of doubt, any reference in this Loan Agreement to the Advance shall be to the full amount of such Advance (being at the date hereof U.S.$500,000,000) notwithstanding any deductions of amounts pursuant to this Clause 3.2.

4. INTEREST PERIODS The period for which the Advance is outstanding shall be divided into successive periods, each of which (other than the first Interest Period, which shall start on (and shall include) the Advance Date and shall end on (but shall exclude) the first Interest Payment Date) shall start on (and shall include) an Interest Payment Date and shall end on (but shall exclude) the next following Interest Payment Date (each, an Interest Period).

5. PAYMENT AND CALCULATION OF INTEREST 5.1 Rate of Interest Naftogaz will pay interest on the outstanding principal amount of the Advance from time to time hereunder at the rate of 8.125 per cent. per annum (the Rate of Interest).

5.2 Payments of Interest Naftogaz shall in respect of each Interest Period not later than 10.00 a.m. (New York City time) one business day prior to the relevant Interest Payment Date pay accrued interest (calculated to the last day of the relevant Interest Period) on the outstanding principal amount of the Advance at the Rate of Interest calculated in accordance with this Clause 5.2. The amount of interest payable in respect of the Advance shall be calculated by applying the Rate of Interest to the Advance, dividing the product by two and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). When interest is required to be calculated in respect of any other period , it will be calculated by applying the Rate of Interest to the Advance on the basis of a 360-day year consisting

130 of 12 months of 30 days each and, in the case of an incomplete month, the actual number of days elapsed on the basis of a month of 30 days.

5.3 Assumption when Calculating Interest Whenever under this Agreement interest is to be calculated to the last day of an Interest Period and the calculation is required to be made before such last day, the parties shall assume that the amount of the Advance outstanding on the day of the calculation is also the amount of the Advance outstanding on the last day of the relevant Interest Period.

6. REPAYMENT Not later than 10.00 a.m. (New York City time) one business day prior to the Repayment Date, Naftogaz shall repay in full the outstanding principal amount of the Facility and, to the extent not already paid in accordance with Clause 5.2 (Payment of Interest), pay all interest accrued in respect of the last Interest Period (calculated to the last day of the last Interest Period) to the Account.

7. PREPAYMENT 7.1 Prepayment for Tax Reasons Naftogaz may (without premium or penalty), if (a) it is required to pay any additional amounts under Clause 8.1 (Tax Gross-up), or make any payment under Clause 8.3 (Tax Indemnity and Withholding on Notes or SBL Loan), and (b) such payment cannot be avoided by Naftogaz taking reasonable measures available to it, subject to giving to SBL not less than 30 business days’ prior notice to that effect and providing documentary evidence thereof satisfactory to SBL, prepay the whole (but not part only) of the outstanding principal amount of the Facility, together with any amounts then payable under Clauses 8.1 (Tax Gross-up) or 8.3 (Tax Indemnity and Withholding on Notes or SBL Loan) and accrued interest. Prior to the delivery of any notice of prepayment pursuant to this paragraph, Naftogaz shall deliver to SBL a certificate signed by two Directors of Naftogaz stating the obligation referred to in (a) above cannot be avoided by Naftogaz taking reasonable measures avnilablc to it and SBL shall be entitltd to accept such certificate as sufficient evidence of the satisfaction of the condition precedent set out in (b) above.

7.2 Prepayment for Reasons of Increased Costs Naftogaz may (without premium or penalty), if it is required to make any payment by way of indemnity under Clause 10.1 (Increased Costs), subject to giving to SBL not less than 30 business days’ prior notice to that effect, prepay the whole (but not part only) of the outstanding principal amount of the Facility, together with any amounts then payable under Clause 10.1 (Increased Costs) and accrued interest.

7.3 Notice of Prepayment Any notice of prepayment given by Naftogaz pursuant to Clauses 7.1 (Prepayment for Tax Reasons) or 7.2 (Prepayment for Reasons of Increased Costs) shall be irrevocable, shall specify the date upon which such prepayment is to be made and shall oblige Naftogaz to make such prepayment on such date.

7.4 Costs of Prepayment Naftogaz shall, not later than 10.00 a.m. (New York City time) one business day prior to the date of prepayment, pay all accrued interest (calculated to (but excluding) the date of prepayment) and all other amounts owing to SBL hereunder. Naftogaz shall indemnify SBL on demand against any costs and expenses reasonably incurred and properly documented by SBL on account of any prepayment made in accordance with this Clause 7 (Prepayment).

7.5 No Other Repayments and no Reborrowing Naftogaz shall not repay the whole or any part of the outstanding principal amount of the Facility except at the times and in the manner expressly provided for in this Agreement. No amount prepaid under this Agreement may subsequently be reborrowed.

131 7.6 Purchase of Notes Naftogaz or any of its Subsidiaries may purchase Notes at any time. Any such Notes so purchased may be delivered by Naftogaz to SBL (for onward delivery to the Issuer as issuer of such Notes) for cancellation (provided that, in the case of delivery of Notes for cancellation, the aggregate principal amount of such Notes is not less than U.S.$1,OOO,OOO) and, against such surrender and cancellation, SBL shall credit Naftogaz with the prepayment of an amount of the Advance equal to the principal amount of such surrendered and cancelled Notes. Any such amount of the Advance prepaid shall reduce the outstanding principal amount of the Facility by the same amount as of the date of such delivery by or on behalf of Naftogaz to SBL.

7.7 Prepayment upon a Put Event (1) Promptly, and in any event within 15 calendar days after a Put Event, Naftogaz shall deliver to SBL, the Issuer, the Principal Paying Agent and the Trustee a written notice substantially in the form of Schedule Four (Form of Put Event Notice) (the Put Event Notice) hereto signed on behalf of Naftogaz by two officers of Naftogaz at least one of whom shall be the principal executive officer, principal accounting officer or principal financial officer of Kaftogaz, which notice shall be irrevocable, stating: (i) that a Put Event has occurred; and (ii) the circumstances and relevant facts giving rise to such Put Event and the date upon which such Put Event was or will be legally completed. (2) Naftogaz shall, having been given a Put Redemption Notice by or on behalf of SBL (following receipt by SBL of written confirmation from the Principal Paying Agent of the Put Redemption Amount), prepay the amount equal to the Put Redemption Amount specified in the Put Redemption Notice, together with accrued interest (if any) on such principal amount, up to (but excluding) the Put Event Payment Date, and all other amounts owing to SBL hereunder, on such Put Event Payment Date.

8. TAXES 8.1 Tax Gross-up All payments (including, without limitation, any payments under Clause 8.3 (Tax Indemnity and Withholding on Notes or SBL Loan) below) to be made by Naftogaz to SBL hereunder shall be made in full without set-off or counterclaim, free and clear of and without deduction for or on account of taxes imposed by any taxing authority of or in the United Kingdom or Ukraine or any other jurisdiction from which Naftogaz effects payment, unless Naftogaz is required by any such taxing authority to make such a payment subject to the deduction or withholding of such tax. If at any time such deduction or withholding is so required, the sum payable by Naftogaz in respect of which such deduction or withholding is required to be made shall be increased to the extent necessary to ensure that, after the making of the required deduction or withholding, SBL receives and retains (free from any liability in respect of any such deduction or withholding) a net sum equal to the sum which it would have received and so retained had no such deduction or withholding been made or required to be made. If SBL pays any amount in respect of such taxes, penalties or interest, Naftogaz shall on demand reimburse SBL in U.S. dollars for such payment. For the avoidance of doubt, there is no obligation on SBL to make any such payments. If SBL or Naftogaz becomes subject at any time to any taxing jurisdiction other than the United Kingdom or Ukraine, as the case may be, references in this Clause 8 (Taxes) to the United Kingdom and/or Ukraine shall be construed as references to the United Kingdom andor Ukraine and/or such other jurisdiction.

8.2 Payments Naftogaz shall to the extent reasonably practicable assist SBL in ensuring that all payments made under this Agreement are exempt from deduction or withholding of tax.

8.3 Tax Indemnity and Withholding on Notes or SBL Loan Without prejudice to the provisions of Clause 8.1 (Tax Gross-up). if SBL notifies Naftogaz that (a) the Issuer is obliged under or in respect of the Notes to make any payment or withholding or deduction from any payment which, but for the limited recourse nature of its obligations under the Trust Deed, the Issuer is or would be obliged to make under or in respect of the Notes or (b) it or the Issuer is or would otherwise be required to pay any tax (other than tax assessed on it by

132 reference to its net income) in relation to any sum (other than fees) received by it or the Issuer under this Agreement or the SBL Loan Agreement, as the case may be or (c) it or the Issuer is obliged to make any withholding or deduction for or on account of any taxes imposed by any taxing authority in the United Kingdom under or in respect of the SBL Loan Agreement, Naftogaz agrees to pay to SBL (in the case of (a) or (c) above), no later than one business day prior to the date on which payment is due to the holders of the Notes, an additional amount such that the net amount received by the holders of the Notes, after such withholding or deduction, will equal the amount which would have been received by the holders of the Notes in the absence of such withholding or deduction or (in the case of (b) above and to the extent not already paid under Clause 10.1 (Increased Costs)) no later than one business day prior to the date on which SBL or the Issuer, as the case may be, is required to pay any such tax, an additional amount such that SBL or the Issuer shall be in the same position as it or the Issuer would have been in had it or the Issuer not been required to pay any such tax, and further agrees to indemnify SBL or, as the case may be, the Issuer against any interest, penalties, costs and expenses payable or incurred in connection therewith; provided, however, that (in the case of (a) above) SBL shall as soon as reasonably practicable upon receipt by the Issuer from any holder of Notes of any reimbursement of a sum paid pursuant to this provision, to the extent that a holder of Notes is not entitled to such an additional amount pursuant to the terms and conditions of the Notes, pay an amount to Naftogaz equal to, and in the currency of, the amount received by way of such reimbursement less any applicable taxes, duties or other costs (it being understood that SBL and the Issuer shall not have any obligations to determine whether any holder of Notes is entitled to any such additional amount) provided that the Issuer shall not be in a worse after-tax position than it would have been in had it not been obliged to make such withholding or deduction.

8.4 Tax Claims If SBL intends to make a claim pursuant to Clause 8.3 (Tax Indemnity and Withholding on Notes or SBL Loan), it shall notify Naftogaz thereof provided that nothing herein shall require SBL to disclosc any confidential information relating to the organisation of its affairs.

8.5 Tax Credits and Tax Refunds (1) If an amount is paid under Clauses 8.1 (Tax Gross-up) or 8.3 (Tax Indemnity and Withholding on Notes or SBL Loan) by Naftogat for the bcncfit of SBL and SBL. in its reasonable opinion, determines that it has received or been granted a credit against, a relief or remission for, or a repayment of, any tax, then, if and to the extent that SBL, in its reasonable opinion, determines that such credit, relief, remission or repayment is in respect of or calculated with reference to the deduction or withholding giving rise to such payment or, in the case of an additional payment made or indemnity payment pursuant to Clause 8.3 (Tax Indemnity and Withholding on Notes or SBL Loan), with reference to the liability, expense or loss to which the payment giving rise to the payment relates, SBL shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to Naftogaz such amount as SBL shall, in its sole opinion, have concluded to be attributable to such deduction or withholding or, as the case may be, such liability, expense or loss, provided that SBL shall not be obliged to make any payment under this Clause 8.5 in respect of such credit. relief. rcmission or repayment until SBL is, in its sole opinion, satisfied that its tax affairs for its tax year in respect of which such credit, relief, remission or repayment was obtained have been finally settled and provided that SBL shall not be obliged to make any such payment to the extent that it determines in its sole opinion that to do so would leave it (after the payment) in a worse after-tax position than it would have been in had the increased or additional amount not been required under Clauses 8.1 or 8.3. Any such payment shall, in the absence of manifest error and subject to SBL specifying in writing in reasonable detail the calculation of such credit, relief, remission or repayment and of such payment and providing relevant supporting documents evidencing such matters, be conclusive evidence of the amount due to Naftogaz hereunder and shall be accepted by Naftogaz in full and final settlement of its rights of reimbursement hereunder in respect of such deduction or withholding, or as the case may be, liability, expense or loss. Nothing contained in this Clause 8.5 shall interfere with the right of SBL to arrange its tax affairs generally in whatever manner it thinks tit nor oblige SBL to disclose any information relating to its tax affairs generally or any computations in respect thereof.

133 If as a result of a failure to obtain relief from deduction or withholding of any tax imposed by the Ukrainian tax authorities (a) such tax is deducted or withheld by Naftogaz and pursuant to Clause 8.1. (Tax Gross-up) an increased amount is paid by Naftogaz to SBL in respect of such deduction or withholding, and (b) following the deduction or withholding of tax as referred to above Naftogaz applies on behalf of SBL to the relevant Ukrainian tax authorities for a tax refund and if such tax refund is credited by the Ukrainian tax authorities to a bank account of SBL, SBL shall as soon as reasonably possible notify Naftogaz of the receipt of such tax refund and promptly transfer the entire amount of the tax refund actually received by it in the currency actually received and less any taxes, duties and other costs to a bank account of Naftogaz specificd for that purpose by Naftogaz to the extent that SBL determines in its sole opinion that to do so still leaves it (after the payment) in no worse an after-tax position than it would have been in had no such withholding or deduction been made or required.

8.6 Tax Position of SBL SBL represents that it (i) is a bank which at the date hereof is a resident of the United Kingdom and is resident for United Kingdom taxation purposes in the United Kingdom, (ii) does not have a permanent establishment in Ukraine, and (iii) does not have any current intentions to effect, during the term of the Facility, any corporate action or reorganisation or change of taxing jurisdiction that would result in SBL ceasing to be a resident of the United Kingdom. SBL makes no representation as to the application or interpretation of any double taxation treaty between Ukraine and the United Kingdom.

8.7 Delivery of Forms SBL shall within 30 days of the request of Naftogaz (to the extent it is able to do so under applicable law including Ukrainian laws) use its best efforts to obtain and deliver to Naftogaz such duly completed certificate issued by the competent taxing authority in the United Kingdom confirming that SBL is a tax resident in the United Kingdom and such other information or forms as may need to be duly completed (including a power of attorney in form and substance satisfactory to Naftogaz authorking it to file the certificate on behalf of SBL with the relevant tax authority) and delivered by SBL to enable Naftogaz to apply to obtain relief from deduction or withholding of Ukrainian tax or, as the case may be, to apply to obtain a tax refund if a relief from deduction or withholding of Ukrainian tax has not been obtained. The certificatc and. if rcquircd. other forms referred to in this Clause 8.7 shall, as applicable, be duly signed by SBL and SBL shall use its reasonable endeavours to procure the stamping or approval thereof by the competent tax authority in the United Kingdom. If a relief from deduction or withholding of Ukrainian tax or a tax refund under this Clause 8.7 has not been obtained and further to an application of Naftogaz to the relevant Ukrainian tax authorities the latter requests SBL's hryvnia bank account details, SBL shall (subject to it being satisfied that such action is not adverse to its interests) at the request of Naftogaz (i) use reasonable efforts to procure that such hryvnia bank account of SBL is duly opened and maintained, and (ii) thereafter furnish Naftogaz with the details of such hryvnia bank account. Naftogaz shall pay all costs associated with opening and maintaining such hryvnia bank account, if any.

9. TAX RECEIPTS 9.1 Notification of Requirement to Deduct Tax If, at any time, Naftogaz is required by law to make any deduction or withholding from any sum payable by it hereunder (or if thereafter there is any change in the rates at which or the manner in which such deductions or withholdings are calculated), Naftogaz shall promptly notify SBL.

9.2 Evidence of Payment of Tax If Naftogaz makes any payment hereunder in respect of which it is required to make any deduction or withholding, it shall pay the full amount required to be deducted or withheld to the relevant tax or other authority (subject to any right which Naftogaz may have to contest such payment) within the time allowed for such payment under applicable law and shall deliver to SBL, within 30 days after it has made such payment to the applicable authority, an original receipt (or a certified copy thereof) issued by such authority evidencing the payment to such authority of all amounts so required to be deducted or withheld in respect of such payment.

134 10. CHANGES IN CIRCUMSTANCES 10.1 Increased Costs If, by reason of (i) any change in, repeal of or introduction of any tax, law (including any statute, treaty, order, decree, ordinance or similar legislative or executive action), regulation, regulatory requirement or official directive (having the forcc of law). letter, instruction, request, noticc, guideline, policy or practice statement (whether or not having the force of law) or in the decision or ruling on, or the interpretation or application thereof by any court of law, tribunal, central bank, monetary authority, taxation authority, any other person charged with the administration thereof or other competent authority in Ukraine or the United Kingdom, which, in each case, occurs on or after 29 September 2004 and/or (ii) any compliance by SBL in respect of the Facility or Advance with any request, policy or guideline (whether or not having the force of law but, if not having the force of law, the observance of which is in accordance with the generally accepted accounting or financial practice of financial institutions in the country concerned) from or of the Ccntral Bank, the State Tax Administration of Ukraine, any other central bank or other authority having effect in Ukraine or the United Kingdom, in each case occurring on or after 29 September 2004: (i) SBL incurs an additional cost as a result of SBL’s entering into or performing its obligations (including its obligation to make the Advance) under this Agreement (excluding tax payable by SBL by reference to its net income); (ii) SBL becomes liable to make any additional payment on account of tax or otherwise (not being a tax imposed on its net income or the amounts due pursuant to the Fees Letter) on or calculated by reference to the amount of the Advance andlor to any sum received or receivable by it hereunder, except where compensated under Clause 8.1 or 8.3; or (iii) SBL makes any payment or foregoes any interest or other return on or calculated by reference to the gross amount of any sum receivable by it from Naftogaz hereunder or makes any payment or foregoes any interest or other return on or calculated by reference to the gross amount of the Advance, then Naftogaz shall, from time to time within 30 days of demand of SBL, pay to SBL amounts sufficient to hold harmless and indcmnify it from and against, as the case may be. such properly documented (1) cost, (2) liability or (3) payment or foregone interest or other return, provided that SBL will not be entitled to indemnification where such additional cost or liability arises as a result of the negligence, fraud or wilful default of SBL or is a cost or liability that falls within Clause 8.1 or 8.3.

10.2 Increased Costs Claims If SBL intends to make a claim pursuant to Clause 10.1 (Increased Costs), it shall promptly notify Naftogaz thereof and provide a description in writing in reasonable detail of the relevant reason (as described in Clause 10.1 (Increased Costs) above) including a description of the relevant affected jurisdiction or country and the date on which the change in circumstances took effect. This written description shall demonstrate the connection between the change in circumstance and the additional costs and shall be accompanied by relevant supporting documents evidencing the matters described therein. provided that nothing herein shall require SBL to disclose any confidential information relating to the organisation of its or any other Person’s affairs.

10.3 Illegality If, at any time after the date of this Agreement, it is unlawful for SBL or the Issuer to make, fund or allow to remain outstanding the Advance made or to be made by it hereunder or the SBL Loan or for SBL or the Issuer to maintain or give effect to any of its obligations, in connection with this Agreement or the SBL Loan Agreement or to allow the Notes to remain outstanding then SBL shall, as soon as reasonably practicable after becoming aware of the same, deliver to Naftogaz a notice (setting out in reasonable detail the nature and extent of the relevant circumstances and, if so requested by Naftogaz and at Naftogaz’s expense, accompanied by an opinion of counsel chosen by SBL) to that effect. Within a reasonable time after delivery of such notification, but in no event later than 5 calendar days thereafter, Naftogaz and SBL shall in good faith conduct consultations with the purpose of avoiding the circumstances which result in the unlawfulness, and if, in the sole opinion of SBL,this is not possible, then:

11c (1) if the Advance has not then been made, SBL shall not thereafter be obliged to make the Advance; and

(2) if the Advance is then outstanding and SBL SO requires, Naftogaz shall (without premium or penalty), on the latest date permitted by the relevant law or such earlier day as Naftogaz elects (with notice of such election required to be given by Naftogaz not less than 20 days prior to such earlier date), repay the whole (but not part only) of the outstanding principal amount of the Facility together with accrued interest (up to but excluding the date of such payment) thereon and all other amounts owing to SBL hereunder.

10.4 Mitigation If circumstances arise which would result in: (1) any payment falling due to be made to SBL or for its account pursuant to Clause 10.3 (Illegality); (2) any payment falling due to be made by Naftogaz pursuant to Clause 8.1 (Tax Gross-up); or (3) a claim for additional amounts pursuant to Clause 8.3 (Tax Indemnity and Withholding on Notes or SBL Loan) or indemnification pursuant to Clause 10.1 (Increased Costs). then, without in any way limiting, reducing or otherwise qualifying the rights of SBL or Naftogaz’s obligations under any of the above mentioned provisions, SBL shall, as soon as reasonably practicable upon becoming aware of the same, notify Naftogaz thereof and, in consultation with Naftogaz and to the extent it can lawfully do so and without prejudice to its own position, take reasonable steps (at Naftogaz’s expense) to remove such circumstances or mitigate the effects of such circumstances including (without limitation) by the change of its lending office or transfer of its rights or obligations under this Agreement to another bank, provided that SBL shall be under no obligation to take any such action if, in its opinion, to do so might have any adverse effect upon its business. operations or financial condition or might bc in breach of any provisions of thc Notes.

11. REPRESENTATIONS AND WARRANTIES OF NAFTOGAZ Naftogaz makes the representations and warranties set out in Clause 11.1 (Status) to Clause 11.11 (Compliance with Laws) (inclusive) and acknowledges that SBL has entered into this Agreement in reliance on those representations and warranties.

11.1 Status It and each of its Material Subsidiaries is validly existing under Ukrainian law, is not in liquidation or receivership and has full power and authority to own, lease and operate its properties and conduct its business a5 currently conducted and that Naftogaz is able lawfully, and is duly authorised, to execute and perform its obligations under this Agreement.

11.2 Governmental Approvals Except for the Central Bank licence required to open a foreign account to receive the Advance and the Central Bank certificate of registration of this Agrement (which Naftogaz, in the case of (ii) and (iii) below, undertakes to obtain on or before the Advance Date, and in the case of (i) below, undertakes to obtain on or before the Advance Date (in respect of assets owned, and business carried on, at the date hereof)). all actions or things required to bc taken, fulfilled or done by the laws and regulations of Ukraine, involving any authorisation, order. licence or qualification of or with any court or governmental agency, and all registrations. filings or notarisations required by the laws and regulations of Ukraine in order to ensure (i) that each of Naftogaz and its Material Subsidiaries is able to own its assets and carry on its business and, if not, the absence of which would not be expected to have a Material Adverse Effect; (ii) the due execution, delivery and performance by Naftogaz of this Agreement and (iii) the validity or enforceability against Naftogaz of this Agrccment have been obtained, fulfilled or done and arc in full force and effect.

11.3 Pari Passu Obligations The obligations of Naftogaz under this Agreement will rank at least pari passu in right of payment with all other unsecured and unsubordinated obligations of Naftogaz, except as otherwise provided by mandatory provisions of applicable law.

136 ll.4 Validity and Admissibility in Evidence Except for the Central Bank approval of this Agreement (which Naftogaz undertakes to obtain on or before the Advance Date), all acts. conditions and things requircd to he donc. fulfilled and performed (other than by SBL) to make this Agreement admissible in evidence in Ukraine (whether in arbitration proceedings or otherwise) have been done. fulfilled and performed.

1L5 Valid and Binding Obligations The obligations expressed to be assumed by Naftogaz in this Agreement are legal, valid and binding and, subject to the laws of bankruptcy and other laws affecting the rights of creditors generally, enforceable against it in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity.

11.6 No Stamp Taxes Under the laws of Ukraine in force at the date hereof, the execution, delivery and enforceability of this Agreement is not subject to any Ukrainian tax, duty, fee or other charge including, without limitation, any registration or transfer tax, stamp duty or similar levy except the Central Bank registration fee, which Naftogaz undertakes to pay on or before the Advance Date. lL7 NoDefault No event has occurred or circumstance has arisen which would constitute an Event of Default, a Default or a default under any other agreement or instrument evidencing any Indebtedness of Naftogaz or any of its Material Subsidiaries and no such event will occur upon or as a result of the making of the Advance.

11.8 No Material Proceedings There are no lawsuits, litigation or other legal or administrative or arbitration proceedings current or pending or, to the best of the knowledge and belief of Naftogaz, threatened before any court, tribunal, arbitration panel or Agency which might (a) prohibit the execution and delivery of this Agreement or Naftogaz’s compliance with its obligations hereunder or (b) adversely affect the right and power of Naftogaz to enter into this Agreement or (c) have a Material Adverse Effect.

11.9 No Material Adverse Change Since 31st December, 2003 there has been no material adverse change or any development involving a prospective material adverse change in the financial condition. business prospects, properties, shareholders’ equity or results of operations of the Group.

11.10Execution of Agreement Its execution and delivery of this Agreement and its exercise of its rights and performance of its obligations hereunder do not and will not: (1) conflict with or result in a breach of any of the terms of. or constitute a default under, any instrument, agreement or order to which Naftogaz or any of its Material Subsidiaries is a party or by which it or its or their properties is or are bound; (2) conflict with the provisions of the constitutional documents of Naftogaz or any corporate approvals thereof; or (3) give rise to any event of default or moratorium in respect of any of the obligations of Naftogaz or any of its Material Subsidiaries or the creation of any lien, encumbrance or other security interest (howsoever described) in respect of any of the assets of Naftogaz or any of its Material Subsidiaries, and which, in the case of a Material Subsidiary, could reasonably be expected to have a Material Adverse Effect. ll.ll Compliance with Laws Neither the entry into nor the performance by Naftogaz of its obligations under this Agreement will violate any laws or regulations of Ukraine or any directives of governmental authorities therein having the force of law or, so far as Naftogaz is aware, any other law or regulation affecting it and,

137 except where failure to be so in compliance would not have a Material Adverse Effect, Naftogaz and each of its Material Subsidiaries is in compliance in all respects with all applicable provisions of the law and regulations of Ukraine.

11.12 No Deduction Under the laws of Ukraine in force at the date of this Agreement, in accordance with the terms of the Double Tax Treaty and subject to the due satisfaction by SBL of certain conditions set forth therein, payments of interest by Naftogaz to SBL under this Agreement may be made without deduction of applicable withholding tax, as established by applicable Ukrainian legislation.

11.13 Repetition Each of the representations and warranties contained in Clause 11 (Representations and Warranties of Naftogaz) shall be deemed to be repeated by Naftogaz on the Advance Date.

12. REPRESENTATIONS AND WARRANTIES OF SBL SBL makes as at the date of this Agreement the representations and warranties set out in Clause 12.1 (Status and Due Authorisation) to Clause 12.4 (Consents and Approvals) (inclusive) and acknowledges that Naftogaz has entered into this Agreement in reliance on those representations and warranties.

12.1 Status and Due Authorisation SBL is duly incorporated under the laws of the United Kingdom and has full power and capacity to execute this Agreement, the SBL Loan Agreement, the Trust Deed, the Agency Agreement and the Subscription Agreement, has full power and capacity to undertake and perform the obligations expressed to be assumed by it herein and therein and has taken all necessary action to approve and authorise the same.

12.2 Execution of Agreement The execution of this Agreement, the SBL Loan Agreement, the Trust Deed; the Agency Agreement and the Subscription Agreement and the undertaking and performance by SBL of the obligations expressed to be assumed by it herein and therein will not conflict with, or result in a breach of or default under, the laws of England or the provisions of its constitutional documents, save where such breach or default is not material in the context of the issue of the Notes, any agreement or instrument to which it is a party or by which it is bound or in respect of indebtedness in relation to which it is a surety.

12.3 Valid and Binding Obligations This Agreement, the SBL Loan Agreement, the Trust Deed, the Agency Agreement and the Subscription Agreement, constitute legal, valid and binding obligations of SBL enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors’ rights generally and to general principles of equity.

12.4 Consents and Approvals All authorisations, consents and approvals required by SBL for or in connection with the execution of this Agreement, the SBL Loan Agreement, the Trust Deed, the Agency Agreement, the Subscription Agreement and the performance by SBL of the obligations expressed to be undertaken by it herein and therein have been obtained and are in full force and effect.

13. INFORMATION Naftogaz shall supply or procure to be supplied to SBL (in sufficient copies as may reasonably bc required by SBL) all such information as the Luxembourg Stock Exchange (or any other or further stock exchange or stock exchanges or any other relevant authority or authorities on which the Notes may, from time to time, be listed or admitted to trading) may require in connection with the listing or admittance to trading on such stock exchange or relevant authority of the Notes.

138 14. COVENANTS The covenants in this Clause 14 remain in force from the date of this Agreement for so long as the Advance or any part of it is or may be outstanding.

14.1 Negative Pledge So long as any amount remains outstanding hereunder, Naftogaz shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur or suffer to exist any Liens, other than Permitted Liens, on any of its assets, now owned or hereafter acquired, securing any Indebtedness, unless the Facility is secured equally and rateably with such other Indebtedness.

14.2 Maintenance of Legal Validity Save as provided in the proviso to the next sentence, Naftogaz shall obtain, comply with the terms of and do all that is necessary to maintain in full force and effect all authorisations, approvals, licences and consents and make or cause to be made all registrations, recordings and filings required in or by the laws and regulations of Ukraine to enable it lawfully to continue to perform its obligations under this Agreement and for the validity or enforceability thereof. Naftogaz shall promptly pay all amounts payable in respect of fees, expenses and payments under indemnities as required by this Agreement (Relevant Payments), provided that, in the event that Naftogaz is prevented from paying such amounts by virtue of any requirement of the Central Bank or any other equivalent or similar authority, Naftogaz undertakes that it will promptly obtain and maintain in full force and effect any necessary licences or other authorisations to enable it to make the Relevant Payments and shall, as soon as practicable thereafter, make all Relevant Payments under this Agreement.

14.3 Mergers So long as any amount remains outstanding hereunder and subject to subclause 14.4, (a) Naftogaz shall not, without the prior written consent of SBL, (i) enter into any reorganisation (whether by way of a merger, accession, division, separation or transformation, as these terms are construed by applicable Ukrainian legislation), or (ii) participate in any other type of corporate reconstruction and (b) Naftogaz shall ensure that no Material Subsidiary (i) enters into any reorganisation (whether by way of a merger, accession, division, separation or transformation, as these terms are construed by applicable Ukrainian legislation), or (ii) participates in any other type of corporate reconstruction, if any reorganisation or other type of corporate reconstruction mentioned in (a) and (b) after such reorganisation or corporate reconstruction, has a Material Adverse Effect.

14.4 Disposals Without prejudice to the provisions of Clause 14.5, so long as any amount remains outstanding hereunder, Naftogaz shall not and shall ensure that no Material Subsidiary shall (in each case disregarding sales of stock in trade on an arm's-length basis in the ordinary course of business and assignments of or other arrangements over the rights or revenues arising from contracts for the sale of gas, crude oil or oil products) sell, lease, transfer or otherwise dispose of, to a person that is not a member of the Group, by one or more transactions or series of transactions (whether related or not), the whole or any part of its revenues or its assets if such sale, lease, transfer or disposal has a Material Adverse Effect.

14.5 Transactions with Affiliates Naftogaz shall not, and shall not permit any of its Material Subsidiaries to, directly or indirectly, conduct any business, enter into or permit to exist any transaction or series of related transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any property or the rendering of any service) with, or for the benefit of. any Affiliate (an miate Transaction) including intercompany loans unlcss (a) the terms of such Affiliate Transaction are no less favourable to Naftogaz or such Material Subsidiary, as the case may be, than those that could be obtaincd in a comparable arm's-lungth transaction with a Person that is not an Affiliate of Naftogaz or such Subsidiary: or (b) such Affiliate Transaction is made pursuant to a contract existing on 30 Septcmber 2004 (excluding any amendments or modifications thereof). This subclause 14.5 shall not apply to (i) transactions where prices are regulated by or through the Ukrainian government. (ii) compensation or employee benefit arrangements with any officer or director of Naftogaz or any of its Material Subsidiaries arising as a result of their employment

139 contract and (iii) transactions between Naftogaz and any of its Material Subsidiaries or between such Material Subsidiaries.

14.6 Maintenance of Property So long as any amount remains outstanding hereunder, Naftogaz will and shall procure that its Material Subsidiaries will, cause all property used in the conduct of its or their business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as, in the judgment of Naftogaz or any such Material Subsidiary, may be reasonably necessary so that the business carried on in connection therewith may be properly conducted at all times.

14.7 Payment of Taxes and Other Claims So long as any amount remains outstanding (which, for the avoidance of doubt, shall not include restructured tax indebtedness for prior years) hereunder, Naftogaz and its Subsidiaries shall pay or discharge or cause to be paid or discharged, before the same shall become overdue, all taxes, assessments and governmental charges levied or imposed upon. or upon the income, profits or property of Naftogaz or any of its Subsidiaries; provided that none of Naftogaz nor any such Subsidiary shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim (a) whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with IFRS or other appropriate provision has been made or (b) whose amount, together with all such other unpaid or undischarged taxes, assessments, charges and claims, does not in the aggregate exceed U.S.$20,000,000 and does not remain unpaid or undischarged by the tenth day following such levy or imposition.

14.8 Withholdmg Tax Exemption Naftogaz and SBL shall provide all reasonable assistance to each other as that other requires to ensure that SBL can benefit from the withholding tax exemption pursuant to the Double Tax Treaty.

14.9 Maintenance of Insurance So long as any amount remains outstanding hereunder, Naftogaz shall, and shall procure that its Material Subsidiaries shall, keep those of their properties which are of an insurable nature insured with insurers, believed by Naftogaz or such Material Subsidiary to be of good standing, against loss or damage to the extent that property of similar character is usually so insured by corporations in the same jurisdictions similarly situated and owning like properties in the same jurisdictions.

1410 Financial Information (a) Naftogaz hereby undertakes that so long as the Facility or any other sum owing hereunder remains outstanding it shall deliver to SBL,within seven months after the end of each of its financial years, copies of its audited consolidated financial statements for such financial year, prepared in accordance with IFRS consistently applied with the corresponding financial statements for the preceding period. (b) Naftogaz hereby undertakes that so long as the Advance or any other sum owing hereunder remains outstanding it shall deliver to SBL,without undue delay, such additional information regarding the financial position or the business of Naftogaz and its Subsidiaries as SBL may reasonably request including providing certification to the Trustee pursuant to subclauscs 13.2(d) and 13.2(i) of the Trust Deed.

14.11 Financial Covenant Naftogaz shall not, at any time, permit Consolidated Net Indebtedness to exceed 75 per cent. of Consolidated Net Worth and shall procure that, of such permitted Consolidated Net Indebtedness, the aggregate Indebtedness of all Consolidated Subsidiaries shall not be, at any time, greater than an amount equal to 30 per cent. of Consolidated Net Worth.

140 14.12 Compliance Certificate On cach Interest Payment Date (other than the final Interest Payment Date that falls on thc Repayment Date). Naftogaz shall deliver to SBL written notice in the form of an Officcr's Certificate stating whcther any Default or Event of Default has occurred and. if it has occurred. what action Naftogaz is taking or proposes to take with respect thereto.

15. EVENTS OF DEFAULT U.1 Events of Default If one or more of the following events of default (each, an Event of Default) shall occur and be continuing, SBL shall be entitled to the remedies set forth in subclause 15.3. Naftogaz fails to pay any amount payable hereunder as and when such amount becomes payable in the currency and in the manner specified herein and. in the case of payments of interest, such failure continues for a period of five days. Naftogaz fails to perform or observe any covenant or agreement contained herein to be performed or observed by it, and such failure (if capable of being remedied) is not remedied within 30 days after SBL has given written notice thereof to Naftogaz. Any Indebtedness of Naftogaz or any of its Material Subsidiaries is not paid when due or within any originally applicable grace period, or any Indebtedness of Naftogaz or any of its Material Subsidiaries is or becomes capable of being declared to be or otherwise becomes due and payable prior to its specified maturity otherwise than at the option of Naftogaz or such Material Subsidiary or (provided that no event of default, howsoever described, has occurred) any person entitled to such Indebtedness; provided however, that the total amount of such Indebtedness which is not paid when due or becomcs due and payable prior to its specified maturity is equal to or greater than U.S.$20,000,000(or its equivalent in another currency). The occurrence of any of the following events: (i) any of Naftogaz or any of its Material Subsidiaries seeking, consenting or acquiescing in the introduction of proceedings for its liquidation or bankruptcy or the appointment of a liquidation commission or a similar officer of any of Naftogaz or any of its Material Subsidiaries as the case may be; (ii) unless being contested in good faith by Naftogaz or the relevant Material Subsidiary within 30 days of such presentation or filinp thereof. the presentation or tiling of a petition in respect of any of Naftogaz or any of its Material Subsidiaries in any court, arbitration court or before any agency alleging or for the bankruptcy, insolvency, dissolution, liquidation (or any analogous proceeding) of any of Naftogaz or any of its Material Subsidiaries; (iii) the institution of the supervision, external management, bankruptcy management of any of Naftogaz or any of its Material Subsidiaries; (iv) the convening or announcement of an intention to convene a meeting of creditors of any of Naftogaz or any of its Material Subsidiaries for the purposes of considering an amicable settlement. as the above terms are defined in Ukrainian legislation: and/or (v) any extra judicial liquidation or analogous act in respect of any of Naftogaz or any of its Material Subsidiaries by any governmental, regulatory or supervisory body in or of Ukraine. Naftogaz or any of its Material Subsidiaries (i) fails or is unable to pay its debts generally as they become due, or (ii) consents by answer or otherwise to the commencement against it of an involuntary case in bankruptcy or any other such action or proceeding or to the appointment of a custodian of it or for any substantial part of its property or (iii) a court of competent jurisdiction enters an order for relief or a decree in an involuntary case in bankruptcy or any other such action or proceeding or for the appointment of a custodian in respect of Naftogaz or any of its Material Subsidiaries or any of its property and such order or decree remains unstayed and in effect for 60 days. Any governmental authorisation necessary for the performance of any obligation of Naftogaz under this Agreement fails to be in full force and effect. Any governmental authority or court takes any action that has a Material Adverse Effect. The Shareholders of Naftogaz shall have approved any plan of liquidation or dissolution of Naftogaz.

141 The aggregate amount of unsatisfied judgments. decrees or orders of courts or other appropriate law-enforcement bodies for the payment of money against Naftogaz and its Material Subsidiaries in the aggregate exceeds U.S.$25,000,000, or the equivalent thereof in any other currency or currencies, unless such judgment, decree or order is being contested in good faith by Naftogaz or any other Subsidiary, as the case may be and there is a period of 60 days following the entry thereof during which such judgment, decree or order is not discharged, waived or the execution thereof stayed. At any time it is or becomes unlawful for Naftogaz to perform or comply with any or all of its obligations under this Agreement or any of such obligations are not, or cease to be, legal, valid, binding and enforceable. Naftogaz ceases to carry on the principal business it carries on at the date hereof. Any execution or distress is levied against, or an encumbrancer takes possession of or sells, the whole or any part of, the property, undertaking, revenues or assets of Naftogaz or any of its Subsidiaries in respect of property, undertaking, revenues or assets and such action has a Material Adverse Effect. Any event occurs which under the laws of any relevant jurisdiction has an analogous effect to any of the events referred to in (d), (e), (g), (h) and (i) of the foregoing paragraphs.

15.2 Notice of Default Naftogaz shall deliver to SBL and the Trustee, within 15 business days after the occurrence thereof, written notice in the form of an Officers’ Certificate of any cvcnt which is. or with the giving of notice or the lapse of time, or both, would become, an Event of Default, its status and what action Naftogaz is taking or proposes to take with respect thereto.

15.3 Default Remedies If any Event of Default shall occur and be continuing, SBL may, by notice to Naftogaz, (a) declare the obligations of SBL hereunder to be terminated, whereupon such obligations shall terminate, and (b) declare all amounts payable hereunder by Naftogaz that would otherwise be due after the date of such termination to be immediately due and payable, whereupon all such amounts shall become immediately due and payable, all without diligence, presentment, demand of payment, protest or notice of any kind, which are expressly waived by Naftogaz; provided, however, that if any event of any kind referred to in sub-clause 15.l(e) occurs the obligations of SBL hereunder shall immediately terminate, and all amounts payable hereunder by Naftogaz that would otherwise be due after the occurrence of such event shall become immediately due and payable, all without diligence, presentment, demand of payment, protest or notice of any kind, which are expressly waived by Naftogaz.

16. ACCRUAL OF INTEREST AND INDEMNH‘Y 16.1. Accrual of Interest If any sum due and payable by Naftogaz hereunder is not paid on the due date therefor in accordance with the provisions of Clause 18 (Payments), interest will continue to accrue on such sum at a rate per annum equal to the Interest Rate up to but excluding the date on which it is paid by Naftogaz.

16.2 Naftogaz’s Indemnity Naftogaz undertakes to SBL. that if SBL. any of its Affiliates, or any director. officer, employee or agent of SBL or any such Affiliate or any person controlling SBL within the meaning of thc United States securities laws (each an “indemnified party”) incurs any loss, liability, cost, claim, charge, expense (including without limitation, taxes, legal fees and expenses reasonably incurred), demand or damage (a “Loss”) as a result of or in connection with the Advance, this Agreement (or enforcement thereof), or the issue, constitution, sale, listing or enforcement of the Notes or the Notes being outstanding (including any Loss incurred under the documents relating to the Notes or their creation or subscription) or any combination of any of the foregoing, except a LOSS which is caused by an indemnified party’s wilful misconduct or which is caused by a breach by SBL of its representation and warranties herein or a breach by SBL of the selling restrictions in the Subscription Agreement Naftogaz shall pay to SBL, on demand, an amount equal to such Loss and

142 all costs, charges and expenses which it or any indemnified party may pay or incur in connection with investigating, disputing or defending any such action or claim as such costs, charges and expenses are incurred. SBL shall not have any duty or obligation. whether as fiduciary or trustee. for any indemnified party or otherwise. to recover any such paynicnt or to account to any other person for any amounts paid to it under this Clause 16.2.

16.3 Independent Obligation Clause 16.2 constitutes a separate and independent obligation of Naftogaz from its other obligations under or in connection with this Agreement or any other obligations of Naftogaz in connection with the issue of the Notes by the Issuer and shall not affect, or be construed to affect, any provisions of this Agreement or any such other obligations.

16.4 Evidence of Loss A certificate of SBL setting forth the amount of Loss and specifying in full detail the basis therefor shall, in the absence of a manifest error, be conclusive evidence of the amount of such Loss.

16.5 Survival The obligations of Naftogaz pursuant to Clauses 8.1,8.3,10,16,17 and 19 shall survive the execution and delivery of this Agreement, the drawdown of the Facility and the repayment of the Advance, in each case by Naftogaz.

17. CURRENCY OF ACCOUNT AND PAYMENT 17.1 Currency of Account The U.S. dollar is the currency of account and payment for each and every sum at any time due from Naftogaz hereunder.

17.2 Currency Indemnity If any sum due from Naftogaz under this Agreement or any order or judgment given or made in relation hereto has to be converted from the currency (the first currency) in which the same is payable hereunder or under such order or judgment into another currency (the second currency) for the purpose of (a) making or filing a claim or proof against Naftogaz, (b) obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or judgment given or made in relation hereto, Naftogaz shall indemnify and hold harmless SBL from and against any loss suffered or reasonably incurred as a result of any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and (ii) the rate or rates of exchange at which SBL may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof.

18. PAYMENTS 18.1 Payments to SBL On each date on which this Agreement requires an amount denominated in U.S.dollars to be paid by Naftogaz, Naftogaz shall make the same available to SBL by payment in U.S. dollars and in Same-Day Funds not later than 10.00 a.m. (New York City time) one business day prior to such date (or in such other funds as may for the time being be customary in New York for the settlement in New York of international banking transactions in U.S. dollars) to the Account other than amounts payable (i) in respect of the SBL Reserved Rights (as such term is defined in the Trust Deed) and (ii) payable in relation to Clause 16.2 (Naftogaz’s Indemnity), which shall be paid to such account as SBL specifies. Without prejudice to its obligations under Clause 5.2 (Payment of Interest). Naftogaz shall procure that, before 10.00 a.m. (New York City time) on the third Banking Day before the due date of each payment made by it under this Agreement, the bank effecting payment on its behalf confirms to SBL or to such person as SBL may direct by tested telex or authenticated SWIFT message the payment instructions relating to such payment. For these purposes, Bauking Day means a day on which banks are open for general business in New York City,

143 18.2 Alternative Payment Arrangements If, at any time, it shall become impracticable (by reason of any action of any governmental authority or any change of law, exchange control regulations or any similar event) for Naftogaz to make any payments hereunder in the manner specified in Clause 18.1 (Payments to SBL). then Naftogaz may agree with SBL alternative arrangements for such payments to be made provided that, in the absence of any such agreement, Naftogaz shall be obliged to make all payments due to SBL in the manner specified hcrein.

18.3 No Set-off All payments required to be made by Naftogaz hereunder shall be calculated without reference to any set-off or counterclaim and shall be made free and clear of and without any deduction for or on account of any set-off or counterclaim.

19. COSTS AND EXPENSES 19.1 Transaction Expenses and Fees Naftogaz agrees that it shall pay the fees and expenses as specified in the Fees Letter. SBL shall be entitled to deduct the fees and expenses referred to in Clause 1 of such Fees Letter from any amount drawn down under the Facility, in accordance with Clause 3.2 (Deduction for Fees). Naftogaz undertakes to pay, from time to time, such further amounts as are claimed pursuant to Clause 2 of the Fees Letter (and the Schedule thereto), in accordance with the terms thereof.

19.2 Preservation and Enforcement of Rights Naftogaz shall, from time to time on demand of SBL and following receipt from SBL of a description in writing in reasonable detail of the relevant costs and expenses, together with the relevant supporting documents evidencing the matters described therein, reimburse SBL for all costs and expenses (including legal fees and expenses) together with any VAT thereon properly incurred in or in connection with the preservation andor enforcement of any of its rights under this Agreement (except where the relevant claim is successfully defended by Naftogaz).

19.3 Stamp Taxes Naftogaz shall pay all Ukrainian and United Kingdom stamp, registration and other similar duties or taxes (including any interest thereon or penalties in connection therewith) to which this Agreement or any judgment given against Naftogaz in connection herewith is or at any time may be subject and shall, from time to time on demand of SBL, indemnify SBL against any properly documented liabilities, losses, costs, expenses and claims resulting from any failure to pay or any delay in paying any such duty or tax.

19.4 SBL’s Costs Naftogaz shall, from time to time on demand of SBL (and without prejudice to the provisions of Clause 16.2 (Naftogaz’s Indemnity) and Clause 19.2 (Preservation and Enforcement of Rights)) compensate SBL at such daily andor hourly rates as SBL shall from time to time reasonably determine for the time and expenditure, all costs and expenses (including telephone, fax, copying, travel and personnel costs) reasonably incurred and properly documented by SBL in connection with its taking such action as it may deem appropriate or in complying with any request by Naftogaz in connection with: (1) the granting or proposed granting of any waiver or consent requested hereunder by Naftogaz; (2) any actual breach by Naftogaz of its obligations hereunder; (3) any amendment or proposed amendment hereto requested by Naftogaz; or (4) the occurrence of any event which is a Default or an Event of Default.

20. ASSIGNMENTS AND TRANSFERS 20.1 Binding Agreement This Agreement shall be binding upon and enure to the benefit of each party hereto and its or any subsequent successors and assigns.

144 20.2 No Assignments and Transfers by Naftogaz Naftogaz shall not be entitled to assign or transfer all or any of its rights. benefits and obligations hereunder.

20.3 Assignments by SBL (A) Prior to an Event of Default, SBL may, subject (in the case of (b) below) to the prior written consent of Naftogaz (such consent not to be unreasonably withheld or delayed) at any time assign all or any of its rishts and benefits hereunder or transfer all or any of its rights. benefits and obligations hereunder: (a) to the Trustee; or (b) to any company which, as a result of any amalgamation, merger or reconstruction or which, as a result of any agreement with SBL (or any previous substitute) owns beneficially tho whole or substantially the whole of the undertaking. property and asscts owned by SBL prior to such amalgamation, merger, reconstruction or agreement coming into force and where, in the case of any company which will own the whole or substantially the whole of the undertaking, property or assets of SBL,the substitution of that company as principal debtor in relation to the Notes would not be materially prejudicial to the holders of the Notes, provided, however, that Naftogaz's consent shall not be required upon a substitution pursuant to the Trust Deed or for any assignment or transfer which will not materially affect Naftogaz's obligations under this Agreement. (B) On or following an Event of Default, SBL may, by notice to Naftogaz, assign all or any of its rights and benefits hercunder or trarisfcr all or any of its rights. bencfits and obligations hereunder to the Trustee.

21. CALCULATIONS AND EVIDENCE OF DEBT 21.1 Basis of Accrual Default interest shall accrue from day to day and shall be calculated on the basis of a year of 360 days consisting of 12 months of 30 days each and, in the case of an incomplete month, the actual number of days elapsed.

21.2 Evidence of Debt SBL shall maintain in accordance with its usual practice accounts evidencing the amounts from time to time lent by and owing to it hereunder; in any legal action or proceeding arising out of or in connection with this Agreement, in the absence of manifest error and subject to the provision by SBL to Naftogaz of written information describing in reasonable detail the calculation or computation of such amounts together with the relevant supporting documents evidencing the matters described therein, the entries made in such accounts shall be conclusive evidence of the existence and amounts of the obligations of Naftogaz therein recorded.

21.3 Change of Circumstance Certficates A certificate signed bv two Authorised Signatories of SBL describing in reasonable detail (a) the amount by which a sum payable to it hereunder is to be increased under Clause 8.1 (Tax Gross-up) or (b) the amount for the time being required to indemnify it against any such cost, payment or liability as is mentioned in Clause 8.3 (Withholding on Notes) or Clause 10.1 (Increased Costs) shall, in the absence of manifest error, be conclusive evidence of the existence and amounts of the specified obligations of Naftogaz.

22. REMEDIES AND WAIVERS, PARTIAL INVALIDITT 22.1 Remedies and Waivers No failure by SBL to exercise, nor any delay by SBL in exercising, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law.

145 22.2 Partial Invalidity If, at any time, any provision hereof is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions hereof nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby.

23. NOTICES; LANGUAGE 23.1 Communications in Writing Each communication to be made hereunder shall be made in writing and, unless otherwise stated, shall be made by fax or letter.

23.2 Delivery Any communication or document to be made or delivered by one party (A)to another (B)pursuant to this Agreement shall (unless B has by 15 days’ written notice to A specified another address or fax number) be made or delivered to B at the fax number or address below and shall be effective when left at or delivered to that address (in the case of a letter) or when received (in the case of a fax).

23.3 Language This Agreement shall be signed in English and Ukrainian. Each communication and document made or delivered by one party to another pursuant to this Agreement shall be in the English language or accompanied by a translation thereof into English certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof. In the event of any discrepancies between the English and any Ukrainian or other versions of this Agreement, such communication or document, or any dispute regarding the interpretation of any provision in the English or any Ukrainian or other versions of this Agreement, such communication or document, the English version of this Agreement, such communication or document shall prevail, unless the documcnt is a statutory or other official document.

24. LAW AND JURISDICTION 24.1 English Law This Agreement is governed by, and shall be construed in accordance with, English law.

24.2 English Courts Subject to Clause 24.7 (Arbitration), Naftogaz agrees for the bencfit of SBL that the courts of England shall have exclusive jurisdiction to hear and determine any suit, action or proceedings, and to settle any disputes, which arise out of or in connection with this Agreement (Proceedings) and, for such purposes, irrevocably submits to the exclusive jurisdiction of such courts.

24.3 Appropriate forum Naftogaz irrevocably waives any objection which it might now or hereafter have to the courts of England being nominated as the forum to hear and determine any Proceedings and to settle any Disputes (as defined below), and agrees not to claim that any such court is not a convenient or appropriate forum.

24.4 Service of Process Naftogaz agrees that the service of process relating to any Proceedings in England may be by delivery to Law Debenture Corporate Services Limited at Fifth Floor, 100 Wood Street, London EC2V 7EX. If such person is not or ceases to be effectively appointed to accept service of process, Naftogaz shall immediately appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, SBL shall be entitled to appoint such a person by written notice to Naftogaz. Nothing in this Clause shall affect the right of SBL to serve process in any other manner permitted by law.

146 24.5 Non-exclusivity The submission by Naftogaz to the exclusive jurisdiction of the English courts shall not (and shall not be construed so as to) limit the right of SBL to bring Proceedings in any other court of competent jurisdiction.

24.6 Waiver of immunity and consent to enforcement Naftogaz hereby waives with respect to this Agreement any right to claim sovereign or other immunity from jurisdiction or execution and any similar defence, and irrevocably consents to the giving of any relief or the issue of any process in connection with any Proceedings or Disputes including (without limitation) the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgment which is made or given in such Proceedings or Disputes.

24.7 Arbitration If any dispute or difference of whatever nature howsoever arises from or in connection with this Agreement (or any supplement, modification or addition thereto) (each a Dispute), SBL may elect, by notice in writing to Naftogaz, to settle such claim by arbitration in accordance with the following provisions. Naftogaz hereby agrees that any Dispute may be settled by arbitration in accordance with the UNCITRAL Arbitration Rules (the Rules) as at present in force by a panel of three arbitrators (or a sole arbitrator as the parties may agree) appointed in accordance with the Rules. The seat of any arbitration shall be London, England. The language of the arbitration shall be English. The appointing authority for the purposes set forth in Article 7(2) of the Rules shall be the President of the London Court of International Arbitration.

24.8 Contracts (Rights of Third Parties) Act 1999 A person who is not a party to this Agreement has no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement, but this does not affect any right or remedy of a third party which exists or is available apart from that Act. AS WlTNESS the hands of the duly authorised representatives of the parties hereto the day and year first before written.

147 SCHEDULE ONE

CONDITIONS PRECEDENT DOCUMENTS

1. Certificd copies of Naftogaz’s Charter and any other of its constitutive documents of any amendments and changes thereto together with a certified English translation. 2. A certified copy of all resolutions and other authorisations required to be passcd or givcn. and evidence of any other action required to be taken, on behalf of Naftogaz to approve its entry into this Agreement and any other documents to be delivered by Naftogaz pursuant hereto, to authorise appropriate persons to execute this Agreement and such other documents and to take any other action in connection therewith, together with a certified English translation. and for the avoidance of doubt, to include actions required pursuant to Clauses 11.2, 11.4 and 11.6 hereof. A certificate of Naftogaz setting out the positions, namcs and sample signatures of the persons authorised to sign, on behalf of Naftogaz, this Agreement and any other documents to be delivered by Naftogaz pursuant hereto. 4. An opinion of Magister & Partners, legal advisers to Naftogaz as to Ukrainian law (including certain tax matters in respect of Ukraine), addressed to SBL and the Managers, and in form and substance satisfactory to SBL and ABN AMRO (as defined in the Subscription Agreement). 5. An opinion of Linklaters, legal advisers to SBL as to English law, addressed to SBL and the Managers, and in form and substance satisfactory to SBL and ABN AMRO. 6. A copy of the Fees Letter executed by Naftogaz. 7. An opinion of BDO Balance Audit, Kiev, Ukrainian tax advisers to Naftogaz, in form and substance satisfactory to Naftogaz and SBL. 8. Such other signing authorities as Naftogaz may be required to obtain under applicable legislation. 9. A letter from Law Debenture Corporate Services Limited confirming its acceptance as aptfor service of process of Naftogaz. IO. Officers’ Certificate substantially in the form of Schedule Three. 11. Closing Certificate substantially in thc form of Schedule Two (Closing Certificate). 12. A copy of the Central Bank licence and certificate of registration referred to in Clause 11.2.

