1. Ukrnafta: Corporate Governance Case By Mr. Dmitro Tarabakin Director Investment Bank “Dragon Capital”

2. April 17, 2002Page No. 2 Profile The largest oil company in Ukraine (accounted for 92%, 18% and 37% of 2001 oil, gas, and gas condensate extraction respectively) The largest company in the PFTS in terms of MC (USD 217 mil.) and liquidity Posted USD 504 mil. net sales and USD 181.5 mil. net income in 2001 Extracts oil and gas in eastern and western regions of Ukraine Extracts from 2,219 oil and 243 gas wells

3. April 17, 2002Page No. 3 Shareholder structure  The state controls a 50% stake + 1 share and a 0.03% stake via Naftogaz Ukrainy and the State Property Fund  The blocking minority group consists of Privatbank, Ukrsibbank, Alfa Nafta, and affiliated companies (Wartford Petroleum and others)

4. April 17, 2002Page No. 4 History of the conflict I.Minority shareholders have access to oil refining and retail networks, as well as financial resources, while Ukrnafta is the largest oil company in Ukraine and was the major oil supplier (before Russian oil companies entered Ukraine’s refining market) II.Up to 2001 minority shareholders controlled a nearly 30% stake. In 2000 they blocked creation of a subsidiary to operate in Yemen, protesting against the newly elected supervisory board. III.August 2001-present – Privatbank/Ukrsibbank group increased their stake to 40% and blocked three AGMs

5. April 17, 2002Page No. 5 Minority shareholders’ demands  5 out of 11 seats on the supervisory board  Transparency of gas sales to Naftogaz Ukrainy (payment on time and in cash) and repayment of Naftogaz’s debt to Ukrnafta (nearly USD 70 mil. by end-2001)  Change of the registrar, Ukrnaftogaz

6. April 17, 2002Page No. 6 The state’s stance on Ukrnafta  Ukrnafta is on the list of strategic companies  Vertical integration plans with Ukrtatnafta refinery are being implemented  Ukrnafta paid USD 232 mil. in taxes in 2001 and may pay the state USD 15 mil. in 2000-2001 dividends  Ukrnafta was selling natural gas to Naftogaz Ukrainy at USD 24.6/ths. cu. m. in 2001, while the market price is close to USD 60/ths. cu. m.

7. April 17, 2002Page No. 7 Consequences of the conflict  Lost the Yemen contract (estimated oil extraction of 7.3 mil. bbl /year)  Delayed or lost opportunity of a JV with Libya’s National Oil Corporation  Inability to approve 2000 and 2001 results and pay out dividends  Inability to develop a long-term strategy

8. April 17, 2002Page No. 8 Conclusion  Ukrnafta is the biggest Ukrainian stock and any problems with it affect the whole equity market  The state is represented in Ukrnafta by Naftogaz Ukrainy and the State Property Fund. Up until now, the state has prevented any involvement in the management of Ukrnafta  The minority shareholders consolidated their stakes in order to have more influence over the company’s management, be able to elect members of the board and to control material foreseeable risk factors.

9. April 17, 2002Page No. 9 Conclusion (cont.)  The shareholder conflict at Ukrnafta has adversely affected the company’s international expansion plans, namely projects in Yemen and Libya.  Eventually, both Ukrnafta and the minority shareholders stand to benefit from the company’s vertical integration, as unification of production, processing and trading facilities will put Ukrnafta into a stronger competitor position vs. Russian oil companies actively expanding in Ukraine