ROSN.L Regulatory News (ROSN)

Rosneft Oil Company

Consolidated Financial Statements

as of December 31, 2011 and 2010 andfor the years ended December 31, 2011, 2010 and 2009

With Report of Independent Auditors

Report of Independent Auditors

Shareholders and the Board of Directors

of Rosneft Oil Company

We have audited the accompanying consolidated balance sheets of Rosneft Oil Company, an open joint stock company ("the Company"), as of December 31, 2011 and 2010, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

Accounting principles generally accepted in the United States of America require that the supplementary information about the Company's oil and gas exploration and production operations on page 53 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Ernst&Young LLC

February 3, 2012

Rosneft Oil Company

Consolidated Balance Sheets

(in millions of US dollars, except share amounts)

Rosneft Oil Company

Consolidated Statements of Income and Comprehensive Income

(in millions of US dollars, except earnings per share data) 

Rosneft Oil Company

Consolidated Statements of Changes in Shareholders' Equity

for the years ended December 31, 2010, 2009 and 2008

(in millions of US dollars, except share amounts)

Rosneft Oil Company

Consolidated Statements of Cash Flows

(in millions of US dollars)

Rosneft Oil Company

Consolidated Statements of Cash Flows (continued)

(in millions of US dollars)

Rosneft Oil Company

Notes to Consolidated Financial Statements

as of December 31, 2011 and 2010

and for the years ended December 31, 2011, 2010 and 2009

1. General

Nature of Operations

Open Joint Stock Company ("OJSC") Rosneft Oil Company ("Rosneft") and its subsidiaries (collectively the "Company") are principally engaged in exploration, development, production and sale of crude oil and gas and refining, transportation and sale of petroleum products in the Russian Federation and in certain international markets.

Rosneft State Enterprise was incorporated as an open joint stock company on December 7, 1995. All assets and liabilities previously managed by Rosneft State Enterprise were transferred to the Company at their book value effective on that date together with the Government of the Russian Federation ("State") ownership in other privatized oil and gas companies. The transfer of assets and liabilities was made in accordance with Russian Government Resolution No. 971 dated September 29, 1995, On the Transformation of Rosneft State Enterprise into an Open Joint Stock Company "Oil Company Rosneft". Such transfers represented a reorganization of assets under the common control of the State and, accordingly, were accounted for at their book value. In 2005, the State contributed the shares of Rosneft to the share capital of OJSC Rosneftegaz. As of December 31, 2005, 100% of the shares of Rosneft less one share were owned by OJSC Rosneftegaz and one share was owned by the Russian Federation Federal Agency for the Management of Federal Property. Subsequently, OJSC Rosneftegaz's ownership interest decreased through additional issuance of shares during Rosneft's Initial Public Offering ("IPO") in Russia, issuance of Global Depository Receipts ("GDR") for the shares on London Stock Exchange and the share swap realized during the merger of Rosneft and certain subsidiaries in 2006. As of December 31, 2011 and 2010, OJSC Rosneftegaz maintains a 75.16% ownership interest in Rosneft.

Under Russian legislation, natural resources, including oil, gas, precious metals and minerals and other commercial minerals situated within the territory of the Russian Federation are the property of the State until they are extracted. Law of the Russian Federation No. 2395-1, On Subsurface Resources, regulates relations arising in connection with the geological study, and the use and protection of subsurface resources within the territory of the Russian Federation. Pursuant to the Law, subsurface resources may be developed only on the basis of a licence. A licenсe is issued by the regional governmental body and contains information on the site to be developed, the period of activity, as well as financial and other conditions. The Company holds licences issued by regional authorities for geological studies, exploration and development of oil and gas blocks and fields in areas where its subsidiaries are located.