148 SCHEDULE TWO

CLOSING CERTIFICATE

[Letterhead of Naftogazl

Standard Bank London Limited and ABN AMRO Bank N.V. for itself and on behalf of the Managers of the below-mentioned issue 30 September 2004 Dear Sirs Re: U.S.$500,000,000 Loan Agreement, dated 29 September 2004 (the Loan Agreement), between NJSC Naftogaz of Ukraine (Naftogaz) and Standard Bank London Limited (the Lender) Wc, thc undersigned. being duly authorised officers of Naftogaz, hereby certify that there has been, as at the date of this certificate, (i) no cvent has occurred or circumstance arisen which would constitute a Default or Event of Default, (ii) the representations and warranties set out in Clause 11 of the Loan Agreement are true with respect to the facts then subsisting and (iii) Naftogaz is in full compliance with all its obligations under the Loan Agreement and the Fee Letter (as defined in the Loan Agreement). Yours faithfully,

For and on behalf of NJSC Naftogaz of Ukraine

Authorised Signatory ......

149 SCHEDULE THREE

FORM OF OFFICERS' CERTIFICATE

[On the letterhead of Naftogaz] [Date] TO: Standard Bank London Limited Cannon Bridge House 25 Dowgate Hill London EC4R 2SB United Kingdom For the attention of: Tim LuppriardHead of Operations The Bank of New York (as Trustee and Principal Paying Agent) One Canada Square London E14 SAL England For the attention of: Corporate Trust Administration

Dear Sirs Re: U.S.$500,000,000 Loan Agreement, dated 29 September 2004 (the Naftogaz Loan Agreement), between NJSC Naftogaz Ukraine (Naftogaz) and Standard Bank London Limited (SBL) 1. We refer to Clause 14.12 of the Naftogaz Loan Agreement. 2. Capitalised terms used. but not dcfined herein. having thc meanings ascribcd to them in the Naftogaz Loan Agreement. 3. We confirm that [up to and including the date hercof no Default has occurrod and is continuing/ specify any Default which has occurred and is continuing, and if so, what action Naftogaz is taking or proposes to take with respect thereto]." 'Delete and/or complete as applicable

Yours faithfully, For and on behalf of Naftogaz

Authorised Signatory ......

Authorised Signatory......

150 SCHEDULE FOUR

FORM OF PUT EVENT NOTICE

[On the letterhead of Naftogaz] [Date] To: Standard Bank London Limited Cannon Bridge House 25 Dowgate Hill London EC4R 2SB United Kingdom For the attention of: Tim LuppriadHead of Operations Standard Bank London Holdings PLC Cannon Bridge House 25 Dowgate Hill London EC4R 2SB United Kingdom For the attention of: Tim LuppriadHead of Operations The Bank of New York (as Trustee and Principal Paying Agent) One Canada Square London E14 5AL England For the attention of: Corporate Trust Administration

Dear Sirs: Re: U.S.$500,000,000 Loan Agreement, dated 29 September 2004 (the Naftogaz Loan Agreement), between NJSC Naftogaz Ukraine (Nsftogaz) and Standard Bank London Limited (SBL) 1. We refer to Clause 7.7(2) of the Naftogaz Loan Agreement. 2. Capitaliscd terms used. but not defined herein. having thc meanings ascribcd to thcin in thc Naftogaz Loan Agreement. 3. We confirm a Put Event has occurred. 4. The circumstances and relevant facts giving rise to the Put Event are as follows: [ 1.

Yours faithfully, For and on behalf of Naftogaz

Authodsed Signatory......

Authorised Signatory ......

151 SIGNATORIES

Borrower NJSC NAFTOGAZ OF UKRAINE 6, B Khmelnitskogo Street Kyiv, 01001 Ukraine Telephone: 1-380 44 4612517 Fax: +380 44 4612517 Attention: Igor Voronin, Deputy Chairman of the Board

CC: Yuri Velichko, Head of International Economic Activities

By: ......

Name: ......

Title: ......

Lender STANDARD BANK LONDON LIMITED Cannon Bridge House 25 Dowgate Hill London EC4R 2SB United Kingdom Telephone: +44 20 7815 3000 Fax: +44 20 7815 309917979 3142 Attention: Tim Luppriamead of Operations

By:...... By: ......

Name: ...... Name: ......

Title: ...... Title: ......

152 TAXATION

The following is a general description of certain tax laws relation to the Notes and the Loans as in effecton the date hereof and does not purport to be a complete analysis of all tux considerations relating to the Notes. Prospective purchasers of Notes should consult their own tax advisers as to which countries’ tar laws could be relevant to acquiring, holding and disposing of Notes and receiving payments of interest, principal and or other amounts under the Notes and the consequences of such actions under the tar laws of those countries.

Ukraine Genera1 The following summary is included for general information only. Potential investors in and holders of the Notes should consult their own tax advisor as to the tax consequences under the laws of Ukraine of the acquisition, ownership and disposition of the Notes. This summary is based upon the Ukrainian tax laws and regulations as in effect on the date of this Offering Circular. Such laws and regulations are subject to change or varying interpretations, possibly with retrospective effect. As with other areas of Ukrainian legislation, tax law and practice in Ukraine is not as clearly established as that of more developed jurisdictions. It is possible, therefore, that the current interpretation of the law or understanding of the practice may change or that the law may be amended with retrospective effect. Accordingly, it is possible that payments to be made to the holders of the Notes could become subject to taxation or that rates currently in effect with respect to such payments could be increased in ways that cannot be anticipated as of the date of this Offering Circular.

Tax Implications for Non-Residents of Ukraine Tax on Interest Payments under the Loans The Law of Ukraine “On Taxation of Profits of Enterprises’‘, dated 28 December 1994. as amended and restated (thc “Profit Tax Law”) stipulates that income of legal cntities - non-tax rcsidunts of Ukraine derived from sources in Ukraine in the form of interest payments is subject to 15 per cent. withholding tax. At the same time. paragraph 13.2 of Article 13 of the Profits Tax Law provides that the withholding tax rate may be reduced by the provisions of an applicable tax treaty on the avoidance of double taxation. The United Kingdom and Ukraine have entered into such a treaty, signed on 10 February 1993, effective since 11 August 1993 (the “Double Tax Treaty”), pursuant to which (Article 11) interest arising in Ukraine and paid to a resident of the United Kingdom shall be taxable only in the United Kingdom if such resident is the bencficial owner of the interest and subject to tau in respect of the intcrcst in the United Kingdom. Based on professional advice it has received, NJSC Naftogaz believes that, under the terms of the Double Tax Treaty, payments of interest on the Naftogaz loan will not, under current law, be subject to withholding tax, provided that certain conditions set fourth in the Double Tax Treaty and under applicable Ukrainian law are duly satisfied. In particular. in ordcr for exemption from withholding under the Taxation Treaty to be applicable. SBL must be the beneficial owner of the interest payments being receivcd in the United Kinedom. While NJSC Naftogaz believes SBL will be tTeatcd as the beneficial owncr of the income in question under Article 11 of the Double Tax Treaty. the notion of beneficial ownership is not well-defined, neithcr in Ukrainian nor in international law. As a consequcnce, different interpretations are possible and the position could be taken that SBL should not be viewed as the bcneficial owncr of the interest payments bcing reccivecl in the Unitcd Kingdom. However, NJSC Naftogaz believes that it is unlikely that the Ukrainian authorities will adopt this view. Applicable Ukrainian legislation allows upfront relief under the Double Tax Treaty if current confirmation of thc UK recipient’s tax residency in the UK in accordance with the requircments of the Ukrainian authorities is available. In order to be current. a new tax residence confirmation must be obtained for each tax year. The obtaining of this upfront relief does not require the payee or payor to apply for and/or obtain any transaction-specific prior clearance from the Ukrainian tax authorities. Instead, the Ukrainian payor directly applies the rate under the Double Tax Treaty, provided that the current tax residence confirmation is available on or prior to the date of payment of the Ukrainian source income. Therefore, when making payments to SBL under the Naftogaz Loan, NJSC Naftogaz will not make any deduction representing Ukrainian withholding tax, provided that it has a current confirmation of tax residency of SBL on or prior to the date of payment.

153 Tax on Issue of and Interest Payments under the Notes No Ukrainian withholding tax should be applicable to the issue of the Notes or interest payments under the Notes because the Notes will not be issued and interest payments on the Notes will not be made by NJSC Naftogaz or from Ukraine.

Tax on Payment of Instalments of Principal and on Redemption of the Notes The amount received by a non-resident as repayment of a loan is not treated as the non-resident’s income derived from sources in Ukraine. Therefore, it will not be subject to taxation in Ukraine and, consequently, no withholding tax shall be deducted. The amount received by a non-resident on redemption of the Notes should not be subject to Ukrainian taxation because such payments will be made neither to nor by a Ukrainian borrower, nor will there be any guarantee of any payments under the Notes by a Ukrainian borrower.

Gross Up Obligations If payments under the Naftogaz Loan Agreement are subject to any withholding (as a result of which the Issuer would reduce payments under the Notes in the amount of such withholding), then, subject to certain exceptions relating to maintenance by the Issuer of its incorporation in a qualifying jurisdiction, NJSC Naftogaz would be obliged to pay such additional amounts as may be necessary so that the net payments received by the Issuer will not be less than the amount it would have received in the absence of such withholding. In such circumstances, NJSC Naftogaz would have the right to prepay the Naftogaz Loan as fully set out in the Naftogaz Loan Agreement. Notwithstanding the foregoing. the Profits Tax Law generally prohibit contractual provisions requiring one party to pay tax for another party. Absent any official interpretation or guidance on whether such restriction would apply to NJSC Naftogaz’s gross up obligations, the gross up provisions in contracts may be construed as unenforceable under Ukrainian law.

Transfer of Notes to Ukrainian Investors Under the Profits Tax Law, Ukrainian-source profits of non-tax resident legal entities derived from trading securities are subject to 15 per cent. withholding tax (while Ukrainian-source income of non- resident individuals is, subject to certain exceptions, subject to 26 per cent. withholding tax (30 per cent. from 1 January 2007)), unless there is an exemption under an applicable double taxation treaty. Ukrainian investors therefore may be obliged to collect from payments to Non-Ukrainian Noteholders withholding tax in rcspect of profits derived from the transfer of the Notes to Ukrainian investors unless an exemption is available under an applicable double taxation treaty. However, there is some uncertainty as to whether the Notes would be considered “securities” under applicable Ukrainian law. An interpretation that the Notes are not securities under such law would, in principle, exempt the Notes from Ukrainian withholding tax. However, such approach is unlikely to be supported by the Ukrainian Tax Authorities and investors would likely be required to defend their position in court.

Tax Implications for Residents of Ukraine A holder of the Notes who is an individual or legal entity resident in Ukraine for tax purposes (including a permanent establishment of a non-Ukrainian legal entity) is subject to the applicable Ukrainian taxes. Interest from holding debt securities is included into the taxable income of a resident taxpayer, while the principal amount generally is not treated as a taxable income of such persons.

Transfer Pricing Rules Despite the fact that Ukrainian transfer pricing rules are not yet applied on a consistent basis by the Ukrainian tax authorities, the scope of these rules is broad enough and generally applies to any transactions with related persons, including cross-border transactions. Assuming that under the Naftogaz Loan interest would be payable to unrelated persons, deductibility of interest expenses would not be restricted by effective transfer pricing rules. However, in individual cases, the tax authorities may challenge the full deductibility of the expenses payable by a resident taxpayer toa nonresident even in a transaction between unrelated persons. In such a case, the tax authorities are obliged to prove that prices, at which the amount of the expenses is determined, exceed normal prices. This would, however, be difficult to establish given that by definition the normal price is determined primarily by reference to uncontrolled transactions between unrelated persons.

154 United Kingdom United Kingdom Withholding Tar 1. Exemptiom from Withholding Obligation The Notes will constitute “quoted Eurobonds” provided they are and continue to be listed on a “recognised stock exchange” within the meaning of section 841 of the Taxes Act. So long as the Notes constitute “quoted Eurobonds”, payments of interest on the Notes may be made without withholding of deduction for or on account of United Kingdom income tax. The Luxembourg Stock Exchange is a “recognised stock exchange” for these purposes. In all cases falling outside the exemption described above, interest on the Notes may fall to be paid under deduction of United Kingdom income tax at the lower rate (currently 20 per cent.) subject to such relief as may be available under the provisions of any applicable double taxation treaty.

2. Provision of Information Noteholders should note that where any interest on Notes is paid to them (or to any person acting on their behalf) by the Issuer or any person in the United Kingdom acting on behalf of the Issuer (a “paying agent”), or is received by any person in the United Kingdom acting on behalf of the relevant Noteholder (other than solely by clearing or arranging the clearing of a cheque) (a “collecting agent”‘), then the Issuer, the paying agent or the collecting agent (as the case may be) may, in certain cases, be required to supply to the United Kingdom Inland Revenue details of the payment and certain details relating to the Noteholder (including the Noteholder’s name and address). These provisions will apply whether or not the interest has been paid subject to withholding or deduction for or on account of United Kingdom income tax and whether or not the Noteholder is resident in the United Kingdom for United Kingdom taxation purposes. Where the Noteholder is not so resident, the details provided to the United Kingdom Inland Revenue may, in certain cases, be passed by the United Kingdom Inland Revenue to the tax authorities of the jurisdiction in which the Noteholder is resident for taxation purposes. New provision of information requirements are currently anticipated to come into force from 1July 2005 in relation to payments of interest that are subject to the EU Savings Directive (discussed below). These new rules are intended to operate alongside those discussed above.

3. Other Rules Relating to United Kingdom Withholding Tax Where interest has been paid under deduction of United Kingdom income tax, Noteholders who are not resident in the United Kingdom may be able to recover all or part of the tax deducted if there is an appropriate provision in any applicable double taxation treaty. The references to “interest” above mean “interest” as understood under United Kingdom tax law. The statements above do not take any account of any different definitions of “interest” or “principal” which may prevail under any other law or which may be created by the terms and conditions of the Notes or any related documentation. The above description of the United Kingdom withholding tax position assumes that there will be no substitution of the Issuer pursuant to Condition 12(5) of the Notes and does not consider the tax consequences of any such substitution.

EU Savings Directive On 3 June 2003, the EU Council of Economics and Finance Ministers adopted a Directive on the taxation of savings income under which Member States will be required, if a number of important conditions are met and from a date not earlier than 1 June 2005, to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State, except that for a transitional period, Belgium, Luxembourg and Austria will instead be required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries).

155 SUBSCRIPTION AND SALE

ABN AMRO Bank N.V. and Standard Bank London Limited (together, the “Managers”) named in a subscription agreement dated 29 September 2004 (the “Subscription Agreement”) between SBLH PLC, SBL, NJSC Naftogaz and the Managers have, pursuant to the terms and conditions set forth in the Subscription Agreement jointly and severally agreed with SBLH PLC, subject to the satisfaction of certain conditions set forth therein, to subscribe (or procure subscribers for) and pay for the Notes at the issue price of 100 per cent. of the principal amount of the Notes. The Subscription Agreement also provides for ABN AMRO Bank N.V. to receive a combined management and underwriting commission and selling concession of 1.2 per cent. of the principal amount of the Notes plus accrued interest (if any). NJSC Naftogaz has given certain representations and warranties, covenants and indemnities to the Managers, SBL and SBLH PLC therein, including an agreement to pay certain costs in connection with the offering of the Notes and to reimburse the Managers, SBLH PLC and the Trustee for certain of their expenses in connection with the offering of the Notes. The Managers are entitled to be released and discharged from their obligations under the Subscription Agreement in certain circumstances prior to payment being made to SBLH PLC.

United States The Securities have not been and will not be registered under the Securities Act, and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S. The Securities are being offered and sold outside the United States to non-U.S. persons in reliance on Regulation S. Each Manager has agreed that, except as permitted by the Subscription Agreement, it will not offer or sell the Securities (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, within the United States or to, or for the account or benefit of. U.S. persons. and it will have sent to each dealer to which it sells Securities during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Securities within the United States or to, or for the account or benetit of. U.S. persons. Terms used in the paragraph have the meanings given to them by Regulation S. In addition, until 40 days after the commencement of the offering of the Securities, an offer or sale of Securities within the United States by a dealer that is not participating in the offering may violate the registration requirements of the Securities Act. The Notes are subject to United States tax law requirements and may not be offered, sold, or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by United States tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code of 1986, as amended, and regulations thereunder.

United Kingdom Each Manager has represented and agreed that (i) it has not offered or sold and prior to the expiry of the period of six months from the issue date of the Notes will not offer or sell any Notes to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their business or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 (as amended), (ii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act ZOO0 (the “FSMA”)) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to SBLH PLC,and (iii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.

The Netherlands Each Manager has represented and agreed that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer or sell in The Netherlands, the Notes other than to persons who trade or invest in securities in the conduct of a profession or business (which includes banks, stockbrokers,

156 insurance companies. pension funds. other institutional investors and finance companies and treasury departments of large enterprises).

The Russian Federation Each Manager has represented and agreed that it has not offered or sold or otherwise transferred and will not offer or sell or otherwise transfer as part of their initial distribution or at any time thereafter any Notes to or for the bencfit of any person (including legal cntities) resident. incorporated. established or having their usual residence in the Russian Federation or to any person located within the territory of the Russian Federation, unless to the extent otherwise permitted by Russian laws or regulations.

The Federal Republic of Germany Each Manager has represented and agreed it has not offered, sold or publicly promoted or advertised and will not offer, sell or publicly promote or advertise any Notes in the Federal Republic of Germany other than in compliance with the German Securities Selling Prospectus Act (Wenpapier- Verkaufsprospekrgesert) of 13 December 1990, as amended, or any other laws applicable in the Federal Republic of Germany governing the issue, offering and sale of securities.

The Republic of Italy The offering of the Notes in the Republic of Italy (“Italy”) has not been registered with the Commissione Nazionale per le Societa e la Borsa (“CONSOB”) pursuant to Italian securities legislation and, accordingly: (i) the Notes cannot be offered, sold or delivered in Italy in a solicitation to the public at large (sollecitazione all’investimento) within the meaning of Article 1, paragraph 1, letter (t) of Legislative Decree no. 58 of 24 February 1998, (ii) the Notes cannot be offered, sold andor delivered, either in primary or in the secondary market, to individuals in Italy and (iii) sales of the notes in the Republic of Italy will only be: (a) neyotinted on an individual basis with “Professional Investors” (operatori qualificati). as defined under Article 31, paragraph 2, of CONSOB Regulation no. 11522 of 1 July 1998, as amended; (b) effected in compliance with Article 129 of the Legislative Decree no. 385 of 1 September 1993 and the implementing instructions of the Bank of Italy, if applicable; (c) effected in accordance with any other Italian securities, tax and exchange control and other applicable laws and regulations and any other applicable requirement or limitation which may be imposed by CONSOB or the Bank of Italy; and (d) made by an invcstmcnt firm, bank or financial intermudiary pcrmitted to conduct such activities in the Republic of Italy in accordance with the relevant provisions of Italian law.

Ukraine Each Manager has represented and agreed that it has not offered or sold or otherwise transferred and will not offer or sell or otherwise transfer as part of their initial distribution or at any time thereafter any Notes to or for the benefit of any person (including legal entities) resident, incorporated. established or having their usual residence in the Ukraine or to any person located within the territory of the Ukraine, unless to the extent otherwise permitted by Ukrainian laws or regulations.

General No action has been taken by Naftogaz, the Issuer, SBL or any of the Managers that would, or is intended to, permit a public offer of the Notes in any country or jurisdiction where any such action for that purpose is required. Accordingly, each Manager has undertaken that it will not, directly or indirectly, offer or sell any Notes or distribute or publish any offering circular, prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of Notes by it will be made on the same terms.

157

. GENERAL INFORMATION

The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg with a Common Code of 020207868. The International Securities Identification Number for the Notes is XS0202078688. In connection with the application to list the Notes on the Luxembourg Stock Exchange a legal notice relating to the issue of the Notes and copies of the constitutional documents of the Issuer will be deposited prior to listing with the Registre de Commerce et des SociCtts A Luxembourg where such documents may be examined and copies obtained upon request. Copies (and certified English translations where the documents in question are not in English) of the following documents may be inspected and. in respcct of (b), (c). (d) and (h) below, obtained free of charge at the offices of the Paying Agents during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) so long as any of the Notes are listed on the Luxembourg Stock Exchange: (a) constitutional documents of NJSC Naftogaz; (b) the audited consolidated accounts of NJSC Naftogaz for the two years ended 31 December 2003 and 2002; NJSC Naftogaz currently only prepares audited consolidated accounts on an annual basis and does not publish any interim accounts; (c) the audited non-consolidated accounts of NJSC Naftogaz for the two years ended 31 December 2003 and 2002; (d) the Miller and Lents Reserves Report; (e) the Naftogaz Loan Agreement; (f) the Subscription Agreement; (8) the Trust Deed which constitutes the Notes (and which includes the form of the Temporary Global NOW, thc Global Note and the definitive Notes and Coupons) and the Agency Agreement; and (h) copies of the authorisations listed below. 3 NJSC Naftogaz, SBL and SBLH PLC have obtained all necessary consents, approvals and authorisations in Ukraine and the United Kingdom, as the case may be, in connection with the Loans and the issue and performance of the Notes. The issuance of the Notes was authorised by SBLH PLC by a resolution of the board passed on 27 September 2004 and a resolution of the shareholders passed on 27 September 2004. The issuance of the Notes and the Naftogaz Loan was authorised by NJSC Naftogaz by a resolution of NJSC Naftogaz's Management Board passed on 1 September 2004. 4. NJSC Naftogaz was registered with the Unified State Register of Enterprises and Organizations of Ukraine on 2 June 1998 (registration number 20077720). 5 Except as disclosed in this document, there has been no adverse change, nor any development reasonably likely to involve an adverse change in the financial or trading position of NJSC Naftogaz since 31 December 2003 that is material in the context of the issue and performance of the Notes. 6 Except as disclosed in this document, neither NJSC Naftogaz nor any of its subsidiaries is or has been involved in any legal or arbitration proceedings which may have, or have had during the 12 months preceding the date of this document, a significant effect on the financial position of NJSC Naftogaz nor is NJSC Naftogaz aware that any such proceedings are pending or threatened. BDO Balance-Audit, Independent Public Accountants, have audited and rendered qualified audit reports on the accounts of NJSC Naftogaz for the two years ended 31 December 2003 and 2002. The EU Transparency Obligations Directive is currently bcing finalised and may be implemented in Luxembourg in a manner that is unduly burdensome for NJSC Naftogaz. In particular, NJSC Naftogaz may bc roquircd to publish periodic disclosure reports in the EU which include financial statements prepared in accordance with, or reconciled to, International Financial Reporting Standards. In such circumstances NJSC Naftogaz may, subject to the provisions of the Trust Deed, decide to seek an alternative listing for the Notes on a stock exchange outside the European Union.

158 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF NJSC NAETOGAZ

Consolidated Financial Statements for the year ended December 31. 2002 ...... F-3 Independent Auditor's Report ...... F4 Balance Sheet as of 31 December 2002 and 2001 ...... F-6 Income Statement for the years ended 31. December 2002 and 2001 ...... F-7 Statement of Changes in Equity for the years ended 31 December 2002 and 2001 ...... F-8 Cash flow Statement for the years ended 31 December 2002 and 2001 ...... F-9 Notes to financial statements ...... F-10

Consolidated Financial Statements for the year ended December 31. 2003 ...... F-53 Independent Auditor's Report ...... €34 Balance Sheet as of 31 December 2003 and 2002 ...... F-56 Income Statement for the years ended 31 December 2003 and 2002 ...... F-57 Statement of Changes in Equity for the years ended 31 December 2003 and 2002 ...... F-58 Cash flow Statemcnt for the years ended 31 December 2003 and 2002 ...... F-59 Notes to financial statements ...... F-60

F-1 THIS PAGE INTENTIONALLY LEFT BLANK

F-2 NJSC Naftogaz of Ukraine Consolidated financial statements For the year ended December 31, 2002 Together with the Auditors’ report

F-3 Translated from the original Ukrainian text

INDEPENDENT AUDITOR’S REPORT To the Shareholders of National Joint-Stock Company Naftogaz of Ukraine 1. We have audited the consolidated balance sheet of National Joint Stock Company Naftogaz of Ukraine (the Parent Company) and its subsidiary companies (together with the Parent Company, the Group) as at December 31. 2002. and the related consolidated statements of income. cash flows and changes in equity statements for the year then ended. Consolidated financial statements do not include all investments in subsidiaries that are greater than 20% owned by members of the Group. The consolidated statements include 11 companies. The subsidiaries not included in these consolidated financial statements comprise approximately 10% of the Group halancc value. Two companies, SJSC Chernomomaftogas and JSC Ukrnafta, which are included into consolidation of financial statements, were audited by other auditors. The consolidated financial statements arc the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statcments hascd on our audit. 2. Except as discussed in paragraphs 3-8 we performed our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management. as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 3. The consolidation of financial statements for the Parent company and subsidiarics does not comply with International Accounting Standard (IAS) No. 27 ;‘Consolidated financial statements and accounting for investments in subsidiaries”, as the consolidation does not include all of the companies that are directly controlled by the Parent.

4. Due IO the lack of several documents supportins the date of put into use and cost of fixed assets as at the reporting date we were not able to perform audit procedures that would have been provided us with adequate evidence to ground the disclosure of historical value for certain fixed assets in the consolidated financial statements to cnsurc their presentation in accordance with IAS No. 16 “Fixed assets”. We were not able to plan and perform alternative audit procedures, which would have eliminatcd this uncertainty. Due to this fact. we do not confirm the book value of the Group’s fixed assets disclosed in the financial statements to the amount exceeding 6 (six) billion UAH. 5. As at the reporting date we did not observe the stocktaking of assets, since we were appointed auditors after this date. Due to the limiting peculiarities of the Parent Company’s accounting we could not determine the value of assets through the alternative audit procedures. Since these assets are the integral part of Income statement regulation amounts, we were not able to determine the necessary corrections of those results. 6. As indicated in the Note 3 to the financial statements the Group did not perform impairment analysis for long-term assets as required by International Financial Reporting Standards (IFRS). As such, we were not able to obtain adequate evidences to formulate opinion as to the basis for presentation of oil and gas reserves and the respective accumulated depreciation of fixed assets as at December 31,2002, 7. As described in the Note 3, accounting principles with regard to fixed assets acquired before January 1, 2001 can not be presented in accordance with IAS No. 16 “Fixed assets”. More to that, AS described in the Note 3 to the consolidated financial statements the Group did not engage experts for independent valuation of assets, subsurface oil and gas reserves as at December 31,2002. Respectively, the Parent Company’s management made certain assessments in order to present book value of these assets in the consolidatcd financial statemcnts in compliance with historical value principles. Due to the lack of information necessary for application of IAS No. 16 we were not able to obtain adequate evidence to formulate conclusion as to correct reporting of the fwd assets’ book value as at December 31, 2002 and respectful amortization charges for 2002 in accordance with IFRS. The effect of adjustments that would have been necessary to be made is beyond determination.

F-4 8. The Parent Company has accounts payable to the Ministry of Finance of Ukraine amounting to 625,366 ths. UAH incurred in 1995 and was transferred when the Parent Company was established. This debt IS not confirmed ncithcr by supportinp documents. not by reconciliation acts with the Ministry of Finance. We were not able to obtain adequate evidences to form our opinion as to this debt at December 31, 2002. 9. In our opinion, except for the effect of adjustments and disclosures that could have been necessary if we received adequate information with regard to issues provided in the above paragraphs, the accompanying financial statements present fairly. in all material aspects. the financial position of the Group as at December 31. 2002 and consolidatcd results of its operations, cash flows and changes in equity for the year then ended, in accordance with IFRS. 10. Without qualifying our opinion we draw your attention to the Note 1 to consolidated financial statements. The Group performs its operations on the territory of Ukraine and, therefore is subject to regulations and legal framework of this country. The Group has reported severe delays in receiving payments from its clients. The Group realizes major portion of produced gas at prices regulated by the state. Settlements for the gas sold are effected with delays. In addition to this, major transactions and terms of operations are set by the Parent Company, and is not based on market conditions. 11. Without qualifying our opinion we draw your attention to the Note 1 disclosing information about state property not subject to privatization together with information about Agreement between the Government of Ukraine and the Parent Company pursuant to the terms there under such property was transferred into operating management. 12. Without qualifying our opinion we draw your attention to the fact that the Parent Company has long-term accounts payable to JSC “Gasprom” (Russia) for consumed gas, however, as at the reporting date had not agreed the repayment of this debt. 13. We also draw vour attention to the tact that the accompanying consolidated financial statements do not provide detailed information about the Parent Company’s operations. In case of special attcntion to the Parcnt’s financial position and thc result of its operations, the rclevant financial statements are available.

June 18,2004

BDO Balance-Audit

Managing partner BDO Balance-Audit Sergey A. Balchenko

Audit certificate # 000046, Series A

International partner CPA Soren D. K. Sorensen

F-5 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRAINE Consolidated Fmancial Statements for the year ended December 31. 2002 (Thousands of UAH)

CONSOLIDATED BALANCE SHEET

ASSETS Current assets Cash and cash equivalents ...... 5 538.021 367913. Accounts receivable and promissory notes, net ...... 6 3.398.028 6.619.339 Accounts receivable from related parties, net ...... 28 5.649.322 2.315. 156 Inventories, net ...... 7 5.005.556 3.490.431 Other current assets ...... 8 2.993.794 3.295.228 Total current assets ...... 17.584. 721 16.093. 833 Non-current assets Long-term accounts receivable and promissory notes, net ...... 9 766.674 1.419.274 Long-term financial invcstments ...... 751.778 320.056 Fixed assets, residual value ...... 10 24.948.181 24.369.417 Deferred tax assets ...... 12 2.258.533 2.424.055 Total non-current assets ...... 28.725. 166 28,532802 Total assets ...... 4 46.309. 887 44.626. 635

LIABILlTLES AND EQUlTY CAPITAL Current liabilities Accounts payable and other indebtedness ...... 13 17.235.980 18.008.052 Accounts payable to related parties ...... 28 2.297.216 910.384 Tax liabilities ...... 14 7.002.449 4.056.703 Financial liabilities 15 696.857 457.767 ...... Other current liabilities ...... 16 2.374.254 3.351.758 Total current liabilities...... 29.606. 756 26.784. 664 Long-term liabilities Provision for abandonment of wells ...... 17 387.835 359.169 Government grants ...... 18 7.332 32.646 Other long-term financial liabilities...... 19 1,242.756 3.218.071 Total long-term liabilities...... 1.637. 923 3.609,886

Total liabilities ...... 4 31,244. 679 30394. 550

Minority interest ...... 1. 48&008 1304. 132 Equity capital Statutory capital ...... 20 6.848.276 6.848.276 Accumulated profit ...... (5,905.888) (6.944.418) Reserves ...... 20 12.1Ul.812 13.024.095 Total equity capital ...... 13. 584300 12927353 Total liabilities and equity capital ...... 46.309. 887 44,626. 635

Deputy head of the Board of Directors

Chief accountant

F-6 NATlONAL JOINT STOCK COMPANY NAITOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2002 (Thousands of UAH)

CONSOLIDATED INCOME STATEMENT

Notes 2002 2001 Income Income from sales of oil. gas. transportation. etc...... 4. 21 24.716. 414 21.653. 325 Expenses Cost of sales ...... 22 (18.864. 933) (17.192. 046) Gross profit ...... 5.851. 481 4.461. 279 Other operating income ...... 23 526. 161 2.490. 591 Administration expenses and sales related expenses ...... 24 (884.430) (790.438) Other operating expenses ...... 25 (1.832. 679) (2.816. 443) Provision for doubtful debts ...... (1.430. 603) (4.459. 592) Profit (loss) from operations ...... 4 2,229.930 (W4603) Other non-operating income ...... 26 167.086 44.475 Other non-operating expenses ...... 27 (709.787) (658.478) Losses from impairment of assets ...... 0 (7.408) Profit (loss) from operating activities ...... 1.6874 29 (1.736. 014) Income tax ...... 4 (1.463. 396) (1. 135318) Profit after taxation ...... 223. 833 (2.8713 32) Minority interest ...... (159. 687) (391. 782) Net profit (loss) from operating activities ...... 64.146 (3,263. 114) Extraordinary expenses ...... (554) (4. 931) Net profit (loss) ...... 63392 (3,268. 045)

I Deputy head of the Board of Directors

A Chief accountant

F-7 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2002 (Thousands of UAH)

CONSOLIDATED STATEMENT ON CHANGES IN EQUITY statutory Oubtpnding Item capital Reserves IDsSes Total .. Balance as at 01.01.2000 (unaudited)...... 6.8483 76 12.980. 585 (6.186. 122) 13.642. 739 Past periods errors. disclosed in the current period ...... 106.769 106.769 Changes in accounting policy ...... 2.350. 346 2.350. 346 Adjustment of thc cost fixed assets to the effect of hyperinflation. less taxation ...... 26.680 26.680 Elimination of write-up for disposed fixed assets ...... (138.741) (138.741) Assets obtained free of charge ...... 34.777 34.777 Write-off restructured taxes ...... 1. 173 28. 243 29.416 Transfer to reserves ...... 5. 851 (5.851) 0 Consolidation of MT Bank ...... (4.324) (4. 324) Government grants ...... 141.100 141.100 Revaluation of technological oil ...... (98,339) (98.339) Net profit (loss) for the period ...... (3,268.045) (3.268.045) Dividends ...... (23.312) (23.312) Other changes in equity ...... 108.145 20.742 128.887 Total changes in equity ...... 0 43,510 (758. 296) (714. 786) Balance as at 01.01.2001 ...... 6,848, 276 l3,024,095 (6.944. 418) 12.927. 953 Past periods errors disclosed in the current period ...... (1 1. 284) (1 1. 284) Adjustment of FA value to hyperinflation effect. less taxation ...... 326.255 326.255 Write-off increased value after revaluation for disposed property, plant and equipment ...... 12.255 12.255 Assets received free of charge ...... 276.827 276.827 Deduction to reserve capital ...... 798 (798) 0 Government grants ...... 25. 314 25. 314 Provision for buffer gas 40.137 (40.137) 0 I ...... Revaluation of technological oil ...... (41.521) (41.521) Increased value of shares ...... 19. 280 19.280 Redemption of shares ...... (44) (44) Net profit (loss) for the reporting period .... 63.592 63.592 Dividends ...... (4.243) (4.243) Other changes in equity ...... (727.231) 717.048 (10.183) Total changes in equity ...... 0 (382.283) 1.038. 530 656247 Balance as at December 31, 2002 ...... 6.848. 276 12.641. 812 (5.905. 888) l3.584,2 00

F-8 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thourands of UAH)

CONSOLIDATED CASH &OW STATEMENT m2 ulol Cash flow from operating activities ...... Net profit before taxation ...... 1h87.229 (1,736,014) Adjustment to: ...... Amortization ...... 1,659,367 1,714,311 Extraordinary expenses ...... (554) (4,931) Provision abandonment wells ...... 28,666 25,332 Profit from currency exchange differences ...... 197 (20.792) Increase (decrease) in provisions ...... 1,430,603 4,459,592 Income from investment activities ...... (99,003) (10,711) Expense from investment activities ...... 46,515 4,938 Interest income ...... (1,556) (1,435) Interest expenses ...... 28,736 18,168 Operaling profit before changes in working eapital ...... 4,780,200 4,448,458 Decrease (increase) in accounts receivable and other assets ...... (1,182,024) (2,577,124) Decrease (increase) in stock ...... (1,556,646) (1,023,356) Increase (decrease) in trade loans and other liabilities ...... (362,744) 1,834,263 Cash from transactions ...... 1,678,786 2,682,241 Interests paid ...... (28,736) (18,168) Profit tax and other taxes paid ...... 1,647.872 (5,236,924) Net cash flow from operating activities ...... 3,297,922 (2372,851) Cash used for investing activities: Acquisition and sales of non-current assets ...... (1,882,432) (1,082,342) Assets free of charge ...... 276,827 34,777 Inflows from Government grant ...... 25.314 173,746 Other inflows ...... 235,656 Other payments ...... (46,781) 0 Net cash flow from investing activities ...... (1,627,072) (638,163) Cash received bom financial activities: Net Inflows from lending activities ...... (1.736.226) 1,998,855 Net investment in Long-term promissory notes ...... 652,600 1,102,436 Net result in investment activities ...... 54,044 2,884 Net investment in long term financial investments ...... (412.486) (14,460) Dividends paid ...... (4,243) (23,312) Net cmh flow from jnancial acrivities ...... (1,446,311) 3,066,403 Effect of change in exchange rates to the cash balance ...... (197) 20,792 Net cash movements during the year ...... 224,342 (123,819) Cash and cash equivalents at the beginning of the year ...... 313,679 437,498 Cash and cash equivalents at the end of the year ...... 538,021 313,679

F-9 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31,2002

List of Acronyms Acronym hrll name AGACP Automatic Gas Accumulation Compressor Plant JSC Joint-stock Company SJSC State Joint-stock Company sc Subsidiary Company sc PSC Subsidiary Company Production and Sales Company EOC Euro-Asian Oil-Transporting Corridor CMU Cabinet of Ministers of Ukraine IASC International Accounting Standards Committee IAS International Accounting Standards IFRS International Financial Reporting Standards ISU Interregional Stock Union NJSC NaftoGaz of Ukraine National Joint-stock Company NaftoGaz of Ukraine NBU National Bank of Ukraine NCER National Commission for Electrical Energy Regulation UAS Ukrainian Accounting Standards PK Petroleum Refinery VAT Value Added Tax SIC Standards Interpretation Committee GMPH Gas-main Pipelines Headquarters

F-10 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thousands of UAH)

EXPLANATORY NOTES TO THE FLNANCLAL STATEMENTS

1. GENERAL INFORMATION ON NJSC NAlTOGAZ OF UKRAINE National Joint-stock company NaftoGaz of Ukraine (hereinafter, NJSC NaftoGaz of Ukraine) was established in accordance with the Ukrainian Presidential Decree dated February 25, 1998 “Reform in Oil and Gas Industry of Ukraine” and the resolution of the Cabinet of Ministers of Ukraine dated May 25, 1998 “Incorporation of National Joint Stock Company NaftoGaz of Ukraine”. The principal activities of NJSC NaftoGaz of Ukraine, as well as its subsidiary and associated companies (the Group) are: Oil production; Natural gas production;

0 Natural gas reprocessing;

0 Pipeline transport for general consumption;

0 State external trade. The financial statements included herein are not consolidated with respect to the whole structure NJSC NaftoGaz of Ukraine. The Group prcpares and prcsents the consolidated financial statements for the subsidiary and associated companies listed below: Headquarters of NJSC NaftoGaz of Ukraine SC Ukrgazvydobuvannya SC Ukrtransgaz JSC Ukrtransnafta SC Gas of Ukraine SC Chornomornaftogaz JSC Ukrnafta JSC Dniepropetrovskgas JSC Zaporizhgas JSC Luganskgas JSC Mikolayivgas

Financial indicators of these consolidated financial statements include reporting of the largest subsidiary companies of the Group. which major financial indicators of financial statements comprise 90% of all companies controlled by NJSC Naftogaz of Ukraine. By business segments the Group perfoms the following operating activities: 1. oil and gas production and processing - SC Ukrgazvydobuvannya, SJSC Chornomornaftogas, JSC Ukmafta; 2. oil and gas transportation - JSC Ukrtransnafta, SC Ukrtransgaz; 3. sales - SC Gas of Ukraine, JSC Dniepropetrovskgas, JSC Zaporizhgas, JSC Luganska gas, JSC Mikolayivgas; 4. other activities - supply, construction, operating and other enterprises, which are structural subdivisions of consolidated companies. The principal activity of the Group has been performed by the Group in 2002 under the agreements for:

1. Oil and gas production: JSC Ukmafta and SC Ukrgazvydobuvannya perform oil and gas production respectively. Since land and subsurface are state property, the right to exploration and development of oil and gas reserves is provided by the State Geology Committee through the issue of special licenses at nominal value, which is not capitalized. In accordance with the effective legislation in order to perform oil and gas reserves exploration and development, separate licenses should be granted for such activities for each oil and gas

F-11 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH) field. Licenses for exploration and development are granted for 5 and 20 years rcspcctively with the priority right to prolong them for the same period.

2. Gas sales: a State trade Corporation Turkmennaftogas; e EURAL TRANS GAS Kft; a JSC “Gasprom”, in part of gas purchase as payment for the gas transit on the Ukrainian territory;

3. Transit: a Transit, where NJSC Naftogaz Ukraine acted as an Executor was performed in accordance with the agreement for scope and terms of transit through the Ukrainian territory and natural gas supply into Ukraine in 2002 with JSC Gasprom. e Transit, where NJSC NaftoGaz of Ukraine acted as a Customer, was performed in accordance with an agreement for natural gas transit through the Ukrainian territory with SC Ukrtransgaz.

4. Gas sales were performed by the NJSC Naftogaz of Ukraine to: a to the public, state (budget) institutions; municipal entities as well as to industrial and other enterprises through intermediary of SC Trade House Gas of Ukraine (SC Gas of Ukraine) under agreements for import of natural gas and natural gas of own production; a Company ITERA International Energy LLC e Company Wintershall Erdgas Mandelhaus Zug AG The segment “Other operations” includes assets, liabilities and operation results of supply, construction, operating and other enterprises, which are structural subdivisions of consolidated companies, as well as Joint Stock Commercial Bank MT-Bank (JSB MT-Bank).

Agreement for Use of State Property not subject to Privatization In November 2001 the Parent company signed an Agreement for use of State Property not subject to privatization (the Agreement) with the main shareholder NJSC NaftoGaz of Ukraine, which in its turn signed with its subsidiary companies additional agreements, similar in contents and principal provisions. State Property is a network of trunk and distributing oil and gas pipelines of a high productive capacity.

Basic regulations of the Agreement Under the Agreement the Group undertakes the following: to perform operational control over the State Property; to utilize State Property for its intended purpose; not to transfer State Property to third parties or perform other notarial acts (pledge, etc.); to make independent decisions as to exploitation and maintenance of State Property including technical and renewal issues; to keep separate analytical accounting of State Property and profits received from its exploitation; to insure the transferred State Property; to pay for the services related to expert evaluation of the State Property; to make reserve for renewal and reconstruction of received State Property at the expense of depreciation charges.

F-12 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Tholrsandr of UAH)

State portion of profit State portion of profit comprises 50% of net profit received from exploitation of State Property. The Group has the right to use the state portion of profit in the amount sct out in annual plans on reconstruction and technical development after the agreement with NJSC NaftoGaz of Ukraine. However, the Agreement does not provide an algorithm for calculation of the state portion of net profit. thus, it is not possible to determine the amount of net profit as indebtedness to the Govcrnnicnt based on agreements on transfer of State Property that is not subject to privatization. As at the reporting date, the Group was not requested by the Government to make the payments or to perform calculation of net profit.

Term of Agreement The Agreement is effective for one year. If neither party presents written intention to discontinue this Agreement, it is considered extended for the next year.

Establishment of THs NJSC NaftoGaz of Ukraine is a natural monopolist of the oil and gas complexes of Ukraine. Therefore, the principal activities of the Group are regulated by various Ukrainian state authorities, including the Cabinet of Ministers, Ministry of Economy, National Commission for Electrical Energy Regulation (NCER) and the Ministry of Fuel and Energy. These and other controlling bodies decide different issues, including establishment of prices and tariffs for oil and gas acquisition, transportation to the ultimate consumers, and storage and loading of oil. Methods of confirmation of tariffs for oil and gas purchase, sales and transportation are established the agreement of NCER. NCER establishes oil and gas transportation tariffs for all categories of consumers. NJSC NaftoGaz of Ukraine approves natural gas sale prices to be applied by the subsidiaries of the Company. Determinition of natural gas sale prices is carried out based on natural gas intake and distribution balance with NJSC NaftoGaz of Ukraine, by assuming the natural gas purchasing price depending on gas origin (own production, received for transit services, purchased additionally). NCER in accordance with the authorities provided by the resolution of Cabinet of Ministers of Ukraine dated 15.12.1996 No. 1548 “On Determination of Authority of Executive Bodies and Local Executive boards as to Regulation of Prices (Tariffs)”, establishes the boundary natural gas price levels for general populace, budget institutions, municipal heat and power engineering enterprises, as well as natural gas transportation and supply tariffs. In addition, NCER establishes the boundary price level for natural gas supplied by NJSC NaftoGaz of Ukraine for industrial consumers as stipulated by the decision of the Cabinet of Ministers of Ukraine dated 27.12.2M31 No. 1729 “The order of provision of national economy branches and general populace with natural gas”. SC Ukrgazvydobuvannya performs production and processing of gas. The pricing policy of the Company is regulated by the decrees of Ukrainian Government and the orders of NJSC NaftoGaz of Ukraine. In 2002 the Company sold own products in accordance with the decision of the Cabinet of Ministers of Ukraine issued 27.12.2001 No. 1729 “The order of provision of national economy branches and population with natural gas”, the order of NJSC NaftoGaz of Ukraine No. 16 issued 18.01.2002, the orders of the Company No. 39 issued 25.01.2002 “The order of natural gas of own production sales and transportation services rendering in 2002” and No. 40 issued 25.01.2002 ,,The order of condensate, oil and processing products sales in SC Ukrgazvydobuvannya in 2002”. SC Ukrtransgaz transports gas through the Ukrainian territory. Prices and tariffs for natural gas transportation for internal Ukrainian consumers are regulated by the state and were established by NCER in 2002. Per the decision issued 29.01.01 No. 73 the tariff for natural gas transportation through gas-main and distributing pipelines for Ukrainian consumers has been set at 52.5 UAH per 1thousand cubic meters (including VAT). The calculated average tariff for natural gas transportation through gas main pipelines of the Company is 29.10 UAH per 1thousand cubic meters (including VAT).

F-13 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

Tariffs for natural gas storage, pumping and extraction performed by SC Ukrtransgaz for Ukrainian consumers were established in accordance with the decision of NCER issued 27.04.00 No. 447. The tariff in the amount of 12 UAH per 1 thousand cubic meters was specificd as follows:

0 for natural gas storage - 6.00 UAH per 1 thousand cubic meters , including VAT -1.00 UAH per 1 thousand cubic meters (on annual basis);

0 for SC Ukrtransgaz pumping of natural gas - 3.00 UAH per 1 thousand cubic meters, including VAT 0.50 UAH per 1 thousand cubic meters;

0 for SC Ukrtransgaz extraction of natural gas - 3.00 UAH per 1 thousand cubic meters , including VAT -0.50 UAH per 1 thousand cubic meters. JSC Ukrtransnafta performs transportation of raw oil on the Ukrainian territory and abroad. Prices and tariffs for oil and transportation, storage and loading of oil are established by NCER.

Ukrainian oil transportation, storage and loading tarifis NCER has established the following tariffs (VAT not included) for Ukrainian consumers: 2502 u)(I1 UAH per 1 ton Transportation tariff ...... Max 26.53 26.53 Min 2.00 2.00

Transportation tariffs are established depending on transported oil quantity, direction and distance of its transportation. A value added tax of 20% is added to the abovementioned tariffs. Oil transportation tariffs are periodically reviewed, approximately once a year.

International oil transportation, storage and loading tarifls International transit tariffs (transportation of oil on the Ukrainian and Russian territory to third countries) are established under direct agreements concluded between the Group and Exporter Companies. NCER has established the following tariffs for European consumers:

US dollars per 1 ton Transportation tariffs ...... Max 5.20 5.20 Min 1.04 1.04 Storage tariffs ...... 0.15 0.15 Loading tariffs...... 0.60 0.60

In compliance with the legislation in force value added tax is not added to the abovementioned tariffs. SC Gas of Ukraine is mainly an intermediary between affiliated companies and subdivisions of NJSC NaftoGaz of Ukraine, which operate in the spheres of production, export and transportation of gas, as well as between ultimate consumers and gas sellers.

SC dLG~of Ukraine” The main supplier of gas to the SC “Gas of Ukraine’’ is the NJSC NaftoGaz of Ukraine, which buys gas from Russian and Turkmenian suppliers and its own subsidiary companies. In 2002 the average price of gas purchased by the Company:

0 Self-produced gas - UAH 129 per 1 thousand cubic meters of gas.

0 Gas from Russian suppliers - UAH 142 per 1 thousand cubic meters of gas.

F-14 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

0 Gas from Turkmenian suppliers - UAH 330 per 1 thousand cubic meters of gas. Regulatedhon regulated prices Prices for gas purchase from NJSC NaftoGaz of Ukraine, as well as the sale prices and tariffs for transportation of gas to the ultimate consumers are regulated by the National Commission for Electrical Energy Regulation (NCER) and NJSC NaftoGaz of Ukraine. NCER establishes tariffs for gas transportation for all consumer categories. The sales price of gas is established by NCER for the general populace and state supported institutions. Gas tariffs are not regulated for other consumer categories. However, NJSC NaftoGaz of Ukraine establishes tariffs for SC Gas of Ukraine. SC Gas of Ukraine has varied gas supply tariffs for different categories of the general populace, state- supported institution, utilities, power and heat generating companies, industrial customers and several other categories. The 2002 tariffs for gas transportation for affiliated companies were introduced by NJSC NaftoGaz of Ukraine. During 2002 the Company realized gas under thc following fixed prices: General populace - 175 UAH per 1 thousand cubic meters depending on availability or the lack of gas meters and including tariffs for natural gas transportation and supply; - 190 UAH per 1 thousand cubic meters depending on the lack of gas meters and including tariffs for natural gas transportation and supply; Budget entities - 231 UAH per 1 thousand cubic meters of gas including tariffs for natural gas transportation and supply; Municipal heating energy - 189 UAH not including tariffs for natural gas and boiling departments transportation and supply; Energy generating - 331 UAH per 1 thousand cubic meters of gas not including companies tariffs for natural gas transportation and supply; Production and - 331.50 UAH per 1 thousand cubic meters not including technological needs of SC tariffs for natural gas transportation and supply. Ukrtransgaz and JSCs of gas supply and gasification, and its own needs regarding the objects accounted for in SC Gas of Ukraine

Joint stock companies (Dniepropetmvskgns, Zapirizhgas, Lugataskgas, Mikolayivgas) A regulated tariff applies to natural gas transportation and supply at to general populace, budget, industrial enterprises and municipal companies by regional JSCs. The JSC’s pricing depends upon the consumers’ category and contractual terms and can be described as follows:

0 the price for general populace includes the cost of natural gas, the JSC’s supply and transportation services and the services of transportation proved by main-gas pipelines; the price for budget entities includes the cost of natural gas, supply and transportation services; for industrial enterprises and public utilities, which buy natural gas from the JSCs and have supply agreements, the price includes cost of natural gas and the JSC’s transportation services.

F-15 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

Moreover, all the enterprises situated in the region (both purchasing gas from the JSCs and other suppliers) are the users of transportation services.

2. -UKRAJNIAN ENVIRONMENT Operating Environment and Economic Situation In recent years, Ukraine has undergone substantial political, economic and social change. As an emerging market, Ukraine does not possess the well-developed business and regulatory infrastructure that would generally exist in a more mature free market economy. As a result, operations carried out in Ukraine involve significant risks. which are not typically associated with thosc in dcveloped markets. Future economic stability in Ukraine will to a great extent dcpend on the effectivcness of fiscal arrangements performed by the Government, as well as on development of a legislative framework and the political situation. Further existence of political and economic instability can result in unforeseen changes to the principal features of economic infrastructure, which determine the nature of the Company’s present operations. Uncertainty concerning the political, legal, tax, standard and legislative implications for operations, including the possibility of adverse changes can significantly affect the Company’s ability to pcrform its business activities. Since independence in August 1991, the Ukrainian economy deteriorated dramatically until 1994, when reform programs were initiated to enable macroeconomic stabilization and structural reform. During the last 2-3 years positive economical trends have appeared, the national currency has been stabilized. inflation has been reduced and an increase in national domestic product has been noted. However, these positive tendencies have not been strengthened and the situation remains unstable. Future cconoinic stability and growth will to a grcat extent depcnd upon the effectivencss of fiscal. macroeconomic and structural arrangements set forth by the Government. The autumn 2004 presidential elections are a crucial milestone to assess the political stability and economic development plan of Ukraine. The Company will continue to be affected, for the foreseeable future, by the above factors. The financial statements do not include any adjustments reflecting the existence of such uncertainty. Necessary adjustments will be reported in the financial statements of the Group. as they become known and can be fairly estimated.

3. BASIC ACCOUNTING PRINCIPLES General Consolidated financial statements of the Group include the consolidated balance sheet and the related income statenicnt. cash flows and changes in equity capital statemcnts, as well as thc accompanyins Notes. These financial statements have been prepared in accordance with the requirements of International Financial Reporting Standards (IFRS), issued by the International Financial Reporting Standards Board (IFRSB) and Interpretations issued by the Standing Interpretation Committee (SIC) effective for financial statements for thc periods up to December 31, 2003. The companies of the Group maintain their books and records in the Ukrainian currency Hryvna (UAH) based on Ukrainian Accounting Standards (UAS). The financial statements are based on the Group’s statutory books and records, with adjustments and reclassifications made for the purpose of fair presentation in accordance with the regulations prescribed by IFRS. Thc consolidated financial statements were prepared based on historical cost using the accrual basis and presented in thousands of Ukrainian hryvna, unless otherwise stated. The accounting policy chosen under each IFRS permitting the choice of accounting policy is disclosed in corresponding sections of these Notes.

F-16 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

These financial statements wcre prepared according to the requirements of International Accounting Standards effective for financial statements for the vear ended December 31. 2002.

Application of Assessments The Group maintains its records and presents its transactions and other events not only in accordance with their legal form, but also according to their economic substance. As such, the substance of transactions or other circumstances and events does not always comply with their legal form. Preparation of financial statements in accordancc with IFRS requires the managcinent to make certain assessments and assumptions that affect the recording of assets and liabilities in the reporting and information disclosure about the potential assets and liabilities at the reporting date. Actual results might differ from the current assessments. These assessments are periodically reviewed and should an adjustment be needed. such adjustments are reported in the relevant section for financial results for the period when they became known.

Measurement and Presentation Currencies The Group keeps its records and presents the statements in Ukrainian hryvna in accordance with UAS. The Company established measurement and presentation currencies in accordance with SCI-19 “Reporting currency - measurement and presentation of financial statements under IAS-21 and IAS- 29”. Based on the economical substance of transactions and conditions of operation, the Company considers hryvna as the measurement and presentation currency. Thus, transactions in currencies other than hryvna are considered as transactions in foreign currencies.

