1. Yukos/Exxon – Exploring a Deal Rob Anstey Carolina Bresciani Greg Mazur Saurabh Sekhri Kristy Von Ohlen

2. Agenda Russian currency crisis Russian currency crisis Russia today Russia today Russian oil industry Russian oil industry Yukos/Exxon deal Yukos/Exxon deal Exxon perspective Exxon perspective Yukos perspective Yukos perspective Hedging against risk Hedging against risk

3. Russian Currency Crisis Economic and Institutional reasons: Economic and Institutional reasons: Economic transformation Economic transformation Transitional depression Transitional depression Cumulative drop in GDP of 40% from 1989-1996 Cumulative drop in GDP of 40% from 1989-1996 Fiscal Problems: Fiscal Problems: Consolidated budget deficit of 4.8% in 1998 Consolidated budget deficit of 4.8% in 1998 Mounting interest payment as large as the budget deficit itself Mounting interest payment as large as the budget deficit itself Fall in price of Russian commodity exports Fall in price of Russian commodity exports Government Debt: Government Debt: Ruble depreciated by 25% to Ruble 6.1/US$ Ruble depreciated by 25% to Ruble 6.1/US$ Moratorium on foreign debt Moratorium on foreign debt Russia defaults on domestic debt Russia defaults on domestic debt

4. Russia Today Russia is now Investment Grade Imprisonment of Khodorkovsky Economy driven by natural resources

5. Russian Oil Industry Oil Oil Production-275.1 Tons rise of 11.2% Proven Reserves Siberia 70-87 Billion Barrels Rest of Russia 27-32 Billion Barrels Total 97-119 Billion Barrels Probable Reserves 13.43 Billion Barrels (50% probability) Possible Reserves 14.7 Billion Barrels (25% probability) Other Reserves 14.44 Billion Barrels (10% Probability)

6. Oil Pipelines China Pipeline from Angarsk to Daqing 1,500 miles Carry Oil to China, China Export it to other mkts. Environmental Concerns specifically Lake Baikal Japan Conflicting Pipeline from Angarsk to Nakhodka 2,500 miles $7 Billion deal $5 billion for construction $2 billion for exploration Oil could be shipped to Japan, Asia and to U.S. mkts Russia

7. Russia vs. OPEC Russia Did not Join-No Incentives Positives Price-Right now about $28-29 per barrel want $20-25 Oil Production-equal to Saudi Arabia, make own quota OPEC Cartel of Oil Producers-quota of 900,000 barrels per day Meeting quotas poor-overproduction, reserves, Rogue Producers-Russia, Norway, Mexico

8. Basics of the Deal Deal was for Equity Ownership Stake, not Joint Venture Initially $17.5 billion for 25% stake of Yukos Increased to $25 billion for 40% stake Could increase beyond 50% when Khodorkovsky retired in 2007 Estimated $3/barrel (up to $6) compared to BP’s price of $2/barrel. Analysts value Russian reserves at $1-$1.5/barrel Premium resulted from 80% increase in Yukos stock in 2003 Deal lauded by Energy Minister Yusufov. Other Russian officials: “No legal barriers for Exxon” All has changed since Khodorkovsky’s arrest

9. Exxon - Risks Deal is very expensive: Exxon will be overpaying for assets Inflated Yukos stock value Moody’s: Russian sovereign credit rating increased from junk to investment grade Effect on Exxon’s Balance Sheet Threaten perfect AAA credit rating All Cash Deal: Debt-to-Capital Ratio increase of 28% Half Debt/Half Cash Deal: Debt-to-Capital increase of 15% Effect on Financial Performance Return on capital employed (ROCE): only 10% Will require future cash outlays to find untapped Russian reserves

10. Exxon - Risks Biggest Risk – Political Russia: still uncertain investment climate Yukos: uncertain relationship w/ Government Gov’t imposed concession costs: eliminate per barrel profits These risks are materializing with arrest of Khodorkovsky Other Risk – Environmental Inherited risk from Yukos’ outdated legacy assets

11. Exxon – Benefits Exxon must establish a presence in Russia – Yukos is the biggest Russian company (3rd biggest worldwide) Yukos has world’s largest reserves: 20 billion barrels Competitive Move – get in before Chevron and become the dominant Western company in Russia Profitability of Russian oil companies much higher than in the West Would lower Exxon’s worldwide production, refining, and drilling costs Benefits are purely Long-Term and are worth the Short-Term risks

12. Exxon Perspective: After the Yukos Crisis Political Risks are much more dangerous now 42% of Yukos assets frozen: possible re-nationalization Must work with Putin and Gov’t to accomplish deal Investors have reacted negatively to Russian crisis Exxon committed to Russia Exxon will never abandon Russia (Sakhalin-1) Khodorkovsky out – possibly a good thing for Exxon Yukos stock down – new deal would be cheaper Possibility of Greenfield Investment, but unlikely Will Yukos even sell? New CEO, Simon Kukes, deal is delayed indefinitely

13. The Deal: Yukos’ Perspective

14. Export infrastructure has not expanded to keep up with production Export infrastructure has not expanded to keep up with production Bottlenecks restrict output growth Bottlenecks restrict output growth 1 million tons not delivered this year 1 million tons not delivered this year Need to build a new pipeline (current at 99% capacity) Need to build a new pipeline (current at 99% capacity) Transportation costs too high Transportation costs too high Exxon is #1 oil company, mostly cash funded. It has the needed money.

15. American companies allow Russia more control American companies allow Russia more control Implied sales guarantee Implied sales guarantee Both want more Russian oil in the US Both want more Russian oil in the US Russian domestic sales not at right price Russian domestic sales not at right price Wider opportunity to attract more loans for ambitious projects Wider opportunity to attract more loans for ambitious projects Added credibility of US partner = more investments Added credibility of US partner = more investments FDI in Russian oil industry is only $4.5bn FDI in Russian oil industry is only $4.5bn Oligarchs ready to cash in Oligarchs ready to cash in Good at seizing money, but not management Good at seizing money, but not management Need foreign help to manage int’l company Need foreign help to manage int’l company The Deal: Yukos’ Perspective

16. Foreign investment might curb Kremlin’s influence Foreign investment might curb Kremlin’s influence Since August Yukos has been raided by police, subjected to criminal investigations and a murder probe, and has seen its owner arrested. All are thought to be politically motivated. Since August Yukos has been raided by police, subjected to criminal investigations and a murder probe, and has seen its owner arrested. All are thought to be politically motivated. National security National security Strong partner could solidify security Strong partner could solidify security Yukos can capitalize on a foreign investment deal from Exxon. It would increase growth opportunities without giving up control.

17. Hedging Strategies Foreign exchange risk Foreign exchange risk Purchase price ($) Purchase price ($) Local costs offset naturally by local revenues Local costs offset naturally by local revenues Political risk Political risk Possibly offset by a government stake in the deal Possibly offset by a government stake in the deal

18. Any Questions?