The Company is subject to export quotas set by the State Pipeline Commission to allow equal access to the limited capacity of oil pipeline system owned and operated by OJSC Transneft. The Company exports certain quantities of crude oil bypassing Transneft system thus achieving higher export capacity. In 2011, 2010 and 2009, the Company's export sales were approximately 58%, 57% and 57% of produced crude oil, respectively. The remaining production was processed at the Company's refineries for further sale on domestic and international markets.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

1. General (continued)

Nature of Operations (continued)

Principal Rosneft's subsidiaries included in the consolidated financial statements and respective ownership interests as of December 31, 2011 are as follows:

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

1. General (continued)

Nature of Operations (continued)

All of the above subsidiaries, except for Rosneft International Ltd., Rosneft Trading S.A. and Trumpet Limited are incorporated in the Russian Federation. Rosneft International Ltd. and Trumpet Limited are registered in Ireland, Rosneft Trading S.A. is registered in Switzerland.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies

Form and Content of the Consolidated Financial Statements

The Company maintains its books and records in accordance with accounting and taxation principles and practices mandated by Russian legislation. The accompanying consolidated financial statements were derived from the Company's Russian statutory books and records with adjustments made to present them in accordance with accounting principles generally accepted in the United States of America ("US GAAP").

Subsequent events have been evaluated through February 1, 2012, the date these consolidated financial statements were issued.

The accompanying consolidated financial statements differ from the financial statements issued for statutory purposes in Russia in that they reflect certain adjustments, not recorded in the Company's statutory books, which are appropriate to present the financial position, results of operations and cash flows in accordance with US GAAP. The principal adjustments relate to: (1) recognition of certain expenses; (2) valuation and depreciation of property, plant and equipment; (3) foreign currency translation; (4) deferred income taxes; (5) valuation allowances for unrecoverable assets; (6) accounting for the time value of money; (7) accounting for investments in oil and gas property and conveyances; (8) consolidation principles; (9) recognition and disclosure of guarantees, contingencies, commitments and certain assets and liabilities; (10) accounting for asset retirement obligations; (11) business combinations and goodwill; (12) accounting for derivative instruments.

Certain items in the consolidated statements of income and comprehensive income, and the consolidated statements of cash flows and notes for the years 2010 and 2009 were reclassified to conform to the current year presentation.

Management Estimates

The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the amounts of revenues and expenses recognized during the period. Certain significant estimates and assumptions for the Company include: estimation of economically recoverable oil and gas reserves; rights to, recoverability and useful lives of long-term assets and investments; impairment of goodwill; allowances for doubtful accounts receivable; asset retirement obligations; legal and tax contingencies; environmental remediation obligations; recognition and disclosure of guarantees and other commitments; fair value measurements; ability to renew operating leases and to enter into new lease agreements, and classification of certain debt amounts. Management believes it has a reasonable and appropriate basis for its judgment pertaining to its estimates and assumptions. However, actual results could differ from those estimates.

Foreign Currency Translation

US dollar ("US$") is the functional currency of Rosneft and its Russian subsidiaries and the reporting currency of the Company for the purpose of financial reporting under US GAAP. Functional currency of certain foreign subsidiaries may differ from US$. Monetary assets and liabilities of such subsidiaries have been translated into US$ using the official exchange rate of the Central Bank of the Russian Federation ("CBR") as of the balance sheet date. Non monetary assets and liabilities have been translated at historical rates. Revenues, expenses and cash flows have, where practicable, been translated into US$ at exchange rates that are close to the actual rate of exchange prevailing on transaction dates.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Foreign Currency Translation (continued)

Gains and losses resulting from the re-measurement into US$ are included in "Foreign exchange (loss)/gain" in the consolidated statements of income and comprehensive income. For the foreign subsidiaries with the functional currency other than US$ gains and losses resulting from the re-measurement into US$ are included in "Other comprehensive (loss)/income" in the consolidated statements of income and comprehensive income.

As of December 31, 2011 and 2010, the CBR official rates of exchange were 32.20 rubles ("RUB") and 30.48 RUB per US$, respectively. Average rates of exchange for 12 months of 2011 and 2010 were 29.39 RUB and 30.37 RUB per US$, respectively. As of February 13, 2012, the official rate of exchange was 30.19 RUB per US$.

The translation of local currency denominated assets and liabilities into US$ for the purposes of these financial statements does not indicate that the Company could realize or settle, in US$, the reported values of these assets and liabilities. Likewise, it does not indicate that the Company could return or distribute the reported US$ value of equity to its shareholders.