Effect of Inflation During 1991-2000 Ukrainc was considered as a country with a hyperinflationary economy. Adjustments and reclassifications required for the financial statements prepared according to the requirements nf Ukrainian legislation, to be in compliance with IFRS, include any adjustments which are necessary for the reflection of changes in the general purchasing power of the Ukrainian hryvna, on the assumption of IAS No. 29 “Financial reporting in hypcrinflationary economies”. Under IAS No. 29 requirements thc financial statements prepared in the currency of a hyperinflationary economy should be denominated in current units of measurement as at the balance shcct date. Although, starting from the 2001 financial year. the Ukrainian economy had ceased to be of hyperinflationary nature. the Company owns a large quantity of fixed assets acquired during the substantial hyperinflationary period. As such, the recalculation of fixed assets was performed using inflation coefficients received on the basis of inflation indexes of the Ukrainian State Statistics Committee. Bclow are the inflation indexes. applied to make changes in the financial statements, starting from 1991: Revaluation Month Yent Mation index coeilidcnt January ...... 1991 1.06 242,719.6 December ...... 1991 3.06 84,190.9 December ...... 1992 U.31 4,008.1 December ...... 1993 6,595.26 39.1 December ...... 1994 33,050.09 7.8 December ...... 1995 93,085.80 2.8 December ...... 1996 130,062.69 2.0 December ...... 1997 143,221.50 1.8 December ...... 1998 171,855.47 1.5 December ...... 1999 204,877.18 1.3 December ...... 2000 257,768.27 1.o

Thus. the indicators of fixed assets value as at December 31, 2000 serve as the basis for accounting records of future accounting periods.

F-17 NATIONAL JOINT STOCK COMPANY NAlTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thowands of UAH)

In order to dctermine fixed assets initial cost as at January 1.2001 - the date of the first IFRS application - SJSC Chornomornaftoyas has engaged an independent appraiser to perform valuation of fixed assets conditional cost. Thus. the initial cost of that company’s fixcd assets is recorded according to thc independent appraiser’s report.

Bmis of Consolidation In accordance with IAS 27 “Consolidated Financial Statements and Accounting for Investment in Subsidiaries” the financial statements of the parent and its subsidiaries are combined on a line-by-line basis by adding together like items of assets, liabilities, equity, income and expenses. For the consolidated financial statements to present financial information about the group as that of a single enterprise. the following steps are then taken: the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated; minority interests in the net income of consolidated subsidiaries are identified and adjusted against net income of the group held by the parent, i.e. less the amount of net income directly or indirectly held by the parent; minority interests, not directly or indirectly held by the parent, in the net assets of consolidated subsidiaries are identified and presented in the consolidated balance sheet separately from liabilities and the parent shareholder’s equity; any intragroup balances and intragroup transactions and resulting unrealized profits and losscs are eliminated, unless the cost can not be recorded. The Group prepares and presents consolidated financial statements for the companies helow, which are under its control: Capital pnrtidpmtion interest NJSC NaftoGaz of Ukraine ...... SC Ukrgazvydobuvannya ...... 100.00 SC Gas of Ukraine ...... 100.00 SC Ukrtransgaz ...... 100.00 JSC Ukrtransnafta ...... 100.00 SJSC Chornomomaftogas ...... 100.00 JSC Ukmafta ...... 50%+1 share JSC Dniepropetrovskgas ...... 51.00 JSC Luganskgas ...... 51.00 JSC Zaporizhgas ...... 50.00 JSC Mikolayivgas ...... 50.00

I control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or a subsidiary operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the parent. Such subsidiaries should be accounted for as investments in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly

F-18 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH) demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is: a power over more than one half of the voting rights by virtue of an agreement with other investors;

0 power to govern the financial and operating policies of the enterprise under a statutc or an agreement;

0 power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or

0 power to cast the majority of votes at meetings of the board of directors or equivalent governing body. These consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances.

Subsidiaries Consolidated financial statements include reporting of subsidiaries. where the Group owns directly or indirectly more than 50% of voting shares and has the opportunity to control decisions taken by the management of these companies. The results of operations of a subsidiary acquircd are included in the Group’s consolidated financial statement, when the control over the subsidiary arises. Consolidation of the subsidiary in the Group’s reporting is finished at the date when the Group ceases to have control of the subsidiary. Intragroup balances and intragroup transactions, as well as unrealized profits resulting from intragroup transactions are eliminated in full. Unrealized losses resulting from intragroup transactions are also eliminated unless costs cannot be recovered. Accounting of subsidiaries acquisition is carried out under the acquisition method. Minority interest at the reporting date is that part of the net results of operations and of net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent. Minority interests should be presented in the consolidated balance sheet separately from liabilities and the parent shareholders’ equity.

Associates An associate is an enterprise in which the Group has significant influence but which is not under its full control. Generally, the Group has significant influence over the companies in which is owns from 20% to 50% of voting power. Associates are accounted for under the equity method. Under the equity method, a portion of the Group’s interest in operational results of associates per year less received dividends should be accounted for in the consolidated income statement. Unrealized profits from transactions between the Group and associates are included at the amount corresponding to Group’s interest in associates. Unrealized profits and losscs are also included. unless there are showings of decline in value of transferred assets. The Group’s interest in an individual associate are carried in the balance sheet at the amount including acquisition cost. goodwill at acquisition date, as well as its share of profits and losses. The Group makes a provision for possible impairment of these investments. Application of the cquity method ceases from the moment when the carrying amount of financial investment in an associate equals zero, with the exception of cases when the Group settles liabilities of its associates or acts as a guarantor for liabilities of its associates. The Management of NJSC NaftoGaz of Ukraine decided not to account for such investments in the consolidated financial statements.

F-19 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thousands of UAH)

Joint Ventures Joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. Joint ventures are accounted for under the equity method.

Going Concein Assumption The Group operates in an unstable economic environment. Economic stability will depend to a large extent on the efficiency of the fiscal measures takcn by the government and the decision taken by Russian Gasprom as to construction of alternative means of oil and gas transportation passing through Ukraine, as well as other actions beyond the Company’s control. The Group will continue to be affected, for the foreseeable future, by the country’s unstable economy. As a result. therc are significant uncertainties that may affect future operations. the recoverability of thc Group’s assets, and the ability of the Group to maintain or pay its debts as they mature. I The Group‘s consolidated financial statements have been presented on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the consolidated financial statements do not include any adjustments of recorded asset amounts that might result should the Group either be unable to continue as a going concern or if the Group was to dispose of assets outside the normal course of its operating plan.

Reclassification To bring the figures for the previous period in conformity with the data presentation adopted in the current reporting pcriod, the Company performed a reclassification of certain ruspcctivc figurcs.

Cash and Cash Equivalents Cash include cash on hand and cash held in bank accounts. Cash equivalents are liquid investments easily converted into a known amount of cash with original maturities of three months or less and that are sub,ject to an insignificant risk of chanpe in value.

Financial Instruments Financial instruments in accordance with IAS 39 - are any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another entcrprise. Financial assets and financial liabilities accounted at the balance sheet of the Group include cash and cash equivalents, accounts receivable and payable, investments and other liabilities and loans. Accounting policy as to their recognition and assessment is disclosed in the relevant sections of these Notes.

Financial instruments are classified 3s liabilities or equity in accordance with the substance of the contractual agreement. Interest, dividends, gains, and losses relating to the financial instrument or such part classified as a financial liability, are reported as expense or income. Payments to the owners of financial instruments. included in the capital arc rcflected directly through capital. Financial instruments are presented as being offset, when the Company is obligated to account for, and intends to realize it on the basis of the offset balance or to sell its assets together with a decrease in its liabilities.

Financial Instruments: Recognition and Measurement Investments in marketable securities market values of which can be reliably determined, are carried at market value. Securities, the values of which can be reliably determined, are carried at the less of their purchase value and market value. Changes in the market value of securities were recognized in the income statement in the period where changes occurred. As a result of applying IAS 39 from January 1, 2001, the Group has classified its securities by three categories: Investments in securities acquired either for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin or if they arc part of a portfolio used for receiving short-term profit are classified as held for trading;

F-20 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thowands of UAH)

0 Securities with fixed maturity that the manageicnt has the positive intent and ability to hold to maturity are classified as held-to-maturity:

0 Securities that are expected to be held by the enterprise for an indefinite period and that can be sold to maintain liquidity or as a result of change of interest rate, currency exchange rate or prices at the equity market are classified as available-for-sale. Financial investments available for sale are stated at market value determined on an individual basis. Unrealized income and losses are included in the financial results. Shares that are not quoted are recognized at their initial value since for such shares there are no market quotations in the active market. Due to the lack of information on market quotations for similar companies and the data for analysis of discountcd cash flows it is not possible to apply other methods for valid assessment of their fair value. Moreover, at present it is not possible to assess price range within which it is most likely that the fair value of shares would fall. Loans and accounts receivable initiated by the Group are the loans and accounts receivable originated with the Company through provision of funds or goods directly to a debtor, except for those originated with the purpose of immediate sale or sale in the near future. Loans and accounts receivable initiated by the Group mainly include accounts receivable. Investments at receipt are recognized at cost, which is the fair value of consideration given therefore. Fair value of consideration provided, as a rule, is determined based on transaction value or other market value. The Group classifies its investments as availablc for sale and includes those for long-term assets. They do not have market prices on the active market, and their fair value can not be reliably assessed. Investments in construction of real estate in progress are recognized at purchase value. During 2002 the Group did not use any financial derivatives.

Accounts Receivable Current accounts receivable are stated at net realizable value which is calculated by deduction of provision for doubtful accounts from initial accounts receivable. Provision for doubtful debts is calculated by the method of receivables periodization, which implies application of a particular doubtful debt rate for each group of accounts receivable. Provision for doubtful debts was determined on the basis of known factors that might affect debt repayment. Final losses might differ from the current assessments. These assessments are periodically reviewed and, if the adjustment is necessary, are adjusted in the period when those adjustments became known. Due to the lack of reliable information as to the financial position of final consumers and shortcomings in the legal mechanism for indebtedness repayment, valuation of possible losses is the exact.

Promissory Notes Promissory notes received from customers are stated at face value less special provision for doubtful amounts. Notes with maturity dates excceding a onc-year period starting from the balancc sheet date arc classified as long-term assets. Such promissory notes are non-interest-bearing and they are stated at fair value less provision. Notes issued to suppliers are reported at face value.

Loans and Advances to Customers of JSCB MT-Bank Advances and loans made to customers are recorded net of provision for their impairment. Accrual of loan related interest is suspended when full repayment of principal or interest is doubtful. Accrual of loan related interest can be renewed if a debtor fully repays the amount due on the loan and respective interest or if there is sufficient evidence of his ability to repay principal and interest during the corresponding period.

F-21 NATIONAL JOINT STOCK COMPANY NAFIOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

Intcrcst accrued on loans that were deemed to be bad dcbts are not included in thcsc financial statements.

Provision for losses of JSCB MT-Bank Provision for losses is approximately the determined amount of potential losses on loans and deposits in other banks. Provision is reduced by the amount of actual losses on loans net of recovered amounts. Provision for losses is based on the assessment of portfolio of loans, past experience of the Bank as to the losses and risks incident to a portfolio of loans, valuated cost of pledge, adverse situations that can affect the ability of a borrower to repay his loan, and the current economic situation.

Other Current Accounfs Receivable Other current accounts receivable include advances to suppliers, receivables for goods and services other than the ones related to transportation, storage and sale of oil and gas, other deferred assets and liabilities, and assets that are stated net of provision for doubtful accounts. These assets are reported less provision for doubtful debts.

Inventories Inventories include gas, oil, combustive-lubricating materials and other raw materials purchased for cash and bartered logistical support, as well as raw materials and other inventories, which the Group holds for internal use and sale. Inventories in the Group reporting are stated at the initial cost less provision for obsolete inventories or net cost of sale. Initial cost comprises cost of acquisition, delivery costs, costs related to corresponding customs fees, transport costs and other costs directly related to acquisition of inventories. Retirement of inventories is performed at the following assessments: e Materials and goods (by types and groups) - identical cost;

0 Fuel - cost of first arrivcd inventories (FIFO);

0 Spare parts - cost of first arrived inventories (FIFO);

0 Finished products - average-weighted cost. Certain inventories belong to related parties and are held in accordance with consignment agreements. The Group reports these inventories as it reports those inventories that are not on consignment.

Technological Oil The main activity of JSC “Ukrtransnafta” (referred to in this subsection as the Company) is involved with oil transfer to consumers, both in Ukraine and to Europe. In technological process the Company uses oil which it owns. This oil was purchased by the Company when main gas pipelines came into use. The Company purchases technological oil during construction of new oil pipelines. New oil is being acquired at the volume required for the technological process. The Company accounts for technological oil as a non-current asset and carries out its revaluation at market prices existing at the reporting date. Technological oil in pipelines is considered to be a concurrent and essential condition of their use. Amortization of the oil in the pipeline is not accrued. Calculation of book value for technological oil is based on market prices of oil, based on the market of Ukrainian refinery plants and average expenses incurred by the JSC Ukrtransnafta on oil transit increased, on the basis of expert evaluation, by the amount of expenses on technological oil extraction, its delivery to the consumer, utilization of fuel waste products and conservation of pipelines.

F-22 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thousands of UAH) any expenses related to bringing the assets into operating status and their further delivery to the exploitation site. Cost of modernization and other improvements that extend the term of useful life of intangible assets or essentially improve their status and technical-exploitation features, are capitalized. Expenses related to current maintenance and repair are reported through expenses when originated. For the purposes of preparing reports in compliance with IFRS, intangible assets were recalculated according to a recalculating ratio, as described in the section “Currency of measurement and presentation”. Intangible assets are amortized from the month following the one they were put into operation. Amortization is ceases in the month following the one after disposal. Income or losses from disposal of intangible asses are determined on the basis of their book value and considered for purposes of the Group’s financial rcsults. Amortization is accrued using straight-line method during the following estimated useful lives: Amortiznfon Group norms Computer software ...... 5 years Licenses and privileges ...... 3-5 years Copyrights, patents and other rights for industrial property, servicing and exploitation ...... 3-5 years

Research and Development Research and development costs are expensed as incurred. Costs of project development are recognized as intangible assets when there is an assurance thcy will brins future commercial benefits. Other development costs are expensed as they occur. However, development costs that were expensed during their origination are not capitalized in succeeding periods, even if they conform to the conditions of asset recognition.

Proper& Plant and Equipment Fixed assets are stated at historical cost using the units of measurement effective at the balance sheet date less accumulated depreciation. The cost of fixed assets comprises its purchase price. including non- refundable purchase taxes, and any directly attributed costs of bringing the asset to its working condition and location for intended use. The Group keeps its books and records in Ukrainian hryvna (UAH). Before 1992 exchange rates were established by the Government and might have not been adequate for the real market situation. Moreover, portions of fixed assets were purchased through thc centralized bodies of technical support, the purchasing price for such transactions has also been established by the State. After 1991, according to normative requirements entities performed obligatory indexations of cost for fixed assets in order to report the inflationary effects (in 1992. 1993, 1995 and 1996). Those inflation indexes might have not reflected the actual dynamic of changes in thc exchange rate of hryvna and. as a result, its application did not lead to revaluation of indicated fixed assets corresponding to their market value. Therefore. for the purposes of IFRS statements the tixed assets were recalculated in accordance with recalculation ratios. specificd under the caption -‘Basis for prcsentation. Measurement and prcsentation currencies”. With respect to fixed assets of SJSC Chornomornaftogas an independent valuation has been performed under the method of replacement cost net of any impairment originated as at January 1, 2001. Cost of fixed assets received as a result of independent valuation. is a conditional cost of fixed assets calculated for the purposes of thcsc financial statements.

F-23 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

State and, thereforc. is not included in the Group’s financial statements. There is no official lease agreement for land use.

Further Expenses Cost of modifications, reconstruction and improvements that extend the term of useful life of assets or substantially improve their condition are capitalized and expenses related to current maintenance, repair and reconstruction are reported as expenses when originated.

Depreciation of Property, Plant and Equipment In accordance with generally accepted accounting practice depreciation of these assets in the oil and gas branch is calculated under the method of the number of units of produced oil and gas for each field or integrated group of fields on the assumption of quantity of reserves. Thus. depreciation calculation of a producing company depends on data about “commercial resources” (calculated quantity of gas, condensed fluid and oil resources. confirmed by geological and technical data with determined level of probability, the possibility of future production in existing economic and operating conditions). Depreciation is accrued using the straight-line method during the following estimated useful lifetimes: Depredation Group norm Wells ...... 30 years Buildings, other constructions and transmitting devices ...... 20 years Oil and gas pipelines ...... 15-30 years Reservoir tanks ...... 15 years Machinery and equipment ...... 12 years Technological fleet and motor transport ...... 6-10years Equipment for control over oil pipelines ...... 10 years Other fixed assets ...... 5 years

Income or losses from disposal of fixed asses are determined on the basis of their book value and considered for purposes of the Group’s financial result. Apart from production assets the Group also maintains and constructs objects of social infrastructure (kindergartens. health centers and etc.). These assets are capitalized only if future economic benefits from their use are expected. When they are capitalized depreciation related to these assets is accrued during their useful lifetime. 2- Thc caption “Construction in progress” includcs expenses for construction and capital repair of fixed assets in progress. Objects of construction in progress are reported at cost and not amortized until the relevant object is put into use. Caption “Capital investments’’ with SC Ukrgazvydobuvannya includes expenses for construction and capital repair of fixed assets in progress.

F-24 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH) exploration or extraction of these properties. If reserves are not proved, exploration expenses are charged to results of operations as such evaluations are incurred. Fail or success of each exploration effort is determined individually for each well as the potential oil and gas bearing structures are assessed. Such assessment of proved and unproved efforts is performed periodically, at least once per reporting year. Oil and gas exploration expenses for proven reserves are left in the balance sheet. Further tangible and intangible expenses relating to construction of exploratory and dry wells, as well as cost of equipment and forcing wells relating to the development of oil and gas properties are capitalized. When proven and developed reserves are put into operation capitalized expenses are amortized during the useful life of reserves according to the method chosen by the Company. For the purposes of these financial statements fixed assets applied for exploration, development and production of oil and gas reserves are aggregated by the center of expenses. The Company chooses oil and gas properties to be a center of expenses, As at December 31,2003 the Group has engaged independent appraisers to assess the oil and gas reserves in accordance with Standards of the Society of Petroleum Engineers Inc., USA.

Production Expenses Production expenses, which do not result in increase of oil and gas properties, are expensed and included in results of operations in the period when they were incurred.

State Property Not Subject to Privatization The Group has received State Property not subject to privatization for operating control based on the Agreement concluded with the State. State property is a network of trunk and distributing oil and gas pipelines of a high productive capacity. Basic accounting principles related to the State Property not subject to privatization are disclosed in the section of Note 2 “Basic accounting principles - Fixed assets”.

Impairment of Assets Under IAS 36 “Impairment of Assets”. cost analysis for the fixed assets with respect to thc impaimient of their value should be performed by companies whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in income. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an am’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal after the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash generating unit. The Group did not indicate potential loss from impairment of other assets; as such it does not assess the amount of estimated charges.

Government Grant JSC Ukrtransnafta (referred to in this subsection as the Company) has received a government grant for completion of the Ukrainian part of the Euro-Asian Oil-Transporting Corridor (EOC). The constructed oil pipeline is a network of main and distributing high-power pipelines. The Company controls utilization of EOC and receives profit from corresponding cash flows. The Company incurs expenses on repairs, extension and modernization of EOC. EOC property is carried on the balance sheet of the Company at historical cost. The Company accounts for EOC property under IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” and classifies it as a gram related to assets since under the

F-25 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

Agreement the Government obliged the Company to exploit, maintain and restructure the Euro-Asian Oil-Transporting Corridor. Pursuant to IAS 20 the Company recognizes the grant under income method, implying recognition of the grant as income during one or several reporting periods. The most important consideration for the income method is that state grants are recognized as income on a systematic and rational basis over certain periods, which is necessary to match them with the related costs which they are intended to compensate. As such, income from the grant is camed in reporting periods in the same proportion as depreciation accrued on EOC property at the amounts that the Group spent on repairs, extension and modernization of EOC. JSC Ukrtransnafta recognizes income received under the grant if there is reasonable assurance that such income will be received and the terms for grant transfer and further application are met. EOC property is depreciated from the month following the month in which they were put into operational use. Depreciation stops being charged in the month following disposal. Depreciation is accounted for using the straight-line basis over the estimated useful lives as stated in the section “Depreciation of property, plant and equipment’’ of this Note. The cost of expansion, reconstruction, modernization and other improvements which materially extend the useful lives of EOC property or materially improve its state and exploitation features are capitalized, while routine maintenance, repairs and reconstruction costs are expensed in the period when such costs are incurred.

Revenue Recognition Revenue is recognized when there is an assurance that the economic benefits associated with the transaction will flow to the Group and the amount of the revenuc can be measured reliably. Revenue, net of the related taxes, is recognized in the period when products are shipped or services are provided to the customer. The Group earns its revenue from principal and other activities. Revenue from principal activities comprises income from sales of oil, gas, fuel products, and other products, income from oil and gas transportation through main oil and gas pipelines, as well as from oil and gas storage services. Revenue from other activities includes income from inventories sales and rendering services to other divisions of the Group not connected to the Group’s principal activities. Revenue received from services of oil transportation is recognized based on the amount of crude oil transported to destination stations multiplied by the corresponding tariff for crude oil transfer. Tariffs for oil transfer are regulated by the state (see the Note “Establishment of tariffs”). Income from gas transportation (international and national transit) is recognized based on amount of transported gas and its destination. Income from pumping and extraction of gas is recognized at the moment of gas pumping to, or extraction out of gas storage facilities. Gas sales are recognized when gas is shipped to the ultimate consumer. Other sales are income received from operations of supporting subdivisions associated with rendering of services tu third parties and sales of gas and fixed assets. Interest income and expenses are recognized on the accrual basis when such income is received or expense incurred.

Recognition of cost of sales and other tirpcnscs Cost of sales associated with the relevant transaction is determined simultaneously with the relevant revenue. Expenses incurred after the goods were shipped and which can be measured reliably, are recognized concurrently with revenue as well.

F-26 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

Foreign Currenqv Trunsuctions Foreign currency transactions are reflected in the reporting currency through recalculation of the foreign currency amount at the exchange rate of NBU in force at the date of the transaction. The exchange differences originating from recalculation of monetary items at the rates different from the accounted ones are recognized in the income statement in the period of their origination. The official exchange rate of UAH to US dollars established by the National Bank of Ukraine was equal to 5.3324 and 5.2985 as at December 31, 2002 and 2001 respectively. At the rcporting date of these financial statements. the exchanFe rate of UAH to US dollar was equal to 5,3287 UAH per 1 US dollar.

Income Tar Income tax is based on financial results for the year taking into accvunt deferred taxation. Current income tax related expenses are calculated in accordance with Ukrainian tax legislation where the financial result recognised in the income statement of subsidiaries and associates is the taxation basis. Such income statement should be prepared in accordance with Ukraine Accounting Standards, while considering certain adjustments for tax purposes. Deferred taxes are accrued under the balance sheet liability method. The amount of deferred taxes reflects thc net tax effect of tcniporary diffcrcnccs between the balance cost of assets and liabilities for accounting purposes and cost considered for tax accounting. Amount of assets and liabilities from the deferred taxation is calculated on the basis of the expected tax rate to be applied to the income subject to taxation in years when the amount of temporary differences might be charged or realised. Valuation of deferrcd tax assets and liabilities reflects possible tax conscqucnces originating from the cxpccted evaluated probability of recoverability and realisation of the cost of such assets and liabilities. Deferred tax assets arising from tax losses should be recognized as an asset only where there was assurance beyond any reasonable doubt that future taxable income would be sufficient to allow the benefit of the loss to be realizcd. The Group revaluates non-recognised dcferred tax assets at each balance-sheet date as well as the current cost of deferred tax assets. The Group recognizes previously not recognized assets only proportion to which there is a probability to realize it against the future taxable income. The opposite is also true: the Group reduces the balance cost of a deferred tax asset when there is a probability of complete or partial realisation of the asset against future income.

Non-monetary Transactions Subsidiaries and associates performed offsets with its counter-parties, when their receivables were offset with the payable balances to the same counter party. In some cases receivables and payables of different counter-parties were offset based on signed mutual agreements. Sales proceeds and the cost of sales for barter and offset transactions are recognized when products are shipped. Sales are recorded net of VAT.

Non-monetary Transactions Subsidiaries and associates performed offsets with their counter-parties, when their receivables were offset with the payable balances to the same counter party. In some cases receivables and payables of different counter-parties were offset based on signed mutual agreements. Sales proceeds and the cost of sales for barter and offset transactions are recognized when products are shipped. Sales are recorded net of VAT.

Related Pur@ Transactions Under IAS 24 “Related Party Disclosures”, related parties include: 1. enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise. (This includes holding companies, subsidiaries and fellow subsidiaries);

F-27 NATIONAL JOINT STOCK COMPANY NAFI'OGAZ OF UKRAINE Consolidated Fmanchl Statements for the year ended December 31, 2002 (Thousands of UAH)

2. associatcs is an cnterprise in which thc invcstor has significant influence and which is neither a subsidiary nor a joint venture of the investor; 3. individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them significant influence over the cnterprise. and closc members of the family of any such individual; 4. key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. including directors and officers of companies and close members of the families of such individuals; and 5. enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (3) or (4) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. Related companies to the Group include enterprises that directly or indirectly, through one or more companies, control or are controlled by the Group, or are controlled together with the Group andlor with the management of the Group. Related parties are mostly represented by enterprises belonging to NJSC NaftoGaz of Ukraine. In addition, as a result of the Group's investments, there are related companies with the reference to the Company that are not the part of NJSC NaftoGaz of Ukraine. Accounts receivable from related parties are stated at initial cost. Provision for doubtful amounts of such receivables was not made. The Note 28 Related Party Transactions disclose related party transactions for consolidation purposes.

Accounts payable Accounts payable are stated at cost which is the fair value of compensation to be paid in the future for goods, work and services regardless of whether the Group was billed or not. Payables, which mature more than one year after the balance sheet date, are reported in long-term liabilities. Long-term liabilities are mostly represented by restructured tax debt to budget.

Loans Loans are initially assessed at the fair value of received amounts (applying market interest rates for similar instruments if they considerably differ from interest rate for the received loan). In the future loans are assessed at depreciated cost applying the method of effective interest, difference between fair value of received amounts and amount of loan repayment is reflected as interest payable during the credit period. Expenses on servicing of loan proceeds are charged to expenses as they occur.

Provisions Provision is recognized necessary when the Group has a present liability (legal and constructive) owing to a past event and there is probability that in order to repay a liability, an outflow of resources that embody economic benefits will be requircd and thc amount of liability can be reliably assessed. If the effect of cost of money in time is material, the amount of provision is determined by discounting expected cash flows by applying a discount rate reflecting the rate before taxation and current market estimates of the cost of money in time, as well as risks attributable to certain liabilities, if they exist. When applying discounting, an increase of the provision amount reflecting the effect of time is recognized as interest expenses.

F-28 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thousands of UAH) provision for abandonment in full upon completion of drilling. Cost of abandonment is included in the cost of oil and gas fields. The Company has valuated its commitments considering the restoration cost originated from 1997 to 2001 and will continue to specify its estimations in the future. However, Ukrainian legislative acts as to environmental protection might influencc the volume of such expenses; therefore the future expenscs related to such commitments might differ from the accrued ones.

Retirement and Other Beneft Obligations State Pension Program The Group makes current contributions under a pension program for its employees. This system requires a current contribution from the employer calculated as a percentage of gross salary payments; such expense is charged to the income statement in the period the related compensation is accrued to employees.

The Group's Pension Program Aside from the abovementioned contributions to the state pension fund, JSC Ukmafta signed a collective agreement with its employees on certain pension bcncfits that provide for nonrecurring payments to retired employees. The amount of payment depends on the length of service of an employee. No special funds were provided for these liabilities. Expenses for pension payments under this program are determined based on actuarial evaluation of liability under the method of accrual of projected units. Since in Ukraine there are no services for reliable actuarial evaluation, the management applies its own internal estimates to calculate liabilities related to this pension program at each reporting date. Actual results may differ from evaluations made at a certain date. Actuarial profits and losses are recognized as income or expenses when the total amount of unrecognized actuarial income exceeds 10% of recognized pension liability. These protits or losses are recognized during the remaining expected period of service of employees participating in these pension plans. JSC Ukrtransnafta established Private Pension Fund Ukrtransnafta Ltd. During the accounting period the Fund did not operate due to the absence of regulating legislation in Ukraine.

Social Liabilities The Group finances dcvclopment and maintenance of social infrastructure and welfare of its production employees, including contributions for construction, development and maintenance of housing, hospitals, transport services, resorts etc.

Contingent ascis and liabilities The Company should not determine a contingent asset. The relevant information should be presented whcnever the probability of economical benefits exists. An asset and the related income are recognized in the financial statements of the period of change in evaluation. Contingent liabilities are not reflected in the financial statements. exccpt for thc cases when the outflow of economical benefits is likely to take place and the amount of such liabilities can be reliably measured. The information on contingent liabilities is disclosed in the Notos to financial statements with the exception of cases. when the outflow of economical benefits is unlikely. NJSC NaftoGaz of Ukraine has commitments assigned by the Cabinet of Ministers of Ukraine with respect to the Yamburg Agreement dated 19.03.1986 to which Ukraine is bound following the collapse of the USSR. At the reporting date the Company carries out inventory, evaluation and reconciliation with the Cabinet of Ministers of Ukraine regarding liabilities to be incurred.

Segment Reporting The main types of external sales of the Group are oil and natural gas, gas condensate and processing products. The Group's management does not highlight separate business segments within the Group.

F-29 NATIONAL JOINT STOCK COMPANY NAROGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

Since the Group is a vertically integrated enterprise, it determines business segments in accordance with the requirements of IFRS 14 “Segment Reporting” for vertically integrated enterprises. The information on various products and services of the Group and its activities can be presented in accordance with business segments or geographical segments. A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service (or a group of related products or services) and that is subject to risks and returns that are different from those of other business segments. Factors that should be considered in determining business segments are the nature of the products or services, the nature of the production processes and juridical environment, e.g. bank services. A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. On the basis of the abovementioned factors and the requirements of IAS 14 “Segment reporting” for vertically integrated enterprises, the information should be analyzed based on the business segments stated below: Production and processing - exploring, drilling and construction of wells, production and processing of natural gas and other hydrocarbons; Transportation - oil and gas transportation services;

Sales to consumers - sales of production to JSCs and external consumers;

0 Other activities - other activities, including bank services. Intra-segment sales are basically comprised of the following components: Production and processing - sales of natural gas and other hydrocarbons to the segments “Transportation ” and “Sales ”;

Transportation - oil and gas transportation services to the segment “Sales”;

0 Sales - oil and gas sales to the segment “Transportation” for operating needs; Internal prices are established by the Group’s management in accordance with the prices for external sales and sales within NJSC Naftogaz of Ukraine set by the Government and NJSC Naftogaz of Ukraine, and taking into account the needs for optimization of financing of separate business segments. The Group performs its operating activities essentially in Ukraine. The Group’s assets are located in Ukraine as well. Due to this fact geographical segments were not determined.

F-30 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Fmancial Statements for the year ended December 31,2002 (Thousands of UAH)

4. INFORMATION ON BUSINESS SEGMENTS Information on business segments of the Group as at December 31,2002 and €or the year then ended can be presented as follows: CoaPoEQted 2002 Trnnsportation sales Other sctivitits d8la INCOME External sales ...... 3,787,363 11,521,804 9,292,646 114,401 24,716,414 Intrasepent sales ...... 1,037,556 2,120,108 18,329,840 21,487,504 Total income ...... 4,824,919 13,641,912 27,622,486 114,601 46,203,918 EXPENSES External expenses ...... (2,903~12) (2,275,806) (17,239,282) (68,284) (22,486,484) Intrasegment expenses ...... (580,483) (1,916,617) (18,990,404) (21,487,504) Total expenses ...... (3,483,595) (4,192,423) (36,229,686) (68,284) (43,973,988) Operating profit ...... 884,251 9,245,998 (7,946,636) 46,317 2,229,930 Othcr non-operating profit (loss) ...... (401,600) (263,l 18) 122,017 (542,701) Profit from operating actinties...... 482,651 8,982,880 (7,824,619) 46,317 1,687,229 OTHER INFORMATION General segment assets ...... 12,187,058 14,663,289 36,275,311 628,028 63,753,686 Unallot ted assets ...... 503,630 Elimination of intrasegment operations ...... (17,947,429) Total assets ...... 46*$87 Segment liabilities ...... 3,312,681 3,420,982 42,181,982 276,463 49,192,108 Elimination of intrasegment operations ...... (17,947,429) Total liabilities ...... 3524q679

F-31 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thousands of UAH)

Information on business segments of the Group as at December 31,2001 and for the year then ended can be presented as follows: Production and ComUdated 2001 proeesSing Ttausporhtion Other activities data INCOME External sales ...... 2,870,936 11,513,067 7,172,895 96,427 21,653,325 Intrasegment sales ...... 2,365,849 2,069,057 17,036,602 21,471,508 Total income ...... 5,236,785 13,582,124 24,209,497 96,427 43,124,833 EXPENSES External expenses ...... (1,616,070) (1,735,716) (19,366,059) (50,083) (22,767,928) Intrasegment expenses ...... (965,748) (3,25 1,141) (17,254,619) (21,471,508) Total expenses ...... (2,581,818) (4,986,857) (36,620,678) (50,083) (44,239,436) Operating profit ...... 1,254,866 9,777,351 (12,193,164) 46,344 (1,114,603) Other non-operating profit (loss) ...... (224,794) (183.070) (213,547) (621,411) Profit from operating activities ...... 1,030,072 9,594281 (12,406,711) 46,344 (1,736,014) ~ OTHER DATA General segment assets ...... 12,635,082 15,917,387 34,292,485 456,611 63,301,565 Unallotted assets ...... 2,024,061 Elimination of intrasegment operations ...... (20,698,991) Total assets ...... 44,626,635 Segment liabilities ...... 4,092,426 5,183,140 41,658,560 159,415 51,093,541 Elimination of intrasegment operations ...... (20,698,991) Total liabilities ...... 30,394,550

F-32 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

5. CASH AND CASH EQUIVALENTS As at December 31, 2002 and 2001, cash and cash equivalents included: Cpsh and cssh equivalents m2 2001 In foreign currency ...... 238,196 134,406 In national currency ...... 299,825 179,190 Other cash equivalents ...... 0 83 Total ...... 538,021 3W,679

Cash and cash equivalents as at December 31,2002, included cash in national currency and cash in foreign currency (USD and Russian rubles). Cash and cash equivalents as at December 31,2002 and 2001 presented on the balance sheet comply with the cash balances at the beginning and at the end of the year in the cash flow statements for years ended December 31,2002 and 2001.

6. ACCOUNTS RECEIVABLE AND PROMISSORY NOTES As at December 31,2002 and 2001, accounts receivable included: Accounts receivable md promissory notes, net 2002 2M1 Initial cost of accounts receivable for goods, work and services ...... 12,535,977 12,033,664 Notes received ...... 1,534,600 1,606,521 Other current accounts receivable ...... 1,515,023 43,712 Provision for bad debts ...... (12,187,572) (7,064,558) Total ...... 3,398,028 6,619,339

7. INVENTORIES Book value of inventories classified bv groups can be presented as follows: Inventorits 2002 2001 Oil and gas ...... 4,377,455 2,808,240 Construction materials ...... 124,060 297,435 Goods ...... 128,359 143,293 Tools and spare parts ...... 254,767 295,061 Other ...... 581,661 454274 Provision for inventories ...... (460,746) (507,872) Total ...... 5,005,556 3,490,431

F-33 NATIONAL JOINT STOCK COMPANY NAITOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2002 (Thousands of UAH)

8. OTHER CURRENT ASSETS. NET As at December 31. 2002 and 2001 other current assets included: Other mntassets 2502 2001 VAT settlements ...... 582. 033 548.561 Non-trade current accounts receivable ...... 1,210,949 963.079 Advances paid ...... 1,371,048 1.138.377 Other ...... 609227 870.743 Provision for doubtful debts ...... (779,463) (225.532) Total ...... 2,993,794 3495328

9. LONG-TERM ACCOUNTS RECEIVABLE AND NOTES As at December 31. 2002 and 2001 long-term accounts receivable and promissory notes included: 2002 2001 Long-term notes: a) related parties ...... 89.973 21.769 b) other enterprises ...... 101.066 567315. Investments in joint ventures ...... 24.650 0 Loans to employees ...... 7.276 4.944 Long-term accounts receivable ...... 649.091 1.148. 169 Other receivables ...... 9.740 85.034 Provision for impairment of financial investments ...... (76.149) 0 Provision for doubtful accounts ...... (88.973) (356.315) Total ...... 766. 674 1.4199 74

F-34 NATIONAL JOINT STOCK COMPANY NAnOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

F-35 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

11. STATE PROPERTY THAT IS NOT SUBJECT TO PRIVATIZATION As mentioned in Note 1 in November 2001 the State transferred to the Group’s operations the State Property that is not subject to privatization. The parties have signed an agreement stating that half of “net profit” received from utilization of such State Property belongs to the State. The Group has the right to utilize State funds for financing of extension, reconstruction and modernization of State Property instead of repayment. However, the Agreement does not provide for a method for calculation of “net profit”. thus. the Group could not determine the amount of indebtedness to the Government based on agreements on transfer of State Property that is not subject to privatization. At the reporting date the Group did not receive any requests from the Government as to the repayment or carrying out a calculation of “net profit”. In order to increase efficiency and provide reliable operation of the gas and oil-transporting network, the Group annually works out Programs of technical examination and analysis of the gas and oil-transporting network, plans for capital repair, construction and reconstruction. According to the plans certain works are being executed, the most important of which are: a regular examination of oil-transporting routes by the staff of emergency centers using helicopters; a systematic cleaning of pipelines’ interiors from paraffinaceous sediments; a diagnosis of oil pipelines’ interiors, external examination of linear parts of gas and oil pipelines in order to assess their technological state and carrying out selective repair of isolation with elimination of hazardous defects; e work on examining bolts to check their air tightness; a examining and selective repair of underwater and air passages with the assistance of specialized organizations;

0 anticorrosion cover of aerial crossings; repair of other gas and oil pipelines facilities.

12. DEFERRED TAX ASSETS (LLABILlTIES) As at December 31, 2002 and 2001, deferred tax assets and liabilities of the Group included:

Tax effect of temporary differences to: Fixed assets ...... (627,346) (327,225) Accounts receivable and promissory notes...... 1,823,363 1,635,813 Inventories ...... 67,120 43,804 Advances paid and other assets ...... 57,438 344,329 Accounts payable ...... 21,402 7,892 Advances received and other liabilities ...... 1,245,701 1,061,043 Adjustment of cost for technological oil ...... (329,145) (341,601) Total ...... 2,258,533 2,424,OSS

F-36 NATIONAL JOINT STOCK COMPANY NAROGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thowands of UAH)

13. ACCOUNTS PAYABLE AND OTHER INDEBTEDNESS Accounts payable as at December 31 2002 and 2001can be presented as follows:

Payables 2002 2001 Accounts payable for goods, work, services ...... 16,900,338 17,628,201 Notes issued ...... 281,222 308,537 Accounts payable for oil transportation services ...... 54,420 71,314 Total ...... 17,235,980 18,008,052

Aecoaots payable for goods, works, services 24m3 2002

~ JSC Gasprom ...... 7,693,628 7,&44,717 Provision to amount of non-settled outstanding debt with JSC Gasprom. 948,229 941,623 State Trading Company Turkmennaftogas ...... 3,300,791 2,568,221 Itera LLC ...... 1,742,646 2,457,817 Other creditors ...... 3,215,044 4,009,823 Total: ...... 16,900,338 17,628301

14. TAX LIABILlTIES Tax liabilities as at December 31,2002 and 2001can be presented as follows: Tax liabilities 2002 ulol Budget tax settlements ...... 4,@1,443 2,393,257 Non-budget tax settlements ...... 198,151 381,543 Social insurance ...... 8,459 9,838 Payment for transit of oil through main oil pipelines ...... 5,994 5,224 Payment for transit of gas within Ukraine ...... 2,148,402 1,266,841 Total ...... 7,002,449 4,056,703

The following contributions to state budgct from inflows werc established: For oil transportation in the amount of USD 0.685 per ton, except transportation by the Ukrainian portion of Eurasian corridor in the direction of Marine oil terminal Pivdenny-Brody-Westem border of ... Ukraine till December 31,2003; For transit of natural gas in the amount of USD 0.29 per 1,OOO cubic meters of gas for each 100 km. Conversion into Ukrainian currency was performed applying the official exchange rate set by the National Bank as at the day preceding the day of payment. Fines and forfeits charged to the Group by tax authorities for untimely tax payments and noncompliance with tax legislation are reported in the income statement.

15. FINANCIAL LIABILITIES As at December 31. 2002 and 2001financial liabilitics of the Group included:

Finnndal liabilities 2502 ulol Short-term bank loans ...... 696,363 418,811 Current long-term liabilities ...... 494 38,956 Total ...... 696,857 457,767

F-37 NATIONAL JOINT STOCK COMPANY NAFIOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thousands of UAH)

16. OTHER CURRENT LIABILITIES Other current liabilities of the Group as at December 31, 2002 and 2001included: Other murent liabilities 2001 Tax settlements ...... 467,311 677,717 Advances received ...... 743,617 420,553 Payroll settlements ...... 88,071 61,833 Payroll accruals ...... 18,331 7,824 Accounts payable from non-operating activities ...... 595,031 1,504,907 Other liabilities ...... 416,441 634,806 Dividends to shareholders ...... 41,605 41,040 Payments to employees ...... 3,847 3,060 Deferred income ...... 0 18 Total ...... 2,374,254 3251,758

As at December 31, 2002, payroll settlements included reserves for vacations and bonuses payable for results of the Group in 2002. Corresponding accruals to pension and social funds were included in payroll accruals.

17. PROVISION FOR ABANDONMENT OF WELLS The Group’s activities can have a negative effect on the environment. The Group makes periodical review of its environmental liabilities in accordance with environmental protection legislation. According to management’s estimations, as at December 31,2002 and 2001, the actual value of future expenses for torritory restoration and abandonment of oil and gas fields amounted tu 387.835 thousands of UAH and 359,169 thousands of UAH respectively.

18. GOVERNMENT GRANT In 2001 the Group received a government grant for completion of the Ukrainian part of the Euro-Asian Oil-Transporting Corridor. The financing is based on the LAW of Ukraine “About state budget of Ukraine for the 2001” (Law on budget for 2001). The source of aforementioned financing is 80% of inflow of payments for transportation of oil through the main oil pipelines. Movement of Govemment Grant Funds m2 uw)1 Balance of budget funds at the beginning of the period ...... 32,646 Received ...... 8,331 173,746 Utilized ...... (33,W) (141,100) Balance of budget funds at the end of the period ...... 7,332 32,646

F-38 NATIONAL JOINT STOCK COMPANY NAITOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thou“ of UAH)

Utilization of Government Grant Utilization of the government grant for completion of the Ukrainian part of the Euro-Asian Oil- Transporting Comdor during 2062 can be presented as follows: 24M2 tool Totd Budget Diiierences Technological pipelines and reservoir park (reservoir assembling) ...... - 10,521 10321 10,897 (376) Port and cleaning facilities of MOTC ..... 3,766 24,670 28,436 29,841 (1,405) Communication and alarm networks ...... 2,863 1,759 4,623 969 3,653 Automatic system monitoring pipelines . - 520 520 866 (346) General construction work ...... - 21,321 21,321 17,330 3991 Share in construction ...... 18 4,329 4,346 3,046 1300 Special vessels. fire-fighting boats. ladder-tower and chemical-analysis laboratory, port facilities ...... - 32,556 32556 57,000 (24444) Boats of port fleet (2 towboats) ...... - 35,137 35,137 46,783 (11,646) Development works ...... + 383 383 378 5 Materials and equipment supplied by customer ...... 841 9,906 10,747 10~00 547 Insurance certificate ...... - - - 18,096 (18,096) Technological oil ...... 26,157 - 26,l57 - 26,157 33,645 141,100 174,745 195,406 (20,661)

19. OTHER LONG-TERM LIABILITIES Other long-term liabilities of the Group as at December 31, 2002 and 2001 included: Other long-term liabilities 2002 tool Restructured budget liabilities ...... 143,087 479,153 Other liabilities ...... 610,502 1,716,772 Long-term notes: a) related parties ...... 62,396 64,142 b) other enterprises ...... 162,994 623,495 Long-term liabilities to related parties ...... 38,621 40,931 Long-term loans ...... 179,230 250,428 Purpose financing ...... 13,058 13,332 Provision of Pensions...... 32,868 29,798 Total ...... l,242,756 3,218,071

In 1997 the Government gave the three branches of NaftoGaz of Ukraine a 10 years’ extension delay in the payment of income and other taxes due as of April 1,1997. Repayment of these tax liabilities should have been made by equal monthly payments starting from January 1998. The current portion of restructured tax liabilities were included in “Tax liabilities”.

20. EQUITY Capital Pursuant to the Company’s Charter and the related amendments the statutory capital amounts to 5,564,714 thousands of UAH, comprising 5,564,714 ordinary chares of nominal value 1oM)UAH each. In accordance with the Charter the State acting through the Cabinet of Ministers of Ukraine is the Company’s founder. As at December 31, 2000 the statutory fund of the Company was formed in full scope. The State’s share in the Company’s statutory capital comprises 100%. The difference reflects the amount of charter equities of the Group’s companies, not included in the consolidation.

F-39 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thousands of UAH)

Reserves Reserves include a revaluation fund for fixed assets. together with retained earnings from previous periods of the Group and its predecessor - Ukrgasprom - as of the balance sheet date.

21. INCOME FROM REALIZATION OF GOODS, WORK, SERVICES Income from realization of goods, work, services for 2002 and 2001included: Net income boom realization of go* work, services 2502 2001 Income from sale of oil and gas ...... 29,137,279 29,236,425 Income from sale of refinery products ...... 978.203 I .082 .s7 1 Oil and gas transportation ...... 11,404,026 10,316,913 Income from other sales...... 4,684,410 2,488,674 Elimination of transactions within the group ...... (21,487,504) (21,471,508) Net income ...... 24,716,414 21,653,325

22. COST OF SALES Cost of realized goods, work, services for 2002 and 2001 specified by types of sales was as follows: Cost of sales 2002 2001 Oil and gas ...... 33,087,847 30,559,446 Refinery products ...... 155.124 142.972 Oil and gas transportation ...... 5,556,927 6,436,533 Other sales...... 1,552,539 1,524,603 Elimination of transactions within the group ...... (21,487,504) (21,471,508) Net cost of sales ...... 18,864,933 17,192,046

23. OTHER OPERATING INCOME Other operating income of the Group for 2002 and 2001 included: Other opera* income 2002 uw)1 Sales of other current assets ...... (10,707) 87,621 Operating lease of assets ...... 4,946 2,524 Operating exchange difference ...... (6,456) 719,768 Fines, penalties, forfeits received ...... 25,871 9,093 Recovered cost of previously written off assets or from recovered debts previously written off as doubtful ...... 91,274 2,120 Write-off accounts payable ...... 177,763 647,061 Grants and subsidies received ...... 2,230 25,647 Other income from operating activities ...... 241,240 996,757 Total ...... 526,161 2,490,591

F-40 NATIONAL JOINT STOCK COMPANY NAFIOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2002 (Thousands of UAH)

24 . ADMINISTRATIVE AND SALES EXPENSES Administrative and sales expenses of the Group for 2002 and 2001 included: 2002 2001 Payroll expenses ...... 118.877 78. 609 .. Depreciation ...... 83. 9@ 70. 030 Social security expenses ...... 66.612 53. 348 Expenses on materials ...... 36. 270 12.473 Other administrative expenses ...... 232. 868 226. 271 Subtot~l...... 538. 591 440. 731 Sales expenses Payroll expenses ...... 4. 541 3. 062 Depreciation ...... 1.914 1.768 Social security expenses ...... 978 529 Expenses on materials ...... 1.179 2. 250 Gas transportation (by oblgases for Gas of Ukraine) ...... 0 296. 260 Commission ...... 246.600 4. 126 Transportation services...... 3. 925 0 Customs services...... 10.600 10.445 Other sales expenses...... 76. 102 31. 267 Subtotal ...... 345. 839 349. 707 Total ...... 884. 430 790. 438

25 . OTHER OPERATING EXPENSES Other operating expenses of the Group for 2002 and 2001 included: Other operating expenses uw)1 Geological exploring...... 249. 207 55.860 Provision for impairment of capital investments ...... 149.051 655 Expenses on development and exploration ...... 46. 797 9. 321 Fines. penalties, forfeits recognized ...... 92. 164 1.95 1. 198 Charity ...... 31. 763 17.038 Shortages and expenses from impairment...... 2. 738 638 Expenses on impairment of inventories ...... 19.577 (614) Adjustment to provision for inventories ...... (60.415) (69.455) Write-off bad debts ...... 55. 350 16.672 Repair of property. plant and equipment ...... 412. 745 0 Other operating expenses ...... 833. 702 835. 130 Total ...... 1.832. 679 2,816. 443

F41 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2002 (Thousands of UAH)

26 . OTHER NON-OPERATING INCOME Other non-operating income of the Group for 2002 and 2001 included Other non-operating income 2502 2001 Assets received free of charge ...... 30. 883 22.933 Increase of market value in financial investments ...... 398 0 Joint ventures ...... 2. 760 25 Interest received ...... 1.556 1.435 Realization of non-current assets ...... (2.405) 201 Realization of financial investments ...... 93.876 (5) Non-operating exchange difference ...... (3. 266) 1. 320 Realization of promissory notes ...... 0 0 Dividends received ...... 2. 367 10.691 Other non-operating income ...... 40. 917 7. 875 Total ...... 167. 086 44. 475

27 . OTHER NON-OPERATING EXPENSES Other non-operating expenses of the Group for 2002 and 2001 included: Other non-operating expenses 2002 2001 Maintenance of non-operating items and other social arrangements ...... 203. 669 112.783 Provision for impairment of financial investments ...... 46.663 (436) Loan interest ...... 28. 736 18.168 Liquidation of accidents consequences ...... 710 0 Loss from non-operating exchange differences ...... 9. 853 24. 104 Joint ventures ...... 0 3. 547 Loss from sales of non-current assets ...... 175.764 123.254 Loss from share in capital ...... (148) 1.827 Interest expenses under financial lease ...... 2.242 1.690 VAT non recovered from state budget ...... 146.223 0 Other non-operating expenses ...... 96. 075 373.541 Total ...... 709. 787 658. 478

28 . RELATED PARTY TRANSACTIONS In these financial statements related parties are the parties one of which can control another or have material influence on financial and operating decisions of other party. as provided in IAS 24 ‘‘Related Party Disclosures” . In considering each possible related party relationship. attention is directed to the substance of the relationship. and not merely the legal form . Such enterpriscs include . in the first place . all entcrprisus controlled by the parent company NJSC Naftogaz of Ukraine . As of 31.12.2002 NJSC Naftogaz of Ukraine held corporate rights (shares) in approximately 100 enterprises . All enterprises a portion of whose shares are held by NJSC Naftogaz of Ukraine can be divided into 5 groups .

F42 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

First group: subsidiaries of NJSC Naftogaz of Ukraine, which are fully owned by NJSC Naftogaz of Ukraine. Share in capital SC Kurortnaftogas ...... 100 SC Naftogaz servicing...... 100 SC Ukrgazvydobuvannya ...... 100 SC Ukrnaftogaskomplekt ...... 100 SC Gas of Ukraine ...... 100 SC Ukrtransgaz ...... 100 SC Budivelnyk ...... 100 SC Naftogazbezpeka ...... 100 SC Gas-heat ...... SC PSP NJSC Naftogaz ...... 100

Second group: other enterprises in which 100% of corporate rights belong to NJSC Naftogaz of Ukraine. Shue in cnpitpl JCS Azmol ...... 100 JCS Ukrspetstransgas ...... 100 JCS Ukrtransnafta ...... 100 JCS Chernomornaftogas ...... 100

Third group: regional gas companies (oblgases, miskgases) in which more khan 50% of shares belong to NJSC Naftogaz of Ukraine. Shnre in mpital JSC Berezhanygas ...... 51,M JSC Gadyachgas ...... 51,00 JSC Dnipropetrovskgas ...... 51,00 JSC Kirovogradgas ...... 51,00 JSC Kremenetsgas ...... 51,00 JSC Kremenchuggas ...... 51,00 JSC Lubnygas ...... 51,00 JSC Luganskgas ...... __._...... ,...... *...... -...... 51,00 JSC Temopilgasbud ...... 51,00 JSC Tysmenytsyagas ...... 51,00 JSC Cherkasygas ...... ___.____.__...... *...... ,...... 51,00 JSC Terebovlyagas ...... 50,98 JSC Zaporizhgas ...... 50,00+1 share JSC Ivanofrankivskgas...... SO,OO+l share JSC Melitopolgas ...... 50,00+1 share JSC Mykolaivgas ...... ____ ...... _____...... 50,00+1 share JSC Poltavagas ...... 51,00 JSC Sumygas ...... 50,79 JSC Sevastopolgas ...... 50,00+1 share

F43 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2002 (Thousands of UAH)

Fourth group: other enterprises in which more than 50% of shares belong to NJSC Naftogaz of Ukraine . Share in cspitnl JSC Notes and settlement center of NJSC NaftoGaz of Ukraine ...... 80. 00 JSC Ozgas ...... 52.00 JSC Energy and fuel of Ukraine ...... 51.00 JSC Ukrnafta ...... 50,00+1 share JSC Ukrainian gas and energy company ...... 50,00

Fifth group: regional oblgases (miskgases) and other enterprises in which less than 50% of shares belong to NJSC Naftogaz of Ukraine . Share in enpitnl JSC Krymgas ...... 48.99 JSC Umangas ...... 40.30 JSC Ukragaszbut ...... 40.00 JSC Zakarpattyagasbud ...... 39.02 JSC Donetskoblgas ...... 38.28 JSC Chemigivgas ...... 38.25 JSC Gastranzit ...... 37.00 JSC Devon ...... 36.38 JSC Zboribgas ...... 35.97 Finances and Credit CB Ltd ...... 35.00 JSC Rivnensk beverages plant ...... 34.84 JSC Kyivoblgas ...... 33.24 JSC Rivnegas ...... 32.60 JSC Zbarazhgas ...... 32.59 JSC Monostyrskgas ...... 30.97 JSC Ternopilmiskgas ...... 29.96 JSC Chortkivgas ...... 27.70 JSC Lvivgas ...... 27.55 JSC Shepetivkagas ...... 27.00 JSC Pidvolochiskgas...... 26.98 JSC Zalishchykygas...... 26.51 JSC Hmelnytskgas ...... 26.00 JSC Ukrnaftogasinvest ...... 26.00 JSC Temopilgas ...... 25-71 JSB Ukrgasprombank ...... 24.44 JSB Ukrgasbank ...... 24.04 JSC Volyngas ...... 23.42 JSC Korostyshivgas ...... 22.00 JSC Hersongas ...... 20.83 JSC Chernivtsigas ...... 20.40 JSC Ukrbudtransgas ...... 20.00 JSC Ukrgasprylad ...... 20.00 JSC Odesagas ...... 19.90 JSC Ukrfraggas ...... 18.54 JSC Harkivgas ...... 17.70 JSC Kyivpropangas ...... 17.06 JSC Zhitomyrgas ...... 15.86 JSC Last ...... 15.00 JSC Donetskmiskgas ...... 12.54 Megabank SUEB ...... 5.77 JSC Shlumberzhe Ukrgas Meters Company ...... 11.17

F-44 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH}

JSC Krymgas ...... 48.99 JSC Harkivmiskgas ...... 9.91 JKX Oil & Gas plc...... 9.09 JSB Brokbussinessbank ...... 3.13 JSC Ukrnaftogasbud ...... 7.04 JSC Krivorizhgas...... 7.01 JSC Zakarpatgas ...... 6.34 JSC Ukrnaftogastechnology...... 5.00 JSC Krymnaftogaspostach ...... 5.oo JSC Dnestr SKB ...... 2.9 JSC Mdrs ...... 3.00 JSB Prykarpattya ...... 2.19 JSC Shebelynska voda ...... 1.68 JSC Makiyivkagas ...... 1.62 Energy ...... 1.53 JSC Ukrnaftoterm...... 1.39 JSC Dniprogas ...... 1.17 JSB AutoKrazBank ...... 0.61 JSC Galytska SK ...... 0.82 JSC Universal development and partnership bank ...... 0.16 JSC Zaporizhkoks ...... 0.11

Operations of abovementioned enterprises are mainly related to production, transportation and sales of oil, gas and hydrocarbon products. When entering into sales agreements, enterprises belonging to NJSC NaftoGaz of Ukraine may apply special transfer prices that differ from those applied in am’s length transactions. As at December 31, 2002, material commercial operations were carried out and material balances on settlements with the following subsidiaries were reported in the balance sheet:

SC Ukrgazvydobuvannya SC Ukrgazvydobuvannya was founded on August 28, 1998 as a subsidiary to National Joint-stock Company NaftoGaz of Ukraine (further - NJSC NaftoGaz of Ukraine) in the course of reorganization of Ukrainian oil and gas market. The company is fully owned by NJSC NaftoGaz of Ukraine, 100% of shares of which belong to the State. In 2002 this company’s production comprised approximately 13,723 million cubic meters of natural gas (in 2001 - 13,572 million cubic meters), 608 thousand tons of gas condensate (in 2001 - 593 thousand tons), 94 thousand tons of crude oil (in 2001 - 94 thousand tons). As at December 31,2002 the average number of the company’s employees comprised 21,405 persons (as at December 31, 2001 - 20,077 persons). Most of operations of the company were with related parties. During 2002 and 2001 these operations included (a) sales of most of the gas to parent company NJSC NaftoGaz of Ukraine, (b) acquisition of equipment and materials from SC Ukmaftogaskomplekt and (c) various setoff operations with its related parties.

