President’s address

Dear Shareholders,

Rosneft saw many changes in 2010, creating new points of reference for the Company. Our task now is to transform Rosneft from a national player, applying traditional technologies at traditional oilfields, into an international oil & gas leader with a diversified field portfolio including shelf reserves, and applying the latest technologies, including many of our own invention.

I am pleased to report that we not only embarked on this work in 2010, but began to see benefits as a result of it.

Oil production figures are particularly telling. Daily crude output in Russia increased by 218,000 barrels in 2010, of which two thirds (140,000 barrels) were to the credit of Rosneft. Our hydrocarbon output exceeded 2.5 million barrels of oil equivalent per day, compared with 1.7 million barrels per day only five years earlier. So growth over the period was about 50%. This outstanding result was not only due to rapid output increases by our largest production division, Yuganskneftegaz, but also to commissioning of new fields in Eastern Siberia, most notably Vankor.

Strong development of operations ensured excellent financial results. Free cash flow in 2010 was almost 6 billion US dollars, enabling us to roll net debt back to its level at the end of 2006. This more than fulfils our promise in 2006 to achieve net debt-to-EBITDA of 1x by 2010. The ratio in the reporting year was in fact 0.7.

Cost control was an important factor in our record financials last year. Growth of manageable costs was again lower than real strengthening of the rouble, continuing an uninterrupted trend since the Company’s IPO in 2006. Cost reduction is one of our main priorities and we will continue to focus on it in the future.

The Company confirmed its status as a global leader among public companies by levels of proved liquid hydrocarbon reserves. An independent audit by DeGolyer & MacNaughton found that Rosneft held 18.1 billion barrels of oil and nearly 800 billion cubic meters of gas under PRMS classification by the end of 2010. So the replacement rate for proved oil reserves to international standards was 106%. As of December 31 we had hydrocarbon reserves sufficient for 25 years at current rates of production (21 years for oil and 67 years for gas). Rosneft also has enormous potential for augmentation of reserves, thanks mainly to license areas on the Arctic shelf, which were acquired in autumn last year. This potential will be used for replenishment of the Company’s reserve base in the long term.

Rosneft had a productive dialogue with the Russian Government in the reporting year as regards optimization of the tax regime and stimulation of investments. The key issue for Rosneft is creating tax conditions for new oil production regions, which can trigger investment decisions. Such a system has been designed in outline, but technical details and rates still need to be clarified. We are hopeful that joint efforts will lead to an acceptable solution for both oil companies and the Russian budget.

We continued work on modernization of Company refineries in 2010 in order to comply with the Government’s Technical Regulations on fuel quality. Two new isomerization units were completed at the Syzran and Angarsk Refineries, a visbreaking unit was modernized at the Kuibyshev Refinery, and modernization work was completed on reforming facilities at Syzran and isomerization facilities at Novokuibyshevsk.

Rosneft is aware of the huge opportunities for energy saving, energy efficiency, and innovative development in the Russian oil & gas industry. We understand too that our Company, which produces more than 23% of Russian oil, has a special responsibility for implementing a modernization policy in the oil & gas sector. We are therefore increasing expenditures on technical development and innovation business: Rosneft’s R&D spending will rise from 100 million US dollars in 2010 to more than 250 million US dollars in 2011, putting the Company on a level with the largest global oil & gas companies by R&D spending per dollar of revenue. New long-term innovation targets were prepared in the reporting year, and are enshrined in the Rosneft Program for Innovative Development.

The success of our new strategy also depends on internal factors. We have therefore worked hard to optimize management structure and corporate systems, and to strengthen financial and operational discipline. We launched a number of projects in 2010 for withdrawal of non-core assets, optimization of service divisions and improvement of business processes. This work will continue in 2011.

Rosneft understands that growth depends on people. Efficient and motivated work by the Company’s employees is of key importance, and the Company also supports local communities in regions where it has major business presence. Our social spending in the reporting year totaled 550 million US dollars, and enabled many important social programs to be continued.

Rosneft made an excellent start on its strategic initiatives in the reporting year, and results for 2010 and the first part of 2011 show that we are moving in the right direction. We believe that achievements to date offer a strong basis for growth of the business and of Company capitalization.

Eduard Khudainatov
President of OJSC Rosneft Oil Company