Key Sustainability Factors

Key Impacts

As a major employer in Russia, Rosneft has a substantial influence on the national economy, society, and environment.

• considerable contribution to ensuring Russia’s energy security and petroleum product supplies to more than 50 regions;
• the Company is among Russia’s major taxpayers, with a total contribution to the consolidated national budget exceeding USD 40 bln in 2008;
• significant influence on the pipeline, machine-building and service markets;
• the Company’s subsidiaries are major employers in some Russian regions and serve as local economic mainstays for several municipalities, thus making a considerable contribution to sustainability and investment attractiveness of such localities.

• air pollution (air contaminant and greenhouse emissions);
• impacts on water resources (water consumption for process needs; water pollution resulting from operations, leakages and accidents);
• land use for industrial development;
• potential impacts on biodiversity;
• pollution resulting from consumption of Company-produced petroleum products (indirect impacts).

• the Company ensures stable employment and offers competitive compensation and social assistance;
• promoting ethical social and business practices through strict observance of human rights, equality, transparent supplier and contractor relations, and a socially responsible approach to restructuring the Company and its subsidiaries and affiliates;
• contributing to educational and cultural development of the host regions; supporting sports and promoting healthy lifestyle;
• charitable support of local communities and cultural institutions;
• significant contribution to supporting traditional lifestyles of Northern indigenous communities in the host regions.

Risks and Mitigation Opportunities

Rosneft continuously monitors and evaluates legal, financial, industrial, environmental and other risks that may adversely affect its sustainable development.

These risks are associated with potential changes in exchange regulation, in customs and tax legislation, in subsoil resource use and licensing legislation, and in court practice.

The Company assesses the recent regulatory and legislative trends as largely positive and does not expect any adverse effects on its operating and financial results from future changes in Russian legislation.

Risks related to debt servicing

The majority of Rosneft’s debt portfolio is represented by US dollar denominated loans that bear interest primarily at rates determined with reference to LIBOR or EURIBOR. Accordingly, an increase in LIBOR/EURIBOR rates can lead to higher costs of debt servicing, which, in turn, may adversely affect the Company’s solvency and liquidity.

A major proportion of the Company’s gross revenue is attributable to export operations and denominated in foreign currency. A foreign-currency revenue and cost structure allows for natural hedging of the foreign exchange risk, minimizing negative impacts on the Company’s operating and financial results.

Risks related to court proceedings with respect to unsettled tax liabilities and other debt

Rosneft and some of its subsidiaries are currently parties to litigations with the Russian tax authorities and several legal entities. Irrespective of their eventual outcome, these litigations do not materially affect the Company’s financial position.

Risks related to crude oil, natural gas and petroleum product prices

Prices of crude oil, natural gas and petroleum products are the key driver of financial and, indirectly, operational performance of Rosneft. These prices mostly depended on global market trends and supply/demand patterns in Russian regions. A reduction in oil, gas and petroleum product prices can result in falling commercial production, a decrease in the Company’s reserves or lower economic efficiency of exploration programs.

To mitigate this risk, Rosneft is implementing a comprehensive program to improve operating performance and financial discipline, and to enhance cost control.

Risks related to gas production and marketing

The Unified Gas Supply System (UGSS), which is owned and operated by OJSC Gazprom, transports virtually all gas in Russia. In practice, Gazprom has considerable freedom to decide on granting access to UGSS to third parties. Further growth in the Company’s gas production and sales to independent regional traders and industrial consumers primarily depends on sufficient access to UGSS capacity.

In 2006, the Company signed a strategic partnership agreement with Gazprom to cooperate on hydrocarbons exploration, production, transport, and processing. In particular, the agreement envisages that Gazprom will purchase excess oil produced at the Company’s West Siberian fields connected to UGSS.

Risks related to reserve base estimates

Crude oil and gas reserves data are only estimates and are inherently uncertain. The actual size of accumulations may differ materially from these estimates whose accuracy depends on the quality of available information and interpretation of petroleum engineering and seismic data.

This risk is common to all oil companies, and is mitigated through ongoing enhancement of exploration and reserve estimation techniques. At Rosneft, this function is the responsibility of Corporate Research and Development Center.

Risks related to complicated oil production conditions

Rosneft’s long-term crude production growth will be provided primarily by the development of Far East and Southern seas fields. These shelf projects are associated with high development costs and significant environmental and industrial risks.

In developing its shelf projects, Rosneft actively collaborates with leading Russian and international companies, which ensures reduced risks and continuous adoption of global best practice in this area.

HR-related risks

Demographic forecasts anticipate labor force shrinkage in Russia in the near future. This would increase labor costs and intensify competition between oil companies for attraction of skilled workforce. Low workforce mobility aggravates the issues of recruiting personnel for new oil fields. In addition, since the education system in Russia has been degrading, the Company faces difficulties in attracting qualified workers and junior managers.

To address these adverse trends, the Company seeks to offer competitive compensation and working conditions to its employees, develops priority social programs aimed at retaining the most valuable employees, continuously improves the corporate professional training and development system, and cooperates with specialized educational establishments to select the most capable young specialists and improve their professional skills.

Risks related to restructuring

Rosneft’s restructuring measures aimed at improving performance and optimizing employee headcount and structure of the Company’s divisions may lead to social conflicts.

To mitigate such risks, Rosneft strives to efficiently interact with labor unions, taking into account interests of all the parties involved and selecting restructuring options most appropriate to local labor markets.

Environmental risks

The Company’s core operations are associated with large-scale and diverse environmental impacts. Exceeding permissible impact levels may result in significant penalties imposed on the Company and damage to its reputation.

To minimize such risks, the Company implements the Environmental, Gas, and Pipeline Reliability and Safety Programs, introduces state-of-the-art and safer equipment, trains the staff and works out emergency response methods, recycles oil sludge and remediates contaminated soils, and reclaims land upon completion of production operations.