SC Ukmansgaz Subsidiary Company Ukrtransgaz of NJSC NaftoGaz of Ukraine (further - Ukrtransgaz or the Company) was founded on July 24, 1998 in accordance with he Ukrainian legislation pursuant to the Decree of Cabinet of Ministers of Ukraine on decentralization of gas market. The Company gained the assets of liquidated JSC Ukrgasprom and its business area associated with gas transportation. The main activities of the Company are gas transportation and rendering of gas storage services. NATIONAL JOINT STOCK COMPANY NAITOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31, 2002 (Thousands of UAH)

The Company is wholly owned by the National Joint-stock Company NaftoGaz of Ukraine. The Company and its assets are considered of strategic importance to Ukraine and, therefore, are not subject to privatization under the existing Ukrainian legislation. As at December 31,2002 and 2001 the number of the Company’s employees comprised 27,722 and 27,864 persons respectively. The Company performs certain substantial operations with NJSC NaftoGaz of Ukraine or other companies included into the Group. Tariffs for some operations are established by NJSC NaftoGaz of Ukraine. Such transactions might be performed on terms, which are different from those that could be proposed from not related parties. Among the most substantial transactions performed not on the basis of arm’s length relationships was Russian gas transit to the Eastern Europe. The management believes that the Company could have received other compensation for its services and other commercial terms had the Company concluded the agreement for transit services directly with the third party. Related parties with which the Company has the most material transactions are:

0 National Joint Stock Company NaftoGaz of Ukraine;

0 Subsidiary company Gas of Ukraine; Subsidiary company Ukrgazvydobuvannya;

0 Gas supply and gasification regional companies (JSCs), which are controlled by NJSC NaftoGaz of Ukraine to a great extent;

0 Subsidiary company Ukrnaftagaskomplekt. The most significant transactions with related parties in 2007 include:

0 purchases of gas from NJSC NaftoGaz of Ukraine and SC TH Gas of Ukraine. Purchased gas was used for own consumption and for resale;

0 purchase of inventories from Ukrnaftagaskomplect;

0 transportation services (international transit) to NJSC NaftoGaz of Ukraine; transportation services (national transit) to TH Gas of Ukraine;

0 storage services to NJSC NaftoGaz of Ukraine. The settlements with NJSC NaftoGaz of Ukraine for purchased gas and national transits are performed on a non-cash basis by setting off mutual indebtedness. As at December 31, 2002 balances of accounts receivable with NJSC NaftoGaz of Ukraine and SC Ukrgazvydobuvannya and as at December 31, 2001 with SC TH Gas of Ukraine account for non- reconciled receivables. This difference originated in 1998 in the course of enterprises’ restructuring, which are included into NJSC NaftoGaz of Ukraine. To the above receivables provision for doubtful debts has been accrued in the whole non-reconciled amount. The provision has not been accrued for reconciled receivables amount.

JSC Ukrtransnafta Joint-stock company Ukrtransnafta and its subsidiaries (further - the company) was founded in accordance with the legislation in force of Ukraine pursuant to the decision of Cabinet of Ministers of Ukraine in June 2001 and the decision of the Supervisory Board of NJSC NaftoGaz of Ukraine in July 2001 owing to reorganization through merger of SJSC Oil-trunk pipeline Druzhba (Lviv), and SJSC Pridniprovsk oil-trunk pipelines (Kremenchuck). The founder and sole shareholder is NJSC NaftoGaz of Ukraine. The company is an assignee of state joint-stock companies Oil-trunk pipeline Druzhba and SJSC Pridniprovsk oil-trunk pipelines.

F-46 NATIONAL JOEVT STOCK COMPANY NAlTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

The principal activities of this company are transportation of crude oil inside and outside the Ukraine and obtaining profit from provided services. The company provides oil transportation services on Ukrainian territory both to residents and to non- residents. The cost of crude oil transportation is set based on the state-regulated tariffs. Earnings of the company depend on the amount of oil transported, direction and length of transportation. In 2002 the average number of the Company’s employees was equal to 6,607 persons.

SC Gas of Ukraine Subsidiary Company Gas of Ukraine (further - SC Gas of Ukraine or the Company) was founded under the decision of the Supervisory Board of NJSC NaftoGaz of Ukraine issued December 26,2000 through reorganization of Subsidiary Company Trade House Gas of Ukraine and the Headquarters for exploitation of natural and condensed gas supply system Golovpobutgas. As a result of reorganization the name has been changed to SC Gas of Ukraine. The reorganization has been completed in April 2001.SC Gas of Ukraine was registered as an entrepreneur on February 12,2001. The company is a regulated gas supplier. SC Gas of Ukraine is fully owned by NJSC NaftoGaz of Ukraine, 100% of shares of which belong to the State. SC Gas of Ukraine mainly acts as an intermediary between gas extracting, exporting and transporting affiliates and divisions of the NJSC NaftoGaz of Ukraine and between gas consuniers and gas wholesalers. In 2002 the National Commission for Electrical Energy Regulation (NCER) granted the company a license to supply gas at a non-regulated tariff in the Ukrainian territory, except for the Chernivetsky region. In this region, the NCER granted a license to supply gas at a regulated tariff only. These licenses were granted for a three-year period. In 2002 and 2001 the company supplied approximately 443 milliard of cubic meters and 43,8 milliard of cubic meters of gas respectively. The average number of employees as at December 31, 2002 and 2001 comprised 728 and 1073 persons respectively. The company has entered into a variety of transactions with related parties in the normal course of business. These transactions in 2002 and 2001 include: a) purchase of the most part of gas from NJSC Naftogaz of Ukraine; b) purchase of transportation services from, sales of gas for internal use, sales of merchandise, equipment and promissory notes of Ukrtransgaz; c) purchase of transportation services from regional gas transportation companies (Oblgases); d) numerous off-set transactions with related parties. As indicated in financial statements in 2000 the Company has incurred losses in thc amount of 1.631,797 ths. UAH. in 2001 profit of thc Company comprised 188,966 ths. UAH, in 2002 profit of the Company comprised 684,189 ths. UAH. Accumulated losses of the Company as at 31.12.02 included 7,838229 ths. UAH. Furthermore. for the most part of 2000-2002 the prices for significant volumes of gas purchased by the company exceeded the selling tariffs applied by the company to gas distribution during the same period. The company has no control over its pricing policy as its purchase and sale prices are established by the orders of NJSC NaftoCaz of Ukraine. As a result. due to significant differences between purchase price and selling tariffs the company has incurred substantial losses. The company’s budget for 2004, which is prepared based on financial information available to company management. provides for an increase in income from gas sales in 2004 amounting to UAH 12,820,457 thousand (according to UAS). For 2003 Company’s loss from its operations comprised UAH 1,218,742 thousand (according to UAS). As a result of the aforementioned, the company’s ability to operate in the future to a great extent depends upon management’s intention to increase income in order to cover direct and overhead cxpenses. and to provide sufficient cash inflow to repay its liabilities. When entering into sales agreements, enterprises belonging to NJSC NaftoGaz of Ukraine may apply special transfer prices that differ from those applied in arm’s length transactions.

F-47 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

SJSC Chomomomaftogas State Joint-stock company Chomomomaftogas (hereinafter referred to as Chornomornaftogas or the company) was originally established as a State Industrial Enterprise and reorganized into a State Joint- Stock Company according to the Order of the President of Ukraine No. 151/98 ,,On Reformation of Oil and Gas Industry" dated February 25,1998.SJSC Chomomomaftogas is fully owned by NJSC NaftoGaz of Ukraine, 100% of chares of which belong to the State. Principal activities of the company are exploitation, development and production of gas and crude oil, gas transportation and distribution of gas and oil products. A major portion of operations associated with exploitation and operation of oil and gas fields is performed on the Black and Azov sea shelves. The company owns 17 natural gas fields and 1 oil field. 43 gas distributing stations, over 1.100 kilometers of gas main pipelines, with an underground gas storage capacity equal to 1 billion cubic meters, 10 sea stationary platforms and 22 vessels. As at December 31,2002 and 2001 SC Chornomomaftogas had 3,368 (2001: 3,373 employees).

JSC Ukrnafta Joint-stock Company Ukmafta (further - JSC Ukmafta or the cmpany) was founded as a state enterprise Production Association Ukmafta. In 1994 the Company has been privatized through corporatization and registered as Joint-stock Company. The company and its subsidiaries perform oil and gas exploring and production and exploit gas- transferring plants in Ukraine. As at December 31,2002 the company included 6 production subdivisions, 6 subdivisions involved in drilling and exploring operations, 3 gas-transferring plants and a number of research and auxiliary departments. In addition the company performs exploring and production of oil and gas under the agreements for joint activities. In 2002 the company produced approximately 2,812 thousand metric tons of crude oil and condensate (in 2001 - 2,811.4 thousand metric tons), 3.254,8 million of cubic meters of gas (in 2001 - 3.292,5 million cubic meters) and produced 309,7 thousand metric tons of condensed gas and gasoline (in 2001 - 289.8 thousand metric tons). The most substantial related party transactions performed during 2002 were gas sales and acquisition of raw materials from HJSC NaftoGaz of Ukraine and enterprises controlled by NJSC NaftoGaz of Ukraine.

29. COMMlTMENTS AND CONTINGENCIES Govemment's Activities The functioning of oil and gas capacities is of great importance to Ukraine for various reasons including issues of economic, strategic and state security. As such, the Ukrainian government has and, probably, will have substantial influence over the Group's activities. The State exercises its property rights through NJSC NaftoGaz of Ukraine and the Fund of State Property of Ukraine.

Economic Environment Economic activities and revenues of the Group arc to a certain extent influenced by political, financial and administrative changes, changes of current legislation, as well as environmental protection legislation in Ukraine. Taking into account that this industry is very capital-intensive, risks related to substantial physical expenses should also be considered. It is not possible to predict the nature of events related to these risks, thc probability of their arising and their cffect on operations and profitability of the Group in the future.

Taxation System Ukraine currently has a number of laws related to various taxes imposed by both state and local government authorities. Applicable taxes include value added tax, income tax, a number of turnover

F-48 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH) based taxes, and payroll (social) taxes, together with others. Laws relating to these taxes are subject to frequent changes, and regulations are often unclear or non-existent and few precedents have been established. Often, differing opinions regarding legal interpretation exist both among and within government ministries and organizations (like the State tax administration and its various inspectorates), thus creating uncertainties and areas at conflict. Tax declarations, togcther with other lcpal compliance areas (for example, customs and currency control matters) are subject to review and investigation by a number of authorities, who are cnabled by law to impose extremely sivcrc fincs. penaltics and interest charges. These facts create tax risks in Ukraine substantiallv more siyniticant than typically found in countries with more developed tax systems. Generally. tax declarations rcmain open and subject to inspection for an indefinite period of time. However. in practice the risk of retroactive tax assessments and penalties charged decreases significantly after three years. The fact that a year has been reviewed does not islate that year, or any tax declaration applicable to that year, from further reviews. Management believes that the Group operates in full compliance with the laws regulating its operations. The Group has accrued and paid all respective taxes. When there is an uncertainty with respect to payable taxes, accruals are made depending on the Group’s management estimates based on available information analysis. However, there is no certainty that tax authorities won’t have a contrary opinion as to the roup’s tax liabilities under current tax legislation and won’t apply punitive measures. These financial statcnicnts do not provide for provisions for potential fines related to taxation.

Legal Liabilities Various legal actions are pending or may be asserted in the future against the Group from litigation and claims incident to the ordinary course of business. Although the outcome of the matters cannot always be ascertained with precision. management believes that it will not have any material effect on thc financial position or results of future operations of the Group.

Insurance The Group’s insurance expenses are insignificant and mainly include obligatory insurance provided by Ukrainian legislation. General liability insurance is generally not available in Ukraine at present.

Environmental Protection The Group makes periodical review of its environmental liabilities assessment in accordance with environmental protection legislation. Liabilities arc rccordcd in financial statements as they arise. Contingent liabilities, which may arise in case of establishment of stricter legal requirements as to environmental protection, changes in legislation, standards, and regulation of civil disputes, can not be reliably assessed, but they may be material. Under the current control system and punishment measures for infraction of current environmental legislation, the Group considers that at the moment it does not have material liabilities arising from damage to the environment. cxcept those referred to in the financial statements.

Social Liabilities The Group finances development and maintenance of social infrastructure and the welfare of its production employees, including contributions for construction, development and maintenance of housing, hospitals, transport services etc. Thus, the Group makes substantial contribution to the maintenance and improvement of local infrastructure and the welfare of its employees.

Liabilities Related to Capital Investments In the ordinary course of business, the Group has signed contracts for fixed assets and equipment acquisition.

F-49 NATIONAL JOINT STOCK COMPANY NAliTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thou" of UAH)

The management of SCUkrtransgaz accepted a plan of capital investments for 2003 in the amount of 1,388.7 million UAH. A major part of work was performed by specialized sub-divisions of the company. As of December 31, 2002, commitments on acquisition of the property, plant and equipment for SJSC Chomomornatogas equaled to 40,023 ths. UAH (2001: 42,247 ths. UAH). As of December 31, 2002 unexecuted commitments on construction of exploratory wells approximated 15,729 ths. UAH.

30. FACTORS OF FINANCIAL RISKS During its operations the Group bears certain financial risks. including the effect of changes in market prices of securities and exchange rates.

Currency Risk The Group performs its transactions internationally, and still foreign currency transactions do not have a material effect on the Group's operations. Monetary items of assets and liabilities are reported mainly in national currency. The Group did not enter into any special contracts to hedge its currency risks due to the immaterial effect on operational and financial activities. The Group does not have investments in foreign companies.

Interest Risk The Group incurs a risk related to agreements on acquisition denominated in foreign currencies. The principle currency giving rise to this risk is the US dollar. The currency risk of the Group is not material. The Group mostly applies short-term bank loans in national currency. Thus, management believes that the Group was not subject to material interest risk uti1 2003. However, taking into account issuance of bonds in 2004 and general intention of the Group to expand its financial markets in the nearest future. potential negative consequences of these measures may affect the Group's financial results. The Group has taken no measures aimcd at unpredictability of financial markcts and minimization of potential negative effects on the Group's financial results. because loan amounts are not material. The Group has no material assets that would bring interest income.

Credit Risk The highest risk of the Group relates to accounts and notes receivable. These risks are periodically assessed and taken into account when making provision for doubtful debts. Most of the indebtedness arouse from related parties transactions, provision for which is not made. The process of debt repayment for budget and communal enterprises may depend on the influence of state authorities and other social and economic factors. Nevertheless, the Management believes that the Group has no significant risk of losses exceeding existing provision for decrease in value of accounts receivable.

Liquidity Risk The Group's task is to balance continuous financiny and flexibility in application of terms of credits granted by suppliers and banks. The Group analyzes the urgency of payables and plans its liquidity depending on expected maturities of liabilities. In case of insufficient liquidity the Group can resort to both extcmal sources of financing and related parties.

Market Risk The Group's sales depend on prices of natural gas and other carbohydrates. Decrease of gas and other carbohydrates prices may lead to reduction of net income and money inflows. If prices remain low for a long time it may cause a decrease of exploration and extraction activities, as well as a reduction of gas available for sale and processing, and, finally. may affect the ability of the Group to carry out its contractual obligations.

F-SO NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,202 (Thousands of UAH)

31. SUBSEQUENT EVENTS Events that took place after the balance sheet date and provide additional information regarding financial statcments of the Group as at that datc are disclosed in the financial statements. According to the statement of President of Ukraine and the President of the Russian Federation on strategic cooperation in the gas industry from June 9, 2002, the Cabinet of Ministers of Ukraine and the Government of the Russian Federation on October 7, 2002 have signed the Treaty on strategic cooperation in gas iudustry. Based on this Treaty in October of 2002 NJSC NaftoGaz of Ukraine and JSC Gasprom entered into agreement on establishment, on an equal footing, of International Consortium on administration and development of gas and transport network of Ukraine. At the meeting of Consortium that took place in August 26.2003, it was decided that first stage of investment phase would be prescnted by the project on expansion of gas and transport network of Ukraine in the direction of Novopskov- Uzhgorod. The project is to be worked out till March 1, 2004. At present, the Consortium develops technical and economical documentation. scheme of financing, organizational and legal terms of implementation of project on construction of gas pipeline segment Bogorodchany-Uzhgorod. According to the protocol of Company Meeting No. 5 from August 14, 2003, and protocol 89 from July 25,2003, of meeting of Board of Directors of National Joint-stock Company NaftaGas of Ukraine, it was resolved to issue bonds. Money obtained from sales of these bonds will be directed to modernization of tixed assets of gas and transport network to make it compatible in domestic and international markets. Retirement of bonds and payment of interest income on bonds are camed out through transit of natural gas to Ukraine upon settlements with budget and other obligatory payments. The bonds are secured by Company’s assets. The bonds are easily circulated on the territory of Ukraine during their term of circulation. The bonds can be owned by physical and legal persons, residents and non-residents of Ukraine. Term of bonds circulation: from September 1, 2003, to September 1, 2006, inclusive. Circulation of bonds is performed on the security accounts opened by depositories with the JSC International Funding Union. To carry out operations with bonds the owner should open security account with chosen by him depository. Ownership of acquired bonds begins when they are entered on security account of owner with depository and is confirmed by statement of this account provided by the depository. Bonds are issued in non-documentary form, interest registered bonds with free circulation. Total value of bonds comprises 300,000,MH) UAH, 1000 UAH each. 300,000 bonds were issued. Bond circulation term is from September 1.2003, to January 1.2004. Interest income is fixed during all bond circulation term and comprises 12% per year. Subsequent events that took place but which do not influence the financial state of the Group:

NJSC NaftoGaz of Ukraine Under the agreement dated April 22,2004 the Company received a short-term loan from ABN AMRO BANK N.V., London Branch in the amount of USD 200 million. The loan was granted for general needs. Interest on the loan will consist of a margin of 3.49% annually over LIBOR. Security for this loan is an account with ABN AMRO BANK N.V., London Branch. Under the decree of the Fund of State Propcrty of Ukrainc in the first quartcr of 2004 JSC Azmol shares of which were contributed to the statutory fund of NJSC NaftoGaz of Ukraaine were the financial investments of the Company. The restriction was aplied without adjustment of Company’s statutory fund. On April 29,2004 the Cabinet of Ministers of Ukraine issued decree No. 550 to write-off unpaid natural gas. According to the decree gas supply and gasification companies will write-off liability following csteblished procedures. The cffect of such decrce to the Company’s financial statements can not be estimated at the reporting date.

F-51 NATIONAL JOINT STOCK COMPANY NAROGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2002 (Thousands of UAH)

SC Ukrtransgaz In February, 2004, NJSC NaftoGaz of Ukraine made public the information regarding an increase of statutory fund of the company by UAH 5 billion. The new amount of statutory fund of the company comprises UAH 6,495 billion. The company plans to spend this amount on an increase of capital investments in modemization-and development of the gas and transport system of Ukraine in 2004.

JSC Ukrtransnafta JSC Ukrtransnafta started developing norms for implementation of system of control over environmental protection under ISO-14000. Besides, JSC Ukrtransnafta develops quality control system under ISO-9000. During 2002 with participation of JSC Ukrtransnafta the following projects were worked out:

0 Agreement between the Cabinet of Ministers of Ukraine and Government of Russian Federation on transit of oil through Ukrainian territory (signing is planned for second quarter of 2003);

0 Agreement between oil and gas companies as to implementation of integration of oil pipelines Druzhba and Adriya (signing is planned for second quarter of 2003);

0 Intergovernmental agreements on cooperation in implementation of integration of oil pipelines Druzhba and Adriya (signed on December 16,2002);

0 Agreement on basis of cooperation in oil and gas industry between JSC Ukrtransnafta and JSC KazTransOil (signed on November 8, 2002);

0 Agreement between the Government of Kazakhstan Republic and Cabinet of Ministers of Ukraine on transit conditions and delivery of Kazakh oil through Ukrainian territory (on the stage of interdepartmental approval and preparation to initialing).

SC Gas of Ukraine In 2004 SC Gas of Ukraine developed a policy of step-by-step increases for gas prices. Prices for gas sold to industrial enterprises from February 1,2004, are planned to be increased by 3-6%. In December 2003 the Ministry of fuel and energy and the National Commission for Electrical Energy Regulation assigned a task group for analysis of the practicability of tariffs increase in 2004 and working out appropriate recommendations. Under Order No. 158 from 18.02.04, NCER has approved tariffs for natural gas supplied to industrial consumers in the amount of 284,55 UAH per 1.000 cubic meters of gas excluding transportation tariff and value added tax.

E-52 NJSC Naftogaz of Ukraine Consolidated financial stat ement s For the year ended December 31, 2003 Together with the Auditors’ report

F-53 Translated from the original Ukrainian text

INDEPENDENT AUDITOR’S REPORT To the Shareholders of National Joint-stock Company Naftogaz of Ukraine 1. We have audited the consolidated balance sheet of National Joint Stock Company Naftogaz of Ukraine (the Parent Company) and its subsidiary companies (together with the Parent Company, the Group) as at December 31,2003, and the related consolidated statements of income. cash flows and changes in equity statements for the year then ended. Consolidated financial statements do not include all investments in subsidiaries that are greater than 20% owned by members of the Group. The consolidated statements include 11 companies. The subsidiaries not included in these consolidated financial statements comprisc approximately 10% of thc Group balance value. Two companies, SJSC Chernomomaftogas and JSC Ukrnafta, which are included into consolidation of financial statements, were audited by other auditors. The consolidated financial statements arc the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements bascd on our audit. 2. Except as discussed in paragraphs 3-6 we performed our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management. as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 3. As described in Note 3, the accounting principlcs with regard to fixed assets acquired before January 1,2001 can not be presented in accordance with International Accounting Standards (IAS) No. 16 “Fixed assets”. Furthermore. as described in Note 3 to the consolidated financial statements the Group did not engage experts for independent valuation of assets, subsurface oil and gas reserves as at December 31,2002. In this respect, the Parent Company’s management made certain assessments in order to present the book value of these assets in the consolidated financial statements in compliance with historical value principles. Due to the lack of information necessary for application of IAS No. 16 we were not able to obtain adequate evidence to formulate a conclusion as to correct rcporting of the fixcd asscts’ book value as at Dcccmber 31, 2002 and the respective amortization charges for 2003 in accordance with International Financial Reporting Standards (IFRS). The effect of adjustments that would have been necessary to be made is beyond determination. 4. The Parent Company owes accounts payable to the Ministry of Finance of Ukraine amounting to 625,366 thousand UAH incurred in 1995 and was transferred when the Parent Company was established. This debt is confirmed neither by supporting documents, nor by reconciliation acts with the Ministry of Finance. We were not able to obtain adequate evidence to form our opinion as to this debt as at December 31,2003. 5. The consolidation of financial statements for the Parent company and subsidiaries does not comply with IAS No. 27 “Consolidated financial statements and accounting for investments in subsidiaries”, as consolidation not include all of the companies that are directly controlled by the Parent. Due to this, thc results of operations and changes in financial position of thc Group considered as a single entity would be different if consolidation procedures were performed in accordance with LFRS requirements. 6. In our opinion, except for the effect of adjustments and disclosures that could have been necessary if we had received adequate information with regard to issues discussed in the above paragraphs, the accompanying financial statements present fairly, in all material aspects. the financial position of the Group as at December 31. 2003, and the consolidated results of its operations, cash flows and changes in equity for the year then ended, in accordance with IFRS. 7. Without qualifying our opinion we draw your attention to Note 1 to the consolidated financial statements. The Group performs its operations within the territory of Ukraine and, therefore, is subject to the regulations and legal framework of that country. The Group has reported severe delays in receiving payments from its clients. The Group realizes a major portion of produced gas at prices regulated by the state. Settlements for the gas sold are affected with delays. In addition to

F-54 this, major transactions and terms of operations are set by the Parent Company, and are not based on market conditions. 8. Without qualifying our opinion we draw your attention to Note 1 disclosing information about state property not subject to privatization together with information about the Agreement between the Government of Ukraine and the Parent Company, pursuant to which such property was transferred into operating management. 9. Without qualifying our opinion we draw your attention to the fact that the Parent Company owes long-term accounts payable to JSC “Gasprom” (Russia) for consumed gas; however, as at the reporting date the Parent Company had not agreed on the repayment of this debt. 10. We also draw your attention to the fact that the accompanying consolidated financial statcnicnts do not provide detailed information about the Parent Company’s operations. In case special attention to the Parent’s financial position and the results of its operations is rcquired. the relevant financial statements are available.

June 18,2004

BDO Balance-Audit

Managing partner BDO Balance-Audit Sergey A. Balchenko

Audit certSficate # 000046, Series A

International partner CPA Soren D. K. Sorensen

F-55 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

CONSOLIDATED BALANCE SHEET Notes 2003 .. m ASSETS Current assets Cash and cash equivalents ...... 5 400. 167 538. 021 Accounts receivable and promissory notes, net ...... 6 5.177. 538 3.398. 028 Accounts receivable from related parties, net ...... 28 4.340. &I4 5.649. 322 Inventories, net ...... 7 3.873. 119 5.005.556 Other current assets ...... 8 2.867. 371 2.993. 794 Total current assets ...... 16.658. 839 17,584.721 Non-current assets Long-term accounts receivable and promissory notes, net ...... 9 342. 703 766. 674 Long-term financial investments ...... 1.355.393 751.778 Fixed assets, depreciated value ...... 10 58.610. 287 24.948. 181 Deferred tax assets ...... 12 0 2.258. 533 Total non-current assets ...... 60.308. 383 28.725. 166 Total assets ...... 4 76.967,222 46,309. 887

LIABILITIES AND EQUITY CAPlTAL Current liabilities Accounts payable and other indebtedness ...... 13 16.190. 468 17.235. 980 Accounts payable to related parties ...... 28 322. 268 2.297. 216 Tax liabilities...... 14 6.487. 750 7.002. 449 Financial liabilities ...... 15 1.137. 999 696. 857 Other current liabilities ...... 16 2.540. 158 2.374. 254 Total current liabilities...... 26.678. 643 29.606. 756 Long-term liabilities Provision for abandonment of wells ...... 17 4 15.848 387. 835 Government grants ...... 18 0 7. 332 Deferred tax ...... 12 6.650. 906 0 Other long-term financial liabilities...... 19 1.958.447 1.242. 756 Total long-term liabiirhes...... 9.0253 01 1. 637923

Total liabilities ...... 4 35.703. 844 31w. 679

Minority interest ...... 3.648. 072 1.481. 008 Equity capital Statutory capital ...... 20 6.848. 281 6.848. 276 Accumulated profit ...... (4.460.509) (5.905.888) Reserves ...... 20 35.227. 534 12.641. 812 Total equity capital ...... 37.615. 306 13,584300 Total liabilities and equity capital ...... 76.967,2 22 46,309.887

Deputy head of the Board of Directors

I Chief accountant

F-56 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

CONSOLIDATED INCOME STATEMENT Notes 2003 2002 Income Income from sales of oil. gas. transportation. etc...... 4. 21 33,261. 425 24.716. 414 Expenses Cost of sales ...... 22 (25.006. 137) (18.864. 933) Gross profit ...... 8,26128 8 5.851. 481 Other operating income ...... 23 379.457 526. 161 Administration expenses and sales related expenses ...... 24 (944. 319) (884.430) Other operating expenses ...... 25 (2.301. 229) (1.832. 679) Provision for doubtful debts ...... (180. 483) (1.430. 603) Profit (loss) from operations ...... 4 5J14714 2,229,930 Other non-operating income ...... 26 763. 969 167.086 Other non-operating expenses ...... 27 (411. 835) (709. 787) Losses from impairment of assets...... (2.972. 981) 0 Profit (loss) from operating activities ...... 4 2.593. 867 1.6874 29 Income tax ...... (1.158. 343) (1.463. 396) Profit after taxation ...... 1.435. 524 2234 33 Minority interest ...... (67. 536) (159. 687) Net profit (loss) from operating activities...... 1.367. 988 64. 146

Extraordinary expenses ...... (10. 269) (554) Net profit ...... L357.719 63392

Deputy head of the Board of Directors

Chief accountant

F-57 NATIONAL JONSTOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

CONSOLIDATED STATEMENT ON CHANGES IN EQUITY Statutory outstanding Item capital Reserves losges Total

~ Balance as at 31.l2.2001 ...... 6.843,276 13.024. 095 (6.944.418) 12.927. 952 Past periods errors disclosed in the current period ...... (11.284) Adjustment of fixed assets value to hyperinflation effect. less taxation ...... 326.255 326.255 Write-off increased value after revaluation for disposed property. plant and equipment ...... 12.255 12,255 Assets received free of charge ...... 276. 827 276. 827 Deduction to reserve capital ...... 798 (798) . Government grants ...... 25. 314 25. 314 Provision for buffer gas ...... 40. 137 (40. 137) . Revaluation of technological oil ...... (41,521) (41. 521) Increased value of shares ...... 19.280 19.280 Redemption of shares ...... (44) (44) Net profit (loss) for the reporting period .... 63. 592 63. 592 Dividends ...... (4.243) (4. 243) Other changes in equity ...... (727,231) 717. 048 (10. 183)

Total changes in equity ...... I (382. 283) 1.038. 530 656. 248 Balance as at December 31, 2002 ...... 6,848,276 12,641,812 (5.905.888) 13.5843 00 Past periods errors disclosed in the current period ...... 204. 070 204. 070 Write-off increased value after revaluation for disposed property. plant and equipment ...... (25,690) 25. 690 Assets received free of charge ...... 42. 443 42. 443 Deduction to reserve capital ...... 8. 682 (8.682) Government grants ...... (17. 982) (17.982) Increase in value for investments ...... 35.342 35.342 Revaluation of hcd assets less taxation ..... 22.908. 752 40. 126 22.948. 878 Write-off gas shortage ...... (48. 011) (48.011) Revaluation of technological oil ...... (22.494) (22. 494) Sale of repurchased shares...... 5 5 Net profit (loss) for the reporting period .... 1.357.719 1.357.719 Dividends ...... (9. 119) (9. 119) Other changes in equity (Adjustment in provisions) ...... (318. 869) (140. 876) (459. 745) Total changes in equity ...... 5 22,585, 723 1.445. 378 24.03l, 106 Balance as at December 31, 2003 ...... 6,848,281 35J27335 37. 6lS,?iO6

F-58 NATIONAL JOINT STOCK COMPANY NAJTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

CONSOLIDATED CASH FLOW STATEMENT too3 2002 Cash flow from operating activities ...... Set profit before taxation ...... 2.593.867 1.6K7.229 Adjustment to: Amortization ...... 1.702. 259 1.659. 367 Extraordinary expenses ...... (10. 269) (554) Impairment of fixed assets ...... 2.972. 981 0 Provision abandonment wells ...... 28. 013 28. 666 Profit from currency exchange diffcrerices...... 224 197 Increase (decrease) in provisions ...... 180. 483 1.430. 603 Income from investment activities...... (729. 377) (99. 003) Expense due to investment activities ...... 18.667 46315 Interest income ...... (2. 296) (1556) Interest expenses ...... 13.584 28.7 36 Operating profit before changes in working capital ...... 6.768. W6 4. 780JW Decrease (increase) in accounts receivable and other assets ...... (984. 637) (1.182. 024) Decrease (increase) in stock ...... 1.061. 932 (1.556. 646) Increase (decrease) in trade loans and other liabilities ...... (2.854. 556) (362. 744) Cash from transactions ...... 3.990. 875 1.678. 786 Interests paid ...... (13.584) (28. 736) Profit lax and other taxes paid ...... (972. 0 16) 1.647,872 Ner cash pow from operating activities ...... 3.005. 275 3,2!W. 922 Cash used for investing activities: Acquisition and sales of non-current assets ...... (5.080. 527) (1.882. 432) Assets free of charge ...... 42. 443 276. 827 Inflows from Ciovemmcnt grant ...... (17.982) 25.314 Other inflows...... 204. 070 Other payments ...... (7. 332) (46. 781) Net cmh flow from investing activities ...... (4.859. 328) (1.627. 072) Cash received from financial activities: Net inflows froin lending activities ...... 1.156. 833 (1.736. 226) Net investment in long-term promissory notes ...... 423. 971 652. 600 Net result in investment activities ...... 713. 006 54. 044 Net investment in long term financial investments ...... (568.273) (412.486) Inflows from increase in capital ...... 5 0 Dividends paid ...... (9. 119) (4.243) Net cash jlo w from fmancial activities ...... 1.716. 423 (1.446JW Effect of change in exchange rates to the cash balance ...... (224) (197) Net cash movements during the year ...... (137. 854) 224342 Cash and cash equivalents at the beginning of the year ...... 538.021 367913. Cash and cash equivalents at the end of the year ...... 400. 167 538. 021

F-59 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31,2003 List of Acronyms Acronym Full name AGACP Automatic Gas Accumulation Compressor Plant JSCB Joint Stock Commercial Bank JSC Joint Stock Company SJSC State Joint Stock Company sc Subsidiary Company sc PSC Subsidiary Company Production and Sales Company EOTC Eurasian Oil Transportation Corridor CMU Cabinet of Ministers of Ukraine IASC International Accounting Standards Committee IAS International Accounting Standards IFRS International Financial Reporting Standards NJSC NaftoGaz of Ukraine National Joint Stock Company NaftoGaz of Ukraine NBU National Bank of Ukraine NCER National Commission for Electrical Energy Regulation UAS Ukrainian Accounting Standards PR Petroleum Refinery VAT Value Added Tax SIC Standards Interpretation Committee GMPH Gas-main Pipelines Headquarters

F-60 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

EXPLANATORY NOTES TO THE FINANCIAL STATEMENTS

1. GENERAL INFORMATION ON NJSC NAFTOGAZ OF UKRAINE National Joint-stock company Naftogaz of Ukraine (hereinafter, NJSC NaftoGaz of Ukraine) was established in accordance with the Ukrainian Presidential Decree dated February 25, 1998 ‘‘Reform in Oil and Gas Industry of Ukraine” and the resolution of the Cabinet of Ministers of Ukraine dated May 25, 1998 “Incorporation of National Joint Stock Company NaftoGaz of Ukraine”. The principal activities of NJSC NaftoGaz of Ukraine, as well as its subsidiary and associated companies (the Group) are: Oil production; Natural gas production; Natural gas reprocessing; Pipeline transport for general consumption;

0 State external trade. The financial statements included herein are not consolidated with respect to the whole structure NJSC NaftoGaz of Ukraine. The Group prepares and presents the consolidated financial statements for the subsidiary and associated companies listed below: Headquarters of NJSC NaftoGaz of Ukraine SC Ukrgazvydobuvannya SC Ukrtransgaz JSC Ukrtransnafta SC Gas of Ukraine SC Chomomornaftogas JSC Ukrnafta JSC Dniepropetrovskgas JSC Zaporizhgas JSC Luganskgas JSC Mikolayivgas

Financial indicators of these consolidated financial statements include reporting of the largest subsidiary companies of the Group, which major financial indicators of financial statements comprise 90% of all companies controlled by NJSC Naftogaz of Ukraine. By business segments the Group performs the following operating activities: 1. oil and gas production and processing - SC Ukrgazvydobuvannya, SJSC Chornomornaftogas, JSC Ukmafta; 2. oil and gas transportation - JSC Ukrtransnafta, SC Ukrtransgaz; 3. sales - SC Gas of Ukraine, JSC Dniepropetrovskgas, JSC Zaporizhgas, JSC Luganska gas, JSC Mikolayivgas; 4. other activities - supply, construction, operating and other enterprises, which are structural subdivisions of consolidated companies. The principal activities have been performed by the Group in 2003 under the agreements for:

1. Oil and gas production: Since land and subsurface are state property, the right to exploration and development of oil and gas reserves is provided by the State Geology Committee through the issue of special licenses at nominal value, which is not capitalized. In accordance with the effective legislation in order to perform oil and gas reserves exploration and development, separate licenses should be granted for such activities for each oil

F-61 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

and gas field. Licenses for exploration and development are granted for 5 and 20 years respectively with the priority right to prolong them for the same period.

2. Gas purchase:

0 State trade Corporation Turkmennaftogas;

0 EURAL TRANS GAS Kft; JSC “Gasprom”, in part of gas purchase as payment for the gas transit on the Ukrainian territory;

0 Eastern Distribution Ltd.

3. Transit: Transit where NJSC Naftogaz Ukraine acted as an Executor was performed in accordance with the agreements:

0 For natural gas transit through Ukrainian territory in 2003 with the Company EURAL TRANS GAS Kft;

0 For scope and terms of transit through the Ukrainian territory and natural gas supply into Ukraine in 2003 with JSC Gasprom. Transit, where NJSC NaftoGaz of Ukraine acted as a Customer, was performed in accordance with an agreement for natural gas transit through the Ukrainian territory with SC Ukrtransgaz.

4. Gas sales - performed by NJSC Naftogaz of Ukraine 0 to the public, state (budget) institutions; municipal entities as well as to industrial and other enterprises through intermediary of SC Trade House Gas of Ukraine (SC Gas of Ukraine) under agreements for import of natural gas and natural gas of own production;

0 to the Company EURAL TRANS GAS

0 to Zarubezhgas Management und Beteiligunsgesselschaft mbH The segment “Other operations” includes assets, liabilities and operation results of supply, construction, operating and other enterprises, which are structural subdivisions of consolidated companies, as well as Joint Stock Commercial Bank MT-Bank (JSB MT-Bank).

Basic regulations of the Agreement Under the Agreement the Group undertakes the following:

0 to perform operational control over the State Property;

0 to utilize State Property for its intended purpose;

0 not to transfer State Property to third parties or perform other notarial acts (pledge, etc.);

0 to make independent decisions as to exploitation and maintenance of State Property including technical and renewal issues; to keep separate analytical accounting of State Property and profits received from its exploitation;

0 to insure the transferred State Property; to pay for the services related to expert evaluation of the State Property;

F-62 NATIONAL JOINT STOCK COMPANY NAROGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

to make reserve for renewal and reconstruction of received State Property at the expense of depreciation charges.

State portion of proBt State portion of profit comprises 50% of net profit received from exploitation of State Property. The Group has the right to use the state portion of profit in the amount set out in annual plans on reconstruction and technical development after the agreement with NJSC NaftoGaz of Ukraine. However, the Agreement does not provide an algorithm for calculation of the state portion of net profit. thus. it is not possible to determine thc amount of net profit as indebtedncss to the Govcrnmcnt based on agreements on transfer of State Property that is not subject to privatization. As at the reporting date, the Group was not requested by the Government to make the payments or to perform calculation of net profit.

Term of Agreement The Agreement is effective for one year. If neither party presents written intention to discontinue this Agreement, it is considered extended for the next year.

Establishment of Tariffs NJSC NaftoGaz of Ukraine is a natural monopolist of the oil and gas complexes of Ukraine. Therefore, the principal activities of the Group are regulated by various Ukrainian state authorities, including the Cabinet of Ministers, Ministry of Economy, National Commission for Electrical Energy Regulation (NCER) and the Ministry of Fuel and Energy. These and other controlling bodies decide different issues, including establishment of prices and tariffs for oil and gas acquisition, transportation to the ultimate consumers, and storage and loading of oil. Methods of confirmation of tariffs for oil and gas purchase, sales and transportation are established the agreement of NCER. NCER establishes oil and gas transportation tariffs for all categories of consumers. NJSC NaftoGaz of Ukraine approves natural gas sale prices to be applied by the subsidiaries of the Company. Determinition of natural gas sale prices is carried out based on natural gas intake and distribution balance with NJSC NaftoGaz of Ukraine, by assuming the natural gas purchasing price depending on gas origin (own production, received for transit services, purchased additionally). NCER in accordance with the authorities provided by the Resolution of Cabinet of Ministers of Ukraine dated 15.12.1994 No. 1548 “On Determination of Authority of Executive Bodies and Local Executive Boards as to Regulation of Prices (Tariffs)”, establishes the boundary natural gas price levels for general populace, budget institutions, municipal heat and power engineering enterprises, as well as natural gas transportation and supply tariffs. In addition, NCER establishes the boundary price level for natural gas supplied by NJSC NaftoGaz of Ukraine for industrial consumers as stipulated by the decision of the Cabinet of Ministers of Ukraine dated 27.12.2001 No. 1729 “The order of provision of national economy branches and general populace with natural gas”. SC Ukrgazvydobuvannya performs production and processing of gas. The pricing policy of the Company is regulated by the decrees of Ukrainian Government and the orders of NJSC NaftoGaz of Ukraine. In 2003 the Company sold its own products in accordance with the decree of the Cabinet of Ministers of Ukraine issued 27.12.2001 No. 1729 “The order for provision of national economy branches and general populace with natural gas”, and the decree issued 21.01.2003 No. 104 “On introduction of amendments to the decree of CMU issued 27.12.2001 No. 1729”. Gas sales to the other consumers under direct agreements were performed at prices approved by NJSC Naftogaz of Ukraine issued on 21.02.2003 No. 74 and 20.03.2003 No. 118. SC Ukrtransgaz transports gas through the Ukrainian territory. Prices and tariffs for natural gas transportation for internal Ukrainian consumers are regulated by the state and were established by NCER in 2003 in compliance with capacities approved by the CMU Resolution No. 1548 issued 25.12.1996 “On Determination of Authority of Executive Bodies and Local Executive Boards as to Regulation of Prices (Tariffs)”. Per the decision issued 29.01.01 No. 73 the tariff for natural gas

F-43 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH) transportation through gas-main and distributing pipelines for Ukrainian consumers has been set at 52.5 UAH per 1 thousand cubic meters (including VAT). The calculated average tariff for natural gas transportation through gas main pipelines of the Company is 29.10 UAH per 1 thousand cubic meters (including VAT). Tariffs for natural gas storage, pumping and extraction performed by SC Ukrtransgaz for Ukrainian consumers were established in accordance with the decision of NCER issued 27.04.00No. 447. The tariff in the amount of 12 UAH per 1 thousand cubic meters was specified as follows:

0 for natural gas storage - 6.00 UAH per 1 thousand cubic meters , including VAT - 1.00 UAH per 1 thousand cubic meters(on annual basis); e for SC Ukrtransgaz pumping of natural gas - 3.00 UAH per 1 thousand cubic meters, including VAT 0.50 UAH per 1 thousand cubic meters;

0 for SC Ukrtransgaz extraction of natural gas - 3.00 UAH per 1 thousand cubic meters , including VAT - 0.50 UAH per 1 thousand cubic meters. JSC Ukrtransnafta performs transportation of raw oil on the Ukrainian territory and abroad. Prices and tariffs for oil and transportation, storage and loading of oil are established by NCER.

Ukrainian oil transportation. storage and loading tariffs NCER has established the following tariffs (VAT not included) for Ukrainian consumers: 2003 m2

UAH per 1 ton Transportation tariff ...... Max 31.80 26.53 Min 5.30 2.00

International oil transportation, storage and loading tariffs International transit tariffs (transportation of oil on the Ukrainian and Russian territory to third countries) are established under direct agreements concluded between the Group and Exporter Companies. NCER has established the following tariffs for European consumers: 2003 unn

US dollars per 1 ton Transportation tariffs ...... Max 5.70 5.20 Min 1.42 1.04

In compliance with the legislation in force value added tax is not added to the abovementioned tariffs. In March 2003 tariffs for oil transportation through the main oil pipelines were revised. As such, those tariffs generally increased by 10%. SC Gas of Ukraine is mainly an intermediary between affiliated companies and subdivisions of NJSC NaftoGaz of Ukraine, which operate in the spheres of production, export and transportation of gas, as well as between ultimate consumers and gas sellers.

F-64 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Oil. condensate and liquefied gas are realized throush an auction at neptiated prices. In 1003 prices for oil (less VAT) realized through auctions were ranged around 843 UAH per 1 ton (2002: from 376 to 752 UAH per 1 ton).

SC “Gw of Ukraine” The main supplier of gas to the SC “Gas of Ukraine” is the NJSC NaftoGaz of Ukraine, which buys gas from Russian and Turkmenian suppliers and its own subsidiary companies. In 2002 the average price of gas purchased by the Company:

0 Self-produced gas - UAH 129 per 1 thousand cubic meters of gas.

0 Gas from Russian suppliers - UAH 155 per 1 thousand cubic meters of gas.

Gas from Turkmenian suppliers - UAH 277 per 1 thousand cubic meters of gas.

0 Gas from Uzbek suppliers - UAH 282 per 1 thousand cubic meters of gas. The sales price of gas is established by NCER for the general populace and state supported institutions. Gas tariffs are not regulated for other consumer categories. However, NJSC NaftoGaz of Ukraine establishes tariffs for SC Gas of Ukraine. SC Gas of Ukraine has varied gas supply tariffs for different categories of the general populace, state- supported institution, utilities, power and heat generating companies, industrial customers and several other catcgories. The 2003 tariffs for gas transportation for affiliated companics wcre introduced by NJSC NaftoGaz of Ukraine. During 2003 thc Company rcalized gas under the following fixcd prices:

General populace I 175 UAH per 1 thousand cubic meters depending on availability or the lack of gas meters and including tariffs for natural gas transportation and supply; - 190 UAH per 1 thousand cubic meters depending on the lack of gas meters and including tariffs for natural gas transportation and supply; Budget entities - 231 UAH per 1 thousand cubic meters of gas including tariffs for natural gas transportation and supply; Municipal heating energy - 189 UAH not including tariffs for natural gas and boiling departments transportation and supply; Energy generating - 331 UAH per 1 thousand cubic meters of gas not including companies tariffs for natural gas transportation and supply; Production and - 276.25 UAH per 1 thousand cubic meters not including technological needs of SC tariffs for natural gas transportation and supply. Ukrtransgaz and JSCs of gas supply and gasification. and its own needs regarding the objects accounted for in SC Gas of Ukraine

Joint stock companies (Dnicpmpcmvskgas, Zapirizhgas, Luganskgas, Mikolayivgas) A regulated tariff applies to natural gas transportation and supply at to general populace, budget, industrial enterprises and municipal companies by regional JSCs. The JSC’s pricing depends upon the consumers’ category and contractual terms and can be described as follows:

F-65 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of VAH)

e the price for general populace includes the cost of natural gas, the JSC's supply and transportation services and the services of transportation proved by main-gas pipelines;

0 the price for budget entities includes the cost of natural gas, supply and transportation services: for industrial enterprises and public utilities, which buy natural gas from the JSCs and have supply agreements, the price includes cost of natural gas and the JSC's transportation services. Moreover, all the enterprises situated in the region (both purchasing gas from the JSCs and other suppliers) are the users of transportation services.

2. UKRAINIAN ENVIRONMENT Operating Environment and Economic Situation In recent years, Ukraine has undergone substantial political, economic and social change. As an emerging market, Ukraine does not possess the well-developed business and regulatory infrastructure that would generally exist in a more mature free market economy. As a result, operations carried out in Ukraine involve significant risks. which are not typically associated with those in developed markets. Future economic stability in Ukraine will to a great extent depend on the effectiveness of fiscal arrangements performed by the Government, as well as on development of a legislative framework and the political situation. Further existence of political and economic instability can result in unforeseen changes to the principal features of economic infrastructure, which determine the nature of the Company's present operations. Uncertainty concerning the political, legal, tax, standard and legislative implications for operations, including the possibility of advcrse changes can significantly affect the Company's ability to perform its business activities. Since independence in August 1991, the Ukrainian economy deteriorated dramatically until 1994, when reform programs were initiated to enable macroeconomic stabilization and structural reform. During the last 2-3 years positive economical trends have appeared, the national currency has been stabilized, inflation has been reduced and an increase in national domestic product has bccn noted. However, these positive tendencies have not been strengthened and the situation remains unstable. Future economic stability and growth will to a great extent depend upon the effectiveness of fiscal, macroeconomic and structural arrangements set forth by the Government. The autumn 2004 presidential elections are a crucial milestone to assess the political stability and economic development plan of Ukraine. The Company will continue to be affected, for the foreseeable future, by the above factors. The financial statements do not include any adjustments reflecting the cxistence of such unccrtainty. Necessary adjustments will be reported in the financial statements of the Group, as they become known and can be fairly estimated.

F-66 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

3. BASIC ACCOUNTING PRINCIPLES General Consolidated financial statements of the Group includc thc consolidatcd balance sheet and the related income statement, cash flows and changes in equity capital statements. as well as the accompanying Sotcs. These financial statements have been prepared in accordance with the requiremcnts of International Financial Reporting Standards (IFRS), issued by the International Financial Reporting Standards Board (IFRSB) and Interpretations issued by the Standing Interpretation Committee (SIC) effective for financial statements for the periods up to December 31. 203. The companies of the Group maintain their books and records in the Ukrainian currency Hryvna (UAH) based on Ukrainian Accounting Standards (UAS). The financial statements are based on thc Group’s statutory books and records. with adjustments and reclassifications made for the purpose of fair presentation in accordance with the regulations prescribed by IFRS. The consolidated financial statements were prepared based on historical cost using the accrual basis and presented in thousands of Ukrainian hryvna, unless otherwise stated. The accounting policy chosen under each IFRS permitting the choice of accounting policy is disclosed in corresponding sections of these Notes.

Application of Assessments The Group maintains its records and presents its transactions and other events not only in accordance with their legal form, but also according to their economic substance. A5 such, the substance of transactions or other circumstances and events does not always comply with their legal form. Preparation of financial statemcnts in accordance with IFRS roquires the management to makc ccrtain assessments and assumptions that affect the recording of assets and liabilities in the reporting and information disclosure about the potential assets and liabilities at the reporting date. Actual results might differ from the current assessments. These assessments are periodically reviewed and should an adjustment be needed, such adjustments arc reported in thc relevant section for financial results for the period when they became known.

Measurement and Presentation Currencies The Group keeps its records and presents the statements in Ukrainian hryvna in accordance with UAS. The Company established measurement and presentation currencies in accordance with SCI-19 “Reporting currency -. mcasurement and presentation of financial statements under IAS-21 and IAS-29”. Based on the economical substance of transactions and conditions of operation, the Company considers hryvna as the measurement and presentation currency. Thus, transactions in currencies other than hryvna are considered as transactions in foreign currencies.

Eflect of Inflation During 1991-2000 Ukraine was considered as a country with a hyperinflationary economy. Adjustments and reclassifications required for thc financial statements prepared according to thc requirements of Ukrainian legislation, to be in compliance with IFRS,include any adjustments which are necessary for the reflection of chan9es in the general purchasing power of the Ukrainian hryvna, on the assumption of IAS No. 29 “Financial reporting in hyperinflationary cconomies”. Under IAS No. 29 requirements the financial statements prepared in the currency of a hyperinflationary cconomy should be denominated in current units of measuremcnt as at the balancc sheet date. Although. starting from the 2001 financial year, the Ukrainian economy had ceased to be of hyperinflationary nature, the Company owns a large quantity of fixed assets acquired during the substantial hyperinflationary period. As such. the recalculation of fixed assets was performed using inflation coefficients received on the basis of inflation indexes of the Ukrainian State Statistics Committee.

F-67 NATIONAL JOINT STOCK COMPANY NAlTOGAZ OF UKRAINE Consolidated Fmmcial Statements for the year ended December 31,2003 (Thousands of UAH)

Below are the inflation indexes, applied to make changes in the financial statements. starting from 1991: Wtion RevnhraEion Month Year index coeffiaent - January ...... 1991 1.06 242,719.6 December ...... 1991 3.06 84,190.9 December ...... 1992 64.31 4,008.1 December ...... 1993 6,595.26 39.1 December ...... 1994 33,050.09 7.8 December ...... 1995 93,085.80 2.8 December ...... 1996 130,062.69 2.0 December ...... 1997 143,221SO 1.8 December ...... 1998 171,855.47 1.5 December ...... 1999 204,877.18 1.3 December ...... 2000 257,768.27 1.0

Thus, the indicators of fixed assets value as at December 31,2000 serve as the basis for accounting records of future accounting periods.

In order to determine fixed assets initial cost as at January 1.2001 - the date of the first IFRS application - SJSC Chornomornaftogas has engaged an independent appraiser to perform valuation of fixed assets conditional cost. Thus. the initial cost of that company’s fixed assets is recorded according to the independent appraiser’s report. Other Group companies as at December 31, 2003 have also performed independent revaluation for all groups of fixed assets.

Basis of Consolidation In accordance with IAS 27 “Consolidated Financial Statements and Accounting for Investment in Subsidiaries” thc financial statements of the parent and its subsidiaries are comhined on a line-by-line basis by adding together like items of assets, liabilities, equity, income and expenses. For the consolidated financial statcments to present financial information about the group as that of a single cnterprise. the following steps are then taken: e the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated; minority interests in the net income of consolidated subsidiaries are identified and adjusted against net income of the group held by the parent, i.e. less the amount of net income directly or indirectly held by the parent; e minority interests, not directly or indirectly held by the parent, in the net assets of consolidated subsidiaries are identified and presented in the consolidated balance sheet separately from liabilities and the parent shareholder’s equity;

0 any intragroup balances and intragroup transactions and resulting unrealized profits and losses are eliminated, unless the cost can not be recorded.