Principles of Consolidation

The consolidated financial statements include the accounts of majority-owned, controlled subsidiaries and variable interest entities where the Company is the primary beneficiary. All significant intercompany transactions and balances have been eliminated. The equity method is used to account for investments in affiliates in which the Company has the ability to exert significant influence over the affiliates' operating and financial policies. The investments in entities where the Company holds the majority of shares, but the minority shareholders have significant participating rights, are also accounted for using the equity method. The Company's share in net profit or loss of equity investees also includes any other-than-temporary declines in fair value recognized during the period. Investments in other companies are accounted for at cost and adjusted for impairment, if any.

Business Combinations

The Company accounts for its business combinations according to FASB ASC 805, Business Combinations, and FASB ASC 810, Consolidation. The Company applies the acquisition method of accounting and recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, licenсe and other asset lives and market multiples, among other items.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net asset acquired. The excess of the fair values of the identifiable net asset acquired over the consideration transferred plus the fair value of any noncontrolling interest in the acquiree should be recognized as a gain in consolidated statements of income and comprehensive income on the acquisition date.

For investees accounted for under the equity method, the excess of the cost to acquire a share in those entities over the fair value of the acquired share of net assets as of the acquisition date is treated as embedded goodwill.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Goodwill and Other Intangible Assets (continued)

In accordance with requirements of FASB ASC 350, Intangibles - Goodwill and Other, goodwill and intangible assets with indefinite useful lives are not amortized. Instead, they are tested at least annually for impairment. The impairment loss is recognized when the carrying value of goodwill exceeds its fair value. The impairment test is comprised of two stages. The first step compares the fair value of the reporting unit with its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill of the reporting unit is considered not impaired. Otherwise, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss resulting from the excess of the reporting unit's carrying value over its fair value. The loss recognized cannot exceed the carrying amount of goodwill. Subsequent reversal of a previously recognized goodwill impairment loss is prohibited.

Intangible assets that have a finite useful life are amortized using the straight-line method over the shorter of their useful life or the term established by legislation.

Noncontrolling Interests

Noncontrolling interests in the net assets and net results of consolidated subsidiaries are shown under "Noncontrolling interests" and "Net income attributable to noncontrolling interests" in the accompanying consolidated balance sheets and statements of income and comprehensive income, respectively. Losses attributable to the Company and the noncontrolling interest in a subsidiary may exceed their interests in the subsidiary's equity. The excess, and any further losses attributable to the Company and the noncontrolling interest, are to be attributed to those interests. That is, the noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. The actual ruble-denominated balances attributable to noncontrolling interests may differ from these amounts presented in these consolidated financial statements.

Assets Held For Sale

The Company accounts for its assets as held for sale in accordance with the provisions of FASB ASC 205-20, Discontinued operations. A long-lived asset (disposal group) to be sold is classified as held for sale in the period in which all of the held-for-sale criteria are met, and measured at the lower of its carrying amount or fair value less cost to sell. A long-lived asset is not depreciated (amortized) while it is classified as held for sale.

Cash and Cash Equivalents

Cash represents cash on hand and in the Company's bank accounts and interest bearing deposits which can be effectively withdrawn at any time without prior notice or penalties reducing the principal amount of the deposit. Cash equivalents are highly liquid, short-term investments that are readily convertible to known amounts of cash and have original maturities of three months or less from their date of purchase. Cash equivalents are carried at cost plus accrued interest, which approximates fair value.

Loans, Notes and Accounts Receivable

Loans, notes and accounts receivable are stated at their principal amounts outstanding net of loan losses and allowances for doubtful debts. Specific allowances are recorded against notes receivable and trade receivables whose recovery has been identified as doubtful. Estimates of allowances require the exercise of judgment and the use of assumptions.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Earnings per Share

Basic earnings per share is calculated by dividing net earnings attributable to common shares by the weighted average number of common shares outstanding during the corresponding period. In the absence of any securities-to-shares conversion transactions, the amount of basic earnings per share stated in these financial statements is equal to the amount of diluted earnings per share.

