Progressive Advance Strategy ‘08 Annual Report Contents Joint Address of the Chairman of OAO TATNEFT Board of Directors and the General Director, Chairman of the Management Board, to Shareholders, Investors and Partners 2 About Financial 6 the Company 96 Results 1.1. The Company Status 6 4.1. Auditor’s Conclusion 97 1.2. The Company Mission 12 4.2. Financial Statements of 1.3. The Company's Strategic Initiatives OAO TATNEFT FY 2008 100 and Tasks till 2012 12 4.3. Brief Financial Analysis of the 1.4. The Company's Equity Structure. TATNEFT Financial Statements FY 2008 103 Securities Market and Stock Market. 12 4.4. Important Aspects of the Accounting 1.5. TATNEFT Capitalization Policy and Information Representation Management System 13 in Financial Statements for 2008 105 Activity Areas 14 Structure of TATNEFT Business-Group 18 Representation of Shareholders' 1.6. Business Environment 19 108 and Investors' Interests Partners of OAO TATNEFT 20 Distribution of Powers among the Board Corporate Social Liabilitiy of Directors Members and of the 116 6.1. Corporate Liability to the Personnel 116 Management Board of OAO TATNEFT 22 Main Indices of the Oil Joint-Stock Appendices Company by the Results of FY 2008 28 118 7.1. Information Reference about the Members of the Board of Directors Production of OAO TATNEFT 118 32 Activity 7.2. Information Reference about the 2.1. Geology and Oil and Gas Members of the Management Board Production Department 32 of OAO TATNEFT 120 2.2. Management of the Oil, Gas and 7.3. List of Main Issues Reviewed at the Petrochemical Complexes 38 Meetings of the Board of Directors 2.3. Management of Oil/Gas and Oil/Gas in 2008 121 Products Sale and Delivery 43 7.4. Information about Observance of the 2.4. Servicing Management 46 Corporate Behavior Norms in 2.5. Industrial Safety 53 OAO TATNEFT in 2008 122 7.5. Main Corporate Events of 2008 124 Corporate List of Abbreviations 126 Management 56 Forecast Comments 128 3.1. Management System of the Company 56 Annotation to the Report about Stable 3.2. Management of TATNEFT Group 56 Development and Social Liability 3.3. Management Mechanisms 67 of OAO TATNEFT FY 2008 129 3.4. Financial Management 74 3.5. Logistics Management 77 3.6. Management of Production Efficiency 80 3.7. Company Restructuring 84 3.8. Investment Activity 89 3.9. Investment Projects 90 3.10. Ecological Activity 92 3.11. Indices of Ecological Safety and Environmental Impact 92 OAO Tatneft Annual report 2008 The Annual OAO TATNEFT Report FY 2008 was reviewed by the Board of Directors on May 26, 2009 and it was recommended for approval by the OAO TATNEFT Shareholders' General Meeting Main performance indicators Oil production volume Proved reserves The Company's core business is oil produc- According to the hydrocarbon reserves esti- tion which was conducted at 77 oil fields mation of «Miller and Lents» international in the reported year. In 2008, 25.766 mil- independent consulting company, as of 01 lion tons of oil has been produced by the January 2009, proved hydrocarbon reserves Company's extracting enterprises, which is (including producing, non-producing and the highest in the last 15 years. Thanks to non-drilled reserves) of OAO Tatneft made enhanced oil recovery methods employed, 878.2 mln tons of oil (by SPE estimation tech- 45.2% of all oil has been recovered in 2008. nique, taking into account average annual oil price in 2008). 25.766mln tons. 878.2 mln tons. OAO Tatneft’s Oil production dynamics (mln tons) ‘08 ‘06 ‘02 ‘98 ‘94 Net profit Net profit bn. bn. 34.3rbl. 224.2 rbl. Financial and economic activities of 2008 result- In 2008, the volume of net assets has grown ed in pretax profit of more than 50 bn roubles, from 203.6 bn. rbl. to 224.2 bn. rbl. the aftertax profit making 34.3 bn roubles. OAO Tatneft exercises its activity as a vertically integrated Group, which includes oil and gas producing, oil and gas refining and petrochemical productions, companies selling oil, gas, oil and gas products and petrochemical products, and service units. The main territory of the Company activity is the Russian Federation. for details see www.tatneft.ru The Year of New Perspective Projects Implementation Joint Address of the Chairman of OAO TATNEFT Board of Directors and the General Director, Chairman of the Management Board, to Shareholders, Investors and Partners R.N. MINNIKHANO Head of the Board of Directors Board Withdrawal of non-core assets and restructuring that have taken place resulted in the qualitative change of the Company. The system of oil service management has been principally restructured and the Institute of Management Companies has been formed with break- down by the activity sectors, thus allowing to increase transparency of expenditures and efficiency of the production management, as well as to create a strategic reserve for implementation of the Company's investment projects. The system of uniform corporate standards has been aimed at mini- Dear Shareholders, Investors and Partners, mization all