F-68 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

The Group prepares and presents consolidated financial statcments for the companies below. which are under its control: Capital pasttripation NJSC NaftoGaz of Ukraine ...... SC Ukrgazvydobuvannya ...... 100.00 SC Gas of Ukraine ...... 100.00 SC Ukrtransgaz ...... 100.00 SJSC Chornomomaftogas ...... 100.00 JSC Ukmafta ...... 50%+1 share JSC Ukrtransnafta ...... 100.00 JSC Dniepropetrovskgas ...... 51.00 JSC Luganskgas ...... 51.00 JSC Zaporizhgas ...... 50.00 JSC Mikolayivgas ...... 50.00

In accordance with the requirements of IAS 27 “Consolidated Financial Statements and Accounting for Investment in Subsidiaries” NJSC NaftoGaz of Ukraine is a Parent Company and includes all subsidiaries, except for the cases where: control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its subsequent disposal in the near future; or a subsidiary operatcs undcr sevcrc long-tcmi restrictions. which significantly impair its ability to transfer funds to the parent. Such subsidiaries should be accounted for as investments in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is:

0 power over more than one hall of the voting rights by virtue of an agreement with other investors; power to govern thc financial and operating policies of thc enterprise undcr a statute or an agreement;

0 power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or

0 power to cast the majority of votes at meetings of the board of directors or equivalent governing body. Thesc consolidated financial statemcnts arc prepared using uniform accounting policies for like transactions and other events in similar circumstances.

Subsidiaries Consolidated financial statcments includc reporting of subsidiaries, where thc Group owns directly or indirectly more than 50% of voting shares and has the opportunity to control decisions taken by the management of these companies. The rcsults of opcrations of a subsidiary acquircd arc included in the Group’s consolidatcd financial statement, when the control over the subsidiary arises. Consolidation of the subsidiary in the Group’s rcporting is finished at the date when the Group ceases to have control of the subsidiary. Intragroup balances and intragroup transactions, as well as unrealized profits resulting from intragroup transactions are eliminated in full. Unrealized losses resulting from intragroup transactions are also eliminated unless costs cannot be recovered.

F-69 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Accounting of subsidiaries acquisition is carried out under the acquisition method. Minority interest at the reporting date is that part of the net results of operations and of net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent. Minority interests should be presented in the consolidated balance sheet separately from liabilities and the parent shareholders’ equity.

Associates An associate is an enterprise in which the Group has significant influence but which is not under its full control. Gencrally. the Group has significant influence over the companies in which is owns from 20% to 50% of voting power. Associates are accounted for under the equity method. Under the equity method, a portion of the Group’s interest in operational results of associates per year less received dividends should be accounted for in the consolidated income statu”. Unrealized profits from transactions between the Group and associates are included at the amount corresponding to Group’s interest in associates. Unrcalized profits and losses arc also includcd. unless there arc showings of decline in value of transferred assets. The Group’s interest in an individual associate are carried in the balance sheet at the amount including acquisition cost, goodwill at acquisition datc, as well as its share of profits and losses. The Group makes a provision for possible impairment of these investments. Application of the equity method ceases from the moment when the carrying amount of financial investment in an associate equals zero, with the exception of cases when the Group settles liabilities of its associates or acts as a guarantor for liabilities of its associates. The Management of NJSC NaftoGaz of Ukraine decided not to account for such investments in the consolidated financial statements.

Joint Vennrres Joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. Joint ventures are accounted for under the equity method.

Going Concem Assumption The Group operates in an unstable economic environment. Economic stability will depend to a large extent on the efficiency of the fiscal measures taken by the government and the dccision taken by Russian Gasprom as to construction of alternative means of oil and gas transportation passing through Ukraine, as well as other actions beyond the Company’s control. The Group will continue to be affected, for the foreseeable future, by the country’s unstable economy. AS a result, there are significant uncertainties that may affect future operations. the recoverability of the Group’s assets, and the ability of the Group to maintain or pay its debts as they mature. ‘The Group’s consolidated financial statements have been prescnted on the going concern basis. which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the consolidated financial statements do not include any adjustmcnts of recorded asset amounts that might result should the Group either be unable to continue as a going concern or if the Group was to dispose of assets outside the normal course of its operating plan.

Reclassification To bring the figures for the previous period in conformity with the data presentation adopted in the current reporting period. the Company performed a reclassification of certain respective figures.

Cmh and Cmh Equivalents Cash include cash on hand and cash held in bank accounts. Cash equivalents are liquid investments easily converted into a known amount of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value.

F-70 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Financial Instruments

Financial instruments in accordance with IAS 39 - are any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. Financial assets and financial liabilities accounted at the balance sheet of thc Group include cash and cash equivalents. accounts receivable and payable, investments and other liabilities and loans. Accounting policy as to their recognition and assessment is disclosed in the relevant sections of these Notes. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual agreement. Interest. dividends. gains. and losses relating to the financial instrument or such part classified as a financial liability. are reported as expense or incomc. Paymcnts to thc owners of financial instruments, included in the capital are reflected directly through capital. Financial instruments are presented as being offset, when the Company is obligated to account for, and intends to realize it on the basis of the offset balance or to sell its assets together with a decrease in its liabilities.

0 Investments in securities acquired either for the purpose of pencrating a profit from short-term fluctuations in price or dealer's margin or if they are part of a portfolio used for receiving short-term profit are classified as held for trading:

0 Sccurities with fixcd maturity that the managcment has the positive iritznt and ability to hold to maturity are classified as held-to-maturity:

0 Sccuritics that are expected to bc hcld by thc enterprise for an indufinite pcriod and that can be sold to maintain liquidity or as a result of change of interest rate, currency exchange rate or prices at the equity market are classified as available-for-sale. Financial investments available for sale are stated at market value determined on an individual basis. Unrealized income and losses are included in the financial results. Shares that are not quoted are recognized at their initial value since for such shares there are no market quotations in the active market, Due to the lack of information on market quotations €or similar companies and the data for analysis of discountcd cash flows it is not possible to apply other methods for valid assessment of their fair value. Moreover, at present it is not possible to assess price range within which it is most likely that the fair value of shares would fall. Loans and accounts receivable initiated by the Group are the loans and accounts receivable originated with the Company through provision of funds or goods directly to a debtor, except for those originated with the purpose of immediate sale or sale in the near future. Loans and accounts receivable initiated by the Group mainly include accounts receivable. Investments at receipt are recognized at cost, which is the fair value of consideration given therefore. Fair value of consideration provided, as a rule, is determined based on transaction value or other market value. The Group classifies its investments as available for sale and includes those for long-tcmi assets. They do not have market prices on the active market, and their fair value can not be reliably assessed. Investments in construction of real estate in progress are recognized at purchase value. During 2003 the Group did not use any financial derivatives.

Accounts Receivable Current accounts receivable are stated at net realizable value which is calculated by deduction of provision for doubtful accounts from initial accounts receivable.

F-71 NATIONAL JOINT STOCK COMPANY NAliTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Provision for doubtful debts is calculated by the method of receivables periodization, which implies application of a particular doubtful debt rate for each group of accounts receivable. Provision for doubtful debts was determined on the basis of known factors that might affect debt repayment. Final losses might differ from the current assessments. These assessments are periodically reviewed and, if the adjustment is necessary, are adjusted in the period when those adjustments became known. Due to the lack of reliable information as to the financial position of final consumers and shortcomings in the legal mechanism for indebtedness repayment, valuation of possible losses is the exact.

Promissory Notes Promissory notes received from customers are stated at face value less special provision for doubtful amounts. Notes with maturity dates exceeding a one-year period starting from the balance sheet date are classified as long-term assets. Such promissory notes are non-interest-bearing and they are stated at fair value less provision. Notes issued to suppliers are reported at face value.

Provision for losses of JSCB MT-Bank. Provision for losses is approximately the determined amount of potential losses on loans and deposits in other banks. Provision is reduced by the amount of actual losses on loans net of recovered amounts. Provision for losses is based on the assessment of portfolio of loans, past experience of the Bank as to the losses and risks incident to a portfolio of loans, valuated cost of pledge, adverse situations that can affect the ability of a borrower to repay his loan, and the current economic situation.

Other Current Accounts Receivable Other current accounts receivable include advances to suppliers, receivables for goods and services other than the ones related to transportation, storage and sale of oil and gas, other deferred assets and liabilities, and assets that are stated net of provision for doubtful accounts.

F-72 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAmE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Certain inventories belong to related parties and are held in accordance with consignment agreements. The Group reports these inventories as it reports those inventories that are not on consignment.

Technological Oil The main activity of JSC “Ukrtransnafta” (referred to in this subsection as the Company) is involved with oil transfer to consumers, both in Ukraine and to Europe. In technological process the Company uses oil which it owns. This oil was purchased by the Company when main gas pipelines came into use. The Company purchases technological oil during construction of new oil pipelines. New oil is being acquired at the volume required for the technological process. The Company accounts for technological oil as a non-current asset and carries out its revaluation at market prices existing at the reporting date. Technological oil in pipelines is considered to be a concurrent and essential condition of their use. Amortization of the oil in the pipeline is not accrued. Calculation of book value for technological oil is based on market prices of oil, based on the market of Ukrainian refinery plants and average expenses incurred by thc JSC LJkrtransnafta on oil transit increased, on the basis of expert evaluation, by the amount of expenses on technological oil extraction, its delivery to the consumer, utilization of fuel waste products and conservation of pipelines.

Intangible Assets Intangible assets are reported at indexed price less accumulated depreciation. Cost of intangible assets before indexation is comprised of cost of their acquisition, including outstanding acquisition taxes, and any expenses related to bringing the assets into operating status and their further delivery to the exploitation site. Cost of modernization and other improvements that extend the term of useful life of intangible assets or essentially improve their status and technical-exploitation features, are capitalized. Expenses related to current maintenance and repair are reported through expenses when originated. For the purposes of preparing reports in compliance with IFRS, intangible assets were recalculated according to a recalculating ratio, as described in the section “Currency of measurement and presentation”. Intangible assets are amortized from the month following the one they were put into operation. Amortization is ceases in the month following the one after disposal. Income or losses from disposal of intangible asses are determined on the basis of their book va!ue and considered for purposes of the Group’s financial results. Amortization is accrued using the straight-line method during the following estimated useful livetimes: Amortiution Group norms Computer software ...... 5 years Licenses and privileges ...... 3-5 years Copyrights, patents and other rights for industrial property, servicing and exploitation ...... 3-5 years

Research and Development Research and development costs are expensed as incurred. Costs of project development are recognized as intangible assets when therc is an assurance they will bring future commercial benetits. Other development costs are expensed as they occur. However, development costs that were expensed during their origination are not capitalized in succeeding periods, even if they conform to the conditions of asset recognition.

Property, Plant and Equipment As at December 31,2002 Fixed assets acquired before January 1,2001 are reported at cost adjusted for hyperinflation effects (according to the recalculation ratio described in the caption ‘‘Basis for presentation: Measurement and Presentation Currencies”), less accumulated depreciation and any

F-73 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH) impairment. Fixed assets acquired after January 1, 2001 are stated at historical cost using the units of measurement cffective at thc balance shcet datc less accumulatcd depreciation. The cost of fixed assets comprises its purchase price, including non-refundable purchase taxes, and any directly attributed costs of bringing the asset to its working condition and location for intended use. The Group keeps its books and records in Ukrainian hryvna (UAH).Before 1992 exchange rates were established by the Government and might have not been adequate for the real market situation. Moreover. portions of fixed assets were purchascd through thc centralized bodics of technical support. the purchasing price for such transactions has also been established by the State. After 1991, according to normative requircments cntities performed obligatory indexations of cost for fixcd assets in order to report the inflationary effects (in 1992. 1993. 19‘35 and 1996). Those inflation indexes might have not reflected the actual dynamic of changes in the exchange rate of hryvna and, as a result. its application did not lead to revaluation of indicated fixed assets corresponding to their market value. In 2004 the Group changed its accounting policy as to the cost of fixed assets and approved the accepted alternative accounting policy for assets revaluation. The Group has engaged independent appraisers to assess the fair value of its fixed assets as at December 31,2003. Such change was reported as a revaluation in thc 2003 financial starcments. These financial statements report fixed assets at revaluated cost, which is a fair value at the revaluation date less accumulated depreciation and losses for impairment. Such revaluation will be performed quiet regularly. With respect to fixed assets of SJSC Chornomornaftogas an independcnt valuation has been performed under the method of replacement cost net of any impairment originated as at January 1, 2001. Cost of tixed assets rcceivcd as a result of indcpcndent valuation. is a conditional cost of fixcd assets calculated for the purposes of these financial statements. As at December 31, 2003 other consolidated companies of the Group have also performed an independent valuation for all groups of fixed asscts.

Property, Plant and Equipment Applied in Exploring, Development and Production of Oil and Gas Accounting of Expenses before Production For accounting of its oil and gas exploration and production activities, as well as development of oil and gas reserves, the subsidiary companies Ukrgazvydobuvannya, SJSC Chornomomaftogas and JSC Ukrnafta follow the method of cost capitalization of successful efforts. According to the method of cost capitalization of successful efforts expenses, which originate during oil and gas exploration and production, but have a general nature and do not relate directly to the reserves found are charged to . . . ,. .. results of operations when incurred. Expenses related directly to reserves that were revealed but not proved are capitalized in the balance sheet item “Capital investments” for each effort and each well. Exploration expenses including cost of exploration and test wells are capitalized before evaluation of economical practicability of further exploration or extraction of these properties. If reserves are not proved, exploration expenses are charged to results of operations as such evaluations are incurred. Fail or success of each exploration effort is determined individually for each well as the potential oil and gas bearing structures are assessed. Such assessment of proved and unproved efforts is performed periodically, at least once per reporting year. Oil and gas exploration expenses for proven reserves are left in the balance sheet. Further tangible and intangible expenses relating to construction of exploratory and dry wells, as well as cost of equipment and forcing wells relating to the development of oil and gas properties are capitalized. When proven and developed reserves are put into operation capitalized expenses are amortized during the useful life of reserves according to the method chosen by the Company. For the purposes of these financial statements tixed assets applied for exploration. development and production of oil and gas reserves are aggregated by the center of expenses. The Company chooses oil and gas properties to be a center of expenses.

F-74 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

As at December 31,2003 the Group has engaged independent appraisers to assess the oil and gas reserves in accordance with Standards of the Society of Petroleum Engineers Inc., USA.

Production Expenses Production expenses, which do not result in increase of oil and gas properties, are expensed and included in results of operations in the period when they were incurred.

Land The Group is entitled to constant land use, where it is located, and pays land tax, calculated by the State on a yearly basis on the assumption of total area and the purpose of the land. Land is the property of the State and, therefore. is not included in thc Group’s financial statements. There is no official lease agreement for land use.

Further Expenses Cost of modifications. reconstruction and iniprowmcnts that cxtcnd the term of useful life of assets or substantially improve their condition are capitalized and expenses related to current maintenance, repair and reconstruction are reported as expenses when originated.

Depreciation of Property, Plant and Equipment In accordance with generally accepted accounting practice depreciation of these assets in the oil and gas branch is calculatcd under the method of the number of units of produced oil and _cas for each field or integratcd group of fields on the assumption of quantity of reserves. Thus. depreciation calculation of a producing company depends on data about “commercial resources” (calculated quantity of gas, condensed fluid and oil resources. confimied by gcological and technical data with determined level of probability, the possibility of future production in existing economic and operating conditions). Depreciation is accrued using the straight-line method during the following estimated useful lifetimes: Depredation nom Buildings, other constructions and transmitting devices ...... 20 years Oil and gas pipelines ...... 15-30 years Reservoir tanks ...... 15 years Machinery and equipment ...... 12 years Technological fleet and motor transport ...... 6-10 years Equipment for control over oil pipelines ...... 10 years Other fixed assets ...... 5 years

Fixed assets are amortized in the month following the one they were put into use. Depreciation ceases in the month following the one after their disposal. Income or losscs from disposal of fixed assm are dctcrmincd on the basis of their book value and considered for purposes of the Group’s financial result. Apart from production assets the Group also maintains and constructs objects of social infrastructure (kindergartens, health centers and etc.). These assets are capitalizcd only if future economic benefits from their use are expected. When they are capitalized depreciation related to these assets is accrued during their useful lifetime. The caption ‘Construction in progress” includes expenses for construction and capital repair of fixed assets in progress. Objects of construction in progress are reported at cost and not amortized until the relevant object is put into use.

F-75 NATIONAL JOINT STOCK COMPANY NAlTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Impairment of Assets Under IAS 36 “Impairment of Assets”, cost analysis for the fixed assets with respect to the impairment of their value should be performed by companies whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in income. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of an asset in an am’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal after the end of its useful life. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash generating unit. The Group did not indicate potential loss from impairment of other assets; as such it does not assess the amount of estimated charges.

Govemment Grant JSC Ukrtransnafta (referred to in this subsection as the Company) has received a government grant for completion of the Ukrainian part of the Euro-Asian Oil-Transporting Comdor (EOC). The constructed oil pipeline is a network of main and distributing high-power pipelines. The Company controls utilization of EOC and receives profit from corresponding cash flows. The Company incurs expenscs on repairs, extension and modernization of EOC. EOC property is carried on the balance sheet of the Company at historical cost. The Company accounts for EOC property under IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” and classifies it as a grant related to assets since under the Agreement the Government obliged the Company to exploit, maintain and restructure the Euro-Asian Oil-Transporting Corridor. -_ Pursuant to IAS 20 the Company recognizes the grant under income method, implying recognition of the grant as income during one or several reporting periods. The most important consideration for the income method is that state grants are recognized as income on a systematic and rational basis over certain periods, which is necessary to match them with the related costs which they are intended to compensate. As such, income from the grant is carried in reporting periods in the same proportion as depreciation accrued on EOC property at the amounts that the Group spent on repairs, extension and modernization of EOC. JSC Ukrtransnafta recognizes income received under the grant if there is reasonable assurance that such income will be received and the terms for grant transfer and further application are met. EOC property is depreciated from the month following the month in which they were put into operational use. Depreciation stops being charged in the month following disposal. Depreciation is accounted for using the straight-line basis over the estimated useful lives as stated in the section “Depreciation of property, plant and equipment” of this Note. The cost of expansion, reconstruction, modernization and other improvements which materially extend the useful lives of EOC property or materially improve its state and exploitation features are capitalized, while routine maintenance, repairs and reconstruction costs are expensed in the period when such costs are incurred.

F-76 NATIONAL JONSTOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Revenue Recognition Revenue is recognized when there is an assurance that the economic benefits associated with the transaction will Row to thc Group and the amount of the revenue can be measured rcliably. Rcvenue. net of the related taxes, is recognized in the period when products are shipped or services are provided to the customer. The Group earns its revenue from principal and other activities. Revenue from principal activities comprises income from sales of oil, gas, fuel products, and other products, income from oil and gas transportation through main oil and gas pipelines, as well as from oil and gas storage services. Revenue from other activities includes income from inventories sales and rendering services to other divisions of the Group not connected to the Group’s principal activities. Revenue received from services of oil transportation is recognized based on the amount of crude oil transported to destination stations multiplied by the corresponding tariff for crude oil transfer. Tariffs for oil transfer are regulated by the state (see the Note “Establishment of tariffs”). Income from gas transportation (international and national transit) is recognized based on amount of transported gas and its destination. Income from pumping and extraction of gas is recognized at the moment of gas pumping to, or extraction out of gas storage facilities. Gas sales are recognized when gas is shipped to the ultimate consumer. Interest income and expenses are recognized on the accrual basis when such income is received or expense incurred.

Recognition of cost of sales and other txpenses Cost of sales associated with the relevant transaction is determined simultaneously with the relevant revenue. Expenses incurred after the goods were shipped and which can be measured reliably, are recognized concurrently with revenue as well.

Foreign Currency Transactions Foreign currency transactions are reflected in the reporting currency through recalculation of the foreign currency amount at the exchange rate of NBU in force at the date of the transaction. The exchange differences originating from recalculation of monetary items at the rates different from the accounted ones are recognized in the income statement in the period of their origination. Thc officialexchangc rate of UAH to US dollars established by the National Bank of Ukraine was equal to 5.3315 and 5.3324 as at December 31,2003 and 2002 respectively. At the reporting datc of these financial statements, the exchange rate of LAH to US dollar was equal to 5,3287 UAH per 1 US dollar.

Income Tax Income tax is based on financial results for the year taking into account deferred taxation. Current income tax related expenses are calculated in accordance with Ukrainian tax legislation where the financial result recognised in the income statement of subsidiaries and associatcs is thu taxation basis. Such income statement should be prepared in accordance with Ukraine Accounting Standards, while considering certain adjustments for tax purposes. Deferred taxes are accrued under the balance sheet liability method. The amount of deferred taxes rcfects the net tax effect of temporary differences between the balance cost of assets and liabilities for accounting purposes and cost considered for tax accounting. Amount of assets and liabilities from the deferred taxation is calculated on the basis of the expected tax rate to be applied to the income subject to taxation in years when the amount of temporary differences might be charged or realised. Valuation of

F-77 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH) deferred tax assets and liabilities reflects possible tax consequences originating from the expected evaluated probability of recoverability and realisation of the cost of such assets and liabilities. Deferred tax assets arising from tax losses should be recognized as an asset only where there was assurance beyond any reasonable doubt that future taxable income would be sufficient to allow the benefit of the loss to be rcalized. The Group revaluates non-recognised deferred tax assets at each balance-sheet date as well as the current cost of deferred tax assets. The Group recognizes previously not recognized assets only proportion to which there is a probability to realize it against the future taxable income. The opposite is also true: the Group reduces the balance cost of a deferred tax asset when there is a probability of complete or partial realisation of the asset against future income.

Non-monetary Tmnsactions Subsidiaries and associates performed offsets with their counter-parties, when their receivables were offset with the payable balances to the same counter party. In some cases receivables and payables of different counter-parties were offset based on signed mutual agreements. Sales proceeds and the cost of sales for barter and offset transactions are recognized when products are shipped. Sales are recorded net of VAT.

Related Party Tmnsactions Under IAS 24 “Related Party Disclosures”, related parties include: 1. enterprises that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise. (This includes holding companies, subsidiaries and fellow subsidiaries); 2. associates is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor; 3. individuals owning, directly or indirectly, an interest in the voting power of the reporting enterprise that Fives thcm significant influence over the enterprise, and close membcrs of thc f:imily of any such individual; 4. key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of the rcporting enterprise, including dircctors and officers of companies and close members of the families of such individuals; and 5. enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (3) or (4) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the reporting enterprise and enterprises that have a member of key management in common with the reporting enterprise. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. Related companies to the Group include enterprises that directly or indirectly, through one or more companies, control or are controlled by the Group, or are controlled together with the Group andor with the management of the Group. Related parties are mostly represented by enterprises belonging to NJSC NaftoGaz of Ukraine. In addition, as a result of the Group’s investments, there are related companies with the reference to the Company that are not the part of NJSC NaftoGaz of Ukraine. Accounts receivable from related parties are stated at initial cost. Provision for doubtful amounts of such receivables was not made.

F-78 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Provisions Provision is recognized necessary when the Group has a present liability (legal and constructive) owing to a past event and there is probability that in order to repay a liability, an outflow of resources that embody economic benefits will be required and the amount of liability can be reliably assesscd. If the effect of cost of money in time is material. the amount of provision is determined by discounting expected cash flows by applying a discount rate reflecting the rate before taxation and current market estimates of the cost of money in time, as well as risks attributable to certain liabilities, if they exist. When applying discounting, an increase of the provision amount reflectin? the effect of time is recognized as interest expenses.

Provision for Abandonment Costs SC Ukrgazvydobuvannya, SJSC Chornomomaftogas and JSC Ukrnafta have commitments assigned by the Government with respect to restoration of areas used during the development of oil and gas reserves after the production cycle is over. The Company has valuated relevant future liabilities and makes provision for abandonment in full upon completion of drilling. Cost of abandonment is included in the cost of oil and gas fields. The Company has valuated its commitments considering the restoration cost originated from 1997 to 2001 and will continue to specify its estimations in the future. However, Ukrainian legislative acts as to environmental protection miyht influence the volume of such cxpenscs: thzreforc the future expcnses related to such commitments might differ from the accrued ones.

Retirement and Other Benefit Obligations State Pension Program The Group makes current contributions under a pension program for its employees. This system requires a current contribution from the employer calculated as a percentage of gross salary payments; such expense is charged to the income statement in the period the related compensation is accrued to employees.

The Group’s Pension Program Aside from the abovementioned contributions to the state pension fund, JSC Ukrnafta signed a collective agreement with its employees on certain pension benefits that provide for nonrecurring payments to retired employees. The amount of payment depends on the length of service of an employee. No special funds were provided for these liabilities. Expenses for pension payments under this program are determined based on actuarial evaluation of liability under the method of accrual of projected units. Since in Ukraine there are no services for reliable actuarial evaluation, the management applies its own internal estimates to calculate liabilities related to this pension program at each reporting date. Actual results niay differ from evaluations madc at a curtain date. Actuarial profits and losscs are recognized as income or expenses when the total amount of unrecognized actuarial income exceeds 10% of recognized pension liability. Thew profits or losscs are rccognized during the remaining expected pcriod of service of employees participating in these pension plans. JSC Ukrtransnafta established Private Pension Fund Ukrtransnafta Ltd. During the accounting period the Fund did-not operate due to the absence of regulating legislation in Ukraine.

F-79 NATIONAL JOINT STOCK COMPANY NAFI‘OGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Social Liabilities The Group finances development and maintenance of social infrastructure and welfare of its production employees, including contributions for construction, development and maintenance of housing, hospitals, transport services, resorts etc.

Expenses on Abandonment of Fields and Restoration of Territory SJSC Chornomornaftopas estimation of actual cost of expenses on abandonment of ficlds and restoration of temtory is based on estimated future expenses which, as it is expected, will be incurred due to restoration of territory. adjusted by the effect of inflation of futurc periods and discounted applying the interest rate applied to provisions. Interest expenses attributable to provisions are included in financial expenses in the income statement.

Contingent assets and liabilities The Company should not determine a contingent asset. The relevant information should be presented whenever the probability of economical benefits exists. An asset and the related income are recognized in the financial statements of the period of change in evaluation. Contingent liabilities arc not reflected in the financial statements, except €or the cases when the outflow of economical benefits is likely to take place and the amount of such liabilities can be reliably measured. The information on contingent liabilities is disclosed in the Notes to financial statements with the exception of cases, when the outflow of economical benefits is unlikely. NJSC NaftoGaz of Ukraine has commitments assigned by the Cabinet of Ministers of Ukraine with respect to the Yamburg Agreement dated 19.03.1986 to which Ukraine is bound following the collapse of the USSR. At the reporting date the Company carries out inventory, evaluation and reconciliation with the Cabinet of Ministers of Ukraine regarding liabilities to be incurred.

Segment Reporting The main types of external sales of the Group are oil and natural gas, gas condensate and processing products. The Group’s management does not highlight separate business segments within the Group. Since the Group is a vertically integrated enterprise, it determines business segments in accordance with the requirements of IFRS 14 “Segment Reporting” for vertically integrated enterprises. The information on various products and services of the Group and its activities can be presented in accordance with business segments or geographical segments. A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service (or a group of related products or services) and that is subject to risks and returns that are different from those of other business segments. Factors that should be considered in determining business segments are the nature of the products or services, the nature of the production processes and juridical environment, e.g. bank services. On the basis of the abovementioned factors and the requirements of IAS 14 “Segment reporting” for vertically integrated enterprises, the information should be analyzed based on the business segments stated below:

0 Production and processing - exploring, drilling and construction of wells, production and processing of natural gas and other hydrocarbons;

0 Transportation - oil and gas transportation services;

0 Sales to consumers - sales of production to JSCs and external consumers:

F-80 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

0 Transportation - oil and gas transportation services to the segment “Sales”; Sales - oil and gas sales to the segment “Transportation” for operating needs; Internal prices are established by the Group’s management in accordance with the prices for external sales and sales within NJSC Naftogaz of Ukraine set by the Government and NJSC Naftogaz of Ukraine, and taking into account the needs for optimization of financing of separate husiness segments. The Group performs its operating activities essentially in Ukraine. The Group’s assets are located in Ukraine as well. Due to this fact geographical segments were not determined.

4. INFORMATION ON BUSINESS SEGMENTS Information on business segments of the Group as at December 31,2003 and for the year then ended can be presented as follows: Produdon and Consolidmhd re6ning Tmppporijng Sdea dah INCOME External sales ...... 4,805,995 11,260,640 17,094,016 106,774 33,267,425 Intersegment sales ...... 1,109,907 2,320,183 20,994,771 24,424,861 Total income ...... 5,915,902 13,580,823 38,088,787 106,774 57,692,286 EXPENSES External sales ...... (3,229,017) (2,652,432) (22,107,690) (63,572) (28,052,711) Intersegment sales ...... (677,448) (2,423,290) (21,324,123) (24,424,861) Total expenses ...... (3,906,465) (5,075,722) (43,431,813) (63,572) (52,477,572)

~ Operating profit ...... 1,576,978 8,608,208 (5,013,674) 43,202 5,214,714 Other non-operating profit (losses)...... (1,476,317) (1,800,465) 655,935 (2,620,847) Profit from ordinary activities ...... 100,661 6,807,743 (4,357,739) 43,202 2,593,867 OTHER INFORMATION General assets of segments 16,386,462 40,199,292 38,184,281 754,152 95,524,187 Unalloted assets ...... 852,000 Elimination of intersegment transactions ...... (19,408,965)

Total for assets ...... 76,967,222 Liabilities of segments ...... 3,956,990 10,260,857 40,480,603 414,359 55,112,809 Elimination of intersegment transactions ...... (19,408,965) Total for liabilities...... 35,703,844

F-81 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Information on business segments of the Group as at December 31,2002 and for the year then ended can be presented as follows: hoduetion snd Other typof Consolidated relining Transporting Sales activities data INCOME External sales ...... 3,787,363 11,521,804 9,292,646 114,601 24,716,414 Intersegment sales ...... 1,037,556 2,120,108 18,329,840 21,487,504 Total income ...... 4,824,919 13,641,912 27,622,486 114,601 46,203,918 EXPENSES External sales ...... (2,903,112) (2,275,806) (17,239,282) (68,284) (22,486,484) Intersegment sales ...... (580,483) (1,916,617) (18,990,404) (21,487,504) Total expenses ...... (3,483,595) (4,192,423) (36,229,686) (68,284) (43,973,988) Operating profit ...... 884,251 9,245,998 (7,946,636) 46,317 2,229,930 Other non-operating profit (losses) ...... (401,600) (263,118) 122,017 (542,701) Profit from ordinary activities ...... 482,651 8,982,880 (7,824,619) 46,317 1,687,229 OTHER INFORMATION General assets of segments 12,187,058 14,663,289 36,275,311 628,028 63,753,686 Unalloted assets ...... 503,630 Elimination of intersegment transactions ...... (17,947,429) Total for assets ...... 46,309,887 Liabilities of segments ...... 3,312,681 3,420,982 42,181,982 276,463 49,192,108 Elimination of intersegment transactions...... (17,947,429) Total for liabilities...... 31,244,679

Supplementary information on gas, natural gas liquids and oil exploration

5. CASH AND CASH EQUIVALENTS As at December 31, 2003 and 2002, cash and cash equivalents included: Cash and crph equivalents 2003 2002 In foreign currency...... 72,169 238,196 In national currency ...... 327,998 299,825 Total ...... 400,167 538,021

Cash and cash equivalents as at December 31,2003, included cash in national currency and cash in foreign currency (US dollars and Russian rubles) Cash and cash equivalents as at December 31,2003 and 2002 presented on the balance sheet comply with the cash balances at the beginning and at the end of the year in the cash flow statements for years ended December 31,2003 and 2002.

F-82 NATIONAL JOINT STOCK COMPANY NAlTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

6. ACCOUNTS RECEIVABLE AND PROMISSORY NOTES As at December 31. 2003 and 2002. accounts receivable included:

Accounts receivable and promissory notes, net m3 2002 Initial cost of accounts receivable for goods. work and services...... 15.622.915 12.535. 977 Notes received ...... 938. 812 1.534. 600 Other current accounts receivable ...... 1,182,968 1.515. 023 Provision for bad debts ...... (12,567,157) (12.187. 572) Total ...... 5,177,538 3398.028

7. INVENTORIES Balance value of inventories classified by groups can be presented as follows:

Inventories m3 2002 Oil and gas ...... 2.769. 852 4.377. 455 Construction materials ...... 250. 471 124.060 Goods ...... 46. 666 128.359 Tools and spare parts ...... 308. 332 254.767 Other ...... 847.717 581. 661 Provision for inventories ...... (349. 919) (460.746) Total ...... 3.873. 119 5.0053 56

8. OTHER CURRENT ASSETS. NET As at December 31. 2003 and 2002 other current assets included: Other current assets m3 m2 VAT settlements ...... 477. 252 582.033 Non-trade current accounts receivable ...... 1.025.752 1.210. 949 Advances paid ...... 1.620. 906 1.371. 048 Other ...... 463.921 609. 227 Provision for doubtful debts ...... (720. 460) (779.463) Total ...... 2.8673 71 293.794

F-83 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

9. LONG-TERM ACCOUNTS RECEIVABLE AND NOTES As at December 31. 2003 and 2002. long-term accounts receivable and promissory notes included: 2003 2002 Long-term notes: a) related parties ...... 8.746 89.973 b) other enterprises ...... 108.878 101.066 Investments in joint ventures ...... 59.073 24.650 Loans to employees ...... 8.066 7.276 Long-term accounts receivable ...... 249.354 t49.091 Other receivables ...... 25.459 9.740 Provision for impairment of financial investments ...... (66.671) (26.149) Provision for bad debts ...... (50.202) (88.973) Total ...... 342. 703 766. 674

F-84 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

F-85 NATIONAL JOINT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

11. STATE PROPERTY THAT IS NOT SUBJECT TO PRIVATIZATION As mentioned in Note 1 in November 2001 the State transferred to the Group’s operations the State Property that is not subject to privatization. The parties have signed an agreement stating that half of “net profit” received from utilization of such State Property belongs to the State. The Group has the right to utilize State funds €or financing of extension, reconstruction and modernization of State Property instead of repayment. However, the Agreement does not provide for a method for calculation of “net profit”, thus. the Group could not determine the amount of indebtedness to the Government based on agreements on transfer of State Property that is not subject to privatization. At the reporting date the Group did not receive any requests from the Government as to the repayment or carrying out a calculation of “net profit”. In order to increase efficiency and provide reliable operation of the gas and oil-transportin_enetwork, the Group annually works out Programs of technical examination and analysis of the gas and oil-transporting network, plans for capital repair, construction and reconstruction. According to the plans certain works are being executed, the most important of which are: regular examination of oil-transporting routes by the staff of emergency centers using helicopters;

0 systematic cleaning of pipelines’ interiors from paraffinaceous sediments;

0 diagnosis of oil pipelines’ interiors, external examination of linear parts of gas and oil pipelines in order to assess their technological state and carrying out selective repair of isolation with elimination of hazardous defects;

0 work on examining bolts to check their air tightness;

0 examining and selective repair of underwater and air passages with the assistance of specialized organizations;

0 anticorrosion cover of aerial crossings; repair of other gas and oil pipelines facilities.

12. DEFERRED TAX ASSETS (LIABILlTIES) As at December 31, 2003 and 2002, deferred tax assets and liabilities of the Group included:

2005 2002 Tax effect of temporary differences to: Fixed assets ...... (8,139,301) (627,346) Accounts receivable and promissory notes ...... 1,528,693 1,823,363 Inventories ...... 47,216 67,120 Advances paid and other assets ...... (9,497) 57,438 Accounts payable ...... 13,146 21,402 Advances received and other liabilities ...... 232,358 1,245,701 Adjustment of cost for technological oil ...... (323,521) (329,145) Total ...... (6,650,906) 2,258,533

F-86 NATIONAL JONSTOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

13. ACCOUNTS PAYABLE As at December 31, 2003 and 2002 accounts payable and other indebtedness included: Accounts payable 2003 uwn For goods, work, services ...... 15,666,933 16,900,338 Notes issued ...... 461,499 281,222 For oil transportation services...... 62,036 54,420 Total ...... 16,190,468 17,235,980

Accounts payable for goo&, works, services m3

~~~ JSC Gasprom ...... 7,692,330 7,693,628 Provision for amount of non-settled outstanding debt with JSC Gasprom ..... 948,068 948,229 State Trading Company Turkmennaftogas ...... 2,040,690 3,300,791 Eural Trans Gas ...... 1,129,423 0 Itera LLC ...... 0 1,742,646 Other creditors ...... 3,856,422 3,215,044 Total ...... 15,666,933 16,900$38 14. TAX LIABILlTIES As at December 31, 2003 and 2002 tax liabilities included

Tax liabilities 2003 2002 Budget tax settlements ...... 3,948,067 4,641,443 Non-budget tax settlements ...... 203 584 198,151 Social insurance ...... 12,297 8,459 Payment for transit of oil through main oil pipelines ...... 3,248 5,994 Payment for transit of gas within Ukraine ...... 2,320,554 2,148,402 Total ...... 6,487,750 7,002,449

The following charges against earnings were introduced

0 oil transportation amounting to 0.685 USD per ton, except transportation by the Ukrainian portion of EOTC in the direction of the Marine oil terminal “Pivdenny” - Brody-Zakhidny border of Ukraine until December 31,2003;

0 natural gas transit in amount of 0.29 USD per 1,OOO cubic meters of gas for each 100 km. Conversion into Ukrainian currency was performed applying the official exchange rate set by the National Bank as at the day preceding the day of payment. Fines and forfeits charged to the Group by tax authorities for untimely tax payments and noncompliance with tax legislation are reported in the income statement.

15. FINANCIAL LIABILITES As at December 31. 2003 and 2002 financial liabilities of the Group included: financial Libilines 2005 u102 Short-tenn bank loans ...... 1,137,706 696,363 Current long-term liabilities ...... 293 494 Total ...... 1,137,999 696,857

F-87 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

16. Other Current Liabilities Other current liabilities of the Group as at December 31, 2003 and 2002 included: Other Rurent liabilities 2003

~ ~ ~ ~ ~ VAT settlements ...... 409,271 467,311 Advances received ...... 478,119 743,617 Payroll settlements ...... 105,763 88,071 Payroll accruals...... 25,527 18,331 Accounts payable from non-operating activities ...... 1,201,867 595,031 Other liabilities ...... 272,339 416,441 Dividends to shareholders ...... 42,504 41,605 Payments to employees ...... 4,768 3,847 Total ...... 2,540,158 2,374,2!54

As at December 31,2003, the caption “Payroll settlements” included reserves for vacations and bonuses payable for results of the Group in 2003.

17. PROVISION FOR ABANDONMENT OF FIELDS The Group’s activities can have a negative effect on environment. The Group makes periodical review of its environmental liabilities in accordance with the environmental protection legislation. According to the management’s estimations, as at December 31, 2003 and 2002, the actual value of future expenses for restoration of territory and abandonment of oil and gas fields amounted to 415.848 thousands of UAH and 387,835 thousands of UAH respectively.

Movement of government grant funds 2003 ulot Balance of budget funds at the begiuning of the period ...... 1,332 32,646 Received ...... - 8,331 Utilized ...... (7,332) (33,W) Balance of budget funds at the end of the period ...... - 7,332

F-88 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Utilization of Government Grant Utilization of the government grant for completion of the Ukrainian part of the Euro-Asian Oil- Transporting Corridor during 2003 can be presented as follows:

Mo3 2002 Total Budget DiPlerenrrs Technological pipelines and reservoir park (reservoir assembling)...... - 10,521 10,521 10,897 (376) Port and cleaning facilities of MOTC ...... - 28,436 28,436 29,841 (1,405) Communication and alarm networks ...... - 4,623 4,623 969 3,653 Automatic system monitoring pipelines .... - 520 520 866 (346) General construction work ...... - 21,321 21,321 17,330 3,991 Share in construction ...... - 4,346 4,346 3,046 1,300 Special vessels, fire-fighting boats. ladder- tower and chemical-analysis laboratory, port facilities ...... - 32,556 32,556 57,000 (24,444) Boats of port fleet (2 towboats) ...... - 35.137 35,137 46,783 (11,646) Development works ...... - 383 383 378 5 Materials and equipment supplied by customer ...... - 10,747 10,747 10,200 547 Insurance certificate ...... - - - 18,096 (18,096) Process oil ...... 7,332 26,157 33,489 - 33,489 Total ...... 7,332 174,745 182,077 195,406 (13,329)

F-89 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

19. OTHER LONG-TERMFINANCIAL LIABILITIES Other long-term financial liabilities of the Group as at December 31. 2003 and 2002 included:

Other long-term liabilities 2503 2002 Restructured budget liabilities ...... 144,503 143,087 Other liabilities ...... 667.65 1 610.502 Long-term notes: a) related parties ...... 262,987 62,396 b) other enterprises ...... 36,915 162,994 Long-term liabilities to related parties ...... 10,167 38,621 Long-term loans ...... 666,630 179,230 Purpose financing ...... 2,015 13,058 Provision of pensions ...... 39,996 32,868 Debentures ...... 127,583 0 Total ...... 1,958,447 1,242,756

20. EQUITY Capital Pursuant to the Company’s Charter and the related amendments the statutory capital amounts to 5,564,714 thousands of UAH, comprising 5,564,714 ordinary chares of nominal value 1000 UAH each. In accordance with the Charter the State acting through the Cabinet of Ministers of Ukraine is the Company’s founder. As at December 31, 2000 the statutory fund of the Company was formed in full scope. The State‘s share in the Company’s statutory capital comprises 100%. The difference reflects the amount of charter equities of the Group’s companies, not included in the consolidation.

Reserves Reserves include a revaluation fund for fixed assets, together with retained earnings from previous periods of the Group and its predecessor - Ukrgasprom - as of the balance sheet date. 21. INCOME FROM REALIZATION OF GOODS, WORK, SERVICES Income from realization of goods, work, services for 2003 and 2002 included:

Net income from realization of goods, work, services 2003 2002 Income from sale of oil and gas ...... 39,554,944 29,137,279 Income from sale of refinery products ...... 1,596.797 978.203 Oil and gas transportation ...... 10,781,671 11,404,026 Income from other sales ...... 5,758,874 4,684,410 Elimination of transactions within the group ...... (24,424,861) (21,487,504) Net income ...... 33,261,425 24,116,414

F-90 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

22. COST OF SALES Cost of realized goods. work . serviccs for 2003 and 2002 sprcified by types of sales was as follows: Cmt of des 2003 2002 Cost of oil and gas sale ...... 40.568. 421 33.087. 847 Cost of refinery products sold ...... 433.435 155.124 Cost of oil and gas transportation ...... 5.500. 919 5.556. 927 Cost of other sales...... 2.928. 223 1.552.539 Elimination of transactions within the group ...... (24.424. 861) (21.487. 504) Net cost of sales ...... 25.006. 137 18.864. 933

23 . OTHER OPERATING INCOME Other operating income of the Group for 2003 and 2002 included Other operating income 2003 toot

~ Income from sales of other current assets ...... 20.208 (10.707) Income from operating lease of assets...... 4.931 4.946 Income from operating exchange difference ...... (24.060) (6.456) Fines, penalties, forfeits received...... 5.308 25. 871 Income from recovered cost of previously written off assets or from recovered debts previously written off as doubtful ...... 15.497 91. 274 Income from write-off of accounts payable ...... 127.133 177.763 Income from received grants and subsidies ...... 122 2. 230 Other income from operating activities ...... 230. 318 241. 240 Total ...... 379. 457 526. 161

24 . ADMINISTRATIVE AND SALES EXPENSES Administrative and sales expenses of the Group for 2003 and 2002 included: Adminislntive nod des expenses 2403 m2 Administrative expenses Payroll expenses ...... 164.401 118. 877 Depreciation ...... 49. 905 83.9a Social security expenses ...... 87.633 66. 612 Expenses on materials ...... 18.917 36. 270 Other administrative expenses ...... 367. 545 232. 868 Total ...... 688. 401 538,591 Sales expenses Payroll expenses ...... 6. 939 4. 541 Depreciation ...... 2. 283 1. 914 Social security expenses ...... 1.122 978 Expenses on materials ...... 1.790 1. 179 Commission ...... 128.647 246. 600 Transportation services...... 42. 098 3. 925 Customs services ...... 14215 10.600 Other sales expenses...... 58.824 76. 102 Total sales expenses ...... 255. 918 345.839 Totd ...... 944. 319 884,430

F-91 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

25. OTHER OPERATING EXPENSES Other operating expenses of the Group for 2003 and 2002 included: Cost of sales 2003 m2 Geological exploring ...... 194.894 249. 207 Provision for impairment of capital investments ...... 21. 214 149.051 Expenses on development and exploration ...... 76. 941 46. 797 Fines, penalties, forfeits recognized ...... 179.733 92. 164 Charity ...... 38235 31. 763 Shortages and expenses from impairment ...... 21. 543 2. 738 Expenses on impairment of inventories ...... (60. 364) 19.577 Adjustment to provision for inventories ...... 3. 012 (60. 415) Write-off of bad debts ...... 309. 324 55. 350 Repair of property, plant and equipment ...... 697. 847 412.745 Other operating expenses ...... 818.850 833.702 Total ...... 2.301. 229 1.832. 679

26 . OTHER NON-OPERATING INCOME Other non-operating income of the Group for 2003 and 2002 included: Cat of des 2003 2002

Other non-operating income Income from assets received free of charge ...... 26. 070 30. 883 Increase of market value of financial investments ...... 13 L.277 398 Income form joint ventures ...... 9. 997 2. 760 Interest received ...... 2. 296 1.556 Income from realization of non-current assets ...... (655) (2. 405) Income from realization of financial investnicnts ...... 586.524 93. 876 Income from non-operating exchange difference ...... (3.224) (3. 266) Income from realization of notes ...... 879 0 Dividends received ...... 600 2.367 Other non-operating income ...... 102OS 40. 917 Total: ...... 763. 969 167.086

F-92 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

27. OTHER NON-OPERATING EXPENSES Other non-operating expenses of the Group for 2003 and 2002 included: cost of sales 2003 2002

Other non-operating expenses Expenses on maintenance of non-operating items and other social arrangements ...... 113,950 203,669 Provision for impairment of financial investments ...... 18.406 46.663 Loan interest ...... 13,584 28,736 Liquidation of accidents consequences ...... 1,133 710 Loss from non-operating exchange differences ...... 135 9,853 Expenses on joint ventures ...... 0 0 Loss from sales of non-current assets ...... 118,866 175,764 Loss from share in capital ...... 261 (148) Interest expenses on financial lease ...... 0 2,242 VAT non recovered from state budget ...... 38,968 146,223

Other non-operating expenses ...... f__.__...... 106,532 96,075 Total: ...... ____...... __...... ___..__._...... 411,835 709,787

28. BELATED PARTY TRANSACTIONS In thew financial statements rclated partirs are the partics one of which can control another or have material influence on financial and operating decisions of other party. as providcd in IGS 23 “Related Party Disclosures”. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. Such enterprises include. in the first placc, all enterprises controllcd by the parent company NJSC Naftogaz of Ukraine. As of 31.12.2003 NJSC Naftogaz of Ukraine held corporate rights (shares) in approximately 100 enterprises. All enterprises a portion of whose shares are held by NJSC Naftogaz of Ukraine can be divided into 5 groups. 1. First group: subsidiaries of NJSC Naftogaz of Ukraine which are 100% owned by NJSC Naftogaz of Ukraine. Share in capital SC VZP Naftogaz...... 100% SC Kurortnaftogas ...... 100% SC Ukmaftogaskomplekt ...... 100% SC Naftogazbezpeka ...... 100% SC Gas-heat ...... 100% SC Ukrtransgaz ...... 100% SC Ukrgazvydobuvannya ...... 100% SC Gas of Ukraine ...... 100% SC Budivelnyk ...... 100% SC Naftogaz servicing...... 100%

F-93 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Second group: other enterprises in which 100% of corporate rights belong to NJSC Naftogaz of Ukraine. Sham in eapitd JSC Chemomornaftogas ...... 100% JSC Ukrspetstransgas ...... 100% JSC Ukrtransnafta ...... 100% JSC &mol ...... 100%

Third group: regional gas companies (oblgases, miskgases) in which more than 50% of shares belong to NJSC Naftogaz of Ukraine. Share P apital

~~~ JSC Berezhanygas ...... 51% JSC Cherkasygas ...... 51 % JSC Tysmenytsyagas ...... 51 % JSC Ternopilgasbud ...... 51 % JSC Poltavagas ...... 51% JSC Luganskgas ...... 51 % JSC Lubnygas ...... 51% JSC Kremenchukgas ...... 51% JSC Kremenetsgas ...... 51% JSC Kirovogradgas ...... 51% JSC Dnipropetrovskgas ...... 51 % JSC Gadyachgas ...... 51% JSC Terebovlyagas ...... 51% JSC Sumygas ...... 51% JSC Ivanofrankivskgas...... 50,00 JSC Melitopolgas...... 50,00 JSC Sevastopolgas ...... 50,OO JSC Zaporizhgas ...... s0,oo JSC Mykolaivgas ...... 50,OO

Fourth group: other enterprises in which more than 50% of shares belong to NJSC Naftogaz of Ukraine. Shein -Pftal Clearing trade company Naftogaz of Ukraine ...... 51% JSC Energy and fuel of Ukraine ...... 51 % JSC Shebelynske-2 ...... 82% JSC Notes and settlement center ...... 80 % JSC Vodogray-rivne-3 ...... 70% JSC Ukrainian gas and energy company ...... 50% JSC Ukrnafta ...... 51 % JSC Rivent-3 ...... 52 %

Fifth group: regional gas companies (oblgases, miskgases) and other enterprises where less than 50% of shares belong to NJSC Naftogaz of Ukraine. Shein CPPM JSC Krymgas ...... 49.0% JSC Binnytsyagas ...... 47.1%

F-94 NATIONAL JOINT STOCK COMPANY NAITOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31. 2003 (Thousands of UAH)

share in .capital JSC Umangas ...... 40.3% JSC Ukragaszbut ...... 40.0% JSC insurance company Vorskla-6 ...... 39.7% JSC Zakarpattyagasbud ...... 39.0% JS C Done tskoblgas ...... 38.3 % JSC Chernigivgas...... 38.3% JSC Konkord-3 ...... 37.0% JSC Gastramit ...... 31.0% JSC Devon ...... 36.4% JSC Zboribgas...... 36.0% JSC Ukrgasbydobutok-2 ...... 35.0% JSC Rivnensk beverages plant ...... 34.8% JSC Kyivoblgas ...... 33.2% JSC Joint venture Romgasd ...... 32.6% JSC Rivnegas ...... 32.6% JSC Zbarazhgas ...... 32.6% JSC Gusyatyngas ...... 32.4% JSC MT-Bank3 ...... 31.3% JSC Monostyrskgas ...... 31.0% JSC Naftogazbud-Ukraine ...... 30.0% JSC Ternopilmiskgas ...... 30.0% JSC Borshchivgas ...... 29.1% JSC Buchagas ...... 28.9% JSC Ukrainian oil and gas insurance company-6 ...... 28.8% JSC Chortkivgas ...... 27 .I Yo JSC Lvivgas ...... 27.6% JSC Shepetivkagas ...... 27.0% JSC Pidvolochiskgas...... 27.0% JSC Zalishchykygas...... 26.5% JSC Ukrnaftogasinvest ...... 26.0% JSC Tysagas-2 ...... 26.0% JSC Hmelnytskgas ...... 26.0% JSC Ukmaftogas-3 ...... 26.0% JSC Temopilgas...... 25.7% JSC Agronaftoserviced ...... 25.5% JSC Trade House LUKoil-Kyiv-6 ...... 25.0% JSC Gascontinental-5 ...... 25.0% JSB Ukrgasprombank ...... 24.4% JSB Insurance company Ukrnaftatrans-3 ...... 24.0% JSB Kyivgaspostach ...... 24.0% JSC Volyngas ...... 23.4% JSC Korostyshivgas ...... 22.0% JSC Khersongas ...... 20.8% JSC Chemivtsigas ...... 20.4% JSC Galychyna-3 ...... 20.1% JSC Ukrgasprylad ...... 20.0% JSC Ukrbudtransgas ...... 20.0% JSC Odesagas ...... 19.9% JSC Fond-servise-6 ...... 18.5% JSC Kharkivgas ...... 17.7% JSC Kyivpropangas ...... 17.1% JSCAzot-4 ...... 16.3% JSC Spartak-6 ...... 16.3%

F-95 NATIONAL JOINT STOCK COMPANY NAITOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

JSC Zhitomyrgas ...... 15.9% JSC Last ...... 15.0% JSB Ukrgasbank ...... 13.6% JSC Donetskmiskgas ...... 12.5% JSC Shlumberzhe Ukrgas Meters Company ...... 11.2% JSC Kharkivmiskgas ...... 9.9% JKX Oil & Gas plc...... 8.9% JSB Brokbussinessbank ...... 8.3 yo

The abovementioned enterprises are mainly involved in production, transportation and sales of oil, gas and hydrocarbon products. When entering into sales agreements, enterprises belonging to NJSC NaftoGaz of Ukraine may apply special transfer prices that differ from those applied in am’s length transactions. As at December 31, 2003, material commercial operations were performed and material balances on settlements with the following subsidiaries were reported in the balance sheet:

SC Ukrgazvydobuvannya In 2003 this company’s production comprised about 14 039 million cubic metres of natural gas (2002: 13 723 million cubic metres), 684 thousand tons of gas condensate (2002: 608 thousand tons), 103 thousand tons of crude oil (2002 94 thousand tons). As at December 31,2003 SC Ukrgazvydobuvannya had 21 471 employees (2002: 21 405 employees). Most of the Group’s transactions were with the related parties. During 2003 and 2002 these transactions included (a) sales of most gas portion to the parent company NJSC NaftoGaz of Ukraine, (b) aquisition of equipment and materials from SC Ukrnaftogaskomplekt and (c) various set-off transactions with their related parties.

SC Ukmansgaz This company’s main operations are the provision of gas transportation and gas storage services. The average number of employees as of December 2003 and 2002 was 27,894 and 27,722, respectively. The following are related parties which the company has the most material transactions with:

0 National Joint Stock Company NaftoGaz of Ukraine:

0 Subsidiary company Gas of Ukraine; e Subsidiary company Ukrgazvydobuvannya; e Regional companies €or gas supply and gasification (JSCs). substantially controlled by NJSC NaftoGaz of Ukraine;

0 Subsidiary company Ukmaftagaskomplekt. The most significant related party transactions in 2003 include:

0 Gas purchases from NJSC NaftoGaz of Ukraine. Purchased gas was used for the company’s own consumption and for resale:

0 Purchase of inventories from Ukmaftagaskomplect;

0 Transportation services (international transit) to NJSC NaftoGaz of Ukraine; e Transportation services (national transit) to SC Gas of Ukraine;

0 Storage services to NJSC NaftoGaz of Ukraine.

F-96 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

The settlements with NJSC NaftoGaz of Ukraine for purchased gas and national transit are performed on a Don-cash basis by setting off mutual indebtedness. For the period from 1 September 2003 to 1 January 2004 the Company had placed bonds amounting to UAH 127,583 thousand. The nominal value of each bond is UAH l,OOO, form of issue is non- documentary. Interest income comprises 12% per year in hryvna for the entire term of circulation. The bonds mature on September 2,2006 . It is planned to use proceeds from the sale of bonds for renewal and modernization of the gas transporting system. Repayment of bonds and payment of interest income will be made at the expense of transit of natural gas through the territory of Ukraine. The bonds are convertible in the secondary equity market and can be submitted for pre-term buy-out. The bonds are secured by property of the Company. The authorized payment oftice is L‘krsotsbank. depositary JSC Inter-regional Fund Union.