Inventories

Inventories consisting primarily of crude oil, petroleum products and materials and supplies are expensed at the average cost or the cost of each unit and are stated at the lower of weighted average cost of acquisition (production) or market value. Market value shall not exceed net realizable value (i.e. the price at which inventories can be sold after allowing for the cost of completion and sale), and shall not be lower than net realizable values less the amount of margin.

Financial Investments

All debt and equity securities held by the Company are classified into one of the following three categories: trading securities, available-for-sale securities, held-to-maturity securities.

Trading securities are purchased and held principally for the purpose of sale in the nearest future. Held-to-maturity securities represent financial instruments that the Company has both the intent and the ability to hold to maturity. All other securities, which do not fall into these two categories, are classified as available-for-sale securities.

Trading securities and available-for-sale securities are carried at fair (market) value. Held-to-maturity securities are stated at amortized cost. Unrealized gains or losses on trading securities are recognized in the consolidated statements of income and comprehensive income. Unrealized gains and losses on available-for-sale securities less related tax effects are recognized as a separate component of comprehensive income through the date of disposal.

Realized gains and losses from the sale of available-for-sale securities are reported separately for each type of security. Dividends and interest income are recognized in the consolidated statements of income and comprehensive income.

Investments in shares or interests of companies where the Company has less than 20% equity interest and no significant influence, which are not publicly traded, and whose market value is not readily available, are carried at cost.

Repurchase and Resale Agreements

Securities sold under agreements to repurchase ("REPO") and securities purchased under agreements to resell ("reverse REPO") generally do not constitute a sale for accounting purposes of the underlying securities, and are treated as collateralized financing transactions. Interest paid or received on all REPO and reverse REPO transactions is recorded in "Interest expense" or "Interest income" at the contractually specified rate using the effective interest method.

Oil and Gas Exploration and Development

In accordance with FASB ASC 932, Extractive Activities-Oil and Gas, oil and gas exploration and development costs are recognized under the successful efforts method. This method prescribes that

exploration costs, including geological and geophysical costs and the costs of dry holes, are charged to expense when incurred.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Oil and Gas Exploration and Development (continued)

Exploratory well costs (including costs associated with stratigraphic test wells) are temporarily capitalized pending determination of whether commercial oil and gas reserves have been discovered by the drilling effort. The length of time necessary for this determination depends on the specific technical or economic difficulties in assessing the recoverability of the reserves. If a determination is made that the well did not encounter oil and gas in economically viable quantities, the well costs are expensed and are reported in "Exploration expense".

Exploratory drilling costs are temporarily capitalized pending determination of whether the well has found proved reserves if both of the following conditions are met:

• the well has found a sufficient quantity of reserves to justify, if appropriate, its completion as a producing well, assuming that the required capital expenditure is made; and

• satisfactory progress toward ultimate development of the reserves is being achieved, with the Company making sufficient progress assessing the reserves and the economic and operating viability of the project.

The Company evaluates the progress made on the basis of regular project reviews which take into account the following factors:

• If additional exploratory drilling or other exploratory activities (such as seismic work or other significant studies) are either underway or firmly planned, the Company deems there to be satisfactory progress. For these purposes, exploratory activities are considered firmly planned only if they are included in the Company's three-year exploration plan/budget. At December 31, 2011 and 2010, exploratory drilling costs capitalized on this basis were not material.

• In cases where exploratory activity has been completed, the evaluation of satisfactory progress takes into account indicators such as the fact that costs for development studies are incurred in the current period, or that governmental or other third-party authorizations are pending or that the availability of capacity on an existing transport or processing facility awaits confirmation. At December 31, 2011 and 2010, exploratory drilling costs capitalized on this basis were not material.

Should the project be deemed commercially viable, it is then transferred to the development stage, otherwise the costs are expensed.

Costs, including "internal" costs relating to drilling and equipping of development wells, including development dry holes, as well as costs required for drilling and equipping of injection wells in the process of oil and gas reserves development, are capitalized. These costs are included in exploration and production assets in the consolidated balance sheets.

