Development and Strategy outlook

Rosneft’s strategic objective is to become the world’s leading oil and gas company. The Company is aiming to achieve the best production and financial indicators, while also maintaining the highest environmental and industrial security standards, improved social responsibility, and efficient corporate governance. Rosneft’s management expects to accomplish these goals by expanding production, refining, and marketing operations both in Russia and abroad. Ongoing development and application of new technology, enhanced management policies, and tighter financial discipline are also crucial to this strategy. All of these measures will ensure continued growth in Rosneft’s production and financial performance for the benefit of its numerous shareholders.

The Company’s development strategy has the following key priorities:

Further Growth in Crude Oil Production

Provided the favorable economic conditions continue, Rosneft believes it can increase annual crude oil output to 950 mln. barrels (130 mln. tonnes) by 2010 and up to 1,170 mln. barrels (160 mln. tonnes) by 2015. In the short term, growth will be driven primarily by further development of the Company’s fields in West Siberia and Timan-Pechora.

East Siberia is crucial to the Company’s medium-term development. Currently, Rosneft is completing production facilities at the massive Vankor field in the Krasnoyarsk region. The plan is to export Vankor crude via the East Siberia — Pacific Ocean pipeline, which is now under construction. Meanwhile, crude oil from the field will be delivered westward through Transneft’s trunk pipeline system. Rosneft in cooperation with TNK-BP will also participate in the development of the Verkhnechonsk field in the north of the Irkutsk region.

In addition, Rosneft holds licenses to several blocks adjacent to the Vankor and Verkhnechonsk fields, which ensure the Company’s sustainable development.

The Okhotsk Sea shelf will also greatly contribute to long-term production growth. Although Rosneft’s Sakhalin-3, Sakhalin-4, Sakhalin-5, and Kamchatka shelf projects are currently at an early exploration stage, they represent some of the most promising sources for stable growth in hydrocarbon output, thus enabling the Company to become a major player in the Far East energy market. All these projects are being implemented under joint financing agreements to ensure lower operational risks and capital expenditures.

Increasing Crude Throughput and Refineries Complexity

The acquisition of new assets in 2007 enabled Rosneft to substantially increase its refining capacity and the quality of petroleum products. In the coming years, the Company will continue to improve the efficiency of refining operations.

Comprehensive upgrades of Rosneft’s refining facilities allow steadily increasing production of petroleum products in compliance with the most rigorous international standards. Better-quality petroleum products as well as higher complexity and capacity of refineries will enhance the Company’s profitability and improve the balance between production and refining operations.

In addition, Rosneft plans to expand and upgrade its network of filling stations and related facilities to increase its share in the dynamic retail market of petroleum products.

Increasing the Company’s Value by Improving Operating Efficiency

Rosneft consistently aims to improve its key performance indicators, such as upstream operating expenses per barrel of production, upstream capital expenditures per barrel of production, return on average capital employed, and return on equity.

The Company has therefore introduced an advanced Total Production Management System™, which is based on geological and simulation models for major fields. TPMSYS™ enables Rosneft to identify wells with the highest production potential, and efficiently allocate financial resources for drilling, hydraulic fracturing, and artificial lift operations. Rosneft’s active cooperation with the world’s leading service companies, such as Schlumberger, Halliburton, and Baker Hughes, facilitates the introduction of top-of-the-line drilling and workover technologies.

The Company’s capital-intensive projects are assessed on the basis of such key parameters as the net present value, internal rate of return, payback period, and profitability index.

Comprehensive measures to improve operating efficiency, coupled with favorable geological conditions and crude oil and gas characteristics at its major fields, help the Company to hold operating expenses and capital expenditures per barrel of crude output below the industry average.

Commitment to the Highest Standards of Corporate Governance

Rosneft is committed to the highest standards of corporate governance. The Company’s code of corporate governance includes provisions for:

• at least three independent directors on the Board of Directors;
• committees of the Board of Directors, of which at least two (the Audit Committee and the HR and Remuneration Committee) are headed by independent directors;
• prohibiting the use of insider information;
• introducing and continuously enhancing internal control policies and procedures.

Rosneft also strives to constantly improve its information disclosure system. At the end of each quarter, the Company issues Management Discussion and Analysis (MD&A), which contains comprehensive data on its operating and financing activities. Furthermore, Rosneft is among the few global petroleum companies that publish reserve audit reports under international standards.

In 2008, a new development strategy is planned to be submitted for approval to the Board of Directors.