Gas Strategy

Rosneft is among the largest independent gas producers in Russia, with gas output currently accounting for about 10% of its total hydrocarbon production. Gas business is becoming increasingly important to Rosneft as the Company has excellent prospects to build on its significant undeveloped gas reserves, which is further supported by the growing gas prices. Rosneft plans to increase output of gas from 12.4 bln cubic meters in 2008 to 55 bln cubic meters by 2020 to monetize its rapidly increasing gas reserves. Rosneft’s gas production growth is only limited by the access to Gazprom’s transportation system and Gazprom’s ability to procure gas on the domestic market (Rosneft can not export natural gas as Gazprom holds export monopoly, and the capacity of the domestic market is limited) – those two issues are currently being discussed with Gazprom.

As of year-end 2008, the Company’s proved gas reserves under PRMS classification totaled 784 bcm, with only less than one-quarter of these being developed. Approximately 80% of Rosneft’s proved gas reserves are located in Western Siberia, primarily in the Yamal-Nenets Autonomous District, and 47% of proved gas reserves are concentrated at the Kharampurskoye field.

Rosneft is implementing an integrated gas strategy, which covers both onshore and offshore gas fields. The main onshore project is the massive Kharampurskoye field in Western Siberia. Gas produced at this field and within other onshore projects is planned to be sold to Gazprom and domestic end-users. Sakhalin-1 in the Russian Far East is Rosneft’s key offshore gas project, where gas production has been underway since late 2005. The Company also performs full-scale exploration activities within its prospective offshore projects — Sakhalin-3 and Sakhalin-5.

Another strategic priority of the Company’s gas strategy is improving the utilization of associated petroleum gas. The associated gas utilization ratio was 61.1% in 2008, compared with 60.0% in 2007. The Company made progress in 2008 in its program for increasing rates of associated gas utilization. Work included the launch and fine-tuning of the first gas compression station at the Priobskoye field in Khanty-Mansiysk Autonomous District. The station was brought into commercial use, enabling an increase of 700 mln cubic meters per year in the amount of usefully employed associated gas. Rosneft subsidiary Samaraneftegaz brought several new installations into operation, increasing rates of associated gas utilization at the Pinenkovskoye, Sophinsko-Dzerzhinskoye, Gorbatovskoye and Yezhovskoye fields from 38% to 95%.

The gas utilization program also envisages using comprehensive mechanisms of the United Nations’ Kyoto Protocol. In September Rosneft and the World Bank signed an agreement on the purchase of Emission Reduction Units (ERUs) created by the implementation of the associated gas utilization program at the Komsomolskoye field in Yamal-Nenets Autonomous District. Another agreement, on the purchase from Rosneft of ERUs created thanks to the associated gas utilization program at the Kharampurskoye field in Western Siberia and Khasyreiskoye field in Timan-Pechora, was signed in December 2008 with Carbon Trade & Finance SICAR S.A. (a joint venture between Dresdner Bank and OJSC Gazprombank). These agreements should allow Rosneft to reimburse partially its investments in programs for more efficient use of associated gas at the above-mentioned fields.

In 2008, the Company’s total gas production was 12.4 bcm, down by 21.2% compared with 2007. The decline was due to temporary suspension of production at several gas fields in the Yamal-Nenets Autonomous District as part of the Company’s policy of rational reserve use and environmental protection, which envisages reduction of gas flaring and increase of gas utilization rates. Gas sales declined by only 9.8% in 2008 compared with 2007, despite the production decline of more than 20%.

Rosneft’s gas business — key performance indicators