Property, Plant and Equipment

Property, plant and equipment are stated at historical cost, net of accumulated depreciation and depletion. The cost of maintenance, repairs, and replacement of minor items of property is charged to operating expenses. Renewals and betterments of assets are capitalized.

Upon sale or retirement of property, plant and equipment, the cost and related accumulated depreciation and depletion are eliminated from the accounts. Any resulting gains or losses are included in the income statement.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Depreciation, Depletion and Amortization

Depletion expense of acquisition costs of proved oil and gas properties is calculated using the unit-of-production method based on total proved reserves. Depletion expense of other capitalized costs related to oil and gas production is calculated using the unit-of production method based on proved developed reserves. Management of the Company considers each field as the appropriate level for these calculations.

Acquisition costs of unproved properties are not amortized. These costs are reclassified as proved properties when the relevant reserve reclassification is made. Acquisition costs of unproved properties are reviewed for impairment, and where impairment arises, these costs are expensed.

Depreciation charges with respect to property, plant and equipment other than oil and gas properties is computed using the straight-line method and based on their useful lives.

Depreciation rates are applied to groups of assets with similar economic characteristics, as shown below:

Interests in Joint Operations

A joint operation is a contractual arrangement whereby two or more parties (participants) undertake an economic activity that is subject to joint control. Joint control is only exercised when strategic, financial and operating decisions relating to the joint activity are made unanimously by all the parties. A joint venture is a registered company, partnership or any other legal form for the purposes of handling joint operations.

Financial results, assets and liabilities arising from interests in incorporated joint ventures are recognized in these consolidated financial statements using the equity method of accounting. Under the equity method, investments in joint ventures are recognized at the cost of financial investments increased by any change to the share of net assets from the date of inception of a joint venture, less distributed earnings and impairment of financial investments. The consolidated statements of income and comprehensive income include the Company's share in gains and losses arising from joint ventures.

The Company discontinues the use of the equity method of accounting from the date on which it ceases to have joint control over, or have significant influence in, a jointly-controlled entity.

Undivided interests in unincorporated oil and gas joint ventures are consolidated on a proportionate basis.

A part of an interest in a jointly-controlled oil and gas exploration and production entity may be assigned to other participants or third parties. In which case, in accordance with FASB ASC 932, such assignment is performed and accounted for under an arrangement called a "carried interest" whereby the assignee agrees to carry all costs of drilling, developing, and operating the property. The assignee is also entitled to all of the revenue from hydrocarbon production from the property, excluding any third party interest, until all of the assignee's costs, including the contractual rate of return, have been recovered, at such time the assignor will resume its participation in operating expenses and income.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Impairment of Long-Lived Assets

Long-lived assets, including blocks with proved oil and gas reserves, are assessed for potential impairment in accordance with paragraphs 360-10-35-17 through 360-10-35-36 of FASB ASC 360, Property, Plant and Equipment.

Oil and gas properties are assessed whenever events or circumstances indicate potential impairment. If the carrying value of oil and gas properties is not recoverable through undiscounted cash flows, an impairment is recognized. The impairment is determined on the basis of the estimated fair value of oil and gas properties which, in turn, is measured by discounting future net cash flows or with reference to current market prices of oil and gas properties, if available. Discounted future cash flows from oil and gas fields are based on the most reliable management estimates of future prices that rely on recent actual prices and published prices for forward transactions; such prices are applied to forecast production volumes at particular fields with further discounting for the expected risk level.

Forecast production volumes shall be understood as reserves, including probable reserves that are proposed to be extracted using a known amount of capital expenditures. Production volumes and prices correspond to the internal plans and forecasts, as well as other data in the published financial statements. Assumptions regarding future prices and costs used to assess oil and gas properties for impairment differ from those used in the standard procedure for discounting net cash flows from proved oil and gas reserves.

Individual assets are grouped for impairment purposes at the lowest level of identifiable cash flows that are largely independent of the cash flows from other groups of assets - generally on a field-by-field basis for exploration and production assets, for refining assets - at the entire refining unit, for service stations - at the site level. Long-lived assets intended by management for use during a period not exceeding one year are recorded at the lower of depreciated value or fair value, less selling expenses.