JSC Ukriransnafta The principal activities of this company are transportation of crude oil inside and outside the Ukraine and obtaining profit from provided scrvices. The company provides transport services on Ukrainian territory both to residents and to non-residents. The cost of crude oil transportation is set based on the state-regulated tariffs. Earnings of the company depend on the amount of oil transported, direction and length of transportation. The average number of employees during 2003 and 2002 was equal to 6,865 and 6,607 employees, respectively.

SC Gas of Ukraine This company supplies gas to the general public. state financed (budget) institutions. local utilities and industrial and other companies at tariffs established by the Government. The Company purchases most of its gas from NJSC NaftoGaz of Ukraine at prices established by NJSC NaftoGaz of Ukraine. In 2003 and 2002 the company has supplied approximately 56.6 billion cubic meters and 44.5 billion cubic meters, respectively. The average number of employees as at December 31,2003 and 2002 was 728 and 1073, respectively. The company has entered into a variety of transactions with related parties in the normal course of business. These transactions in 2003 include: a) purchase of most of its gas from NJSC Naftogaz of Ukraine; b) purchase of transportation services from, sales of gas for internal use, sales of merchandise, equipment and promissory notes of Ukrtransgaz; c) purchase of transportation services from regional gas transportation companies (Oblgases); d) numerous off-set transactions with related parties. As at December 31, 2003 financial invcstments in shares of JSC Azot amounting to UAH 138.390 thousand (16.26 % of the share capital of JSC Azot) are reported in the Company’s financial statements. These assets are recorded at the market value. The amount of provision for decrease in value of such investments to their fair value is reflected in the income statement as expenses of the period. As at December 31.2003 financial investmcnts of JSC Azot were not realized. Duc to the unccrtainty of further operations with these assets they have bccn reflected in the reporting as at 31.12.3003 as long-term assets. Furthermore. for the most part of 2000-2003 the prices for significant volumes of gas purchased by the company exceeded the selling tariffs applied by the company to gas distribution during the same period. The company has no control over its pricing policy as its purchase and sale prices are established by the orders of NJSC NaftoCaz of Ukraine. As a result. duc to significant differences between purchase price and selling tariffs the company has incurred substantial losses. The company’s budget for 2004, which is prepared based on financial information availablc to company nianasemcnt, providcs for an increase in income from gas sales in 2004 amounting to UAH 12, 820,457 thousand (according to UAS). For 2003 Company’s loss from its operations comprised UAH 1,218,742 thousand (according to UAS). As a result of the aforementioned, the company’s ability to operate in the future to a great extent depends upon management’s intention to increase income in order to cover direct and overhead expenses. and to provide sufficient cash inflow to repay its liabilities.

F-97 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

When entering into sales agreements, enterprises belonging to NJSC NaftoGaz of Ukraine may apply special transfer prices that differ from those applied in am’s length transactions.

SISC Chornomomuftogas Principal activities of the company are exploitation, development and production of gas and crude oil, gas transportation and distribution of gas and oil products. A major portion of operations associated with exploitation and operation of oil and gas fields is performed on the Black and Azov sea shelves. The company owns 17 natural gas fields and 1 oil field, 43 gas distributing stations. over 1,100 kilometers of gas main pipelines, with an underground gas storage capacity equal to 1 billion cubic meters, 10 sea stationary platforms and 22 vessels.

JSC Ukrnafta The company and its subsidiaries perform oil and gas exploring and production and use gas-transferring plants in Ukraine. As at December 31, 2003 the company included 6 production subdivisions, 6 subdivisions involved in drilling and exploring operations, 3 gas-transferring plants and a number of research and auxiliary departments. In 2003 the company produced approximately 2,895 thousand metric tons of crude oil and condensate (2002 - 2,812 thousand metric tons), 3,274.6 million cubic meters of gas (2002 - 3,254.8 million cubic meters) and produced 339.2 thousand metric tons of condensed gas and gasoline (2002 - 309.7 thousand metric tons). The most substantial related party transactions performed during 2002 were gas sales and acquisition of raw materials from NJSC NaftoGaz of Ukraine and enterprises controlled by NJSC NaftoGaz of Ukraine.

29. COMMITMENTS AND CONTINGENCIES Government’s Activities The functioning of oil and gas capacities is of great importance to Ukraine for various reasons including issues of economic, strategic and state security. As such, the Ukrainian government has and, probably, will have substantial influence over the Group’s activities. The State cxcrcises its property rights through NJSC NaftoGaz of Ukraine and the Fund of State Property of Ukraine.

Economic Environment Economic activities and revenues of the Group are to a certain extent influenced by political. financial and administrative changes, changes of current legislation, as well as environmental protection legislation in Ukraine. Taking into account that this industry is very capital-intensive, risks related to substantial physical expenses should also be considered. It is not possible to predict the nature of events related to these risks, the probability of their arising and their effect on operations and profitability of the Group in the future.

Taration System Ukraine currently has a number of laws related to various taxes imposed by both state and local government authorities. Applicable taxes include value added tax, income tax, a number of turnover based taxes, and payroll (social) taxes, together with others. Laws relating to these taxes are subject to frequent changes, and regulations are often unclear or non-existent and few precedents have been established. Often, differing opinions regarding legal interpretation exist both among and within government ministries and organizations (like the State tax administration and its various inspectorates), thus creating unccrtaintics and areas at conflict. Tax declarations, together with other legal compliance areas (for example, customs and currency control matters) are subject to review and investigation by a number of authorities, who are enabled by law to impose extremely severe tines. penalties and interest charges. These facts create tax risks in Ukraine substantially more significant than typically found in countries with more developed tax systems.

F-98 NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

Generally. tax declarations remain open and subject to inspection for an indefinite period of time. However. in practice the risk of retroactive tax assessments and penaltics charged dccreases significantly after three years. The fact that a year has been reviewed does not isolate that year, or any tax declaration applicable to that year, from further reviews. Management believes that the Group operates in full compliance with the laws regulating its operations. The Group has accrued and paid all respective taxes. When there is an uncertainty with respect to payable taxes, accruals are made depending on the Group’s management estimates based on available information analysis. However, there is no certainty that tax authorities won’t have a contrary opinion as to the Group’s tax liabilities under current tax legislation and won’t apply punitive measures.

These financial statements do not provide for provisions for potential tines related to taxation.

Legal Liabilities Various legal actions are pending or may be asserted in the future against the Group from litigation and claims incident to the ordinary course of business. Although the outcome of the matters cannot always be ascertained with precision. management believes that it will not havc any material effect on the financial position or results of future operations of the Group.

Insurance The Group’s insurance cxpenses are insignificant and mainly include obligatory insurance provided by Ukrainian legislation. General liability insurance is generally not available in Ukraine at present.

Environmental Protection The Group makes periodical review of its environmental liabilities assessment in accordance with environmental protection legislation. Liabilities are recorded in financial statements as they arise. Contingent liabilities, which may arise in case of establishment of stricter legal requirements as to environmental protection, changes in legislation, standards, and regulation of civil disputes, can not be reliably assessed, but they may be material. Under the current control system and punishment measures €or infraction of current environmental legislation, the Group considers that at the moment it does not havc material liabilities arisinp from damage to the environmcnt. exccpt those referred to in the financial statements.

Social Liabilities The Group finances development and maintenancc of social infrastructure and thc welfare of its production employees, including contributions for construction, development and maintenance of housing, hospitals, transport services etc. Thus, the Group makes substantial contribution to the maintenance and improvement of local infrastructure and the welfare of its employees.

Liabilities Related to Capital Expenses In the ordinary course of business. the Group has signed contracts for acquisition of fixed assets and equipment. The management of SC Ukrgazvydobuvannya has approved a plan for 2004 capita1 investments totaling UAH 1.861.1 million. A major part of such work is performed by specialized subdivisions of the company. Actual expenses for 2003 amounted to UAH 1,630.3 million. During 2004 JSC Ukrtransnafta plans to perform the following investments using its own and borrowed funds: - maintenance control. technical and econcimical justification and preparing working documents €or route and two oil-transfer stations of the Brody-Derzhkordon pipeline (120 km) - UGH 8 million; - completion of work on loading of Odesa-Brody oil pipeline by process oil -USD 90 million or UAH 478.0 million;

F-99 NATIONAL J01NT STOCK COMPANY NAmOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousandr of UAH)

- construction of an oil pipeline (154 km) Snigurivka-Odesa- main oil pipeline Pivdenny (0-52 km) 52 km long - UAH 110 million; Non-repaid liabilities of SJSC Chomomomaftogas relating to acquisition of property, plant and equipment as at December 31, 2003 amounted to approximately 40,023 ths. UAH (2002: 40,023 ths. UAH).

30. FACTORS OF FINANCIAL RISKS During its operations the Group bears certain financial risks. including the effect of changes in market prices of securities and exchange rates.

Currency Risk The Group performs its transactions internationally, and still foreign currency transactions do not have a material effect on the Group’s operations. Monetary items of assets and liabilities are reported mainly in national currency. The Group did not enter into any special contracts to hedge its currency risks due to the immaterial effect on operational and financial activities. The Group does not have investments in foreign companies.

Interest Risk The Group incurs a risk related to agreements on acquisition denominated in foreign currencies. The principle currency giving rise to this risk is the US dollar. The currency risk of the Group is not material. The Group mostly applies short-term bank loans in national currency. Thus, management believes that the Group was not subject to material interest risk uti1 2003. However, taking into account issuance of bonds in 2004 and general intention of the Group to expand its financial markets in the nearest future. potential negative consequences of these measures may affect the Group’s financial results. The Group has taken no measures aimcd at unpredictability of financial markets and minimization of potential negative effects on the Group’s financial results, because loan amounts arc not material. The Group has no material assets that would bring interest income.

Credit Risk The highest risk of the Group relates to accounts and notes receivable. These risks are periodically assessed and taken into account when making provision for doubtful debts. Most of the indebtedness arouse from related parties transactions, provision for which is not made. The process of debt repayment for budget and communal enterprises may depend on the influence of state authorities and other social and economic factors. Nevertheless, the Managcmcnt believes that thc Group has no significant risk of losses exceeding existing provision for decrease in value of accounts receivable.

Liquidity Risk Thc Group’s task is to balance continuous financing and flexibility in application of terms of credits granted by suppliers and banks. The Group analyzes the urgency of payables and plans its liquidity dcpending on expccted maturities of liabilities. In caw of insufficient liquidity the Group can resort to both external sources of financing and related parties.

Market Risk The Group’s sales depend on prices of natural gas and other carbohydrates. Decrease of gas and other carbohydrates prices may lead to reduction of net income and money inflows. If prices remain low for a long time it may cause a decrease of exploration and extraction activities, as well as a reduction of gas available for sale and processing, and, finally. may affect the ability of the Group to carry out its contractual obligations.

F-100 NATIONAL JOINT STOCK COMPANY NAETOGAZ OF UKRALNE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

31. SUBSEQUENT EVENTS Events that took place after the balance shcet date and provide additional information regarding financial statements of the Group RS at that date arc disclosed in the financial statements. Subsequent events that took place but which do not influence the financial state of the Group.

NJSC NaftoGaz of Ukraine Under the agreement dated April 22, 2004 NJSC the Company received a short-term loan from ABN AMRO BANK N.V., London Branch in the amount of USD 200 million. The loan was granted for general needs. Interest on the loan will consist of a margin of 3.49% annually over LIBOR. Security for this loan is an account with ABN AMRO BANK N.V., London Branch. Under the decree of the Fund of State Property of Ukraine in the first quarter of 2003 JSC Azmol shares of which wcre contributed to the statutory fund of NJSC NaftoGaz of Ukraine wcre the financial investments of the Company. The restriction was applied without adjustment of Company's statutory fund. On April 29,2004 the Cabinet of Ministers of Ukraine issued decree No. 550 to write-off unpaid natural gas. According to the decree gas supply and gasification companies will write-off liability following established procedures. The effect of such decree to the Companyis financial statements can not be estimated at the reporting date.

SC Ukrtransgaz According to the statement of President of Ukraine and the President of the Russian Federation on strategic cooperation in the gas industry from June 9,2002, the Cabinet of Ministers of Ukraine and the Government of the Russian Federation on October 7, 2002 have signed the Treaty on strategic cooperation in gas industry. Based on this treaty in October of 2002 NJSC NaftoGaz of Ukraine and JSC Gasprom entered into an agreement on establishment, on an equal footing, of International Consortium on administration and development of gas and transport network of Ukraine. At the meeting of the C:onsortium that took placc on August 26. 2003. it was decided that the first stage of investment phase would be represented by the project on expansion of the gas and transport network of Ukraine in the direction of Novopskov-Uzhgorod. The project is to be worked out till March 1, 2004. At present, the Consortium develops technical and economical documentation. the scheme of financing, organizational and legal terms of implementation of the project on construction of the gas pipeline segment Bogorodchany-Uzhgorod. In February, 2004, NJSC NaftoGaz of Ukraine made public the information regarding an increase of statutory fund of the Company by UAH 5 billion. The new amount of statutory fund of SC Ukrtransgaz comprises UAH 6,495 billion. SC Ukrtransgaz plans to spend this amount on an increase of capital investments in modernization and development of the gas and transport system of Ukraine in 2004.

JSC Ukrtmnsnafta On December 16, 2002 in Zagreb (Horvatiya) the governments of 6 countries including the Russian Federation, Belarussia, Ukraine, Slovak Republic, Ugorshchina, and Horvatiya signed an agreement on the integration of the Druzhba and Adriya oil pipelines. The Supremc Soviet of Ukraine has ratified the Agreement on cooperation in implementation of integration of the Druzhba and Adriya oil pipelines.

This Agreement is aimed at establishing a new trans-European route for transporting oil from fields in the Russian Federation to the Howatian deep-sea port Omishal. The additional guarantied volume of oil transportation at the first stage will amount to 5 million tons a year with a step-by-step increase of transportation to 10, then 15 million tons of oil per year. Reservoir construction of 75 ths. cubic meters holding capacity is performed at Brody pipeline in order to extend storage plants, to bring the holding capacity up to the required one within the framework of the Odesa-Brody and Druzhba-Adria project realization. Reservoir steel erection is being currently completed, and water testing procedures are being prepared. The works are performed in line with the scheduled time and completion in August 2004.

F-101 NATIONAL JOINT STOCK COMPANY NAlTOGAZ OF UKRAINE Consolidated Financial Statements for the year ended December 31,2003 (Thousands of UAH)

SC Gas of Ukraine In 2004 the Gas of Ukraine developed a policy of step-by-step increases for gas prices. Prices for gas sold to industrial enterprises from February 1,2004, are planned to be increased by 3-6%. In December 2003 the Ministry of fuel and energy and the National Commission for Electrical Energy Regulation assigned a task group for analysis of the practicability of tariffs increase in 2004 and working out appropriate recommendations. With its Order No. 279 issued 30.03.04 the NCER has approved tariffs for natural gas supplied to industrial consumers in the amount of UAH 310,OO for 1 thousand cubic metersof gas excluding transportation tariff and value added tax. These tariffs are valid from 01.04.04 to 31.03.05. NCER has not changed price’ limits for gas sold to public, budget organizations and heat-and-power enterprises for 2004. NJSC NaftoGaz of Ukraine has submitted to NCER a project for natural gas price’ increases. It is planned to increase the price’ limits for industrial companies up to 323 UAH per one thousand cubic meters, starting from May 1, 2004.

Supplementary information on gas, natural gas liquids and oil exploration As of December 31,2003, an appraisal of gas and gas condensate reserve quantities was performed by an independent appraiser, Miller and Lents Ltd. This appraisal was performed in accordance with the Standards of the Society of Petroleum Engineers Inc. and World Petroleum Congresses. The independent appraisal of gas and gas condensate reserves was performed volumetrically based on the isopach maps and reservoir parameters as assessed by the Company’s management. While perfonning the appraisal of oil and gas reserves, the independent appraiser has covered six oil and gas fields out of eighteen. These appraised fields account for over 80% of thc Company’s oil and gas reserves. For determining total oil and gas reserves, the management of the Company has extrapolated the average difference between thc Conipany‘s data and the rcsults of independent appraisal of six fields to the remaining twelve ficlds that were not covered by the appraisal.

Reserve quantity information Proved reserves are the estimated quantities of gas, natural gas liquids and oil reserves, which geological and engineering data demonstrate will be recoverable with reasonable certainty in future years known from reservoirs under existing economic and operating conditions. Proved reserves do not include additional quantities of gas and oil reserves that may result from extensions of currently proved areas or from applying secondary or tertiary recovery processes not yet tested and determined to be economic. Proved developed reserves are the quantities of reserves expected to be recovered through existing wells with existing equipment and operating methods. Rescnes - net, under infomation provided by Rwwes - net, reddated independent oppdsers proportiondy Total Oil and Oil aud Oil aud condeospte, condemate, condensate, million of Gps, billion million of Gps. billion million of Gly billion Resene catcgoty barrels cubic meters barrtls mbic meters barrels mbic metem Proved developed performing ...... 163.2 234.1 32.6 46.8 195.8 280.9 Proved developed non-performing ...... 14.1 9.9 2.8 2.0 16.9 11.9 Proved non-performing ... 10.5 20.3 2.1 4.1 12.6 24.4 Total proved ...... 187.8 2a.3 37.6 52.9 225.4 317.2

F-102 INDEX TO THE NON-CONSOLIDATED FINANCIAL STATEMENTS OF NJSC NAFTOGAZ

Non-consolidated Financial Statements for the year ended December 31. 2002 ...... G-2 Independent Auditor's Report ...... G-3 Balance Sheet as of 31 December 2002 and 2001 ...... G-5 Income Statement for the years ended 3 1 December 2002 and 2001 ...... G-6 Statement of Changes in Equity for the years ended 31 December 2002 and 2001 ...... G-7 Cash flow Statement for the years ended 31 December 2002 and 2001 ...... G-8 Notes to financial statements ...... G-9

Non-consolidated Financial Statements for the year ended December 31. 2003 ...... G-36 Independent Auditor's Report ...... G-37 Balance Sheet as of 3 1 December 2003 and 2002 ...... G-38 Income Statement for the years ended 31 December 2003 and 2002 ...... G-39 Statement of Changes in Equity for the years ended 31 December 2003 and 2002 ...... G-40 Cash flow Statement for the years ended 31 December 2003 and 2002 ...... G-41 Notes to financial statements ...... G-42

G-1 NJSC Naftogaz of Ukraine Non-Consolidated financial statements

For the year ended December 31,2002

Together with the Auditors’ report

G-2 Translated from the original Ukrainian text

Independent Auditors’ Report

To the Shareholders of National Joint-stock Company NaftoGas of Ukraine

1. We have performed an audit of accompanying balance sheet for headquarters of NJSC NaRoGas of Ukraine (hereinafter referred to as the Company) as of December 3 1,2002, and corresponding consolidated income statement, statement of changes in equity, cash flow statement of for the year then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

2. Except as discussed in the paragraphs 3 and 4, we conducted our audit in accordance with Inter- national Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3. We did not observe the counting of the physical inventories and fixed assets since we were initially engaged as auditors for the Company in July 2003. We were not able to determine necessary adjustments to operating results since these assets are a part of process of operating results calculation.

4. The Company has accounts payable to the Ministry of Finance of Ukraine amounting to 625,366 ths. UAH incurred in 1995 and was transferred when the Company was established. This debt is not confirmed neither by supporting documents, not by reconciliation acts with the Ministry of Finance. We were not able to obtain adequate evidences to form our opinion as to this debt at December 3 1,2002.

5. In our opinion, except for the effect on the financial statements of the matters referred to in the preceding paragraphs the financial statements present fairly, in all material aspects, the financial position of the Company as of December 31, 2002, and of its operating results, cash flows and changes in equity for the year then ended in accordance with International Financial Reporting Standards.

G-3 6. We would like to draw the attention of the users of these statements to the fact that the Company has prepared consolidated financial statements for nine enterprises of the group. Consolidated financial statements are a separate document.

The Company has reconciled accounts payable to JSC Gasprom for utilized gas and at the reporting date the Company does not have developed agreed procedures for repayment of these payable~.

Kyiv, June 18,2004

ED0 Balance-Audit

Managing Partner of International Partner BDO Balance-Audit

Auditor’s certificate CPA

Ng 000046, A

Sergiy Balchenko Soren D.K. Sorensen

G-4 Headquarters NJSC NAF'I'OGAS OF UKRAINE Balance Sheet For the ycars endcd December 31,2002 and 2001

1000' T JATT)

Current assets Cash and cash equivalents 5 98,223 2,072 Accounts rcceivable from related parties, net 6 7,717,237 7,042,882 Accounts rcccivable and notes, net 7 1,633,698 1,764,43 1 Jnventories 8 2,336,O 10 739,662 Othcr current assets 9 1,148,379 1,203,130 Total current assets 12,933,547 10,752,177 Non-current assets Long-term accounts receivablo, nct 52 1,065 1,074,685 Intangible assets 3,487 36,962 Property, plant and equipment, residual value 10 122,617 1O0,3 19 Long-term financial iiivcstinents 11 24,087,571 22,786,057 Deferred tax assets 12 2,006,333 2,430,3 13 Total non-current assets 26,741,073 26,428,336 . Total assets 39,674,620 37,180,513

.. . ~ LIABI1,l'rIES iiND EQUITY Cirrrcnt liabilities Accounts payable to related partics 6 3,269,347 4,670,597 Accounts payable and othcr liabilities 13 15,633,874 15,106,864 Tax liabilitics 14 6,080,796 3,027,120 Other cuirent liabilities 596,174 1,390,996 Total current liabilities 25,580,191 24,195,577 Long-term liabilities Other long-term liabilities 625,366 1,747,182 Long-term bank loans and financial liabilities 101,728 184,237 Total long-term liabilities 727,094 1,931,419 Provision for non-reconsiled payables to JSC: Gasproin 948,229 947,623 Equity 15 Share capilal 5,564,714 5,564,714 Reserves and accumulated profit 16 6,854,392 4,541,180 Total equity 12,419,106 10,105,894 -. Total liabilities and equity 39,674,620 37,180,513

Director

Chief Accountant

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Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

List of Acronyms

Acronym Full name JSC Joint-stock Company SJSC State Joint-stock Company sc Subsidiary Company CMU Cabinet of Ministers of Ukraine IFRSB International Financial Reporting Standards Board IAS International Accounting Standards IFRS International Financial Reporting Standards NJSC NaftoGas of Ukraine National Joint-stock Company NafroGas of Ukraine NBU National Bank of Ukraine NCER National Commission of Electrical Energy Regulation UAS Ukrainian Accounting Standards VAT Value Added Tax SIC Standard Interpretation Committee

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Accompanying nota and basic accounting principles are the integral pan of thefinancial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

1. General Information on NJSC NaftoGas of Ukraine

National Joint-stock Company NaftoGas of Ukraine (hereinafter, the Company) was established in accordance with the Ukrainian President Decree dated February 25, 1998 Reform of Oil and Gas Industry in Ukraine and resolution of Cabinet of Ministers of Ukraine issued in May 25, 1998 In- corporation of National Joint-Stock Company NaftoGas of Ukraine.

Company activities listed in the Statute: Oil production; Natural gas production; Natural gas processing; Pipeline transport of general use; State external trade.

List of companies by types of activities, included into the Company: 1. oil and gas production - SC Ukrgasproduction, SC Chomomomaftagas, JSC UkrnaRa 2. oil transit - JSC Ukrtransnafia; 3. gas transit - SC Ukrtransgas, SJSC Ukrspetstransgas; 4. gas supply SC Gas of Ukraine; 5. oil processing, supply, construction and servicing companies - JSC Azmol, SC Gas of Ukraine, SC Ukrnaftogaskomplect, SC Budivelnik and other.

Given financial statements are not consolidated with respect to the whole structure NJSCNaftoGas of Ukraine. These financial statements present reporting of the NJSC NaftoGas of Ukraine as parent Company and centralized accounting center, which accounts for all gas sales and purchases, its transportation and other operations.

Bellow there are principal activities performed by the Company in 2002. Gas was purchased in accordance with purchase-sale agreements (contracts) with:

0 State trade Corporation Turkmennaftogas; a SC Ukrgasproduction; ITEM International Energy LLC; a JSC Gasprom, in part of gas purchase as payment for the gas transit through Ukrainian territory.

Gas sales were performed by the NJSC NaftoGas of Ukraine to: a SC Trade House Gas of Ukraine (SC Gas of Ukraine) under the agreement for imported and own produced natural gas; 0 ITEM International Energy LLC; 0 Winterhall Erdgas Handelhouse Zug AG.

Transit, where NJSC Nafiogas Ukraine acted as executer was performed under the agreement with JSC Gasprom on amounts and terms of gas transit through Ukrainian territory and gas supply in Ukraine in 2002.

Transit, where the NJSC NaftoGas of Ukraine acted as customer, was performed in accordance with the agreement for natural gas transit through Ukrainian territory with SC Uldransgas.

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Accompanying nota and basic accounting principles arc the integral part of these financial statements Headquarters NJSC “TOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Corporative structure of NJSC NaftoGas of Ukraine can be presented in the following manner. As of 31.12.2002 NJSC NaftoGas of Ukraine held corporative rights (shares, stocks) for about 100 companies. All enterprises in whch to NJSC NaftoGas of Ukraine belongs any portion of shares can be divided into 5 groups.

1. First group: subsidiaries of NJSC NafioGas of Ukraine whch are fully owned by NJSC NaRo- Gas of Ukraine. Share in capital SC Kurortnaftogas 100 SC Nafiogas servicing 100 SC Ukrgasproduction 100 SC Ukrnafiogaskomplekt 100 SC Gas of Ukraine 100 SC Ukttransgas 100 SC Naftogasbezpeka 100 SC Budivelnyk 100 SC PSP NJSC Naftogas 100

2. Second group: other enterprises in which 100% of corporate rights belong to NJSC NaftoGas of Ukraine.

Share in capital JSC Azmol IO0 SJSC Ukrtransnafta 100 JSC Ukrspetstransgas 100 SJSC Chernomomaftogas 100

3. Third group: regional oblgases (miskgases) in which more than 50% of shares belong to NJSC NaftoGas of Ukraine.

Share in capital JSC Berezhanygas 5 1,04 JSC Gadyachgas 5 1,OO JSC Dnipropetrovskgas 5 1,OO JSC Donetskmiskgas 51,OO JSC Kirovogradgas 5 1,OO JSC Kremenetsgas 5 1,OO JSC Kremenchuggas 5 1,OO JSC Lubnygas 5 1,OO JSC Luganskgas 5 1,OO

G-l 1 Accompanying not- and baciic accounting principles are the integral part of thefinancial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

JSC Temopolgasbud 5 1,OO JSC Tysmenytsyagas 51,OO JSC Cherkasygas 5 1,OO JSC Terebovlyagas 50,98 JSC Zaporizhgas 50,00+1 share JSC Ivanofrankivskgas 50,00+1 share JSC Melitopolgas 50,00+1 share JSC Mykolaivgas 50,00+1 share JSC Poltavagas 5 1,OO JSC Sumygas 50,79 JSC Sevastopolgas 50,00+1 share

4. Fourth group: other enterprises in which more than 50% of shares belong to NJSC NafioGas of Ukraine.

Share in capital JSC Notes and settlement center of NJSC NaftoGas of Ukraine 80,OO

JSC Ozgas 52,OO JSC Energy and fuel of Ukraine 51 .no JSC Ukrnafta 50,00+1 share JSC Ukrainian gas and energy company 50,OO

5. Fifth group: regional oblgases (miskgases) and other enterprises in which less than 50% of shares belong to NJSC NafioGas of Ukraine.

Share in capital JSC Krymgas 48.99 JSC Umangas 40.30 JSC Ukragaszbut 40.00 JSC Zakarpattyagasbud 39.02 JSC Donetskoblgas 38.28 JSC Chemigivgas 38.25 JSC Gastranzit 37.00 JSC Devon 36.38 JSC Zboribgas 35.97 Finances and Credit CB Ltd. 35.00 JSC Rivnensk beverages plant 34.84 JSC Kyivoblgas 33.24 JSC Rivnegas 32.60 JSC Zbarazhgas 32.59 JSC Monostyrskgas 30.97 JSC Temopilmiskgas 29.96 JSC Chortkivgas 27.70 JSC Lvivgas 27.55 JSC Shepetivkagas 27.00 G-12

Accompanying notes and basic sccaunting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

JSC Pidvolochiskgas 26.98 JSC Zalishchykygas 26.5 1 JSC Hmelnytskgas 26.00 JSC Ukrnaftogasinvest 26.00 JSC Ternopilgas 25.71 JSB Ukrgasprombank 24.44 JSB Ukrgasbank 24.04 JSC Volyngas 23.42 JSC Korostyshivgas 22.00 JSC Hersongas 20.83 JSC Chernivtsigas 20.40 JSC Uktbudtransgas 20.00 JSC Uktgasprylad 20.00 JSC Odesagas 19.90 JSC Ukrfraggas 18.54 JSC Harkivgas 17.70 JSC Kyivpropangas 17.06 JSC Zhitomyrgas 15.86 JSC Last 15.00 JSC Donetskmiskgas 12.54 Megabank SUEB 5.77 JSC Shlumberzhe Ukrgas Meters Company 11.17 JSC Harkivmiskgas 9.91 JKX Oil & Gas pls. 9.09 JSB Brokbussinessbank 3.13 JSC Ukrnaftogasbud 7.04 JSC Knvorizhgas 7.01 JSC Zakarpatgas 6.34 JSC Uhaftogastechnology 5.00 JSC Krymnaftogaspostach 5.00 JSC Dnestr SKI3 2.9 JSC Mdrs 3.00 JSB Prykarpattya 2.19 JSC Shebelynska voda 1.68 JSC Mykyyvkagas 1.62 Energy 1.53 JSC Ukrnaftoterm 1.39 JSC Dniprogas 1.17 JSB AutoKrazBank 0.61 JSC Galytska SK 0.82 JSC Universal development and partnership bank 0.16 JSC Zaporizhkoks 0.1 1

Establishment of Tarqfs

NJSC NaftoGas of Ukraine is a natural monopolist of oil and gas complex of Ukraine. Therefore, the pricing policy of the Company is regulated by the decisions of Ukrainian Government and the

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orders of NJSC NaftoGas of Ukraine.

The orders of NJSC NaRoGas of Ukraine confirm natural gas sale prices to be applied by the enterprises of the Company. Definition of natural gas sale prices is carried out based on natural gas intake and distribution balance with NJSC NaRoGas of Ukraine, on the assumption of the level of natural gas purchasing price depending on gas origin (own production, received for transit services, purchased additionally).

In accordance with the authorities provided by the decision of Cabinet of Ministers of Ukraine dated 15.12.1996 #1548 ,,Identification of capacities of executive bodies and local executive boards as to regulation of prices (tariffs)”, establishment of boundary natural gas price levels for population, budget institutions, municipal heat and power engineering enterprises, as well as natural gas transportation and supply tariffs, is carried out by the National Commission of Electrical Energy Regulation. In addition, National Commission of Electrical Energy Regulation establishes boundary price level for natural gas supplied by NJSC NaftoGas of Ukraine for industrial consumer as stipulated by the decision of Cabinet of Ministers of Ukraine dated 27.12.2001 #1729,,The order of provision of national economy branches and population with natural gas”.

2. Operating Environment in Ukraine

In recent years, Ukraine has undergone substantial political, economic and social change. As an emerging market, Ukraine does not possess the well-developed business infrastructure that would generally exist in a more mature free market economy. As a result, operations carried out in Ukraine involve significant risks, which are not typically associated with those in developed markets.

Future economic stability and growth will be dependent to a large extend on the efficacy of economic measures taken by the Government, as well as development of legislation and political situation.

Future political and economical instability could subject the Company to unpredictable changes in the basic infrastructure under which it currently carries out its operations. Uncertainties regarding the political, legal, tax or regulatory environment, including the potential for adverse changes in any of these factors could significantly affect the Company’s ability to operate commercially.

3. Basis of Presentation General

Consolidated financial statements of NJSC NaftoGas of Ukraine include the balance sheet and the related income statement, cash flow statement and statement of changes in equity. These financial statements have been prepared in accordance with the requirements of International Financial Reporting Standards (further - IFRS), issued by the International Financial Reporting Standards Board (further - IFRSB) and Interpretations issued by the Standing Interpretation Committee (further - SIC).

The Company maintains its accounting books and records in the Ukrainian hryvnia (UAH) based on Ukrainian Accounting Standards (UAS). The accompanying financial statements are based on the Company’s statutory books and records, with adjustments and reclassifications for the purposes of fair presentation in accordance with IFRS.

The fmancial statements were prepared based on historical cost using accrual basis and presented in

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Accompnyiny not= and basic accounting principles arc the integral pari of thefinancial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

thousands of Ukrainian hryvnia, if not otherwise stated. The accounting policy chosen under each IAS permitting to choose the accounting policy is disclosed in corresponding sections of these Notes.

These financial statements were prepared according to the requirements of International Financial Reporting Standards effective for financial statements for the year ended December 3 1,2002.

The Note 26 presents the reconciliation between reserves and accumulated profit stated in the Company’s accounting registers prepared in accordance with the legislative requirements and IFRS reserves and retained earnings as at December 3 1,2002 and 2001.

The Company maintains its records and presents its transactions and other events not only in accordance with their legal form, but also according to their economic substance, therefore, the substance of transactions or other circumstances and events not always complies with their legal form.

Preparation of financial statements requires the management to make certain assessments and assumptions that implement the reflection of assets and liabilities in the reporting and information disclosure of the potential assets and liabilities at the balance sheet date. Actual results might differ from the current assessments. These assessments are periodically reviewed and should an adjustment be needed, such adjustments are reflected in the section of financial results for the period when they became known. Measurement and Presentation Currencies The Company keeps its records and presents the statements in Ukrainian hryvnia in accordance with UAS. The Company established measurement and presentation currencies in accordance with SIC 19 “Reporting currency - measurement and presentation of financial statements under lFRS 21 and FRS 29”. Based on economical substance of transactions and conditions of operation, the Company considers hryvnia as measurement and presentation currency. Thus, transactions in currencies other than hryvnia are considered as transactions in foreign currencies.

Going Concern Assumption

The Group will continue to be affected, for the foreseeable future, by the country’s unstable economy. As a result, there are significant uncertainties that may affect future operations, the recoverability of the Group’s assets, and the ability of the Group to maintain or pay its debts as they mature.

The Company’s financial statements have been presented on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments of recorded asset amounts that might result should the Company either be unable to continue as a going concern or if the Company was to dispose of assets outside the normal course of operating plan.

Reclassification

To bring the figures for the previous period in conformity with the data presentation adopted in current reporting period, the Company performed reclassification of certain respective figures.

Consolidution Principles Including Subsidiuries and Associates

These financial statements are prepared for headquarters NJSC NafioGas of Ukraine and are not consolidated under IFRS 27 Consolidated Financial Statements and Accounting for Investments in

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Accompanying notes and basic accounting principles are the integral pari of thefinancial statements Headquarters NJSC NAFTOGAS OF UKRALNE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Subsidiaries. These statements were prepared by headquarters NJSC NaRoGas of Ukraine for consolidation purposes.

4. Basic Accounting Principles

Cash and Cash Equivalents

Cash include cash on hand and cash with bank accounts. Cash equivalents are liquid investment easily converted into known amount of cash with payment periods of three months or less. There is low risk with respect to their cost changes.

Financial Instruments

Financial assets and liabilities carried on the balance sheet include cash and cash equivalents, accounts receivable and payable, other liabilities and loans. The accounting policies for recognition and measurement of these items are disclosed in the respective sections of these Notes. Financial instruments are classified as liabilities or capital in accordance with the contractual obligations. Interest, dividends, gains and losses relating to the financial instrument classified as liabilities are reported as expenses or income. Payments to the owners of financial instruments, included into capital are reflected directly through capital. Financial instruments are presented as offset, if the Company is entitled to account and intends to realize it on the basis of offset balance or to sale its assets together with decrease of its liabilities.

During 2002 the Company did not use any financial derivatives, interest swaps and forward contracts in order to reduce currency risks.

Accounts Receivable

Current accounts receivable are stated at net realizable value which is calculated by deduction of provision for doubtful accounts from initial accounts receivable. Provision for doubtful accounts is defermined by the method of periodization of accounts receivable, under which to each group of ' receivables certain per cent of doubtful debt is applied.

Promissory Notes Promissory notes are stated at face value, net of provision for doubtful amounts. Notes with a maturity date of one-year or more after the balance sheet date are classified as long-term assets. Such promissory notes are non-interest bearing and they are stated at fair value less provision.

Promissory notes issued to suppliers are stated at face value.

Znven to ries Inventories include industrial reserves of gas, other goods and materials.

Inventories are reflected in the balance sheet at the least of two evaluations - original (initial) cost or net realizable value. Disposal of inventories is carried out under identified cost method.

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Accompanying notes and basic accounting principles are the integral part of these financial statements ~~ Headquarters NJSC NAFTOGAS OF &E NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Most inventories are comprised by gas kept in underground storage facilities of gas of SC Ukrtransgas.

Provision for obsolete and defected inventories has not been formed.

Property, Plant and Equipment Property, plant and equipment are stated at indexed less accumulated depreciation. The cost of property, plant and equipment comprises its purchase prise, including non-refundable purchase taxes, and any directly attributed costs of bringing the asset to its working condition and location for intended use. Replacements and improvements, which materially extend the useful lives of the assets, are capitalised, while routine maintenance, repairs and renovations costs are expensed in the period when such costs are incurred.

The Company keeps its records in national currency. Up to 1992 exchange rates were fixed by the Government and could not reflect actual market situation. According to the legislative requirements after the year 1991 companies had to perform statutory cost indexations of fixed assets, in order to further report the effect of inflationary process (in 1992, 1993, 1995 and 1996). Those inflation indices could not reflect real dynamics of currency exchange changes. In result application of such indices did not lead to revaluation of indicated fixed assets to their market value.

Therefore, in order to prepare IFRS financial statements fixed assets were recalculated in accordance with recalculation ratio, described in section ‘

Fixed assets are amortized from the date of their operation. Depreciation is accrued starting from the following month after the fixed assets are introduced into operation. Depreciation is accrued by straight-line method, applying the below stated terms of useful life period:

Buildings 50 years Machinery and equipment 1Oyears Transport facilities 10 years Other property, plant and equipment 5 years

Construction in progress includes construction expenses and capital investments.

Intangible Assets Intangible assets mainly comprise the cost of acquired software and rights for utilization of natural resources. After initial recognition intangible asset is stated at cost less any accumulated amortization and impairment loss.

Lease

Items of financial lease which pass to the Company substantial part of risks and income related to possession of leased assets are capitalized at the beginning of lease at the lesser of two costs - fair value of leased assets and discounted cost of minimum rent payment. Lease payments are divided between interest expenses and decrease of lease liabilities so that constant rate of unpaid liabilities could be reached. Capitalized lease assets are depreciated during the lesser of periods - expected useful life and lease period.

G-17 Accompanying nota and bmic accounting principles are the integral pan of thme financial statemenm Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Lease under which lessor retains significant part of risks and benefits from possession of leased assets is classified as operational. Operational lease payments included into current expenses under straight-line method during effective period of lease agreement.

Investments

The Company classifies its investments by the following categories: held for trading, held-to- maturity and available-for-sale. Investments made mainly for the purpose of generating a profit from short-term fluctuations in price are classified as held for trading and are included in current assets. Investments with fixed maturity that the management has the positive intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets. As of De- cember 31,2002 and 2001 the Company did not have investments of this type. Investments that are expected to be held by the enterprise for an indefinite period and that can be realized to maintain liquidity or as a result change of interest rate, currency exchange rate or prices at the equity market are classified as available-for-sale. These investments are recorded as non-current assets if the management of the Company does not have the positive intent to dispose of these investments during 12 months after balance sheet date, or for their disposal is not needed for replenishment of working capital. In other cases such investments are recognized as current assets. The Company classifies its investments at the moment of their acquisition and makes their regular review.

All sales and purchases of investments are recognized at the date of agreement which is when the Company accepted obligations on acquisition and sale of a financial asset. Contractual expenses are included in cost of purchase. In time, investments that are held for trading and the ones that are available-for-sale are stated in the balance sheet at fair value. Available-for-sale investments mostly comprise non-marketable securities for which it is not possible to receive current market quotations. For such investments fair value is determined based on market prices for similar assets or based on discounted cash flows of future periods.

Realized profits and losses from sales, and non-realized profits and losses resulted from change in fair value of available-for-sale and held for trading investments are recognized as profit or loss for the period of their origination.

Accounting for Investments in Associates

Under FRS 28 Accounting for Investments in Associates, an investment,in an associate should be accounted for in consolidated financial statements under the equity method. A company is considered associated if the Company owns not less than 20% of shares of an investee.

Accounts Puyuble Accounts payable are stated at cost which is fair value of compensation to be paid in future for goods, work and services regardless of whether the Company was billed or not.

Payables, which mature more than in one year after balance sheet date, are reported in long-term liabilities. Long-term liabilities consist mainly of restructured budget tax liabilities and payables to Ministry of Finance of Ukraine. Loufls

Loans are initially assessed at fair value of received amounts (applying market interest rates for similar instruments if they considerably differ from interest rate for received loan). In future loans are assessed at depreciated cost applying method of effective interest, difference between fair value of received amounts and amount of loan repayment is reflected as interest payable during the credit period. Expenses on servicing of loan proceeds are charged to expenses as they occur.

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Accompanying note and basic accounting principla are the integral part of thefinancial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Retirement and Other Benefit Obligations

The Company does not have any pension arrangements separated from the state pension system of Ukraine, which requires a current contribution from the employer calculated as a percentage of gross salary payments; such expense is charged to the income statement in the period the related compensation is earned by employee. In addition, the Group does not have material post-retirement benefits or significant other compensated benefits requiring accrual. Revenue Recognition

Sales income is recognized, when products are supplied to the customers and the ownership is transferred. Income from sales of products is reported in the financial statements net of value-added tax (VAT), excise and payment for transit in the Ukrainian territory. Income from sales of gas transportation services is recognized, when the relevant services are rendered and confirmed by gas supply to the owner or customer in accordance with the agreement. Revenue is recognized at fair value of payment received or subject to receipt. When the fair value of received payment can not be measured reliably sales proceeds are assessed at the fair value of sold goods or services. Joint Activity

Headquarters NJSC NaRoGas of Ukraine as a separate subdivision are not engaged in the joint activity. Research and Development Research and development costs are expensed as incurred. Costs of projects development are recognized as intangible assets (with other long-term assets) when they are expected to bring future commercial benefits. Other development costs are expensed as they occur. However, development costs that were initially expensed are not capitalized in succeeding periods, even if they conform to the conditions of asset recognition. Foreign Currency Trarrsactions

Foreign currency transactions are reflected in reporting currency through recalculation of foreign currency amount at the exchange rate in force at the date of the transaction. Financial result from exchange differences originating from recalculation of monetary items at the rates different from the accounted ones are recognized in the period of their origination. Income Tax The current income tax charge is calculated in accordance with Ukrainian tax regulations and is based on the financial results reported in the income statement of the Company prepared under UAS after adjustments for tax purposes.

The income tax accrual should be based on the annual profit and must consider deferred taxation. Deferred taxes are accrued through the balance sheet liability method. Amount of deferred taxes reflects net tax effect of temporary differences between the carrying amount of assets and liabilities for the accounting purposes and cost considered for the tax accounting. Amount of assets and liabilities from the deferred taxation is calculated on the basis of expected tax rate to be applied to the income subject to taxation in years when the amount of temporary differences might be refunded or realized. valuation of assets and liabilities from the deferred taxation reflects possible tax consequences originating from the expected at the balance sheet date probability to refund and realize the cost of such assets and liabilities.

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Accompanying nata and bmic accounting principles are the integral pan of these financial statemants Headquarters NJSC NAFTOGAS OF UKRATNE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Deferred tax assets are recognized only when there is a probability that the future amounts of taxable income will be sufficient to realize assets from the deferred taxation. The Company reevaluates non-recognized deferred tax assets at each balance-sheet date, as well as the current cost of deferred tax assets. The Company recognizes previously not recognized asset only in portion when there is a probability to realize it against the future taxable income. And vice versa. The Company reduces book value of a deferred tax asset when there is a probability of complete or partial realization of the asset against the future income. In 2001 the Company has calculated deferred taxation for the first time and reported this operation in the financial statements as a change in accounting policy in statement of changes in equity capital. Application of Assessments Preparation of IAS financial statements requires the management to make certain assessments and assumptions that implement the reflection of assets and liabilities in the reporting and information disclosure of the potential assets and liabilities at the balance sheet date. Actual results might differ from the current assessments. These assessments are periodically reviewed and should an adjustment be needed, such adjustments are reflected in the section of financial results for the period when they became known. Contingencies Contingent liabilities are not reflected in the financial statements. The information on contingent liabilities is presented with the exception of cases, when the outflow of economical benefits is unlike1y. The Company has liabilities transferred by the Cabinet of Ministers of Ukraine under Yamburg agreement dated 19.03.1986, according to which Ukraine is liable after the USSR collapse. At the reporting date the Company makes stock-taking, assessment and reconciliation with the Cabinet of Ministers of Ukraine of liabilities to be incurred. Contingent assets are not reflected in the financial reporting. However, relevant information is presented whenever the probability of economical benefits is increased.

Past Periods Errors

Past periods errors are recognized in statement of changes in equity capital. They adjust accumulated profit or reserves of the related item. Subsequent Events Post-balance sheet events that provide additional information about the Company's position at the balance sheet date are reported in the financial statements. Post-balance sheet events that do not affect the financial position of the Company at stated date are disclosed in the notes to the financial statements when material. Segment Reporting

The main types of the Company's external sales are natural gas, gas condensate and processing products. A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service (or a group of related products or services) and that is subject to risks and returns that are different from those of other business segments. Factors that should be considered in determining business segments are internal organizational and management structures of the Company, as well as the system of its internal reporting (Note 16-17).

During the reporting period the Headquarters NJSC NaftoGas of Ukraine performed trade operations and general management of the companies' group.

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Accompanying not= and basic accounting principles arc the integral part of lhse financial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Explanatory Notes to Financial Statements

2. Cash and Cash Equivalents

Cash and cash equivalents as at December 1, 2002 included cash in national currency in the amount of 30,282 ths. UAH and cash with currency accounts (in US dollars and Russian Roubles) in translation into national currency amounting to 67,941 ths. UAH. As at December 3 1, 2001 cash and cash equivalents included respectively 561 ths. UAH and 1,511 ths. UAH.

3. Related Party Transactions

Related parties of the Company include entities that directly, r indirectly through ne or more intermediaries, control, or are controlled by, or are under common control of the Company and (or) the Company’s management. Such entities include:

0 SC Gas of Ukraine of NJSC NaftoGas of Ukraine (further - Gas of Ukraine); SC Ukrtransgas of NJSC NafloGas of Ukraine (further - Ukrtransgas);

SC Ukrgasproduction of NJSC NaftoGas of Ukraine (further - Ukrgasproduction); Other subsidiary companies and branches of NJSC NafioGas of Ukraine

The Company performs major transactions with related parties. During 2002 and 2001 these transactions included natural gas purchase from SC Ukrgasproduction, gas sales to SC Gas of Ukraine, gas transportation services to SC Ukrtransgas and other.

G-2 1 Accompnying notes and basic accounting principles are the integral pan of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Balance sheet accounts include the following balances of receivables associated with related parties' transactions:

(000' UGH) ~. Accounts receivable from related parties, net December December 31,2002 31,2001

SC Gas of Ukraine 1 1,960,056 11,567,247 Specific provision for doubtful debts (35,440) (324,259) Reduction in price of receivables due to investment assessment under the equity method (7,805,325) (8,467,328) SC Ukrtransgas 1,527,991 2,733,408 Specific provision for doubtful debts (25,856) SC Ukrgasproduction 100,058 53,244 Specific provision for doubtful debts (624) (23,196) JSC Dniepropetrovskgas 124,970 124,969 Specific provision for doubtful debts (32,200) (32,200) JSC Zaporizhgas 42,820 41,375 Specific provision for doubtful debts (5 7 155) (5,154) JSC Luganskgas 11 1,427 93,574 Specific provision for doubtful debts (1 11,427) (93,574) JSC Mikolayivgas 48,973 48,978 Reduction in price of receivables due to investment assessment under the equity method * (48,973) (48,978) Other related debtors 1,840,086 1,400,632 Total: 7,717,237 7,042,882

Balance of accounts receivable with SC Gas of Ukraine, SC ukrtransgas and SC Uhgasprodwtion accounts for non-reconciled receivables. The specific provision for doubtful debts has been accrued for the abovementioned receivables in the whole non-reconciled amount. Provisions were made due to investment assessment under the equity method with SC Gas of Ukraine and JSC Mikolayivgas.

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Accompenying nom and basic accounting principles arc the integral palof these financial stalements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Accounts payable to related parties include:

(000' UAH) Accounts payable to related companies 31,2002 31,2001

SC Ukrtransgas 487,632 2,524,315 SC Ukrgasproduction 779,156 1,120,410 SC Gas of Ukraine 354,077 600,198 JSC Dniepropetrovskgas 79 1 79 1 JSC Luganskgas 17,852 19,402 JSC Mikolayivgas 89 33,881 Other related parties 1,629,750 371,600 I Total: 3.269.347 I 4.670.597 1

Balances of accounts payable with SC Gas of Ukraine, SC Ukrtransgas and SC Ukrgasproduction and other related parties account for non-reconciled payables, which as at December 3 1, 2002 and 2001 comprise 174,172 ths. UAH and 232,974 respectively. When entering into sale agreements the enterprises of NJSC NaftoGas of Ukraine can apply special transfer prices different from those used during ordinary business activities.

7. Accounts Receivable and Promissory Notes, Net

As at December 3 1,2002 and 200 1 accounts receivable comprised of:

(000' UAH) Accounts receivable and promissory notes, net December December 31,2002 31,2001 Accounts receivable for goods, works, services 2,808,862 3,125,109 Promissory notes 768,528 623,276 Other current accounts receivable 1,426,226 1,598 Provision for doubtful debts (3,369,918) (1,985,552) I Total: I 1,633,698 I 1,764,431

G-23

Accompanying notes and basic accounting principles arc the integral part of these financial sraremmts Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS Por the year ended December 31,2002

8. Inventories

Carrying amount by separate classified groups includes:

Carrying amount by separate classified groups December December 31,2002 31,2001

Gas in underground gas-holders 2,086,376 692,45 1 Goods under commission agreements 30,204 30,204 Gas for Bulgargas 2,859 65 1

Other goods 216,571 ' 16,356 I Total: 2,336,010 I 739,662

(000' UAH) Other current assets December I Dge;rny 31,2002 Advances to suppliers 954,220 969,543 Future periods expenses 163 4 Accounts receivable on budget and non-budget settlements 13,801 4 Tax credit 233,550 Other current assets 180,195 28 Total: 1.148.379 1.203.1 29

G-24 Accompanying not= and basic accounting principles arc the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Detailed advances to suppliers are stated below:

(000' UAH) Advances to suppliers December December 31,2002 31,2001 ,-

Suppliers of goods for JSC Gasprom 829,048 826,505 Gas suppliers (other enterprises) 428,203 484,447 Suppliers of goods for gas received from Turkmenistan 58,476 54,745 Electric power 9,668 9,668 Gas storing services 1,553 1,553 Works and services 3 1,942 57 1 Suppliers of fixed assets and other low value items 14,828 4,441 Provision for doubtful debts (419,498) (41 2,387) Total: 954.220 969.543

10. Property, Plant and Equipment

As at December 3 1,2002 and 200 1 property, plant and equipment included:

(000' UAH) Buildings, Con- construc- Machines Property, plant and Trans- Other struc- tions and and equipment - historical port fixed tionin Total transmit- equip- cost means assets pro- ting facili- ment gress ties Cost as at 31.12.2001 18,928 3,252 323 19,677 74,554 116,734 Additions for a year 8,785 1,92 1 170 17,976 11,483 40,335 Disposals for a year (7,716) (573) (2,028) (10,317) Cost as at 31.12.2002 19,997 4,600 493 35,625 86,037 146,752 Accumulated depreciation Cost as at 31.12.2001 (8,411) (688) (31) (7,285) (16,415) Additions for a year (2,583) (682) (26) (5,075) (8,366) Disposals for a year 33 1 50 265 646 Cost as at 31.12.2002 (10,663) (1,320) (57) (12,095) (24,135)

Net value as at 31.12.2001 10,517 2,564 292 12,392 74,554 100,3 19 Net value as at 31.12.2002 9,334 3,280 436 23,531 86,037 122,617

During the reporting period all fixed assets of the company were pledged to the State Tax Inspec- torate. The Company has the opportunity of alienation of these assets only under agreement of the tax authority.

(3-25 Accompanying nota and basic accounting principle3 arc the integral pan of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

11. Long-term Financial Investments

(000' UAH) Long-term financial investments December December 31,2002 31,2001 SC Uhgasproduction 7,373,634 7,346,120 SC Gas of Ukraine SC Ukrtransgas 10,370,600 9,993,167 JSC UkrtransnaRa 3,088,462 2,420,905 JSC Zaporizhgas 33,446 35,549 JSC Mikolayivgas JSC Luganskgas JSC Chernomornaftogas 83 1,459 819,916 JSC Ukrnafta 1,937,730 1,770,748 JSC Dniepropetrovskgas 178,330 179,838 Shares on the security of EBRD 22,000 22,000 Other 25 1,910 197,814 Total 24,087,571 22,786,057

In accordance with IAS # 28 Accounting for Investments in Associates, investments in associates should be recognized in investor's consolidated financial statements under the equity method. The company is considered to be an associate, when an investor owns not less than 20 % of an investee's shares. Some enterprises (about 20% from assets of all financial investments in accordance with UAS) have not prepared financial statements based on IFRS and they were not revalued in the Company's accounting.

SC Gas of Ukraine, JSC Mikolayivgas, JSC Luganskgas have negative value of capital, therefore, they are accounted for at zero value.

12. Deferred Tax Assets

Deferred taxation is calculated for all temporary differences by the balance sheet liability method, applying active regulation tax rate of 30%.

Differences between IAS and Ukrainian tax regulations lead to certain temporary differences between financial and tax accounting data.

Deferred income tax Barter 998,737 Advances received 80,724 1,080 Advences paid (2,371) 5,219 Provision for doubtful debts 953,435 1,253,781 Temporary differences related to depreciation 2,4 14 Other differences ti(12,874) (20,923) Deferred expenses (1 3,732) 276,667 Work in progress Total 2.006.333 ~ ~

G-26

Accompanying note and basic accounting principles are the integral pfdl of thefinancial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

~__

13. Accounts Payable and Other Indebtedness

As at December 3 1,2002 and 2001 accounts payable and other indebtedness included:

(000' UAH) Accounts payable and other indebtedness December December 31,2002 31,2001 Accounts payable on opemting activities 14,474,235 14,556,036 Short-term bank IO~S 530,583 3 15,442 Promissory notes issued 231,656 23 1,656 Advances received 397,400 3,730 Total: 15,633,874 15,106,864

Accounts payable relating to operating activities include the following:

(000' UAH) Accounts payable relating to operating activities December December 31,2002 31,2001 JSC Gazprom 7,693,628 7,644,717 Company Turkmennaftagas 3,300,791 2,568,22 1 Itera LLC 1,742,646 2,457,8 17 Other creditors 1,737,170 1,885,28 1 Total: I 14,474,235 I 14,556,036

14. Tax Liabilities

As at December 3 1, 2002 and 200 1 tax liabilities include:

(000' UAH) I Tax liabilities I December I December 31,2002 31,2001 Budget settlements 5,945,829 2,729,169 Non-budget settlements 297,829 Social insurance I 1347723244 I 122 I Total: I 6,080,796 I 3,027,120

G-27 Accompanying not- and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Liabilities due to budget includes:

(0001 UAH) udget settlements December December 31,2002 31,2001 VAT satlements 2,42 1,265 1,284,274 Gas transit in Ukraine 2,148,402 1,266,841 Income tax 1,348,656 90,941 Payroll tax 249 91 Other tax liabilities 27,257 87,022 Total: 5,945,829 2,729,169

15. Provision for non-reconciled payables to JSC Gasprom

Payables to JSC Gasprom were finally reconciled in 2001 and comprise 1,442,808 ths. USD. There is no developed and agreed mechanizm as to repayment of these payables at the reporting date. Besides, the Company has non-reconciled amount of liabilities for which a provision was formed in the amount of 178 847 495,13 US dollars.

