M.E.Stavsky Vice President OJSC NK Rosneft Moscow Carbon Market Forum 2008 April Rosneft Experience in Preparing Joint Implementation Projects: Constraints and Prospects

2 Associated Petroleum Gas (APG) Production and Utilization in Russia APG Resource Distribution 1 in Russia: 2007 Oil and Condensate Production Growth in Russia 1 APG resources: amount of associated gas extracted together with oil APG flaring is largely underestimated due to the absence of reliable production and recovery measurements Рост в 1,6 раза Рост в 2,4 раза APG Production Growth in Russia Source: Fuel and Energy Sector Central Dispatch Department MMT Oil Production bcm APG Production (Recovery and Flaring) 16.8 bcm (28%) 44.2 bcm (72%) Recovered Flared

3 APG Utilization Issues in Russia Key APG utilization issues:  Absence of additional gas processing capacities in some oil producing regions;  Restricted access to Gazprom’s Unified Gas Transmission System;  Large distances between certain fields and regional gas processing and transport centers;  A relatively narrow range of available technologies and technical solutions;  Low APG prices in oil producing regions. Projects to develop gas collection, transport and processing infrastructure are not cost effective for non-Gazprom gas producers Maintaining status quo means:  Atmosphere pollution by growing GHG emissions;  Suboptimal use of natural resources.

4 Rosneft APG Utilization Program APG Utilization Rate in RosneftAPG Utilization Options and Methods Rosneft activities to enhance APG utilization:  Increasing APG utilization rate in existing fields;  Maximizing APG utilization rate in new fields (Vankorskoye, Yurubcheno-Tokhomskoye);  Looking for new technical solutions and APG utilization technologies bcm Supply to GPP Supply to Gazprom Supply to other users Own consumption and power generation Flaring %

5 APG Recovery Project in Komsomolskoye Oilfield Project scope:  Construction of a 2 bcm booster compressor station (BCS);  Construction of an external gas pipeline. Utilization of Komsomolskoye APG Resources BCS put into operation Project objectives:  Utilization (treatment and supply to Gazprom trunk gas pipeline) over 2 bcm of APG by 2010;  Addressing the APG utilization issue;  Reduction of GHG emissions into the atmosphere. Urengoi-Chelyabinsk trunk gas pipeline BCS with a gas conditioning unit Komsomolskoye oilfield Gubkinsky GPP External gas pipeline Current supply arrangements New supply arrangements bcm APG productionAPG flaring

6 Improving Project Economy Based on the Kyoto Protocol Mechanisms Comparative Economic Indicators of the JI Project in Komsomolskoye Oilfield:  A Joint Implementation (JI) project under the Kyoto Protocol: A set of activities to reduce GHG emissions, with emission reduction unit (ERU) sale options to generate additional income;  The ERU sale facility allows increasing the project’s Internal Rate of Return; The Kyoto Protocol offers a mechanism to reduce economic barriers to GHG emission reduction projects Internal Rate of Return (IRR), % Discounted Payback Period (DPP, 10%), years Without ERU sale optionWith ERU sale option

7 Key JI Project Design and Preparation Stages Analysis of possible technical solutions for gas utilization, and selection of the most cost effective option; Analysis of applicability of the Kyoto Protocol mechanisms with a view to improving project performance; Analysis of project compliance with JI criteria, and selection of a methodology for estimating the GHG emission reduction level; Preparation of technical design documents (TDD); TDD: a preliminary independent review, publication for comments, and the final review. Parallel stages:  State Environmental Review of the project;  ERU sale negotiations;  Document preparation for project review at the national level.

8 Methodology for Estimating the GHG Emission Reduction Level  Selecting of the project baseline scenario: estimating CO 2 emissions from APG flaring;  Estimating emission level under the JI project;  Calculating Emission Reduction Units for further sales СО2 emissions, thousand tons Emission Reduction Units Project implementation year Baseline scenario emission level

9 Scope of Technical Design Documents Mandatory elements of technical design documents: A.General description of project scope/activities; B.Use of the baseline scenario selection methodology and additionality assessment; C.Project lifetime / ERU generation period; D.Use of the monitoring methodology and plan; E.GHG emission assessment by source, and emission reduction estimates; F.Project environmental impact assessment; G.Stakeholder comments. Specific elements of the ‘national’ package: H.Description of project risks.

10 NK Rosneft –World Bank Partnership The Bank’s experts made 3 visits to the oilfield: in July and October 2007, and in March The oilfield was also visited by experts from EcoSecurities (an international consulting firm responsible for the TDD Environmental Monitoring Section) and DNV Certification (a company that evaluated GNL project compliance at the final review stage). World Bank and DNV Certification experts visit LLC RN-Purneftegaz, the Komsomolskoye oilfield operator The World Bank is a partner to Rosneft as regards implementation of the Kyoto Protocol mechanisms in Russia’s oil industry.

11 JI Project Constraints Key methodological constraints:  There is no methodology to assess GHG emission reduction for a number of technical solutions providing for APG utilization (injection into the oil reservoir, underground gas storage facilities) –Potential APG recovery by NK Rosneft under such projects is estimated at not less than 1 bcm per year;  TDD preparation involves much labor input and relatively high costs, and therefore JI projects are not cost effective for small oilfields –Potential APG recovery by NK Rosneft under such projects is estimated, in the aggregate, at not less than 0.5 bcm per year;  There is no practical experience in using available methodologies in the Russian context. National-level constraints:  There is no practical experience in JI project review and approval by authorized public bodies;  The regulatory legal framework governing relations arising from JI project preparation and implementation needs further elaboration and improvement;  It is necessary to specify JI mechanisms in terms of hydrocarbon field licensing and operation.

12 Prospects for JI Use in Russia  Additional investment in the Russian economy to address the GHG emission reduction issue: up to 3 billion Euros in ;  Encouraging transition to more stringent environmental protection standards;  Creation of new jobs and tax revenue growth;  Encouraging new technology development;  Releasing oil companies’ investment resources for enhanced raw material base reproduction;  Rational use of available natural gas resources.

13 Additional slides

14 JI Project Preparation in Komsomolskoye Oilfield: Actual Work Schedule rd Q.4 th Q.1 st Q.2 nd Q.3 rd Q.4 th Q.1 st Q.2 nd Q.3 rd Q. Analysis of possible technical solutions for gas utilization, and selection of the most cost effective option; Search for and selection of the Partner to consider the use of the Kyoto Protocol mechanisms Analysis of project compliance with JI criteria, and methodology selection Project assessment using the JI mechanism Signature of the Letter of Intent with the Partner Selection of the company to prepare technical design documents (TDD). TDD preparation TDD predetermination and publication for comments TDD final determination Preparation of design documents and cost estimates for the technical project; state review; and approvals Bidding for equipment supply Negotiations on Emission Reduction Unit Sales Document package preparation and application submission for project review at the national level