Acquisition costs of unproved oil and gas properties are assessed for impairment on a regular basis and any estimated impairment is charged to expenses.

Impairment of Investments

If the decline in fair value of an investment below its carrying value is other than temporary, the carrying value of the investment is reduced and a loss in the amount of any such decline is recorded. Cost method investments are evaluated for impairment when events or changes in circumstances occur which may have a significant effect on the fair value of these investments. Fair value determination is based on quoted market prices, if available, or on the present value of expected cash flows using discount rates commensurate with the risks of the investment.

Capitalized Interest

Interest expense related to the use of borrowed funds used for capital construction projects and acquisition of properties, plant and equipment is capitalized provided that such interest expense could have been avoided if the Company had not made capital investments. Interest is capitalized only during the period when construction activities are actually in progress and until the resulting properties are put into operation. The Company capitalized US$ 472 million, US$ 347 million and US$ 354 million of interest costs in 2011, 2010 and 2009, respectively.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Leasing Agreements

Capital leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the interest charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liabilities. Interest charges are charged directly to the consolidated statements of income and comprehensive income.

Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term unless leased assets are capitalized because the terms of the lease agreement grant the Company ownership rights over the leased assets by the end of the lease term or contain a bargain purchase option. In the latter cases capitalized assets are depreciated over the estimated useful life of the asset regardless of the lease term.

Leases where the lessor retains substantially all the risks and benefits of ownership of the assets are classified as operating leases. Operating lease payments are recognized as an expense in the consolidated statements of income and comprehensive income on a straight-line basis over the lease term.

Asset Retirement Obligations

The Company has asset retirement obligations associated with its core business activities. The nature of the assets and potential obligations are as follows:

Exploration and Production - the Company's exploration, development and production activities involve the use of the following assets: wells, related equipment and operating sites, oil gathering and treatment facilities, tank farms and in-field pipelines. Generally, licences and other regulatory acts require that such assets be decommissioned upon the completion of production. According to these requirements, the Company is obliged to decommission wells, dismantle equipment, restore the sites and perform other related activities. The Company's estimates of these obligations are based on

current regulatory or licence requirements, as well as actual dismantling and other related costs. Asset retirement obligations are calculated in accordance with the provisions of FASB ASC 410-20, Asset Retirement Obligations.

Refining, Marketing and Distribution - this business segment covers refining operations, marine and other distribution terminals, and retail sales. The Company's refining operations consist of major petrochemical operations and industrial complexes. A number of industrial complexes have been in operation for several decades. Management of the Company believes that given the nature of the operations, the useful lives of these industrial complexes are indeterminable, while certain of their operating components and equipment have definite useful lives. Legal or contractual asset retirement obligations related to petrochemical, oil refining, marketing and distribution activities are not recognized due to the limited history of such activities in these segments, the lack of clear legal requirements as to the recognition of obligations, as well as the fact that useful lives of such assets are not determinable.

FASB ASC 410-20 calls for measurements of asset retirement obligations to include, as a component of expected costs, an estimate of the price that a third party would demand, and could expect to receive, for bearing the uncertainties and unforeseeable circumstances inherent in the obligations, sometimes referred to as a market-risk premium. To date, the oil and gas industry has few examples of credit-worthy third parties which are willing to assume this type of risk, for a determinable price, on major oil and gas production facilities and pipelines. Therefore, because determining such a market-risk premium would be an arbitrary process, it has been excluded from the FASB ASC 410-20.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Asset Retirement Obligations (continued)

Because of the reasons described above the fair value of an asset retirement obligation cannot be reasonably estimated. Due to continuous changes in the Russian regulatory and legal environment, there could be future changes to the requirements and contingencies associated with the retirement of long-lived assets.

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, defines the fair value of a financial instrument as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Financial assets and financial liabilities recognized in the accompanying consolidated balance sheets include cash and cash equivalents, short-term and long-term investments, accounts receivable and payable, short-term and long-term debt and other current and non-current assets and liabilities.