kinds of corporate risks and to maintenance of transparent The year 2008 was marked for TATNEFT Company with an relations between the parent company and affiliated and subordinate important date: the fifteenth anniversary of going public. It is companies. not a jubilee; however it gives a reason to reassess the road A uniform information environment has been created in the passed on the way of TATNEFT establishment and develop- Company. Fiber-optic networking with the information processing cen- ment in the status of a Public Company. ter has been deployed covering performance areas of all TATNEFT's At present activities of the Company unite interests of more than divisions. Permanently active models of some large fields have been 53 thousand Russian and foreign shareholders; it is closely connected built which allowed increasing the efficiency of their development. with international investment community, a wide range of business In general, solid financial and industrial foundation for continuous partners, state and industry branch structures. TATNEFT is a large tax- qualitative growth of the Company resulted from fifteen years of our payer, it provides over 100,000 working places and implements socially activity, which is confirmed by the increasing level of OAO TATNEFT important programs. shareholder value. Successful results of our activity allowed increasing The Company has become a joint-stock entity already having 50 considerably dividends payments. OAO TATNEFT's shares are popular years of unique experience in the oil and gas production. This experi- and they are actively traded at the Russian and the international stock ence has provided serious advantages to the Company. However, in markets. the new free market conditions in the beginning of the 90ies TATNEFT The principle of transparency is fundamental for establishing an started to restructure the business management system. The Company efficient business. The Company was one of the first in Russia to start started to implement principally new long-term strategic programs. application of the international US GAAP standards. At present state- A production enterprise has turned into a vertically integrated ments are executed on a quarterly basis. A uniform web portal of the structure, TATNEFT group of companies. Being one of the largest TATNEFT Group started functioning in 2008 to provide complete infor- national suppliers of oil and gas, TATNEFT develops crude refining mation about all areas of the Company's activity to the shareholders and petrochemical production, and operates its own network of filling and to all interested persons. stations. The Company's annual production volume increased by 12% The Company takes a principally responsible position in the busi- during the last 15 years. Oil reserves replenishment exceeded 120%. ness conduct and takes active part in the improvement of the eco- The Company appreciably expanded its activity outside the Russian nomic and industry branch mechanisms. TATNEFT came out as an Federation and the Republic of Tatarstan. The Company also pays spe- initiator to solve problems hindering maintenance and increase of cial attention to introduction of advanced equipment and technologies. the oil production volumes. With the support of the President and the For the purpose of providing high efficiency of operating and finan- Government of the Republic of Tatarstan respective amendments were cial activities the Company's management applied considerable efforts introduced in the legislation of the Russian Federation with regard to to improve the corporate management system and to optimize busi- setting zero rate of Subsoil Tax for production of extra-viscous oil and ness processes during the recent years. differentiating the Subsoil Tax depending on the reserves depletion. 2 SH.F. TAKHAUTDINOV General Director, Head of the Management Evaluating the past fifteen years we are looking into the future with confidence. We form the portfolio of strategic projects which will allow further growth of operating efficiency during the long period of time. We consider the year 2008 a year of new perspective projects. A Program improving production management efficiency and fur- ther strengthening of financial and economic state of OAO TATNEFT for the period until 2015 was started in 2008. The priority line of the Program is maintenance of the profitable level of production, provi- sion of oil reserves replenishment in full volume and improvement of in 2008. In aggregate the total volume of the Company's investments the reserves structure, expansion of the resource potential, as well amounted to over 72 billion rubles, which is 1.7 times more versus the as further development of oil refining and petrochemistry, including previous year. construction of the Complex of oil refining and petrochemical plants in TATNEFT joined the Top 250 Platts rating of the world's most effi- Nizhnekamsk, development of retail business, development and pro- cient energy companies in 2008.