TNK-BP: Managing risk in Russia

Larry McVayChief Operating Officer, TNK-BPCERA Week, Houston, February 15, 2004

Presentation outline

I. Company introduction

II. Russia’s operating environment: opportunities and challenges

III. TNK-BP experience: managing risk in Russia

TNK-BP at a glance– Annualized 2004 liquids production of 1.44 mln bpd (TNK-BP excluding Slavneft)

+ 0.22 mln bpd (Slavneft)

– Operating in all major hydrocarbon areas of Russia, main production assets located in West Siberia and Volga Urals basins

– Year-end 2003 liquid reserves:• SPE total proved: 9,060 mln bbls

• SPE total proved + probable: 17,383 mln bbls

• SEC total proved with license cut-offs: 4,318 mln bbls

– Total number of fields: 250 • well stock: 15,000 producing and 9,500 idle

– Lift method: circa 80% of production on ESPs

– Pipeline (km): 28,000

– Refineries: 6 (28 mtpa throughput)

– Retail sites: over 2,100

– Employees: 99 000 in Russia and Ukraine

TNK-BP geography

core production areas

project areas

Volga Urals

West Siberia

Moscow

East Siberia

Samotlor

Saratov Orenburg

Udmurt

RospanNyagan

Kovytka

VC

NNG

TNK Sakhalin

Uvat

* SPE proved

Liquid VolumesVolga Urals

West Siberia

East Siberia Total

04 production (kbpd) 451 987 0

0

1.8

1,437

* reserves (bn bbls) 1.9 7.1 9.1

** resource (bn bbls) 4.1 23.1 28.9

** SPE 3P consolidated reserves(excluding Slavneft)

SPE Proved 9.1 bn bbls

SPE Possible 11.4 bn

bbls

SPE Probable

8.3 bn bbls

Industry position

• TNK-BP keeps production growth above Russian average rate

• Oil production growth continuing but slowing in Russia

Source: Company reports

0

200

400

600

800

1000

1200

1400

1600

1800

Yukos Lukoil TNK-BP Surgut Sibneft Tatneft Slavneft Rosneft Bashneft

20032004

Annu

al c

rude

pro

duct

ion

(kbp

d)

0%

5%

10%

15%

20%

25%

Slavneft TNK-BP SurgutNG Rosneft Russia Sibneft Lukoil Yukos

20032004

Production growth rate, 2004

2004 production growth

TNK-BP: 17 months on

• Strong production growth above the industry average 13%

• Renewal of asset base commenced

• Focus on corporate governance

• Exports and sales up

• Refinery modernization on track

• HSE improving

• Robust financials, working within financial framework

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2001 2002 2003 2004

kbpd

35

45

55

65

75

mtpa

Russian Petroleum Basins

Ultimately Recoverable Reserves in bnboe with gas/oil division. Source: BP reports, 2003

Moscow

Irkutsk

WESTSIBERIA

SAKHALIN

EASTSIBERIA

TIMANPECHORA

VOLGA-URALS VC

KT 4

Uvat

Rospan

Ryabchik

Kovykta

BARENTS

OilOilGasGas

531531

105105

6363

3030

3737

2626

Working in Russia: operating environment

ChallengesChallengesPositivesPositives• Compelling opportunity set

• Robust macroeconomic environment

• Domestic market increasingly attractive

• Federal and regional authorities open to dialogue

• Tax regime– Provides cushion in case of price

decline

• Increasing state control

• State monopolies restricting

– Oil transportation and exports

– Gas transportation

• Complex bureaucracy

• Tax regime

– Incremental tax take 90% after $25/bbl

Tax regime

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

15 20 25 30 35$/bbl

Russia Norway US GoM UK old fields UK new fields

Marginal tax rate in %

Source: International Tax and Investment Council/Petroleum Advisory Forum/TNK-BP

The export challenge

• Production substantially outpacing domestic demand growth

• Export system needs de-bottlenecking

– Investment in new infrastructure required

– New export routes required to access higher-growth markets (North America, Asia-Pacific)

• Government supports plans to expand export infrastructure but is reluctant to allow private investment in infrastructure

Incremental crude export capacity expansion, 2002-2006F• Transneft Export Expansions

Source: TNK-BP projection

94273

591511

580

200

400

600

800

2002 2003 2004 2005E 2006E

mtpa

0510152025303540

kbpd

internationalmarkets

Ryabchik

infrastructure access

currentproduction

infill drilling

field optimisation

near infrastructureleddevelopment

0

5

10

15

20

25

30

35

prob

able

poss

ible

drilling & re-completions

SPE

prov

ed

long termshort term medium term

Estimated resources30.8bn boe (Liquids only) estimated bn boe estimated bn boe

SEC basis PD 3.4

4.3

6.0

SEC basis PD + PUD

SPE PD

SPE PD + PUD 9.1

SEC basis : proved, truncated at license expiry

SPE : recovery to economic life of field

PD : proved developed

PUD : proved un-developed

Proved reserves as at 1/1/2004

Resources to reserves to production

Exploration technology

• Currently building world-class exploration capability to underpin production growth aspirations

• Main focus areas are:

– Seismic imaging

– Field operations and data quality

– Exploration methodology and technology

• TNK-BP benefits from access to proprietary BP Group technology and processes

Downstream portfolio

• St. Petersburg

• Moscow• Kaluga

• Tula• Kursk

• Saratov

• Rostov • Orenburg

• Karelia

• Krasnodar

R U S S I A

• Dnipropetrovsk

• Donets'k

• Kiev

U K R A I N E

• Linos refinery

• Orskrefinery

•Krasnoleninskrefinery

• Nizhnevartovskrefinery

•Ryazan

refinery

•Saratovrefinery

•Orenburglubes plant

Russia:• GDP per capita:

8,945 USD• GDP growth rate:

7%• Fuel demand: 70.0

blpa (retail 40.0 blpa)

• Fuel volume growth: 3.5%

Ukraine:• GDP per capita:

5,300 USD• GDP growth rate:

8.2%• Fuel demand: 10.3

blpa (retail 7.0 blpa)• Fuel volume growth:

5.0%

Yaroslavl

GDP PPP terms, CIA world fact book

Fuel demand, McKinsey long term forecast

Strategic prospective regions

Growth regions

Other regions of current presence

Strategic regions

Refining RefineriesRef. volumes,

mtpa

226

Market share10%18%

Russia 5Ukraine 1

MarketingRetail sites

Retail volume,

blpaRussia 1,080 4.3Ukraine 1,020 1.4

Downstream optimization process

Gas Condensate

5 Refineries55 Types of

Products

13 Fields6 Quality Grade of

Crude

Export Crude

Products for Export

Products for domestic market

Crude for domestic market

Pipe (280 routes)

Rail (95 routes)

Barge (2 routes)

18 Ports

12 Ports13 Types of

Products

14 Marketing Subsidiaries

35 Wholesale Terminals

Pipe (84 routes)

Rail (6 routes)

Pipe (46 routes)

Rail (2 routes)

Barge (2 routes)

Pipe supplyfor refining

Supplies to2 refineries

Export pipe supply

Transshipment via

refinery for export

Summary

• Environment remains challenging but manageable

• Long-term horizon is key• A quality opportunity set• Resource base confirmed and

robust• Right technology application

can deliver • High quality skilled workforce• Moving from harvest to renewal • Gas will become increasingly

important• Governance progressing,

more to do