THE RUSSIAN OIL INDUSTRY

Market Developments Russia is the world's second largest producer of crude oil after Saudi Arabia and also one of the world's top oil exporters. *Russian export blend crude oil (REBCO)* is a medium gravity sour crude that accounts for exports of approximately 4 million barrels per day into the Atlantic Basin or to other nearby refining markets. Russians proven oil reserves were estimated at 72.3 billion barrels at the end of 2004, or approximately 6,1% of the world’s total proven reserves of oil estimated at 1,188.6 billion barrels according to the BP statistical Review of World Energy published in June 2005. Following the rapid privatisation drive in the mid-1990s, the Russian oil industry has evolved into a reasonably well defined sector, led by the large Russian oil companies (LUKOIL, Gazprom, Surgutneftegaz and TNK-BP). As these companies were generally created from the remains of the Soviet-controlled production associations that had asset concentrations for efficiency reasons, their operations are typically concentrated in certain regions. A number of other smaller Russian and Western oil companies also conduct operations in Russia. As a result, the industry is highly competitive. Current Russian oil production is predominantly based in Western Siberia. *There are two main qualities of export oil in Russia: Urals Blend and Siberian Light*. Siberian Light, produced in Siberia, has a lower sulphur content and lower viscosity than Urals Blend a mixture of crude oils consisting of Siberian Light with high sulphur oils produced in Russians’ European regions. Privatisation of the oil and gas industry has allowed Russian and foreign oil companies to bid for licences and to offer services, providing for new and increased competitive forces. At the same time, the Russian government has recently increased its role in the oil and gas sector through a number of acquisitions and mergers. The Russian government will continue to play an important direct role in the future development of the oil and gas sector. The Russian government implemented the auction process for licences in 2005 and this program will continue through 2006 and for the foreseeable future. The Russian government’s support for the auction process is indicative of its continuing interest in attracting investment while it continues to consolidate its own leading position. With Russia advancing to investment grade status, a number of oil and gas companies (such as Urals Energy and Novatek) have recently secured financing by accessing the international capital markets, and Gazprom has been able to open its ownership to foreigners. As a consequence, competition is intensifying. Russia has significantly increased its crude oil exports since the 1990s. Contributing factors include the fall in Russian market demand, the continuing differential between Russian domestic and foreign prices, the expansion of transportation capacity, especially pipelines, and the elimination of export quotas and licensing requirements in 1995. However, although export quantities have increased, they have been, and will continue to be, restricted in the medium term by limited Russian market and international pipeline transportation capacity. *Oil Pricing* Crude oil prices have been volatile in the past and are likely to continue to be volatile in the future. In addition, hedging has not been widely utilised in Russia since the 1998 economic crisis. Prices for oil produced in Russia are related to the price of crude oil in the world markets, with Urals Blend historically trading at a discount compared with the benchmark crude oil from the North Sea. Prices for oil are based on world supply and demand and a number of other factors, including government regulation, social and political conditions, and weather conditions. Recent increases in oil prices reflect, among other things, an increase in world-wide demand, particularly in the United States and Asia, heightened geopolitical uncertainty in many areas of the world and supply concerns in the Middle East and other key producing regions. At the end of 2005, the average price per barrel increased as supply concerns arose following hurricanes Katrina and Rita and their adverse effects on crude oil production in the Gulf Coast region of the United States. Russian vertically-integrated oil companies are now typically seeking to increase the utilisation of their refining capacities but, given the increased profitability of export sales, many of them have until recently found it more profitable to export crude oil at higher world prices than to expend resources on refining. This has been changing recently as Russian domestic prices for oil have risen and the Russian government has raised the export tariffs on crude oil to a point where Russian market sales of refined products now present an economic alternative to oil exports.

QUALITY PARAMETERS OF RUSSIAN EXPORT BLEND CRUDE OIL_ QUALITY CERTIFICATE GOST 9965-76* RUSSIAN EXPORT BLEND CRUDE OIL REBCO IN ACCORDANCE WITH THE INTERNATIONAL SPECIFICATIONS AND STANDARDS FOR SUPPLY SET FORTH IN GOST 9965-76 DENSITY AT 20 DEG C KG/M % MAX 0.870 SULPHUR CONTENT % MAX 1.8 PARAFIN CONTENT % MAX 1.8 WATER AND SEDIMENT % MAX 1.2 ASH CONTENT % MAX 0,05 CHLORIDE CONTENT % MAX 100 DESTILATION: UP TO 200 Degr. C. % MAX 21 UP TO 300 Degr. C. % MAX 41 UP TO 350 Degr. C. % MAX 50 INDEX API at 20C Degress % MAX 32,00 SALTS CONTENT, MG/L % MAX 100,00

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