1. © 2015 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Cline & Associates’ interest. Outlook for Russian Oil Production Presentation for TUROGE March 18-19, 2015 AH-14-2127

2. Gaffney, Cline & Associates Global Footprint GCA has a global presence, with 11 offices across Europe, the Americas, and Asia-Pacific Rio de Janeiro Singapore Buenos Aires Houston Sydney London Moscow Almaty Dubai Bogota Calgary 2 The 150-strong professional staff has an average of 20 years of experience Main Office

3. 3 What has changed since TUROGE 2014?  Besides the fact that Beşiktaş is finally winning the Süper Lig…..

4. 4 What has changed since TUROGE 2014?  Dramatic decline in oil prices as market faces global oversupply  Production has not yet caught up to the change in prices

5. 5 What has changed since TUROGE 2014?  Dramatic decline in oil prices as market faces global oversupply  Production has not yet caught up to the change in prices mbpd

6. 6 How can we understand this situation?

7. 7  The top oil producing countries are engaged in a competition of yağlı güreş Oil wrestling in the gardens of Topkapı Palace, 1809

8. 8 How can we understand this situation?  Three heavyweights are USA, Saudi Arabia, and Russia (10+ mln bpd) Copyright Pari Dukovic

9. 9 Yağlı güreş heavyweight: focusing on Russia

10. 10 Yağlı güreş heavyweight: focusing on Russia and four key factors  Dramatic decline in Urals benchmark oil price  Economic sanctions restricting access to credit and technology  Significant change in foreign exchange position (Ruble depreciation)  New ‘tax maneuver’

11. 11 Production reaches post-Soviet high, driven by Rosneft  Post-Soviet high of 10,580 kbpd (~530 mn tonnes) has continued in Q1 2015 (10,660 kbpd)  Though small producers now account for 1 mn bpd, most growth driven by Rosneft and Gazprom Neft; together these two are 52% of overall output  Gazprom Neft growth driven by ramp up at Salym Petroleum Development JV  Rosneft has moved into Phase 2 of 2030 development strategy that includes bringing Vankor cluster to peak output, synergies with TNK-BP’s Suzun and Tagul

12. 12 Importance of “hard-to-recover” oil

13. 13  Small share of current Russian output comes from ‘unconventionals’ (400-500kbpd) –National energy strategy calls for share to increase to 20% by 2030 (nearly 2mbpd)  Classification extends beyond concept of ‘tight oil’ –Makes reserves difficult to quantify  Common themes: –New drilling practices –Major capital investment –Often via foreign partnerships Importance of “hard-to-recover” oil  Bazhenov, Salym, Kara Sea, Pechora (Prirazlomnoye)

14. 14 Qualitative impact of four factors  Factor #1: Low oil price –Companies have cut their capital investment plans (Rosneft -$3 bn, Lukoil -$1.5 bn) –March 2015 Russian government presented revised budget with deficit spending

15. 15 Qualitative impact of four factors  Factor #1: Low oil price (capex reduction, revenue loss)  Factor #2: Economic sanctions –Applications for support from National Wealth Fund; short-term debt obligations (Gazprom Neft $2bn; Rosneft $25 bn) –Delays at key foreign partnerships; ExxonMobil withdraws from Kara Sea, no offshore drilling planned for 2015

16. 16 Qualitative impact of four factors  Factor #1: Low oil price (capex reduction, revenue loss)  Factor #2: Economic sanctions (strain on National Wealth Fund)  Factor #3: Ruble depreciation –Helps meet national spending targets –Companies sell export earnings domestically to support currency

17. 17 Qualitative impact of four factors  Factor #1: Low oil price (capex reduction, revenue loss)  Factor #2: Economic sanctions (strain on National Wealth Fund)  Factor #3: Ruble depreciation (diversion of export revenue)  Factor #4: Tax Maneuver –Re-direction of oil exports due to customs union –Export duties to decrease  will lead to a 2X increase in Mineral Extraction Tax by 2017 –Disincentive for upstream investment –Regional markets flooded with Russian petroleum products

18. 18 Regional implications  Delay unconventional drilling 2-3 years; risked production volumes up to 1 mn bpd in the short term  Other implications: –Pass-through of new tax to domestic market –Kazakhstan refinery investments postponed –45-day ban on Russian gasoline imports  What does it mean for Turkey? –Low oil prices help consumer countries –May see short-term oversupply of refined products, long-term drop in crude trade

19. 19 Thank you! Teşekkür ederim!

20. © 2015 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Cline & Associates’ interest. Thank you! AH-14-2127 Teşekkür ederim!

21. Contents 21  Appendix

22. Midstream Pipeline Process Operations Downstream Chemical Power Marketing Functions Economics Commercial and Financial Legal, Regulatory, and Fiscal Strategy and Planning Organization Business Process Performance Management Upstream Geophysics Geology Petrophysics Reservoir Production Our oil and gas industry expertise spans the full hydrocarbon value chain as well as major functional disciplines 22 Gaffney, Cline & Associates Oil and Gas Industry and Functional Expertise

23. Oil & Gas CompaniesFinancial InstitutionsSovereigns Gaffney, Cline & Associates Selected Clients 23 GCA’s clients include blue chip majors, independents, national oil companies, and financial institutions