16. Equity Capital

Statutory Capital

In accordance with the Company's Statute and the related amendments statutory capital of the Company is equal to 5,564,714 ths. UAH, that includes 5,564,714 of ordinary shares with the nominal value 1000 UAH per each share. Under the Statute the founder of the Company is a State in the person of the Cabinet of Ministers of Ukraine. As at 31.12.2000 statutory capital of the Company was fully made. The portion of the state in the statutory capital of the Company comprises 100%.

Reserves

Reserves contain fixed assets indexation and revaluation, as well as retained earnings of past periods of the Company and its predecessor Ukrgasprom, which were created at the balance sheet dates.

(3-28

Accompanying note and basic accounting principles arc the integral part of thesc financial statements ~ _. Headquarters NJSC "TOGAS OF UKFMNE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

17. Sales Income 000' 1 JAHh Income from sales of products (goods, works, services) 2002 2001

Gas sales 11,876,878 10,584,719 Sales of gas transit services 2,977,065 7,678,708 Sales of Turkmenian goods 2,916,174 1,862,583 Sales of services related to internal transit 6,070,514 1,785 Income from other sales 60,892 Income from sales of products (goods,works, senices) 23,901,523 20,127,795 VAT (1,922,163) (1,779,365) Gas transit payment (2,172,330) (2,028,916) Net income from sales of products (goods, works, services) 19,807,030 16,319,514

In accordance with Ukrainian legislation and decisions of CMU during the reporting period zero rate of value added tax for gas sales in Ukraine acquired from Russian, Turkmenian and Uzbek suppliers, is effective in Ukraine. Value added tax is not accrued for export transactions.

18. Cost of Sales

Cost of sales 2002 2001

Sold gas 15,152,402 14,045,490 Transit services 2,05 1,461 1,994,323 Sold goods 1,213,907 778,726 Sold works and services 168,341 190,466 Transit services of Moldovagas 2,804 1,097 Total: 18,588,915 17,O 10,102

(3-29 Accompanying notes and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCN STATEMENTS For the year ended December 31,2002

19. Other Operating Income

Other operating income 2002 2001

~ Sales of foreign currency 250,553 16,736 Operating exchange rate hfference 24,047 928,376 Accounts payable written-off 4,317 173,978 Operating lease of assets 121 84 Sales of materials 1,189 19,285 Sales of securities and financial investments 93,876 Received fines, penalties and forfeits 5,319 Other income fiom operating activities 188,829 290,077 Total: I 562,932 I 1,433,855

20. Other Operating Expenses

Other operating expenses 2002 2001 Cost of reralized foreign currency 25 1,853 16,699 Operating exchange difference 81,557 202,741 Recognized fines and penalties 3 1,782 1,869,847 Other payroll payments 5,061 I 9,342 Research and development 1,813 2,373 Other expenses of operating activities 465,133 226,775 Total: 837,199 2,327,777

21. Financial Income (Expenses)

Financial income is mostly write-up of long-term financial investments and other income and losses. Revaluation of long-term financial investments comprised 779,723 ths. UAH and 1,617,981 ths. UAH for 2002 and 2001 respectively,

22. Income Tax Expenses

Income tax expenses for 2002 included:

Income tax expenses 2002 2001 Current income tax expenses 528,236 79,967 Effect of temporary differences: not taxable (7 8 ,6 10) (1,23 9,72 1) taxable 502,590 (1,190,592) Total: 952,216 (2,350,346)

G-30

Accompanying nOts and besic accounting principles arc the integral part of these financial statemmu - ... Headquarters NJSC NAFTOGAS OF NOTES TO FINANCIAL,STATEMENTS For the year ended December 31,2002

Reconciliation of amounts of income tax expenses, as well as product received from multiplication of accounting income before taxation by applied tax rate for 2002 can be presented as follows:

Reconciliation 2002 Accounting income before taxation 3,436,088 Tax rate according to legislation 30% Theoretical income tax 1,030,826 Constant differences (78,6 10) Income tax expenses 952,216

23. Commitments and Contingencies

Taxation Framework

Ukraine currently has a number of laws related to various taxes and levies imposed by both state and local authorities. Applicable taxes include value added taxes, income tax, number of turnover based taxes, payrolls (social) taxes - together with others. Laws relating to these taxes are subject to frequent changes, they can contradict each other, and regulations are often unclear or non-existent and few precedents have been established. Often, differing opinions regarding legal interpretation exist both among and within government ministries and organizations (like the State Tax Admini- stration and its various inspectorates), thus creating uncertainties and areas of conflict. Tax declarations, together with other legal compliance areas (as examples, customs and currency control matters) are subject to review and investigation by a number of authorities, who are enabled by law to impose extremely severe fines, penalties and interest charges. These facts create a tax risk in kaine substantially more significant than typically found in countries with a more developed tax system.

Generally, tax declarations are subject to inspection for an indefinite period of time. However, in practice the risk of retroactive tax assessments and penalty charges decreases significantly after three years. The fact that a year has been reviewed does not close that year, or any declaration applicable to that year from further review.

The management believes that the Company's operations fully comply with the effective legislation, which regulates its activities, as well as that the Company accrued all related taxes. When there is an uncertainty with respect to the payable taxes, accrual is carried out on the assumption of the Company's management evaluation based on analysis of available information.

Legal Liabilities In the ordinary course of business, the Company is subject to legal actions and complaints. The Company's management believes that the maximum responsibility related to liabilities, if any, resulted from such actions and complaints, will not have material negative effect on financial position or results of the Company's future operations. Insurance The Company has insignificant insurance coverage related to obligatory insurance provided by the Ukrainian legislation. General liability insurance is not generally available in Ukraine at present.

G-3 1 Accompanying notes and basic accounting principles are the integral part of thefinancial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Social Liabilities

The Company participates in financing of construction and maintenance of housing facilities, medical, children's, educational and sanitary institutions, as well as in satisfaction of other social needs in the regions, where the Company operates. Thus, the Company significantly contributes to maintenance and perfection of local infrastructures and improvement of welfare of its employees.

24. Ukrainian Environment General In recent years, Ukraine has undergone substantial political and economic change. As an emerging market, Ukraine does not possess the well-developed business and regulatory intiastructure that would generally exist in a more mature free market economy. As a result, operations carried out in Ukraine involve significant risks, which are not typically associated with those in developed markets.

Economic Situation Since Independence in August 1991, the Ukrainian economy deteriorated dramatically until 1994, when reform programs were initiated to enable macroeconomic stabilization and structural reform.

However, economic activity continued to decline and progress was impeded further by the 1998 financial crisis in Russia, which had serious consequential effects on the Ukrainian economy. Ukraine was unable to fund its budget deficits and in 1999 and 2000 the Government rescheduled its domestic treasury bills and, in March 2000, was forced to restructure its foreign debt due for repayment in 2000 - 2001, to 2007.

Future economic stability and growth' will be dependent to a large extent on the efficacy of the fiscal, macroeconomic and structural measures taken by the Government.

Future economical instability can cause unpredictable changes in the basic infrastructure under which the Company currently carries out its operations, Uncertainties regarding the political, legal, tax or regulatory environment, including the potential for adverse changes in any of these factors could significantly affect the Company's ability to operate.

The Company will continue to be affected, for the foreseeable future, by the above factors.

25. Factors of Financial Risks

Currency Risk Transactions denominated in foreign currency do not have material effect on the Company's activity. Monetary items of assets and liabilities are also basically denominated in national currency. The Company did not enter into specific agreements with the purpose of exchange rate risk hedging due to immaterial effect on operating and financing activities. Interest Risk The Company mainly attracts short-term bank loans in national currency. The Company does not have a specific program related to the uncertainty of financial markets and aimed at minimization of potential negative consequences for the Company's financial results, since volumes of attracted loans are not material. The Company does not have substantial assets, which bring interest income.

(3-32

Accompnying note and basic accounting principles arc the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

Market Risk

Company’s sales depend on prices of natural gas and other carbohydrates. Decrease of gas prices may lead to reduction of net profit and cash inflows. If prices remain low for a long time it may cause decrease of exploration and extraction activities, as well as reduction of gas available for sale and processing, and, finally, may affect the ability of the Group to carry out its contractual obligations.

Credit Risk The highest risk of the Company relates to accounts receivable and promissory notes. The above risk is periodically assessed and taken into account during accrual of provision for doubtful debts. Major portion of receivables originated from related parties’ transactions; provision for this indebtedness is not accrued. Repayment of receivables by budget and municipal enterprises can depend on effect of the state authorities and other social and economic aspects. Not considering the above facts, the management does not believe that the Company is subject to a high risk of losses over already made provision for reduction of cost of accounts receivable. Liquidity Risk The Company’s task is balancing of continuous financing and flexibility in application of terms of credits granted by suppliers and banks. The Company analyses urgency of payables and plans its liquidity depending on expecting maturities of liabilities. In case of insufficient liquidity the Com- pany can apply both external sources of financing and related parties ones.

26. Going Concern Assumption

The Company will continue to be affected, for the foreseeable future, by the country’s unstable economy. As a result, there are significant uncertainties that may affect future operations, the recoverability of the Company’s assets, and the ability of the Company to maintain or pay its debts as they mature.

The Company operates in an unstable economic environment. Economic stability will be dependent to a large extent on the efficiency of the fiscal measures taken by the government. There is no clear idea as to the measures of the Ukrainian Government to be taken as a result of existing economic situation. It is not possible to predict the impact of financial crisis on the Company’s liquidity and income, including impact on its transactions with consumers and suppliers. Potential uncertainties associated with the economic situation, direct effect of which can not be determined at present, still exist. Financial statements do not include any adjustments that might exist as a result of such uncertainties. Such adjustments will be reported whenever they become known and evaluated.

(3-33 Accompanying nota and basic mounting principles are the integral pan of these financial statements

. Headquarters NJSC NAFTOGAS OF UKRAINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

25. Reconciliation between UAS and IAS

Reconciliation of statutory fund and reserves as at December 31, 2002 and 2001, as well as net profit for 2002 in accordance with UAS and IAS is presented below:

300' UAHI 2002 Statutory Reserves Net profit fund

Reporting in accordance with UAS 5,564,714 430,305 (361,681) (000' UAH) Total adjustments of 2001 13,185,773 (8,870,675) Additional accrual of depreciation according to (47) IAS Adjustment of provision for doubtful accounts receivable Write-up of financial investments 499,930 Correction of error related to recognition of (574,242) 1,587,888 fines and penalties with JSC Gazprom Other adjustments 921,618 Total adjustments 35,524 Reporting in accordance with IAS 12,611,531 (5,825,762) (000' UAH) I 5,564,714 13,041,836 (6,187,443)

000' UAH) 2001 Statutory Reserves Net profit fund

Reporting according to UAS (000' um 5,564,714 328.152 1668.859) Past periods adjustments 12,900,060 (9,355,406) Additional accrual of depreciation according to IAS (47) Provision for doubtful accounts receivable accrued (1,594,012) Correction of error related to recognition of fines and penalties with JSC Gazprom (947,623) Write-up of financial investments 136,982 1,628,743 Adjustments of payroll tax expenses 1,239,721 0t her adjustments 148,732 724,737 Total adjustments 13,185,774 (8,303,88 7) Reporting in accordance with IAS (000' UAH) 5,564,714 13,513,926 (8,972,746)

G-34 Accompanying notes and basic accounting principles arc the integral part of thcsc financial statemmts Headquarters NJSC NAFTOGAS OF WINE NOTES TO FINANCIAL STATEMENTS For the year ended December 31,2002

26. Subsequent Events

According to the agreement dated April 22,2004 the Company received short-term loan from ABN AMRO BANK N.V., London Branch in the amount of 200 million US dollars. FWposes of credit- ing are general needs. Credit interest will be comprised of the margin of 3.49 % per year and LI- BOR. The security for this credit is a settlement account with ABN AMRO BANK N.V., London Branch.

In accordance with the decision of State Property Fund of Ukraine alienation of JSC Azmol from the Company's financial investments was performed during the first quarter of 2004. Shares of JSC Azmol were the contribution into the statutory fund of NJSC NaftoGas of Ukraine. The alienation was performed without adjustments of the Company's statutory fund.

On April 29,2004 the Cabinet of Ministers took a decision # 550 on write-off of unpaid natural gas volumes. According to the decision gas supply and gasification enterprises should write-off indebtedness under the developed mechanism. The impact on the Company's financial statements can not be assessed as at the reporting date.

G-3s Accompanying nota and basic accounting principles arc the integral pan of these financial statements NJSC Naftogaz of Ukraine Non-Consolidated financial statements

For the year ended December 31,2003

Together with the Auditors’ report

G-36 Translated from the original Ukrainian text

Independent Auditors’ Report

To the Shareholders of National Joint-stock Company NaftoGas of Ukraine

1. We have performed an audit of accompanying balance sheet for headquarters of NJSC NaftoGas of Ukraine (hereinafter referred to as the Company) as of December 31,2003, and corresponding consolidated income statement, statement of changes in equity, cash flow statement of for the year then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

2. Except as discussed in the paragraphs 3 we conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3. The Company has accounts payable to the Ministry of Finance of Ukraine amounting to 625,366 ths. UAH incurred in 1995 and was transferred when the Company was established. This debt is not confirmed neither by supporting documents, not by reconciliation acts with the Ministry of Finance. We were not able to obtain adequate evidences to form our opinion as to this debt at December 31,2001.

4. In our opinion, except for the effect on the financial statements of the matters referred to in the preceding paragraphs the financial statements present fairly, in all material aspects, the financial position of the Company as of December 31, 2003, and of its operating results, cash flows and changes in equity for the year then ended in accordance with International Financial Reporting Standards.

5. We would like to draw the attention of the users of these statements to the fact that the Company has prepared consolidated financial statements for nine enterprises of the group. Consolidated financial statements are a separate document. The Company has reconciled accounts payable to JSC Gasprom for utilized gas and at the reporting date the Company does not have developed agreed procedures for repayment of these payables.

Kyiv, June 18,2004

BDO Balance-Audit

Managing Partner of International Partner BDO Balance-Audit

Auditor’s certificate CPA

N! 000046, A Sergiy Balchenko Soren D.K. Sorensen

G-37 Headquarters NJSC NAFTOGAS OF UKRAJNE Balance Sheet For the years ended December 31,2003 and 2002

Current assets Cash and cash equivalciits 5 1 18,042 98,223 Accounts receivable from related parties, net 6 8,815,737 7,717,237 Accounts receivablc and notes, net 7 1 ,OI 6,891 1,633,698 Inventories 8 1,079,743 2,336,010 Other current assets 9 1,215,875 1,148,379 Total current assets 13,146,288 12,933,541 Non-current assets Long-term accounts receivable, net 540,594 52 1,065 Intangible assets 3,785 3,487 Property, plant and equipment, residual value 10 174,385 122,617 Long-term financial invcstmeiits 11 47,496,342 24,087,571 Deferred tax assets 12 924,505 2,006,333 Total non-current assets 49,139,611 26,741,073

~ -_I.I------. Total assets 62,285,899 39,674,620 LIABIT,ITTES AND EQUITY Current liabilities Accounts payable to related parties 6 1,432,545 3,269,347 Accounts payable and other liabilities 13 15,110,220 15,633,874 Tax liabilities 14 5,672,656 6,080,796 Other current li ahi I i ti es 674,152 596,174 Total current liabilities 22,889,573 25,580,191 Long-term liabilities Other long-term liabilities 625,366 625,366 Long-term bank loans and financial liabilities 664,916 101,728 Total long-term liabilities 1,290,282 127,094 Provision for non-reconsiled payables to JSC Gasprom 948,068 948,229 Equity 15 Share capital 5,564,714 5,564,714 Reserves and accumulated profit 16 3 1,593,262 6,854,392 Total equity 37,157,976 12,419,106 Total liabilities and equity 62,285,899 39,674,620

Director

Chief Accountant

G-38 Headquarters NJSC NAFTOGAS OF UKRAINE Income Statement For the years ended December 31,2003 and 2002

(000' UAH)

Net inconic: 17 27,149,xxs 19,X07,030

Cost of salcs 18 (23,241,337) (1 8.588,915) Gross income 3,008,551 1,218,115

Sales expeiises (I 17,828) (1 7,689) General and adiniriistrativc cxpenses (185,125) (133,836) Provisioii for bad dcbts 1 X5$11 499,930

Other opcrating income 19 294,608 562,932 Other operating expenses . - .- 20 -- @94,341_)_-__ (83751 99) Profit (loss) from operations 3,391,676 1,292,253

Financial income (expenses) 21 (I 82,823) 2,143,835 Profit (loss) before taxation 3,208.853 3,436,088

Income tax 22 (1 :071,888) (952,2 16)

Nct profit (loss) 2,136,965 2,4X 3,8 72

Director

Chief Account ant

G-39 Headquarters NJSC NAFTOGAS OF UKRAINE Statement of changes in equity For the year ended December 31,2003

Ralaiicc as of 31 De- cember 2001 5,564,714 13,473,703 40,223 (8,972,746) 10,105,894 Corrections (193,135) (20,344) 30 2,9 75 89,496 Net profit fc)r the period 2,483,872 2,483,872 Write-up of shares 19,280 19,280 Write-up of long-term assets (281,715) (28 1,7 15) Transfer to reserves 798 (798) Assets oblaincd frcc of charge 236 236 2,043 2,043 Other changes in equity - - Total changes in equity (474,850) (828)- 798 2,788,092 2,313,212 Balance as of 31 De- ccmber 2002 5,564,714 12,998,853 39,395 798 (6,184,654) 12,419,106 Corrections (539) 184,942 184,403 Net profit for the period 2,136,965 2,136,965 Write-up of long-term assets 22,828,460 22,828,460 Transfer to reserves 645 (645)

Other changes in~ equity._ - (3,118) (39,395) - (368,444) (410,957)

Total changes in equity 22,824,803 (39,395)^. -- 645 1,952,818 24,738,871 Balance as of 31 De- cembcr 2003 5,564,714 35,823,656 1,443 (4,231,836) 37,157,976

Director

Chief Accountant

G-40 IIeadquarters NJSC NAPTOGAS OF UKRAINE Cash flow statement For the year ended December 31,2003

Cash flow from operating activities Profit (loss) froin opcratirig activitics before taxation 3,208,853 3,436,08 8 Adjustments for: Depreciation 6,311 8,367 Profit (loss) from non-operating activities 391,310 (2321,762) Effect of exchange differences on the balances 21 x 1,497 Interest expcnses 134,621 153,946 .- ... I - Profit (loss) form operating activities before chan&

in working capital ... - 3,741_,313 1,078,136 ~ , Decrease of accounts receivable, other current asscts

Income lax paid . ... .- (63,720) (8,397) I- Net cash flow from operatirig activities - .. - -- (9527769 (1 18,905) Net cash flows from investing activities:

Acquisition of financial investmcnts (9,749) (5,173) Acquisition of non-current asscts (28,861) (9,280) Dividends received 1,032 4,139 Other payments (1 2.449) 2,524 Net cash flows from investing activities (50,027) (7,790)

Net cash flows from financing activities:

Loans received 12,705,633 10,186,605 Repayment of loans (1 1,729,352) (9,963,759) Other inflows 46,325 Net cash flows from financing activities 1,022,606 22 2,8 4 6 Net change in cash and cash equivalents 19,819 96,151 Cash and cash equivalents at the beginning of the ycar 98,223 2,072 Cash and cash equivalents, at the end of the ycar 1 18,042 98,223

Uirector

Chief Accountant

G-4 1 Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the gear ended December 31,2003

List of Acronyms

Acronym Full name JSB Joint-stock Bank JSC Joint-stock Company SJSC State Joint-stock Company sc Subsidiary Company CMU Cabinet of Ministers of Ukraine IFRSC International Financial reporting Standards Committee IAS International Accounting Standards lFRS International Financial Reporting Standards NJSC NaftoGas of Ukraine National Joint-stock Company NaftoGas of Ukraine NBU National Bank of Ukraine NCER National Commission of Electrical Energy Regulation UAS Ukrainian Accounting Standards VAT Value Added Tax SIC Standard Interpretation Committee

G42 Accompanying not= and basic accounting principles are the integral pari of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

1. General Information on NJSC NaftoGas of Ukraine

National Joint-stock Company NaftoGas of Ukraine (hereinafter, the Company) was established in accordance with the Ukrainian President Decree dated February 25,1998 Reform of Oil and Gas Industry in Ukraine and resolution of Cabinet of Ministers of Ukraine dated May 25, 1998 hcorpo- ration of National Joint-stock Company NaftoGas of Ukraine.

Company activities listed in the Statute: 0 Oil production; 0 Natural gas production; Natural gas processing; Pipeline transport of general use; State external trade.

List of companies by types of activities, included into the Company: 1. oil and gas production - SC Ukrgasproduction, SC ChornomomaRagas, JSC Ukrnafta 2. oil transit - JSC Uxtransnafta; 3. gas transit - SC Ukrtransgas; 4. gas supply SC Gas of Ukraine; 5. oil processing, supply, construction and servicing companies - JSC Azmol, SC Gas of Ukraine, SC Ukmaftogaskomplect, SC Budivelnik and other.

Given financial statements are not consolidated with respect to the wholc structure NJSCNafioGas of Ukraine. These financial statements present reporting of the NJSC NaftoGas of Ukraine as parent Company and centralized accounting center, whch accounts for all gas sales and purchases, its transportation and other operations.

Bellow there are principal activities performed by the Company in 2003. Gas was purchased in accordance with purchase-sale agreements (contracts) with: 0 State trade Corporation Turkmennaftogas; SC Ukrgasproduction; 0 EURAL TRANS GAS Kft; e Russian JSC Gasprom, in part of gas purchase as payment for the gas transit through Ukrainian territory; Eastern Distribution Ltd.

Gas sales were performed by the NJSC NaRoGas of Ukraine to: 0 SC Trade House Gas of Ukraine (SC Gas of Ukraine under the agreement for imported and own produced natural gas; EmTRANS GAS Kft; SC Ukrtransgas; Zarubezhgaz Management und Beteilingunsgesellschaft mbH

Transit, where NJSC Naftogas Ukraine acted as executer was performed under the following agreements:

on transit of natural gas through Ukrainian territory in 2003 with EURAL TRANS GAS KR; on amounts and terms of gas transit through Ukrainian territory and gas supply in Ukraine in 2003 with JSC Gasprom.

(3-43 Accompanying notes and basic accounting principles are the integral pan of these financial starements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 Transit, where the NJSC NafioGas of Ukraine acted as customer, was performed in accordance with the agreement for natural gas transit through Ulaainian territory with SC Ukrtransgas.

Corporative structure of NJSC NaftoGas of Ukraine can be presented in the following manner. As of 31.12.2003 NJSC NaftoGas of Ukraine held corporative rights (shares, stocks) for about 100 companies. All enterprises in which to NJSC NaRoGas of Uhaine belongs any portion of shares can be divided into 5 groups.

1. First group: subsidiaries of NJSC NaftoGas of Ukraine which are fully owned by NJSC Nafto- Gas of Ukraine. Share in capital SC VZP Naftogas 100% SC Kurortnaftogas 100% SC Ukrnaftogaskomplekt 100% SC Naftogasbezpeka 100% SC Gas-heat 100% SC Ukrtransgas 100% SC Ukrgasproduction 100% SC Gas of Ukraine 100% SC Budivelnyk 100% SC Naftogas servicing 100%

2. Second group: other enterprises in which 100% of corporate rights belong to NJSC NaftoGas of Ukraine.

Share in capital JSC Chemomomaftogas 100% JSC Ukrspetstransgas 100% JSC Ukrtransnafta 100% JSC Azmol 100%

3. Third group: regional oblgases (miskgases) in which more than 50% of shares belong to NJSC NaRoGas of Ukraine.

Share in capital JSC Berezhanygas 51% JSC Cherkasygas 51% JSC Tysmenytsyagas 51% JSC Temopilgasbud 51% JSC Poltavagas 51% JSC Luganskgas 51% JSC Lubnygas 51% JSC Kremenchukgas 51% JSC Kremenetsgas 51% JSC Kirovogradgas 51% JSC Dnipropetrovskgas 51% JSC Gadyachgas 51% JSC Terebovlyagas 51% JSC Sumygas 51% J SC Ivanofrankivskgas 50,00 JSC Melitopolgas 50,00 JSC Sevastopolgas 50,00

G-44

Accompanying note and basic accounting principles are the integral pari of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 JSC Zaporizhgas 50,OO JSC Mykolaivgas 50,OO

4. Fourth group: other enterprises in whch more than 50% of shares belong to NJSC NaftoGas of Ulaaine.

Share in capital

Clearing trade company Naftogas of Ukraine 51% JSC Energy and fuel of Ukraine 51% JSC Shebelynske-2 82% JSC Notes and settlement center 80% JSC Vodogray-rivne-3 70% JSC Ukrainian gas and energy company 50% JSC Ukrnafta 51% JSC Rivent-3 52%

5. Fifth group: regional oblgases (miskgases) and other enterprises in which less than 50% of shares belongto NJSC NaftoGas of Ukraine.

Share in capital JSC Krymgas 49.0% JSC Binnytsyagas 47.1 % JSC Umangas 40.3% JSC Ukragaszbut 40.0% JSC insurance company Vorskla-6 39.7% JSC Zakarpattyagasbud 39.0% JSC Donetskoblgas 38.3% JSC Chernigivgas 38.3% JSC Konkord-3 37.0% JSC Gastranzit 37.0% JSC Devon 36.4% JSC Zboribgas 36.0% JSC Ukrgasbydobutok-2 35.0% JSC Rivnensk beverages plant 34.8% JSC Kyivoblgas 33.2% JSC Joint venture Romgas-6 32.6% JSC Rivnegas 32.6% JSC Zbarazhgas 32.6% JSC Gusyatyngas 32.4% JSC MT-Bank-3 31.3% JSC Monostyrskgas 31.0% JSC Naftogasbud-Ukraine 30.0% JSC Temopilmiskgas 30.0% JSC Borshchivgas 29.1% JSC Buchagas 28.9% JSC Ukrainian oil and gas insurance company-6 28.8% JSC Chortkivgas 27.7% JSC Lvivgas 27.6% JSC Shepetivkagas 27.0%

G-45 Accompanying notes and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 JSC Pidvolochiskgas 27.0% JSC Zalishchykygas 26.5% JSC Ukmaftogasinvest 26.0% JSC Tysagas-2 26.0% JSC Hmelnytskgas 26.0% JSC Ukmaftogas-3 26.0% JSC Ternopilgas 25.7% JSC Agronaftoservice-6 25.5% JSC Trade House LUKoil-Kyivd 25.0% JSC Gascontinental-5 25.0% JSB Ulcrgasprombank 24.4% JSB Insurance company UkmaRatmns-3 24.0% JSB Kyivgaspostach 24.0% JSC Volyngas 23.4% JSC Korostyshivgas 22.0% JSC Khersongas 20.8% JSC Chernivtsigas 20.4% JSC Galychyna-3 20.1 Yo JSC Ukrgasprylad 20.0% JSC Ukrbudtransgas 20.0% JSC Odesagas 19.9% JSC Fond-servise-6 18.5% JSC Kharkivgas 17.7% JSC Kyivpropangas 17.1% JSC hot-4 16.3% JSC Spartak-6 16.3% JSC Zhitomyrgas 15.9% JSC Last 15.0% JSB Ukrgasbank 13.6% JSC Donetskmiskgas 12.5% JSC Shlumberzhe Ukrgas Meters Company 11.2% JSC Kharkivmiskgas 9.9% JKX Oil & Gas plc. 8.9% JSB Brokbussinessbank 8.3%

Establishment of Tarqfs

NJSC NaftoGas of Ukraine is a natural monopolist of oil and gas complex of Ukraine. Therefore, the pricing policy of the Company is regulated by the decisions of Ukrainian Government and the orders of NJSC NaftoGas of Ukraine.

The orders of NJSC NaftoGas of Ukraine confirm natural gas sale prices to be applied by the enterprises of the Company. Definition of natural gas sale prices is carried out based on natural gas intake and distribution balance with NJSC NaRoGas of Ukraine, on the assumption of the level of natural gas purchasing price depending on gas origin (own production, received for transit services, purchased additionally).

G-46

Accompanying not- and basic accounting principls are the integral patt of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 Regulation. In addition, National Commission of Electrical Energy Regulation establishes boundary price level for natural gas supplied by NJSC NaftoGas of Ukraine for industrial consumer as stipulated by the decision of Cabinet of Ministers of Ukraine dated 27.12.2001 #1729,,The order of provision of national economy branches and population with natural gas”.

2. Operating Environment in Ukraine

Future economic stability and growth will be dependent to a large extend on the efficacy of economic measures taken by the Government, as well as development of legislation and political situation.

Future political and economical instability could subject the Company to unpredictable changes in the basic infrastructure under whch it currently carries out its operations. Uncertainties regarding the political, legal, tax or regulatory environment, including the potential for adverse changes in any of these factors could significantly affect the Company’s ability to operate commercially.

3. Basis of Presentation General

Consolidated financial statements of NJSC NaftoGas of Ukraine include the balance sheet and the related income statement, cash flow statement and statement of changes in equity. These financial statements have been prepared in accordance with the requirements of International Financial Reporting Standards (further - IFRS), issued by the International Financial Reporting Standards Board (further - ERSB) and Interpretations issued by the Standing Interpretation Committee (further - SIC).

The Company maintains its accounting books and records in the Ukrainian hryvnia (UAH)based on Ukrainian accounting standards (UAS). The accompanying financial statements are based on the Company’s statutory books and records, with adjustments and reclassifications for the purposes of fair presentation in accordance with FRS.

The financial statements were prepared based on historical cost using accrual basis and presented in thousands of Ukrainian hryvnta, if not otherwise stated. The accounting policy chosen under each IAS permitting to choose the accounting policy is disclosed in corresponding sections of these Notes.

The financial statements were prepared according to the requirements of International Financial Reporting Standards effective for financial statements for the year ended December 3 1,2003.

The Note 21 presents the reconciliation between reserves and accumulated profit stated in the Company’s accounting registers prepared in accordance with the legislative requirements and lFRS reserves and retained earnings as at December 3 1 2003 and 2002.

G-47

Accompanying notes and basic accounting principles are the integral pan of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 Preparation of financial statements requires the management to make certain assessments and assumptions that implement the reflection of assets and liabilities in the reporting and information disclosure of the potential assets and liabilities at the balance sheet date. Actual results might differ from the current assessments. These assessments are periodically reviewed and should an adjustment be needed, such adjustments are reflected in the section of financial results for the period when they became known.

Measurement and Presentation Currencies

The Company keeps its records and presents the statements in Ukrainian hryvnia in accordance with UAS. The Company established measurement and presentation currencies in accordance with SIC 19 “Reporting currency - measurement and presentation of financial statements under IFRS 21 and IFRS 29”. Based on economical substance of transactions and conditions of operation, the Company considers hryvnia as measurement and presentation currency. Thus, transactions in currencies other than hryvnia are considered as transactions in foreign currencies.

Going Concern Assumption

Reclassijkation

To bring the figures for the previous period in conformity with the data presentation adopted in CUI- rent reporting period, the Company performed reclassification of certain respective figures.

Consolidation Principles Including Subsidiaries and Associates

These financial statements are prepared for headquarters NJSC NaRoGas of Ukraine and are not consolidated under IFRS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries. These statements were prepared by headquarters NJSC NaftoGas of Ukraine for consolidation purposes.

4. Basic Accounting Principles

Cash and Cash Equivalents

Cash include cash on hand and cash with bank accounts. Cash equivalents are liquid investment easily converted into bown amount of cash with payment periods of three months or less. There is low risk with respect to their cost changes. Financial Instruments

Financial assets and liabilities carried on the balance sheet include cash and cash equivalents, ac-

(3-48

Accompanying not- and basic accounting pnncipla are the integml part of thae financial statmefits Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 counts receivable and payable, other liabilities and loans. The accounting policies for recognition and measurement of these items are disclosed in the respective sections of these Notes. Financial instruments are classified as liabilities or capital in accordance with the contractual obligations. Interest, dividends, gains and losses relating to the financial instrument classified as liabilities are reported as expenses or income. Payments to the owners of financial instruments, included into capital are reflected directly through capital. Financial instruments are presented as offset, if the Company is entitled to account and intends to realize it on the basis of offset balance or to sale its assets together with decrease of its liabilities.

During 2003 the Company did not use any financial derivatives, interest swaps and forward contracts in order to reduce currency risks. Accounts Receivable

Current accounts receivable are stated at net realizable value which is calculated by deduction of provision for doubtful accounts fiom initial accounts receivable. Provision for doubtful accounts is determined by the method of periodization of accounts receivable, under which to each group of receivables certain per cent of doubthl debt is applied.

Promissory Notes Promissory notes are stated at face value, net of provision for doubtful amounts. Notes with a maturity date of one-year or more aRer the balance sheet date are classified as long-term assets. Such promissory notes are non-interest bearing and they are stated at fair value less provision.

Promissory notes issued to suppliers are stated at face value. Inventories Inventories include industrial reserves of gas, other goods and materials.

Inventories are reflected in the balance sheet at the least of two evaluations - original (initial) cost or net realizable value. Disposal of inventories is carried out under identified cost method.

Most inventories are comprised by gas kept in underground storage facilities of gas of SC Ukrtransgas.

Provision for obsolete and defected inventories has not been formed.

Propem, Plant and Equipment Property, plant and equipment are stated at indexed less accumulated depreciation. The cost of property, plant and equipment comprises its purchase prise, including non-refundable purchase taxes, and any directly attributed costs of bringing the asset to its working condition and location for intended use. Replacements and improvements, which materially extend the useful lives of the assets, are capitalised, while routine maintenance, repairs and renovations costs are expensed in the period when such costs are incurred.

(3-49 Accompanying notes and basic accounting principles are the integral part of thae financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

Before December 31,2003 fixed assets were reported at historical value in measurement unit in force at the balance-sheet date less accumulated depreciation.

As at December 3 1, 2003 the Company performed revaluation of fixed assets attracting independent valuator. From this date and furtheron the Company applies alternative accounting policy as to valuation of fixed assets. After the primary recogrution fixed assets are reported at restated value, which is their fair value at the date of revaluation less any further accumulated amortization and further accumulated losses from impairment. Revaluation will be performed quiet regularly in order for the balance value not to differ materially from its fair value at the balance-sheet date.

Buildings 50 years Machinery and equipment 10 years Transport facilities 10 years Other fixed assets 5 years

Construction in progress includes construction expenses and capital investments.

Lease

Lease under which lessor retains significant part of risks and benefits fiom possession of leased assets is classified as operational. Operational lease payments included into current expenses under straight-line method during effective period of lease agreement.

Investments

The Company classifies its investments by the following categories: held for trading, held-to- maturity and available-for-sale. Investments made mainly for the purpose of generating a profit from short-term fluctuations in price are classified as held for trading and are included in current assets. Investments with fixed maturity that the management has the positive intent and ability to hold to maturity are classified as held-to-maturity and are included in non-current assets. As of De- cember 3 l, 2003 and 2002 the Company did not have investments of this type. Investments that are expected to be held by the enterprise for an indefinite period and that can be realized to maintain liquidity or as a result change of interest rate, currency exchange rate or prices at the equity market are classified as available-for-sale. These investments are recorded as non-current assets if the management of the Company does not have the positive intent to dispose of these investments during 12 months after balance sheet date, or for their disposal is not needed for replenishment of

G-50 Accompanying notes and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 working capital. In other cases such investments are recognized as current assets. The Company classifies its investments at the moment of their acquisition and makes their regular review.

All sales and purchases of investments are recognized at the date of agreement whch is when the Company accepted obligations on acquisition and sale of a financial asset. Contractual expenses are included in cost of purchase. In time, investments that are held for trading and the ones that are available-for-sale are stated in the balance sheet at fair value. Available-for-sale investments mostly comprise non-marketable securities for which it is not possible to receive current market quotations. For such investments fair value is determined based on market prices for similar assets or based on discounted cash flows of future periods.

Accounting for Investments in Associates

Under IFRS 28 Accounting for Investments in Associates, an investment in an associate should be accounted for in consolidated financial statements under the equity method. A company is considered associated if the Company owns not less than 20% of shares of an investee.

Accounts Payable Accounts payable are stated at cost which is fair value of compensation to be paid in future for goods, work and services regardless of whether the Company was billed or not.

The Group does not have any pension arrangements separated from the state pension system of Ukraine, which requires a current contribution from the employer calculated as a percentage of gross salary payments; such expense is charged to the income statement in the period the related compensation is earned by employee. In addition, the Group does not have material post-retirement benefits or significant other compensated benefits requiring accrual. Revenue Recognition

G-5 1

Accompanying nota and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKFUINE Notes-to the finsncial statements For the year ended December 31,2003 Joint Activity Headquarters NJSC NaftoGas of Ukraine as a separate subdivision are not engaged in the joint activity. Research and Development Research and development costs are expensed as incurred. Costs of projects development are recognized as intangible assets (with other long-term assets) when they are expected to bring future commercial benefits. Other development costs are expensed as they occur. However, development costs that were initially expensed are not capitalized in succeeding periods, even if they conform to the conditions of asset recognition. Foreign Currency Transactions

Foreign currency transactions are reflected in reporting currency though recalculation of foreign currency amount at the exchange rate in force at the date of the transaction. Financial result fiom exchange differences originating fiom recalculation of monetary items at the rates different from the accounted ones are recognized in the period of their origination. Income Tax The current income tax charge is calculated in accordance with Ukrainian tax regulations and is based on the financial results reported in the income statement of the Company prepared under UAS after adjustments for tax purposes.

Generally, the income tax accrual should be based on the annual profit and must consider deferred taxation. Deferred taxes are accrued through the balance sheet liability method. Amount of deferred taxes reflects net tax effect of temporary differences between the carrying amount of assets and liabilities for the accounting purposes and cost considered for the tax accounting. Amount of assets and liabilities from the deferred taxation is calculated on the basis of expected tax rate to be applied to the income subject to taxation in years when the amount of temporary differences might be refunded or realized. Valuation of assets and liabilities from the deferred taxation reflects possible tax consequences originating from the expected at the balance sheet date probability to refund and realize the cost of such assets and liabilities.

Assets from the deferred taxation are recognized only when there is a probability that the future amounts of taxable income will be sufficient to realize assets fiom the deferred taxation. The Company reevaluates non-recognized deferred tax assets at each balance-sheet date, as well as the current cost of deferred tax assets. The Company recognizes previously not recognized asset only in portion when there is a probability to realize it against the future taxable income. And vice versa. The Company reduces book value of a deferred tax asset when there is a probability of complete or partial realization of the asset against the future income. Application of Assessments Preparation of USfinancial statements requires the management to make certain assessments and assumptions that implement the reflection of assets and liabilities in the reporting and information disclosure of the potential assets and liabilities - at the balance sheet date. Actual results might differ from the current assessments. These assessments are periodically reviewed and should an adjustment be needed, such adjustments are reflected in the section of financial results for the period when they became known. Contingencies Contingent liabilities are not reflected in the financial statements. The information on contingent liabilities is presented with the exception of cases, when the outflow of economical benefits is unlikely. The Company has liabilities transferred by the Cabinet of Ministers of Ukraine under Yamburg

G-52

Accompanying not= and basic accounting principles arc the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAZNE Notes to the financial statements For the year ended December 31,2003 agreement dated 19.03.1986, according to which Ukraine is liable after the USSR collapse. At the reporting date the Company makes stock-taking, assessment and reconciliation with the Cabinet of Ministers of Ukraine of liabilities to be incurred. Contingent assets are not reflected in the financial reporting. However, relevant information is presented whenever the probability of economical benefits is increased.

Past Periods Errors

Past periods errors are recognized in statement of changes in equity capital. They adjust accumulated profit or reserves of the related item. Subsequent Events Post-balance sheet events that provide additional information about the Company’s position at the balance sheet date are reported in the financial statements. Post-balance sheet events that do not affect the financial position of the Company at stated date are disclosed in the notes to the financial statements when material. Segment Reporting

The main types of the Company’s external sales are natural gas, gas condensate and processing products. A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service (or a group of related products or services) and that is subject to risks and returns that are different from those of other business segments. Factors that should be considered in determining business segments are internal organizational and management structures of the Company, as well as the system of its internal reporting (see Notes 16-17).

During the reporting period the Headquarters NJSC NaftoGas of Ukraine performed trade operations and general management of the companies’group.

G-53

Accompanying nota and basic accounting principles are the intcgral part of thee financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

Explanatory Notes to the Financial Statements

5. Cash and Cash Equivalents

Cash and cash equivalents as at December 31, 2003 included cash in national currency in the amount of 83,913 ths. UAH and cash with currency accounts (in US dollars and Russian Roubles) in translation into national currency amounting to 34,129 ths. UAH. As at December 3 1,2002 cash and cash equivalents included respectively 30,282 ths. UAH and 67,941 ths. UAH.

6. Related Party Transactions

Related parties to the Company include entities that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control of the Company and (or) the Company’s management. Such entities include: SC Gas of Ukraine of NJSC NaftoGas of Ukraine (further - Gas of Ukraine); SC Ukrtransgas of NJSC NaftoGas of Ukraine (further - Ukrtransgas); SC Ukrgasproduction of NJSC NaftoGas of Ukraine (further - Ukrgasproduction); a Other subsidiary companies and branches of NJSC NaftoGas of Ukraine

The Company performs major transactions with related parties. During 2003 and 2002 these transactions included natural gas purchase from SC Ukrgasproduction, gas sales to SC Gas of Ukraine, gas transportation services to SC Ukrtransgas and other.

(3-54

Accompanying nota and basic accounting principle3 arc the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

Balance sheet accounts include the following balances of receivables associated with related parties' transactions:

(000' UAH) Accounts receivable from related parties, net December December 31,2003 31,2002

SC Gas of Ukraine 12,776,717 11,960,056 Specific provision for doubtful debts (15,880) (35,440) Write-down of receivables due to investment assessment under the equity method (8,662,670) (7,805,325) SC Uldransgas 2,287,411 1,527,991 Specific provision for doubtful debts (3,148) SC Ulagasproduction 151,733 100,058 Specific provision for doubtful debts (23,196) (624) JSC Dniepropetrovskgas 125,629 124,970 Specific provision for doubtful debts (32,859) (32,200) JSC Zaporizhgas 41,376 42,820 Specific provision for doubtful debts (10,321) (5,155) JSC Luganskgas 95,052 111,427 Specific provision for doubtful debts (95,052) (1 11,427) JSC Mikolayivgas 48,973 48,973 Write-down of receivables due to investment assessment under the equity method (48,973) (48,973) Other related debtors 2,180,946 1,840,085 Total: 8,815,737 7,717,237

Balances of accounts receivable with SC Gas of Uhine, SC ulatransgas and SC Ikgasproduction accounts for non-reconciled receivables. The specific provision for doubtful debts has been accrued for the abovementioned receivables in the whole non-reconciled amount. Provisions were made due to investment assessment under the equity method with SC Gas of Ukraine and JSC Mikolayivgas.

G-55

Accompanying not- and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

Accounts payable to related parties include:

(000' UAH) Accounts payable to related companies December December 31,2003 31,2002

SC Ukrtransgas 602,180 487,632 SC Ukrgasproduction 384,181 779,156 SC Gas of Ukraine 405,309 354,077 JSC Dniepropetrovskgas 79 1 79 1 JSC Luganskgas 17,852 JSC Mikolayivgas 89 89 Other related parties 39,994 1,629,749 Total: 1,432,545 3,269,347

Balances of accounts payable with SC Gas of Ukraine, SC Ukrtransgas and SC Ukrgasproductiori and other related parties account for non-reconciled payables, which as at December 3 1, 2002 and 2003 comprise 232,974 ths. UAH and 559, 947 respectively. When entering into sale agreements the enterprises of NJSC NafioGas of Ukraine can apply special transfer prices different from those used during ordinary business activities.

7. Accounts Receivable and Promissory Notes, Net

As at December 3 1,2003 and 2002 accounts receivable comprised ofi

(000' UAH) Accounts receivable and promissory notes, net December December 31,2003 31,2002

Accounts receivable for goods, works, services 3,25 1,819 2,808,862 Promissory notes 229,169 768,528 Other current accounts receivable 1,245,877 1,426,226 Provision for doubtful debts (2,809,974) (3,369,918) Total: 1,916,891 I 1,633,698

G-56 Accompanying notes and basic accounting principles arc the integral pan of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

8. Inventories

Carrying amount by separate classified groups includes:

(000' UAH) Carrying amount by separate classified groups December December 31,2003 31,2002 Gas in underground gas-holders 736,216 2,086,376 Goods under commission agreements 63,370 30,204 Gas for Bulgargas 2,859 Other goods 280,157 216,570 Total: 1,079,743 2,336,010

Other goods were mostly acquired for settlements for Turkmenian gas.

9. Other Current Assets, Net

As at December 3 1,2003 and 2002 other current assets included:

000' UAH) Other current assets December December 31,2003 31,2002

Advances to suppliers 1,044,770 954,220 Deferred expenses 377 163 Accounts receivable on budget and non-budget settlements 7,899 13,801 Other current assets 162,829 180,195 ... . __ ~ Total: 1,215,875 1,148,379

G-57

Accompanying notes and basic accounting principles are the integral part of thae financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

Detailed advances to suppliers are stated below:

300'UAH) Advances to suppliers December December 31,2003 31,2002

Suppliers of goods for JSC Gasprom 824,940 829,048 Gas suppliers (other enterprises) 422,951 428,203 Settlements with suppliers of goods for gas received from 39,240 Turkmenistan 58,476 Electric power 9,668 9,668 Gas storing services 1,553 1,553 Works and services 158,814 3 1,942 Suppliers of fixed assets and other low value items 3,568 14,828 Provision for doubtful debts (4 15,964) (419,4981 Total: 1,044,770 954,220

10. Property, Plant and Equipment

As at December 3 1,2003 and 2002 property, plant and equipment included:

(000' UAH) Buildings, Ma- construc- Con- Property, plant and chines Trans- tions and Other struction equipment - historical and port fixed Total transmit- in pro- cost equip means assets ting facili- grew ment ties Cost as at 31.12.2002 19,997 4,600 493 35,625 86,037 146,752 Additions for a year 13,957 62 51,356 Disposals for a year (1,833) (171) (46,324) (41,411) Cost as at 31.12.2003 33,954 2,829 322 46,657 44,626 128,388 Accumulated depreciation Cost as at 31.12.2002 (10,663) (1,320) (57) (12,094) (24,134) Additions for a year (2,558) (184) (3,569) Disposals for a year 293 26 3,183 Cost as at 31.12.2003 (13,221) (1,211) (31) (12,480) (26,943)

Net value as at 31.12.2002 9,334 3,280 436 23,531 86,037 122.617 Net value as at 31.12.2003 20,733 1,618 291 34, 177 44626 101,445

During the reporting period all fixed assets of the Company were pledged to the State Tax Inspec- torate. The Company has the opportunity of alienation of these assets only under agreement of the tax authority. In 2004 the cost of property, plant and equipment was assessed by independent valuator Ernst &

G-58

Accompanying note and basic accounting principles arc the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 Young Ukraine LLC applying replacement value method and deduction of depreciation as of De- cember 3 l, 2003. Cost of property, plant and equipment determined by independent valuator is fair value of property, plant and equipment calculated for the purposes of the financial statements prepared under IFRS. Increase of book value of an asset is reported in the credit of capital under Re- serves. Decrease of asset’s value due to revaluation is recognized in these statements as expenses. Their value comprised:

Machinery Construc and tions Transport fa- Buildings equipment cilities Implements Total

Replacement value 153,791 7,864 41,359 415 11,768 215,198

Depreciation (76,5 10) (4,214) (738) (153) (3,824) (85,439)

Fair value 77,281 3,650 40,621 262 7,944 129,759 Capital investments in progress 44,626 Total fair value 174,385

G-59 Accompanying notes and basic accounting principles are. the integral pad of these fiMncld statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

11. Long-term Financial Investments

(000' UAH) Long-term financial investments December December 31,2003 31,2002 SC Ukrgasproduction 8,420,855 1,373,634 SC Gas of Ukraine SC Ukrtransgas 25,069,405 10,370,600 JSC Ukrtransnafia 7,069,733 3,088,462 JSC Zaporizhgas 172,188 33,446 JSC Mikolayivgas 26,503 JSC Luganskgas 96,980 JSC Chornomornaftogas 867,130 83 1,459 JSC Ukrnafta 4,861,681 1,937,730 JSC Dniepropetrovskgas 6 12,243 178,330 Shares on the security of EBRD 22,000 22,000 Other ~.. 277,624 251,910 Total 41,496,342 24,087,571

SC Gas of Ukraine, JSC Mikolayivgas, JSC Luganskgas have negative value of capital, therefore, they are accounted for at zero value.

12. Deferred Tax Assets

Deferred taxation is calculated for all temporary differences by the balance sheet liability method, applying active regulation tax rate of 30%.

Differences between IAS and UAS tax regulations lead to certain temporary differences between financial and tax accounting data.

Neither of abovementioned deferred tax asssets was recognized in these financial statements since there is no certainty that the potential deferred tax assets can be realized in future. Deferred income tax 2003 2002 Barter 50,904 998,737 Advances received 69,840 80,724 Advances paid (8,056) (2,371) Provision for doubtful debts 697,159 953,435 Temporary differences related to amortization 1,495 2,414 Other differences 128,793 (1 2,874) Deferred expenses (94) (1 3,732) Work in process (15,536) Total: 924,505 2,006,333 Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

13. Accounts Payable and Other Liabilities

As at December 3 1,2003 and 2002 accounts payable and other liabilities included:

Accounts payable and other liabilities December December 31,2003 31,2002 Accounts payable on operating activities 13,454,444 14,474,235 Short-term bank loans 967,237 530,583 Promissory notes issued 399,152 23 1,656 Advances received 289,387 397,400 Total: i5.iio.220 15,633,874

Accounts payable related to operating activities include the following:

(000' UAH) Accounts payable relating to operating activities December December 31,2003 31,2002

JSC Gazprom 7,692,330 7,693,628 Company Turkmennaftagas 2,040,690 3,300,791 Eural Trans Gas 1,129,423 Itera LLC 1,742,646 Other creditors 2,592,001 1,737,170 Total: 13,454,444 14,474,235

14. Tax Liabilities

As at December 3 1,2003 and 2002 tax liabilities include:

(OOOl UAH)

~ Tax liabilities December 31,2003 December31,2002 I Budget settlements 5,522,627 5,945,829 Non-budget settlements 149,959 134,723 Social insurance Total: 6.080.796

G-6 1

Accompanying notes and basic accounting principles are the integtal part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

Due to budget includes:

(000' UAH) Budget settlements December December 31,2003 31,2002 VAT settlements 1,755,400 2,421,265 Gas transit in Ukraine 2,320,554 2,148,402 Income tax 1,300,069 1,348,656 Payroll tax 9,534 249 Other tax liabilities 137,070 27,257 Total: I 5,522,627 I 5,945,829

15. Provision for Non-Reconciled Payables to JSC Gasprom

Payables to JSC Gasprom were finally reconciled in 2001 and comprise 1,442,808 ths. USD. There is no developed and agreed mechanizm as to repayment of these payables at the reporting date.

Besides, the Company has non-reconciled amount of liabilities for which a provision was formed in the amount of 178 847 495,13 US dollars.

16. Equity Capital

Statutory Capital

Reserves

Reserves contain fixed assets indexation and revaluation, as well as retained earnings of past periods of the Company and its predecessor Ukrgasprom, which were created at the balance sheet dates.

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17. Sales Income

Income from sales of products (goods, works, services) 2003 2002

Gas sales 16,663,822 11,876,878 Sales of gas transit services 8,042,747 2,977,065 Sales of Turkmenian goods 4,529,015 2,916,174 Sales of services related to national transit 952 6,070,514 Income from other sales 696,061 60,892 Income from sales of products (goods, works, services)

VAT Gas transit payment Net income from sales of products (goods, works, services) 27,149,888 I 19,807,030 h accordance with Ukrainian legislation and decisions of CMU during the reporting period zero rate of value added tax for gas sales in Ukraine acquired from Russian, Turkmenian and Uzbek suppliers, is effective in Ukraine. Value added tax is not accrued for export transactions.

18. Cost of Sales

(000'UAH) Cost of sales 2003 2002

Sold gas 18,366,207 15,152,402 Transit services 2,188,770 2,051,461 Sold goods 2,584,877 1,213,907

1 Sold works and services 101,483 168,341 Transit services of Moldovagas 2,804 ' Total: I 23,241,337 18,588,915

(3-63 Accompanying notes and basic accounting principles are the integral part of these firuncial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

19. Other Operating Income (000' UAH)

Other operating income ~ I 2003 2002

Sales of foreign currency 86,442 250,553 Operating exchange rate difference 7,778 24,047 Accounts payable written-off 6,182 4,3 17 Operating lease of assets 195 121 Sales of materials 143 1,189 Sales of securities and financial investments 93,876 Other income from operating activities 193,868 188,829 Total: 294,608 562,932

20. Other Operating Expenses

(000' UAH)

~ Other operating expenses 2003 2002

Sold foreign currency 86,575 25 1,853 Operating exchange rate difference 6,75 1 8 1,557 Recognized fines and penalties 129,694 3 1,782 Other payroll payments 1,260 5,061 Research and development 5,130 1,813 I other expenses of operating activities I 464,93 I 465,133 837,199

21. Financial Income (Expenses)

Financial income is mostly revaluation of long-term financial investments and other income and losses. Revaluation of long-term financial investments comprised 31,393,477 ths. UAH and 1,013,646 ths. UAH for 2003 and 2002 respectively.

22. Income Tax Expenses

Income tax expenses 2003 2002 Current income tax expenses 10,694 528,236 Effect of temporary differences: not taxable 109,232 (78,6 10) taxable 95 1,962 502,590 Total: 1,071,888 952,216

G-64 Accompanying notes and basic accounting principles a= the integml pan of these financial StatemmtS I Reconciliation 2003 I - ~~ Accounting income before taxation 3,193,081 Tax rate accordmg to legislation 30% Theoretical income tax 957,924 Constant differences 1 13,964

23. Commitments and Contingencies

Taxation Framework

Ukraine currently has a number of laws related to various taxes and levies imposed by both state and local authorities. Applicable taxes include value added taxes, income tax, number of turnover based taxes, payrolls (social) taxes - together with others. Laws relating to these taxes are subject to frequent changes, they can contradict each other, and regulations are often unclear or non-existent and few precedents have been established. Often, differing opinions regarding legal interpretation exist both among and within government ministries and organizations (like the State Tax Adrmni- stration and its various inspectorates), thus creating uncertainties and areas of conflict. Tax declarations, together with other legal compliance areas (as examples, customs and currency control matters) are subject to review and investigation by a number of authorities, who are enabled by law to impose extremely severe fines, penalties and interest charges. These facts create a tax risk in Ukraine substantially more significant than typically found in countries with a more developed tax system.

