1. Gwendolyn Fricker Senior Manager RPI Service Conference December 2003

2. Strategy & Information Support Business Opportunity Support Internal Controls and Operations Management Target Identification Business Assessments Negotiation Support Market Research, Corporate Intelligence, and Special Reports Corporate Communications Strategy Review/Development Business Process Optimization Internal Operational Controls

4. Session 2 The Russian Majors: Strategy in Relation to Oilfield Services

5. The Russian Majors and Oilfield Services International ‘best-practice’ International ‘best-practice’ Oil company management time is diverted from core activities Oil company management time is diverted from core activities E&P company management does not have expertise in services E&P company management does not have expertise in services Opportunity cost of capital (leads to reduced E&P CAPEX) Opportunity cost of capital (leads to reduced E&P CAPEX) Access to latest technologies - spread the burden of R&D spending Access to latest technologies - spread the burden of R&D spending Specialized service companies are better able to manage assets Specialized service companies are better able to manage assets Improve Key Variable Performance of Oil companies – also helps banks/funds do comparisons Improve Key Variable Performance of Oil companies – also helps banks/funds do comparisons Improve utilization of equipment and employees Improve utilization of equipment and employees Reduce costs Reduce costs Improve quality and service time Improve quality and service time Use of third parties adds transparency to transactions Use of third parties adds transparency to transactions Cost of downsizing in event of downturn. Cost of downsizing in event of downturn. Reasoning for Divesting Service Companies Do these reasons make sense for the Russian Majors ?

6. The Russian Majors and Oilfield Services Reasoning for Divesting Service Companies International ‘best-practice’ Oil company management time is diverted from core activities E&P company management does not have expertise in services Opportunity cost of capital (leads to reduced E&P CAPEX) Access to latest technologies Specialized service companies are better able to manage assets Improve Key Variable Performance of Oil companies – helps banks/funds do comparisons Improve utilization of equipment and employees Reduce costs Improve quality / service time Use of third parties adds transparency to transactions Cost of downsizing in event of downturn. ‘Issues’ for Oil Companies Maintain or reduce lifting costs– especially for high- maintenance fields Increase expertise in ‘core competencies’- exploration & reservoir planning/mgmt. (?) Lack of internal information to take effective decisions Avoid being monopolized by 1- 2 external companies Ensure access to equipment when needed Decrease downtimes Improve quality and service level Does this same logic work for Russia? Key Factors: Regionally-based monopolies, infrastructure and climate considerations, cost pressures, business conduct/skills Shock therapy for oil companies or transition period? from a ‘regionally-based oil production / service industry What Should their Strategies be for Oilfield Services? Should they sell? To whom? When? How?

7. Session 3 Independent E&P Operators: Options and Challenges of Contracting Service Providers / Vendors

8. Oilfield Service Offerings and ‘Independent’ Operators Workovers / well servicing Workovers / well servicing Drilling Drilling General Infrastructure (electric lines, private roads, social assets) General Infrastructure (electric lines, private roads, social assets) Pumping and Treatment Pumping and Treatment Pipelines (connection to trunk pipelines) Pipelines (connection to trunk pipelines) Purchased drilling rigs and created internal dept.. Diesel generators, plan primary work in winter Double pay. Eventually, build own pipeline. Sample Solutions Located small, independent company

9. The Issues E&P Companies Entry Barrier to E&P sector Entry Barrier to E&P sector Increased costs compared to majors – source of delays Increased costs compared to majors – source of delays Additional CAPEX to develop internal services and/or build infrastructure Additional CAPEX to develop internal services and/or build infrastructure Limits effectiveness of operations Limits effectiveness of operations Service companies Life line for poorly financed closely-held companies. Life line for poorly financed closely-held companies. Market niche for Russian independents and Foreign oilfield service companies. Market niche for Russian independents and Foreign oilfield service companies.

10. Session 4 Growth Strategies for Service Companies

11. Growth Opportunities Spin-offs into separate legal entities significant Divestitures limited - ‘the jury is still out’ JV successful for introducing technology * In terms of revenue. Distribution of Service Expenses - Major Russian oil company - 85%* closely-held service companies - 15%* other Russian Oil and Gas Companies Sell Service Companie s? Divest Hold Opportunities?!

12. Acquisition for ‘Assets’ or ‘Market Share’ 77% of Company owned-tools have been in service since 1996 and have exceeded their ‘service life’. Similar tools in west = 3-year service life. $1.8 million balance sheet liability for 1996 equipment plus inventory. Acquired equipment was   past service life at time of sale/transfer to Company   sold at restated book values + 28.9% markup. Asset base aging Funds for reinvestment minimal Price increases unavoidable OPPORTUNITIES FOR WHOM ?

13. Session 5 Competition and Russian Oilfield Services: The Role of Foreign Service Providers and High Technology

14. Pricing and Cost Structure Russian Service Companies LOWER PRICES are a function of  Lifting cost control  Related party transactions  Lack of trust  Low rate of reinvestment International Service Companies HIGHER PRICES are a function of  High personnel costs  Operating cost structure  R&D costs  Efficiency of operations in Russia  Corporate Overheads (closely-held)

15. Cost Structure 46% 26% 47% 32% 14% 3% 25% 8% Comparison of Cost structure. Foreign Company charged 1.8 more for ‘comparable’* service. Distribution of Revenue from Specific Service (Costs as a % of revenue)

16. The Technology Premium Dilemma Increase value of company- market capitalization and/or Capital Accumulation Short-term 1994-2004 Corporate Priorities Improve transparency Image Reduce production costs with focus on ‘short-term’ Visible production increases Improve margins IPOs Selloff M&A Re- focus Operational Process Restructuring and Personnel Mid-Term 2004-2008 Develop Core Competencies Field and asset management Information systems to support operations and management Quality and quantity of well, reservoir and production data Reservoir and Production engineers ? Long-Term 2008 - future Effective Decision Making Across the Company Ability to evaluate the return on Technology and Quality.

17. Session 6 Uniting Western and Russian Technology, Equipment and Expertise for Cost Effective Solutions

18. Uniting Russian and Western Technology Imported Equipment Russian Equipment Where is the Balance? Import duties Spare parts Repair and Maintenance Workforce Qualification Client requirements Certification issues

19. Uniting Western and Russian Technology Workover Rigs New rig in US – $750 thsd to $1 million New rig in US – $750 thsd to $1 million Refurbishment in US* - $250 thsd. Refurbishment in US* - $250 thsd. Cost of Russian hybrid? $80-125 000? Is there a Chinese ‘threat’? * re-certifying the frame and derrick, replacing the engine with a new highly fuel-efficient engine, replacement of drums, brakes, lines, and installation of advanced lighter-weight materials for flooring.

20. Roundtable Practical Application of Technology in the Russian Oil and Gas Industry: Opportunities, Challenges, Economic Effectiveness