Legal In the ordinary course of business, the Company is subject to legal actions and complaints. The Company's management believes that the maximum responsibility related to liabilities, if any, resulted from such actions and complaints, will not have material negative effect on financial position or results of the Company's future operations. Insurance The Company has insignificant insurance coverage related to obligatory insurance provided by the Ukrainian legislation. General liability insurance is not generally available in Ukraine at present.

Social

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Accompanying notes and basic accounting principlcs are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 The Company participates in financing of construction and maintenance of housing facilities, medical, children's, educational and sanitary institutions, as well as in satisfaction of other social needs in the regions, where the Company operates. Thus, the Company significantly contributes to maintenance and perfection of local infrastructures and improvement of welfare of its employees.

24. Ukrainian Environment General In recent years, Ukraine has undergone substantial political and economic change. As an emerging market, Ukraine does not possess the well-developed business and regulatory infrastructure that would generally exist in a more mature free market economy, As a result, operations carried out in Ukraine involve significant risks, which are not typically associated with those in developed markets.

Future economic stability and growth will be dependent to a large extent on the efficacy of the fiscal, macroeconomic and structural measures taken by the Government.

Future economical instability can cause unpredictable changes in the basic infrastructure under which the Company currently carries out its operations. Uncertainties regarding the political, legal, tax or regulatory environment, including the potential for adverse changes in any of these factors could significantly affect the Company's ability to operate.

The Company will continue to be affected, for the foreseeable future, by the above factors

25. Factors of Financial Ftisks

Exchange Rate Risk Transactions denominated in foreign currency do not have material effect on the Company's activity. Monetary items of assets and liabilities are also basically denominated in national currency. The Company did not enter into specific agreements with the purpose of exchange rate risk hedging due to immaterial effect on operating and financing activities. Interest Risk The Company mainly attracts short-term bank loans in national currency. The Company does not have a specific program related to the uncertainty of financial markets and aimed at minimization of potential negative consequences for the Company's financial results, since volumes of attracted loans are not material, The Company does not have substantial assets, which bring interest income.

G-66 Accompanying nota and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003 on effect of the state authorities and other social and economic aspects. Not considering the above facts, the management does not believe that the Company is subject to a hgh risk of losses over already made provision for reduction of cost of accounts receivable. Liquidity Risk The Company’s task is balancing of continuous financing and flexibility in application of terms of credits granted by suppliers and banks. The Company analyses urgency of payables and plans its liquidity depending on expecting maturities of liabilities. In case of insufficient liquidity the Com- pany can apply both external sources of financing and related parties ones.

26. Going Concern Assumption

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Accompanying notes and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

27. Reconciliation between UAS and IAS

Reconciliation of statutory fund and reserves as at December 31, 2003 and 2002, as well as net profit for 2003 in accordance with UAS and IAS is presented below:

(000' UAH) ~. 2003 Statutory Reserves Net profit fund

Reporting in accordance with UAS 5,564,714 518,482 2,834,221 (000' UAH) Total adjustments for 2001 13,205103 (5,825,763) Additional accrual of depreciation according to (47) IAS Adjustment of provision for doubtful accounts 3,668,060 receivable Revaluation of financial investments 22,02 S,574 (3,9 13,14 1) Other adjustments 72,940 (995,168) Total adjustments 35,306,6 17 (7,066,058) Reporting in accordance with IAS 5,564,714 35,825,100 (4,231,837) (000' UAH)

(000'UAH) 2002 Statutory Reserves Net profit fund

Reporting according to UAS 5,564,714 430,305 (361,681) (000' UAH) Total adjustments for 200 1 13,185,773 (8,8 70,675) Additional accrual of depreciation according to (47) IAS Adjustments of provision for doubtful accounts 499,930 receivable Revaluation of financial investments (574,242) 1,587,888 Correction of erros related to recognition of 92 1,61 8 fines and forfeits from JSC Gasprom Other adjustments 35,524 Total adiustments 12,611,531 (5,825,762) Reporting in accordance with IAS 5,564114 13,041,836 (6,187,443) (000' UAH)

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Accompanying nota and basic accounting principles are the integral part of these financial statements Headquarters NJSC NAFTOGAS OF UKRAINE Notes to the financial statements For the year ended December 31,2003

28. Subsequent Events

According to the agreement dated April 22,2004 the Company received short-term loan from ABN AMRO BANK N.V., London Branch in the amount of 200 million US dollars. Purposes of credit- ing are general needs. Credit interest will be comprised of the margin of 3.49 % per year and LI- BOR. The security for ths credit is a settlement account with ABN AMRO BANK N.V., London Branch.

On April 29, 2004 the Cabinet of Ministers took a decision # 550 on write-off of unpaid natural gas volumes. According to the decision gas supply and gasification enterprises should write-off indebtedness under the developed mechanism. The impact on the Company's financial statements can not be assessed as at the reporting date.

G-69 Accompanying notes and basic accounting principla are the integral part of these financial statements THIS PAGE INTENTIONALLY LEFT BLANK

(3-70 APPENDIX A - REGULATION OF THE OIL AND GAS INDUSTRY IN UKRAINE

Introduction and Overview At the governmental level the Ministry of Fuel and Energy of Ukraine (the “MFE”) and the Ministry of Environmental Protection (“MEP”) (the Ministry of Ecology and Natural Resources of Ukraine before September 2003) form the common policy concerning the operation of the fuel and energy sector and the activities of oil and gas enterprises. In accordance with Presidential Decree No. 598/2000 “On the Ministry of Fuel and Energy of Ukraine” dated 14 April 2000, the MFE is the main body responsible for implementing State policy in the energy, nuclear power, coal, oil and gas industries (the “fuel and energy sector”). In accordance with Decree No. 59812000 the main tasks of the MFE are:

0 state management of the fuel and energy sector;

0 ensuring implementation of the State policy in fuel and energy sectors; b securing energy security of the State; drafting proposals for improvement and development of the fuel and energy sector; and

0 participation in the formation, regulation and development of the fuel and energy sector. According to Decree of the President of Ukraine No. 103912003 “On the Measures to Increase Management Effectiveness in the Sphere Environment Protection and the Use of Natural Resources” the Ministry of Ecology and Natural Resources was reorganized and, as a result, the Ministry of Environmental Protection and the State Committee of Natural Resources of Ukraine were created. The MEP is responsible for ensuring the implementation of State policy in the sphere of environmental protection. efficient use of natural resources (land. subsoil. surface and ground waters etc.). efficient use and reproduction of natural resources, topographic, geodesic and cartographic activity and implementation of state control. The State Committee of Natural Rrsources of Ukraine is an executive body specifically authorised to pcrforni geological research and sccure efficient usc of the subsoil. as wcll as to perform topographic and geodesic, cartographic and conservation activity. It is anticipated that the committee will be entrusted with issuing licences. In accordance with Decree No. 17612004, the main tasks of the MEP are:

0 implementing State policy concerning the preservation, safety and other activities and creation of ecological conditions for the sustainable development of Ukraine’s natural resources;

0 administering and regulating environmental preservation, safety and other activities; and

0 ensuring fulfilment of legislative requirements concerning the environment. the rational use of natural resources (with the exception of subsoil), ecological safety, hydro-meteorologic, topographic-geodesic and cartographic activities and nuclear and radiation safety. The National Commission on Regulation of Power Industry of Ukraine (the “NCRP”) is an independent permanent state body whose primary functions include: participating in the formulation and implementation of a unified Statc policy on the development and functioning of wholesale electricity, gas, oil and oil product markets; State regulation of natural monopolies in the power industry and oil and gas sector; promoting competition in electric power generation, electricity and gas delivery, gas storage and sales, oil and oil products; ensuring the implementation of price and tariff policy in the power industry and oil and gas sector; promoting the effective functioning of the commodity markets on the basis of balanced interests of natural monopolies and consumers of their goods and services; development and approval of the rules for the use of electric energy and gas; co-ordination of the activities of State bodies concerning regulation of the energy resources markets;

A-1 0 issuing certain licences to legal entities, including those for the storage, delivery and transport of natural gas, oil and oil products by pipelines; and

0 monitoring compliance with the terms of the licences. According to the modified Resolution of the Cabinet Ministers No. 1538 of 199h. the N‘CRP determines the following:

0 the maximum retail price of natural gas supplied to residential consumers, State Financed Entities and regional heating companies;

0 tariffs for the transportation by main pipelines of natural gas, oil and oil products supplied to consumers in Ukraine; tariffs for the storage of natural gas;

0 tariffs for transportation of natural gas by distribution networks and its supplies; and

0 the maximum price of natural gas supplied to industrial consumers. The NCRP is not responsible for setting tariffs relating to oil sales, prices for natural gas and oil transiting through Ukraine or oil storage, as well as natural gas storage for non-residents of Ukraine. The main Ukrainian legislative acts governing activities in the oil and gas industry are: Law of Ukraine No.2665-I11 “On Oil and Gas”, dated 12 July 2001 (“Law No. 2665-111”). This law establishes parametres for the exploration and development of oil and gas-bearing subsoil, as well as the transportation, storage and use of oil, gas and refined products. Subsoil Code of Ukraine, dated 27 July 1994 (the “Subsoil Code”). This is the main code governing subsoil use. The Subsoil Code specifically delineates the rights and obligations of subsoil users and sets the fees associated with the exploration and development of subsoil hydrocarbon deposits. Law of Ukraine No. 192/96-BP “On Pipeline Transportation”, dated 15 May 1994 (“Law No. 1921 96-BP”). This law governs the transportation of oil and gas by pipeline. In accordance with Law No. 192/96-BP. Ukraine’s trunk pipeline transportation system is classified as State property, the privatisation of which is prohibited. Law of Ukraine No. 1039-XIV “On Production Sharing Agreements”, dated 14 September 1999. This law establishes the parametres for contractual relations between Ukraine and investors in the oil and gas industry, under which the State reserves a right of ownership over the hydrocarbons produced, while the investor is granted a portion of the production as compensation for its expenses and fees.

Licensing The licensing regime for the exploration and production of oil and gas is established by the Subsoil Code, Law of Ukraine No. 1775-111 “On Licensing of Certain Types of Activities”, dated 1 June 2000 (“Law No. 1775111”) and by Law No. 2665-111 “On Oil and Gas”. On 4 March 2004 changes were introduced into the Subsoil Code and Law 2665 mainly concerning unifying the procedure for granting licences in the oil and gas sector. However, due to the fact that the issuance of new licences has been suspended until 1January 2005, there can be no assurance as to how the new procedure will function. The suspension, however, does not relate to the renewal of existing licences. Furthermore, in accordance with the Subsoil Code, subsoil rights are granted for permanent or temporary usc through licenccs delineating the specific use of the field for which the licence is granted. A licence for temporary use of subsoil is either short-term (up to 5 years) or long-term (up to 20 years). Law No. 1775-111 lists those oil and gas-related activities relating to oil and gas industry for which separate licensing is required, including:

0 mineral exploration;

0 transportation of oil and oil products by trunk pipeline; transportation of natural gas and gas condensate by pipeline and their further distribution;

0 natural gas supply; and

0 storage of natural gas in volumes exceeding the volume set out in the licence terms.

A-2 Pursuant to Law No. 2665-111, following a tender process, special licences are granted by a central governmental body for:

0 geological exploration (including exploratory development) of oil and gas-bearing subsoil (granted for up to 5 years if onshore and up to 10 years. if offshore);

0 oil and gas commercial development (granted for up to 20 years if onshore, and up to 30 years, if offshore);

0 geological survey of oil and gas-bearing subsoil with further commercial development (granted for up to 20 years if onshore, and up to 30 years, if offshore); and construction and operation of underground storage facilities for oil and gas (granted for up to 50 years). Pursuant to the Law No. 2665-111, each of these licences must include:

0 details of the party to whom the licence is issued;

0 the type of work for which the licence is issued;

0 gcographic limits of the oil or gas-hcaring field for which the licence is issued; the duration of the licence; and mandatory additional conditions on use of the field for which the licence is granted and obligations of the parties (e.& environmental obligations of the user).

Regulation of Oil and Gas Transportation The regulation of oil and gas transportation is based on Law No. 192/96-BP. In accordance with Law No. 192/96-BP. Ukraine’s trunk pipeline transportation system is classified as State property. The trunk pipelines are owned by the State, with Naftogaz, as the national oil and gas company exploiting the trunk pipeline system pursuant to its charter, responsible for its day-to-day operation and management. In accordance with Resolution of the Cabinet of Ministers of Ukraine No. 1548 “On Determination of Authority of the Executive Power Bodies and Executive Bodies of Local Authorities Concerning Price (Tariff) Regulation”, dated 25 December 1996, the NCRP has the authority to set tariffs for: the transportation of natural gas, oil and oil products by trunk pipeline; the storage of natural gas; and the transportation of natural gas by distribution pipeline, including the supply of natural gas to end-users, etc.

Volume and Price Controls on Oil and Gas Pursuant to Resolution No. 1548, the NCRP is vested with the authority to set: the maximum retail prices of natural gas supplied to residential consumers, State Financed Entities and regional heating companies; tariffs for the transportation by main pipelines of natural gas, oil and oil products supplied to consumers in Ukraine; tariffs for the storage of natural gas; tariffs for transportation of natural gas by distribution networks and its supplies and the maximum price of natural gas supplied to industrial consumers. In accordance with Resolution of the Cabinet of Ministers of Ukraine No. 1729 “On Natural Gas Supply to Branches of National Industry and to the Population”, dated 27 December 2001, Naftogaz, as the national oil and gas company, supplies natural gas to State Financed Entities, residential consumers and regional heating companies. Private companies purchase natural gas under direct contract with suppliers, however 98 per cent. of all natural gas supplies to industrial consumers are sold by Naftogaz. Pursuant to Decree of the Cabinet of Ministers of Ukraine No. 1424, dated 14 September 1998, and further pursuant to Resolution of the Cabinet of Ministers of Ukraine No. 599 “On Introduction of Auctions for the Sale of Oil, Gas Condensate, Scrap Gas and Coal”, dated 4 April 2000, auctions for the sale of such hydrocarbons were introduced as of 1 May 2000.

Imports and Exports In the past, the Government imposed seasonal limitations on the export of certain products, including gas, oil and diesel. At present, however, no such limitations are in place. According to the Agreement between the Government of Ukraine and the Government of the Russian Federation on Free Trade, dated 24 June 1993 (the “Russian Free Trade Agreement”) and the Resolution of Cabinet of Ministers of Ukraine No. 13 “On Realisation of the Agreement between the Government of Ukraine and the Government of the Russian Federation on Free Trade”, dated 5 January

A-3 1998 (“Resolution No. 13”), as amended, crude oil, gas condensate and natural gas imported into Ukraine from Russia is exempt from import duty and import VAT (the standard rate is 20 per cent.). Exemption from customs duty is a general exemption stipulated by the Free Trade Agreement, applicablc for an indefinite pcriod, for so long as thc Russian Free Trade Agrccment remains in effect. Parties to the Russian Free Trade Agreement could, by bilateral agreement, exclude certain items from the free trade regime, without prescribing a schedule. The exemptions from VAT mentioned above were specified in Resolution No. 13. Beforc 27 June 2001, relevant regulations provided for exemptions in respect of almost all goods imported from Russia. After 27 June 2001, by amendment to Resolution No. 13, the exemptions were kept only for crude oil, gas condensate and natural gas (and certain other items). These amendments were introduced following Russia’s alteration of its VAT rules for the CIS countries. According to an Agreement between the Government of Ukraine and the Government of Turkmenistan on Free Trade. dated 5 November 1994 (ratified by Parliament on 11 November 1995) the ”Turkmen Free Trade Agreement”), and Resolution of the Cabinet of Ministers of Ukraine No. 736 “On Realisation of the Turkmenistan-Ukraine Free Trade Agreement”, dated 27 June 2001, import of Turkmen gas by a supplier to Naftogaz, as the Ukrainian national oil and gas company, is exempt from VAT from 1 May 2001 and exempt from customs duty from 18 December 1996. The exemption from customs duty is a general cxemption stipulated by thc Free Trade Agrccment. It is applicable indefinitely, for so long as the Turkmen Free Trade Agreement remains in effect. Parties to the Turkmen Free Trade Agreement exclude certain items from the free trade regime, without any prescribed terms for consideration. Currently, there are no plans to exclude gas from the free trade regime. Resolution No. 736 signalled the Government’s intention to exempt Turkmen Gas imported by Itera from VAT. With respect to the VAT exemption, only supplies under Itera Contract No. 03-755/2000, dated 5 October 2000, are exempt. However, in 2002 the Cabinet of Ministers of Ukraine passed a resolution pursuant to which imports of Turkmen gas in accordance with the agreement between Naftogaz and Itera dated 15 October 2001 and the agreement between Naftogaz and ETG on 5 December 2002 are VAT exempt. Until 1January 2000, supplies of natural gas imported by Ukraine were subject to zero rate VAT. Import of goods to Ukraine and the supply or sale of goods within Ukraine are two different transactions subject to VAT, according to the VAT legislation. As a rule, direct purchases from abroad are treated as import and the further sale of imported goods within Ukraine as sale or supply within Ukraine. As a rule, sales of imported gas within Ukraine are taxed according to the same rate as gas extracted in Ukraine, and as a result, the standard 20 per cent. VAT rate is applied. By separate legal acts (the Russian Free Trade Agreement and Resolution No. 13), the import of gas in Ukraine by Gazprom remains exempt from VAT. In accordance with current Ukrainian legislation, imports of natural gas under contracts executed pursuant to Ukrainian international agreements and further sales of such imported gas (which covers all natural gas imported by Naftogaz) are exempt from VAT. With regard to domestic sales of earlier imported gas, the applicable 20 per cent. VAT is usually paid by the local supplier. Import VAT is paid at the border by the person responsible for the customs clearance. In most cases, the parties to the import contract agree that customs clearance and import VAT payments are to be made by the local importer, who can further credit the payment. If VAT was paid by the foreign supplier, who is normally not registered as a VAT payer in Ukraine, the import VAT would not be creditable. However, Naftogaz is exempt from VAT payments both for import and for further sale of imported gas in Ukraine, pursuant to the above mentioned provisions of Ukrainian legislation. The export of oil and gas from Ukraine was previously subject to a zero rate VAT, and was exempt from customs duties. However, as a result of the Inter-Governmental Agreement between Ukraine and Russia on Ensuring Transit of Russian Natural Gas Through the Territory of Ukraine, dated October 4,2001, Ukraine became obliged to impose export duties on natural gas re-exported by Ukraine for sale abroad. The export duty rate and exemptions from the export duty regime are required to be stipulated in an annual inter-governmental protocol to the Inter-governmental Agreement. According to Article 5 of the Law “On the 2004 State Budget of Ukraine” legal entities exporting natural gas shall pay export customs duty of U.S.$lO per 1 thousand cubic metres (unless higher rates are set by the international agreements to which Ukraine is a party). Pursuant to an amendment to the 2004 State Budget in June 2004, the above duty is also applicable to gas condensate.

A-4 Environmental Ukraine has historically been one of the most energy-intensive in the world, using almost 5 times as much energy per unit of GDP as Germany and France and 2-3 times as much energy per unit of GDP as neighbouring Poland and the Czech Republic. Furthermore. damage \vas inflicted on Ukraine‘s environment during the Soviet regime as the result of irresponsible resource management. Since independence, however, the ecological legislation has developed in Ukraine. Since independence, Ukraine’s Parliament has adopted nearly 80 basic laws, and the Cabinet of Ministers has issued more than 30 resolutions regarding preservation of the environment. Ukrainian legislation on environmental protection and use of natural resources contains more than 200 legal acts. The ecological legislation of Ukraine is developing in accordance with principles embodied in the Constitution of Ukraine (Articles 13, 16, 49, 50, 66). Development and improvement of the legal framework for environmental protection and the use of natural resources is carried out in accordance with “The Guidelines of Governmental Policy for Environmental Protection, Use of Natural Resources and Ecological Safety” which identify priorities and long-term strategy for solving national environmental problems, and in accordance with Presidential Decree No. 145199, dated February 9, 1999, “On Actions to Be Taken to Improve the Law-Building Activities of Executive Power Bodies”. Environmental protection in Ukraine is based on ecological regulations, which are govemed by Law of Ukraine No. 1264-XII, “On Environmental Protection”, dated 25 June 1991 (“Law No. 1264-XII), and its supporting legal acts, including the Land Code of Ukraine, dated 25 October 2001, the Water Code of Ukraine, dated 6 June 1995, the Forest Code of Ukraine, dated 21 January 1994, and the Subsoil Code of Ukraine, as well as Law of Ukraine No. 2456-XI1 “On the Nature Reserve Stock of Ukraine”, dated 16 June 1992, Law of Ukraine No. 3041-XI1 “On Wildlife”, dated 3 March 1993, Law of Ukraine No. 2707-XI1 “On Atmospheric Air Protection”, dated 16 October 1992 (“Law No. 2707-XII), Law of Ukraine No. 45195-BP “On Ecological Expertise”, dated 9 February 1995, Law of Ukraine No. 39195-BP “On Nuclear Energy Use and Radiation Safety”, dated 8 February 1995, and Law of Ukraine No. 187198- BP “On Waste”, dated 5 March 1998. Law No. 1264-XI1 is the legislative act covering ecological problems in each sector of Ukraine’s economy. Under Article 24 of Law No. 1264-XI1 (“Articles 24”), State and private entities must submit details of their emissions to State authorities. The State compiles details of harmful substances emitted into Ukraine’s air and water, based on Article 24. Under Article 24, the relevant State bodies are required to compile details on those entities having an actual or potentially harmful impact on the environment, the types and amounts of harmful substances released into the environment, and types and dimensions of harmful physical impacts. Resolution of the Cabinet of Ministers of Ukraine No. 391 “On Approval of thc Regulation of the State System of Environmental Monitoring”. dated 30 March 1998, specifies a list of organisations and authorities involved in monitoring the activities of submitting entities, as well as their compliance with applicable environmental legislation. Law No. 2707-XI1 establishes the legal framework for the use of, and ecological requirements for the protection of, the atmosphere. The purpose of Law No. 2707-XI1 is to regulate relationships in this area, with the aims of preserving and improving the atmosphere, preventing chemical, physical, biological and other influences from harming the atmosphere. ensuring the responsible use of atmospheric air for industrial needs and strengthening legislation in this sphere. Law of Ukraine No. 74194-BP “On Energy Conservation”, dated 1 July 1994 (“Law No. 74/94-BP), energy provides for the imposition of economic sanctions for the wasting of fuel and energy. Law No. 74/ 94-BP includes economic incentives to encourage the conservation of energy, including the provision of subsidies, allowances, tax credits and other preferences. Notwithstanding such attempts to encourage energy conservation, Ukraine taxation legislation has not mirrored such incentives, and the principal taxation legislation, Law of Ukraine No. 2151-XI1 “On the Taxation System”, dated 25 June 1991, and Law of Ukraine No. 334/94-BP “On Taxation of Enterprise Income”, dated 28 December 1994, do not allow for such deductions or credits.

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A-6 APPENDM B - COVERING LETI'ER TO MILLER AND LENTS RESERVES REPORT

WARTIN G MILLER ('S48-19801 MILLERAND LENTS,LTD. MAX R LENTS 11948.2001) KENNETH R FORD INTERNATIONAL OIL AND GAS CONSULTANTS JAMES C PEARSON GREGORY W ARHES WENT"-SEVENTH FLOOR CURISTOPHER A BUTT* JAMESA COcL I100 R W FRAZIER GEORGE SCHAEFEA HICnACL 5 YOUNG HOUSTON. TEXAS 77001-5218 GARY B HNAPP TCLLPHOHF713 651-9455 WILL14hl P KOZA STEVEN D MILL5 TELLFAX713 654-9914 ROBERT J CBERST CARL D RICHARD email. mad@mllieMndientscorn GUY M WILLER LESLK A FALLON June 22, 2004 OAVID A FENTOY STEPHEN H HAMBURG GARY W PRIDDV Mr. Yuriy Boyko Chairman of the Board NJSC "Naftogaz of Ukraine" 6, Bogdana Khmelnitskogo Street Kiev 001. 01001. Ukraine Re: Evaluation of 124 Oil and Gas Fields Reserves and Future Net Revenues As of December 3 I. 2003

Net Reserves Future Net Revenues Oil and Discounted at Condensate, Gas, Undiscounted, 10% Per Year, Reserves Category MMBbls. BCf MMS MM$ Proved Developed Producing 163.2 6,629.5 4,633.4 2,313.8 Proved Developed Notiproducing 14.1 - 280.9 176.4 102.3 Proved Undeveloped 10.5 574.8 385.5 165.0

~~ Future Additional Capital _- __ (391.4) (307 -4) Total Proved 187.8 7,4852 I 4,803.9 2,273.7 Probable 2.6 360.9 277.5 83.0 Possible 0.3 337.0 245.9 31.3

B-1 MILLERAND LENTS,LTD.

Mr. Yuriy Boyko June 22, 2004 Chairman of the Board Page 2 NJSC “Naftogaz of Ukraine”

The attachments, exhibits, and figures of this report are grouped into four sections: (1) consolidated results for NAK, (2) CNG-operated fields contribution to NAK. (3) UKRGsperated fields contribution to NAK, and (4) UKRN-operated fields contribution to NAK. For reference purposes herein, the attachments are numbered with a prefix of 1- for NAK, 2- for CNG, 3- for UKRG and 4- UKRN. Lists of attachments, exhibits, and figures are included in each report section for convenience.

Although owned by CNG, there is a revenue sharing arrangement for the Vostochno Kazantipskoye Field between CNG and UKRG. For our repnn to the individual subsidiary companies. only 50 percent interest in the field was included in our CNG report (as instructed by CNG), but no revenues or reserves were included in our UKRG report (as instructed by UKRG). For this consolidation report, all reserves and revenues for the field are shown in the CKG section (as instructed by NAK).

Proved, probable, and possible reserves were estimated in accordance with standards of the Society of Petroleum Engineers, Inc. and World Petroleum Congresses as defined in the Appendix. Future net revenues as used herein are dcfmcd as thc total gross revenues lcss opcrating expenses and capital expenditures. The total gross revenues were determined by multiplying forecast sales volumes by the net product prices after deduction of royalty and special taxes. Future net revenues wete discounted at 10 percent per annum herein to illustrate the present value of future receipts at a standardized discount rate.

The probable and possible reserve volumes and the estimated future net revenues therefrom have not been adjusted for uncertainty. None of the proved, probable, or possible reserve volumes or the revenues projected therefrom should be combined with either of the other without adjustment for uncertainty. Estimates of future net revenues and discounted future net revenues ate nnt intended and should not be interpreted to represent fair market values for the estimated reserves. Future costs of abandoning facilities and wells and any future costs of restoration of producing properties to satisfy environmental standards were not deducted from total revenues as such estimates are beyond the scope of this assignment.

Lists of the evaluated fields are- shown in Attachments 2-1, 3-1, and 4-1 for CNG, UKRG, and UKRN. respectively. For UKRG, the fields are listed in four groupings referenced as GPUs. For UKRN, the fields are listed in six groupings referenced as NGDWs. Attachments 2-2, 3-2. 3-3, 4-2, and 4-3 are maps showing the relative location of the fields within the Ukraine. Attachments 2-3, 34, and 44 are general stratigraphic columns that illustrate the oil and gas producing reservoirs in the various regions.

The fields owned by CNG lie offsham in the nonhwestcm portion of the Black Sea and in the southern portion of the Sea of Azov near the Crimean Peninsula. The fields owned by UKRG and UKRN are located primarily within the Dnieper-Donets Basin in the northeastern part of the Ukraine and the Carpathian basin in the western part of the country. The Dnieper-Donets Basin accounts for more than 90 percent of the country’s oil and gas production from more than 120 oil and gas fields.

B-2 MILLERAND LENTS,LTD

Mr. Yuriy Boyko June 22, 2004 Chairman of the Board Page 3 NJSC ‘Naftogaz of Ukraine” For CNG, the Bezymyanoye, Odesskoye, and Shtormovoye fields lie within the Black Sea, west of the peninsula, while Severo Kazantipskoye. East Kazantipskoye. and Severo Kerchenskoye lie to the east of the peninsula within the Sea of Azov.

The Black Sea Basin is oval in shape and covers an area of 423.000 square kilometers. The basin is bounded on the north by the mountain ranges of the Caucasus and Crimea and to the south by the Pontic Mountains. The east-west alignment of these mountain chains suggests that they and the Black Sea Basin were initially formed by north-south compressional forces. However, during Cenezoic times, downwarping within the basin resulted in the accumulation of up to 14 kilometers of sediments. Ihe productive horizons of the CNG gas fields are Cenezoic in age, ranging from Early Paleocene to Late Miocene.

The three CNG fields in the Sea of Azov structurally lie within the Indolo Kubansky subbasin. All of the fields lie atop small structural domes. The dome at Severo Kerchenskoye Field is bisected by a north-south trending fault. The Middle Miocene carbonate reservoir has been tested productive on both sides of the fault. Similarly, the Severo Kazantipskoye structure is hixted by a north-south trending fault. Three of the Miocene rcservoirs arc shaley sands. Thc shallowest reservoir consists of Miocene age carbonates. The Vostochno Kazantipskoye Field is currently producing from Upper Miocene age shaley sands with intermittent carbonate layers on a northeast-southwest trending dome.

Srrucrurally, the Bezymyannoye, and Odesskoye Fields lie along the northeast slopc of thc Kiliskazmene High. The Bezymyanoye Dome trends northeast-southwest and has tested hydrocarbons in Paleocene and Eocene carbonates. as well as an Eocene sandstone. The Odesskoye Field also trends northeast-southwest and has tested hydrocarbons in a Lower Eocene carbonate, an Upper Paleocene sandstone and an Eocene shaley sandstone.

Shtormovoye Field is the mosr developed of the CNG fields. It consists of three east-west trending domes of Lower Paleocene age. The wells produce from Lower Paleocene carbonates. l‘he field lies within the Karkinitko-North Krimsky Trough off the west coast of the Crimean Peninsula.

The Dnieper-Donets rift basin extends for approximately 500 kilometers in a northeastern- southwestern trend along the western border of the Precambrian IJkraine massif. The basin was formed by two stages of extensional tectonics. the first in Early Paleozoic and later it) Early Carboniferous time. The basin was predominately tilled with Late Paleozoic and Mesozoic clastics. Hydrocarbons are principally located in geologic structures caused by the movement of very mobile Devonian-aged salt. The most prolific gas reservoirs are Permian sandstones and Early Carboniferous terrigenous clastics and carbonates that are generally sealed by salt. Main source rocks are considcred io he coal- bearing sediments of Lower Carboniferous (Visean) and Upper Devonian age. Over most of the basin, the source rocks are over-mature with respect to oil generation: therefore, gas dominates over oil.

The Carpathian Basin was formed at the end of the Alpine orogeny (Cenozoic). a result of the collision of the continental plates that formed the Carpathian Mountains. The sediments in the basin were derived from the uplifted Carpathian Mountains and consist of conglomerates, sandstones. shales,

B-3 MILLERAND LENTS,LTD

Mr. Yuriy Boyko June 22, 2004 Chairman of the Board Page 4 NJSC “Naftogaz of Ukraine”

and local evaporates of late Cenozoic age. The oil and gas fields in the basin occur in an area that _. . ., . parallels the mountains and is about 240 kilometers long by 48 kilometers wide. Hydrocarbon accumulation is found in a complex series of nappes formed during the Alpine orogeny that have ken compressed into a series of recumbent folds that have been firusr over each other during continued basin compression.

Most of the reserves we evaluated are in fields that have reached a mature stage of development and depletion. Approximately 88 percent of rhe remaining proved reserves attributable to NAK in the evaluated fields are classified as proved developed praducing. Mature fields often have little probable or possible reserves due IO limited remaining development opportunities and economic viability of such opportunities. Usually, as new wells are drilled, portions of the prohable and possible reserve quantities will be eithcr upgraded to a higher reserve category or dropped altogether.

Our general approach to the quantification of reserves was (1) to extrapolate performance trends, primarily plots of production rate versus time. to the economic limit calculated in our economic mdcl and (2) to compare the performance forecast with original in-place oil and gas volumes and back- calculate recovery factors to confirm the reasonableness of the results. If reliable data were available for gas reservoirs, PIZ (adjusted reservoir pressure) versus cumulative production plots were used to check original gas in-place and ultimate recovery.

We conducted independent petrophysical analyses on a selected sample of the well logs and compared them with results shown on maps and tables of volumetric parameters provided by the NAK subsidiary companies. Generally, we found reasonable agreement between our petrophysical analyses and that of the companies’ specialists. We also reviewed a selected sample of isopach maps and found reasonable agreement between our estimates of net rock volume compared to the estimates provided by the NAK subsidiaries. Therefore, we concluded that the volumetric parameters of the subsidiaries were acceptable for calculations of original oil and gas in-place.

Based on the calculated in-place volumes and our estimates of ultimate recovery from projections of production performance trends, we calculated an average recovery factor for each field. For most fields, the recovery factor appeaEd to be reasonable, indicating that the volumetric data and the performance data were in good agreement. For a few fields, there appears to lx an inconsistency between the volumetric data and historical performance trends. Bccausc some fields have been producing for many decades. historical records of past production may not be complete and accurate, particularly in the early years of old fields. For our final results we relied primarily on extrapolation of recent production rate versus time trends and on analogies derived therefrom.

Product prices, opcrating cxpcnses, and capital costs used in our cash flow projections were based on information provided by NAK and its subsidiaries as representative of recent actual costs or estimates. Neither the product prices nor the costs were escalated in projecting future cash flows; therefore, our evaluation is designated as the Constant Price Case. The currency exchange rate, royalty, and tax rates are all assumed to remain constant at yearend 2003 levels.

B-4 MILLERAND LENTS,LTO.

Mr. Yuriy Boyko June 22, 2004 Chairman of the Board Page 5 NJSC “Nafrogaz of Ukraine”

The product prices and adjustments, as provided by NAK and its subsidiaries. are shown in Attachments 2-4, 3-5,and 4-5. The prices have been represented to us as actual yearcnd 2003 prices received, after appropriate adjustment for royalty and special taxes. CNG provided operating expenses for its combined fields (Attachment 2-51, UKRG provided operating expenses by GPU or field (Attachments 3-6 through 3-16),and UKRN provided operating expenses by NGDU (Attachments 44 through 4-11). The total operating expenses for each UKRG and UKRN entity were adjusted to exclude depreciation, royalty, and workover CUSIS. then restated as monlhly averages and allocated 70 percent as “fixed” costs (proportional to active well count) and 30 percent as “variable” costs (proportional to production rates). The variable cost was allocated to gas production or to oil and condensate production based on the relative energy equivalent volumes of each product that was produced in 2003. We used an energy equivalence ratio of 6 Mcf gas per barrel of oil and condensate. Similar adjustmcnts and allocations were made for CNG except royalty was carricd as an opcrating expense rather than as a price adjustment (as was done for the report to CNG).

Attachments 2-6, 3-17, and 4-12 are one-line summary tables showing reserves and economics results for each field by reserve category. Attachments 3-18 and 4-13 are one-line summary tables, sorted by GPU or NGDU, by reserve category, and by field. Exhibits 1-1 through 1-7 are annual production and cash flow summaries for the consolidated NAK subsidiaries. Exhibits 2-1 through 2-6 are similar summaries for the combined CNG fields. Exhibits 3-1 through 3-30 are SUlllIMrieS for the combined UKRG fields, including summaries for each GPU. Exhibits 4-1 through 4-28 are summaries for the combined UKRN fields. including summaries for each NGDU.

The cash flow projections include summaries of ‘other” capital costs for infrastructure capital and surface facilities (capital requirements other than drilling, completion, and workover costs). The ‘other” capital is combined with the proved rexrves subcategories of PDP (proved developed producing). PDN (proved developed nonprcducing), and PUD (proved undeveloped) to get the Total Proved projection for each subsidiary. Attachments 2-7, 3-19, and 4-14 are summary tables showing the “other” capital costs. For CNG and UKRG, the costs were provided by field, but for UKRN the costs were provided to us as company totals.

The estimated PDN. PUD. Probable, and Possible reserves require capital expenditures such as drilling, completion. and workover costs that are included in the cash flow projections. Attachments 2- 8, 3-20, and 4-15 through 4-18 are summary tables showing development costs and schtdules. bdon information provided by the subsidiaries. Some of the development work was in progress at year-end 2003. Costs shown on the attachments are average remaining costs at December 3 I, 2003 as estimated by the subsidiaries.

Reserve categories and volumes for development drilling and workover operations were assigned by us based on the locations of proposed wells, the stage of depletion for the subject field, estimated drainage and well interference effects, and economic viability. Our analyses indicate that some of the planned development work is uneconomic and was, therefore, not included in this report. Development work may results in increased reserves recovery. accelerated reserves recovery, or a combination of both.

B -5 MILLER AND LENTS,LTD.

Mr. Yuriy Boyko June 22, 2004 Chairman of the Board Page 6 NJSC “Naftogaz of Ukraim”

The PDN reserves are from recompletion, restoration, or well stimulation workovers on existing wells. Incremental PDN reserves for recompletions (expected to be done in selected wells after production has become uneconomic from the currently active reservoir), stimulations (primarily hydraulic fracture treatments), and restorations (reactivation of shut-in wells) were includcd for sow fields based on historical results and future schedules for such activities.

The PUD reserves are expected to be produced from undeveloped portions of know reservoirs that have been adequately defined by wells that have ken successfully pruduction tested or from additional wells that are scheduled to be drilled in the development area. The estimated probable reserves are expected to be produced from undeveloped portions of known reservoirs not adequately defined to be classified as proved. The estimated possible reserves are expected to be prduced from undeveloped portions of known reservoirs (1) where the reservoir is thin and uncertain to be developed or (2) where subsurface control is limited. Probable or possible reserves may also be from areas that would require unusually large drainage areas per well to be economically viable.

Reserve estimates for PUD, probable, and possible reserves were estimated by volumetric and analogy methods. Reserve estimates from volumetric calculations and from analogies are often less certain than reserve estimates based on well performance obtained over a period during which a substantial portion of the reserves were produced. We did not receive maps showing locations for all of the scheduled drill wells. Therefore, we could not evaluate some of the proposed locations, and they were excluded from our forecasts.

Figure 1-1 shows net historical production nnd wr forecast of net future production attributable to NAK from the evaluated fields of the combined NAK subsidiaries, including the incremental production wedges attributable to each reserve category. (Figure I-1A shows oil and condensate. Figure 1-1B shows gas.) Figures 2-1, 3-1. and 4-1 are similar plots for the evaluated fields of each subsidiary. Our projections do not include currently producing reservoirs that were determined to be uneconomic; therefore, a trend change may be noted at the beginning of 2004.

Figure 1-2 is a set of pie cham showing the NAK reserves and discounted future net revenues, by subsidiary, for all evaluated fields. Figure 1-3 is a set of charts showing results by reserve category for the combined subsidiaries. Figures 2-2, 3-2, and 4-2are similar charts for the evaluated fields of each subsidiary.

In conducting this evaluation, we relied upon (1) production histories, (2) accounting and cost data, (3) ownership. (4) geological. geophysical, and engineering data, and (5) drilling. recomplction. and wotkover schedules supplied by NAK, CNG. UKRG. and UKRN. These data were accepted as represented, as verification of such data and information was beyond the scope of this assignment.

The evaluations presented in this report, with the exceptions of those parameters specified by others, reflect our informed judgments based on accepted standards of professional investigation but are subject to those generally recognized uncertainties associated with interpretation of geological, geophysical, and engineering information. Government policies and market conditions different from

B-6 MILLERAND LENTS.LTD

Mr. Yuriy Boyko June 21, 2W Chairman of the Board Page 7 NJSC "Naftogaz of Ukraine" those employed in this study may cause the total quantity of oil to be recovered. actual production rates, prices received, or operating and capital costs to vaty from those presented in this report. Minor precision inconsistencies in subtotals or rods may exist in the report due to truncation or rounding of aggregated values.

Miller and Lents, Ltd. is an independent oil and gas consulting firm. No director. officer, or key employee of Millet and Lents, Ltd. has any financial ownership in NAK, CNG, UKRG, UKRN, or any affiliated company. Our compensation for rhe required investigations and preparation of this report is nor contingent on the results obtained and reponed. and we have not performed other work that would affect our objectivity. Production of this report was supervised by an officer of the firm who is a professionally qualified and licensed Professional Engineer in the State of Texas with more than 20 years of relevant experience in the estimation. assessment. and evaluation of oil and gas reserves.

Very truly puts.

Carl D. Richard Vice President

RWFlpsh

B-7 Appendix Page I

Definitions for Oil and Gas Reserves

Definitions used. there should be at least a 90 percent probahility that the quantities actually rceovcred will equal or exceed the estimate. Reserves are those quantitta of petroleum which are Esablishmcnt of current economic conditions should anticipated to be commercially recovered from known accumulatiom from a given date forward. All rtscrve cstimatm include relevant historical perroleum prim and associated costs involve some degree of uncertainty. ‘lkuncertainty depends and may involve an averaging pcriod that is consiswnt with the chiefly on the amount of reliable gwlogic and cngimring data pu’poru of thc reserve estimate, appropriate mntraa obligations. available at the time of the estimate and the interpretation of corporate procedures, and govemmcnt regulations involved in these data. The relative degree of uncenainry may bc conveyed reporting these reserves. by placing reserves into one of tw principal classifications. In general. reserves are considered proved if the eilhcr proved or unproved. Unprovtd re~ervt~are less certain commercial prcducibility of tlle reservoir ISsupponed by actual producrion or formation ICSLF. In this coniext, the term proved to bc recovered than proved reserves and may k funher refers to rhe actual quamities of petroleum reserves adna just subclassifred as probable and possible -cs IO denote progressively increasing urrenainty in lhrir rcuuvcrability. he productivity of the well or reservoir. In ccnain cascs. proved rmrvtS may be assigned on the basis of well logs ador ?he interd of SPE and WPC in approving additional core arulysis that indicate the auhjcct rcservoir is hydrocsrbon classifiatioru beyond proved reserves is to facilitate mnssiptercy bearing and is analogous to rmrvoirs in the same area that are MIOW professionals using such terms. In pmmting lksc dcfinirionr, ncithcr organization is rscommrding public producing or have demonstratcd the ability to produce on formation tests. disclosure of reserves classified &F unproved. Public disclosure amof the reservoir considcrcd as proved iwluks of thc quantities classified zs unprovcd reserves is Ich to the Tk (1) thc area delineated by drilling and dalinrd by fluid contacts. discretion of the countries or companies involved. Estimation of reserves is done under conditions of if any, and (2) he unlrilled portions of the rcservoir hat cm reasonably be judged as commercially prductive lhe basis of unceminty. The method of estimation is called deterministic if on available geological andengineering data. In rheabst.ncrofdata a single best cstimste of rexrves is made based on bwn @ogical. engirrering, and economic data. The merhcd of on fluid contacts, the lowcst kruwn wcurrence of hydmcart” controls the provd limit otherwise indicated by dffimtive estimation IS called probabilistic when he kmwn geological. unless geological. enginering, or pcrformancc data. engineering, and economic data are us& to generate a range of estimates and tkir assoctated probabilities. Identifying rscIvcs Rcscrvcs may bc classified as proved if racilitiav to those to at as proved, probable. and possible has been the mt frquent process and trmprt reserves marker are opcratioml time of the estimate or there a reasonable expectation lhat classifmtion method and gives an indicationof the probability of dte is will installed. Reserves in urdevclopcd recovery. Because of potential differences in uncertainty. cs bt caution shwld k exercised when aggregating reservcs of lwtions may be classified as proved undeveloped provided (I) different classifications. the locations are direct offsets IO wells that have indicated commercial production in the objective formation, (2) it is Reserves cstimtes will generally be rcvisd as additional reasonably ccrtain such locations are within the known proved geologic or engineering data becomes available or as economic conditions change. Rcstrves do not include qusntities of productive limits of the objective formation, (3) tk locations petroleum king held in inventory. awl may be reducpd for wage conform to existing well spacing regulations wkre applicable. or processing loss if rquired for fimrcial reponing. and (4) it is rcasombly ccrmin the locations will bt developtd. Reserves from olher locations arc categorized as proved Rcscrve may be attributed to either natural energy or improved recovery methods. lmprovcd recovery muhcds undeveloped only where ~nrerpretations of gcalogical ad include all methods for supplementing natural ewrm or alkring engineering data from wells indicate with reasonable ccminty that objective hrmatiw is laterally wntinuous and conrains natural forces in the reservoir to increase ultimate recovery. tk commercially recoverable permleum at locations btyod di-et Examples of such methods are presliure maintenance. cycling. waterflooding. thermal methods. chemical flooding. and the usc OM<. Reservcs which arc to produced through of miscible and immirible displacement fluik. Other improd ht rhc application of established improved recovery methods are recovery methods may be kvclopcd in thc future as petroleum technology continues tn evolve. included in thp proved classification when (1) successful tsting by a pilot projecr or favorable response of an inrulld program in the =me or an analogous rcscrvoir with similar rak and fluid Proved Reserves pmpcrtim provides support for the amlysis on which tk projecl Roved rescrves are those quantities of petroleum which. was based. ad. (2) it is reasonably Eeruin that the project will by analysis of geological and mgimring data. can be cstimared pm&. Reserves to be recovered by improved recovery with rcasonable certainty to be wmmacially moverable. f”a methods that have yet to hc crublished through commercially given date forward, from known rcscrvoirs and under “It successful applications arc included in the proved classifiution rcommic comiitions. opcrating methods. and governmen only (1) akr a favorablc production response from the subject rcgulatlonr. f’rovod reserves can k categorized as dtvelopCa or rexrvoir fmm cithcr (a) a representative ptlot or (b) an inrtalkd undeveloped. program where the response provides support for the analysis on If dewministic methods arc used. lk term reasonable which the project is based and (2) it is reasonably ccrtain the certainty is intended 10 express a high degrcE of confidewe lhat projett will proceed. the quantities will be recovered. If probabilistic methds are

B-8 Appendix Page 2

Unproved Reserves inoperation and (b) rock. fluid, and rcservoir charactcristics arc Unproved rexrves arc bad on geologic aMlor such that a reawnable doubt exists that rhe project will be commercial, ad (5) reserves in an aru of the formation that engineering dara similar to that used in estimates of proved rescrves: but technical. contractual. ecommic, or regulatory appars to be separated from Ihe pmved area by faulting and uncertainties preclude such rearvcs king classified z proved. geological interpretation indicates the subject area is SlnrcNrally lower ihan ihe proved area. Umrovd reserves may be further cladidas probable rescrvcs and possible reserves. Unproved reserves may he cstimatcd assuming future Reserve Status Categories economic conditions different from hsrprevailing at tk time Rmrve status categories definc thc development atd of the esimatc. The effect of possible future improvements in producing swus of wells and reservoirs. mmmic conditions and technological developments can be exprcsscd by allocating appropriate quantities of reserves IO the Developed. Ucvelopd reserves are expected to he recovered probable and prssible classificatiom. from existing wells including reserves behind pipe. Improved recovery reserves arc mnsidcml dcvclopd only akr tk probable Reserves. Probable reserves are those unproved necessary quipmem has been imulled. or when the ~0~1sIO do reserves which amlysis of geological awl engimring data su are relatively mimr. Developed rmrves my be suggests arc more likely thn not to bc recoverable. In lhis subcategorized as producing or mnproducing. COINCX~, when probabilistic mclhods are used, &re should be at Prdducing. Rcservcs suhrcgori& as prcducing arc Icaaa n 50 prcent probability that tk quantities acnrally expected IO be recovtrrcli from completion inervals which mrc recovered will qual or exdtk sum of cstimtcd provcd plus oprn ad producing at the time of the estimate. Improved probabk rcservcs. recovery rwwes are considered producing only after tk In gcrrral. probable reserves may include (1) rrserves improved recovery project is in opration. anticipated to k proved by normal stepaut drilling wkrc sub- Nonpmduring. Reserves suhcatcgofized as surface control is imdquatc to classify thcsc RSCTVCS as pmval, nurpmducing include shut-in and khind-pipc reserves. Shut-in (2) r-cs in formatiom thac appear to be productive bad an T~WNCS are expccted IO be rrmvercd from (I) completion well log characteristics but lack core data or definitive tests and intrvals which arc opat the time of the estimate but which whichare mt analogous to producing or proved rewvoirs inrk have not waned producing. (2) wclls which were shut in for area. (3) incrcmcntal rerves atuibutable to inftll drilling that market cnndirions or pipclinc connections. or (3) wclls m could have tenclassified as proved if closer starutory spacing capable of production far mechanical reasons. Behird-pipc had knapproved at the rime of the estimate. (4) rcscrvcs rcserves are expected in be remvered from zones in exiging attributable to impruved recovery methods that have been wells. which will require additioml completion work or future established by repcated commercially successful applications recompletion prior In thc stan of prcduction. when (a) a project or pilol is planned but not in opration and 01) rock, fluid, and reservoir characteristics appear favorable for Undeveloped Reserves. Undeveloped rtwrves arc expend to "mrrcial application. (5) reserves in an area oftht formarion be rccovcred (I) from new wells on umirilled acreage, (2) from thar appars to k separated from the proved area by faulting and deepening existing wells to a diffcrea reservoir. or (3) where a the geologic interpretation indillatcs the subject area IS relatively large expenditure is required to (a) rccomplde an structurally higkr than the proved area, (6) reserves attributable existing well or (b) install production or iransponation facilities to a future workover. treatment. re-rrtatmnr, change of fur primary ur improved recovery projects. quipmem. or aher mechaNcal procedures, where such prwsdurt has not bten proved successful in wells which exhibit AW'Ovd QY & bud *I L*mlom. Swcq01 Rimla*n wirrrr (SPEI, Irr similar ktuviar in irrulu~uusreservoirs. and (7) incmental tk EA~IIVCmwd, World Rtml~mton#=- (WPCJ Hrch lTJ7 rscrvcs in proved reservoirs where an alternative interpretation of performance or volumctric data indicates mrc rRerVeP than can be dasificd as proved.

Possible Reserves. Possible remves are rho% unpmvcd reSrves which analysis of geological and engineering daa sugge:cslsore less likely to be rrcoverablc than probable ~SCTVCS. In this context. when probabilistic mcrhods are used. there should be at lnst a 10 perant pmbability that the quamiiia actually recovered will equal of exceed the sum of estimated proved plus probable plus Vible reserves. In general. pssiblc rcscrvcs may include (1) rmrveS which, based on gmlogical intcrprdltians, could Wssibly exist kyodareas classified as probable. (2) rwrm in furmatiow that appcPr to bc petroleum bring bpscd on log ud cow analysis but may m be produclive Y commercial rates. (3) incrmnul ftyrves aaributed to infill drilling that are subjcctlo technical urreminty. (4) merves anributed to improved recovery methods when (a) a project or pilot is plawd but mt

B-9 NAK - Combined Subsidiaries

List of Exhibits

Exhibit Description All Evaluated Fields 1-1 Total Proved Reserves 1-2 Total Proved Producing Reserves 1-3 Total Proved Nonproducing Reserves 1-4 Total Proved Undeveloped Reserves 1-5 Total Other Capital 1-6 Total Probable Reserves 1-7 Total Possible Reserves

B-10 APPENDIX C - LE'ITER OF SUPPORT FROM THE MINISTRY OF FUEL AND ENERGY IMPORTANT NOTICE TO INVESTORS

Attached is a Letter of Support provided by the Ministry of Fuel and Energy to The Bank of New York in its capacity as Trustee acting on behalf of the Noteholders. Investors are cautioned to note that the Letter of Support is simply a statement of support by the Ministry of Fuel and Energy and does not in any form constitute a guarantee. In addition, the Letter of Support does not create any rights in favour of the Trustee or the Noteholders, nor does it bind Ukraine in any way. Therefore, investors should take note that neither they nor the Trustee will be able to rely on the Letter of Support to assert legal claims against the Ministry of Fuel and Energy or Ukraine.

c-1 MIHICTEPCTBO IIAJIHBA TA EHEPrETHKkI YKPAIHH (MiHrranMseHepro YKpaiw)

01601 MCn, U. KHYB,Ey.7. XpeWTHK, 30, Ten.: 221-4333, @KC: 462-0561 E-mail: [email protected]

The Bank of New York

Dear Sirs, According to current Ukrainian legislation, the Cabinet of Ministas of Ukraine owns 100% shares of National Joint Stock Company “Naftogaz of Ukraine”. The Ministry for Fuel and Energy of Ukraine is the principal State entity involved in the management and supervision of Oil & Gas and Energy sectors in the country. NJSC ‘Yaftogaz of Ukraine” produces approximately 100% of all oil and gas in Ukraine, conducts transit of 100% of all oil and gas in the country and plays the key role in the development of the Oil and Gas industry and the country’s economy as a whole. The Ministry for Fuel and Energy of Ukraine closely cooperates on daily basis with the Company: comprehensively follows the results of its industrial and economic activity and will provide any assistance within its competence in securing timely payments of liabilities. The Ministry for Fuel and Energy of Ukraine entirely supports the development strategy of NJSC “Naftogaz of Ukraine”. This Letter is addressed to the Bank of New York as Trustee acting on behalf of Noteholders.

Sincerely Yours,

Minister for Fuel and Energy of Ukraine S.Tulub

c-2 THE COMPANY NJSC Naftogaz of Ukraine 6, B Khmelnitskogo Street Kyiv, 01001 Ukraine SBLH PLC SBL us Issuer of the Notes as lender under the Nuftogaz Loan Standard Bank London Holdings PLC Standard Bank London Limited Cannon Bridge House Cannon Bridge House 25 Dowgate Hill 25 Dowgate Hill London EC4R 2SB London EC4R 2SB England England

TRUSTEE AND PRINCIPAL PAYING AGENT The Bank of New York Global Trust Services One Canada Square London E14 5AL

LUXEMBOURG PAYING AGENT The Bank of New York (Luxembourg) S.A. Adrogolf Centre lA, Hoehenhof L-1736 Senningerberg Luxembourg

LUXEMBOURG LISTING AGENT The Bank of New York Europe Limited One Canada Square London E14 SAL

LEGAL ADVISERS To Naflogaz as to To the Issuer us io To Nafiogaz as to English law: English law: Ukrainian law: White & Case Linklaters Magister & Partners 7-11 Moorgate One Silk Street 10 Muzeyny Provulok London London Kyiv, 01601 ECZR 6HH EC2Y 8HQ Ukraine

To the Managers and the Trustee as To the Managers as to English law: to Ukrainian law: Allen & Overy LLP Proxen & Partners One New Change 3rdFloor, Office 6 London 20 Shota Rustaveli Street EC4M 9QQ Kyiv, 01023 Ukraine AUDITORS TO THE COMPANY BDO Balance-Audit Ltd. 26, Lesi Ukrainki Boulevard, 1”’Floor Kyiv, 01133 Ukraine PriDlcd by Royle Financial Print RF616fl @