The Company, using available market information, management's estimates and appropriate valuation methodologies, has determined the approximate fair values of financial instruments.

The Company applies FASB ASC 820, Fair Value Measurements and Disclosures, which establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs when measuring fair value. FASB ASC 820 defines three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to assess at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Unobservable inputs for the asset or liability. These inputs reflect the Company's own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Income Taxes

Through 2012 Russian legislation did not contain the concept of a "consolidated tax payer" and, accordingly, the Company was not subject to Russian taxation on a consolidated basis but rather on an individual subsidiary basis. Income taxes are provided on taxable profit as determined under the Russian Federation Tax Code. Deferred income tax assets and liabilities are recognized in the accompanying consolidated financial statements in the amount determined by the Company using the liability method in accordance with FASB ASC 740, Income Taxes. This method takes into account future tax consequences, based on the effective tax rate, associated with differences between the carrying values of assets and liabilities and their taxable base, which gives immediate income statement effect to changes in income tax laws, including changes in the tax rates. A valuation allowance for a deferred tax asset is recorded when management believes that it is more likely than not that this tax asset will not be realized.

The Company accounts for uncertain tax positions and reflects liabilities for unrecognized income tax benefits together with corresponding interest and penalties in the consolidated statement of income and comprehensive income as Income tax expense.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Derivative Instruments

All derivative instruments are recorded on the consolidated balance sheets at fair value in either Other current assets, Other non-current assets, Other current liabilities or Other non-current liabilities. Recognition and classification of a gain or loss that results from recognition of a derivative instrument at fair value depends on the purpose for issuing or holding the derivative instrument. Gains and losses from derivatives that are not accounted for as hedges under FASB ASC 815, Derivatives and Hedging, are recognized immediately in the consolidated statements of income and comprehensive income.

Recognition of Revenues

Revenues are recognized when title passes from the seller to the customer, the contract price is fixed or determinable and collectability of the receivable is reasonably assured. Specifically, domestic sales of crude oil and gas, as well as petroleum products and materials are recognized when title passes. For export sales, title generally passes at the border of the Russian Federation and the Company covers transportation expenses (except freight), duties and taxes on those sales. Revenues include excise taxes and customs duties (see Note 17).

Sales of support services are recognized as services are performed provided that the service price can be determined and collectability is reasonably assured.

Transportation Expenses

Transportation expenses recognized in the consolidated statements of income and comprehensive income represent all expenses incurred in the transportation of crude oil and petroleum products via the Transneft pipeline network, as well as by railway and other transport means. Transportation expenses also include all other shipping and handling costs.

Refinery Maintenance Costs

The Company recognizes the costs of overhauls and preventive maintenance performed with respect to oil refining assets as expenses when incurred.

Environmental Liabilities

Environmental expenditures are expensed or capitalized, depending upon their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and do not have a future economic benefit, are expensed. Liabilities for these expenditures are recorded on an undiscounted basis unless the aggregate amount of the obligation and the amount and timing of the cash payments are fixed or reliably determinable.

Guarantees

The fair value of a guarantee is determined and recorded as a liability at the time when the guarantee is issued. The initial guarantee amount is subsequently remeasured to reflect the changes in the underlying liability. The expense is included in the related line items of the consolidated statements of income and comprehensive income, based on the nature of the guarantee. When the likelihood of performing on a guarantee becomes probable, a liability is accrued, provided it is reasonably determinable on the basis of the facts and circumstances at that time.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Comprehensive Income

The Company applies FASB ASC 220, Comprehensive Income, which establishes standards for the calculation and reporting of the Company's comprehensive income (net income plus all other changes in net assets from non-owner sources) and its components in consolidated financial statements.

Accounting for Buy/Sell Contracts

The Company applies FASB ASC 845, Nonmonetary Transactions, which requires that two or more legally separate exchange transactions with the same counterparty, including buy/sell transactions, are combined and considered as a single arrangement, when the transactions are entered into "in contemplation" of one another.

Accounting for Contingencies

Certain conditions may exist as of the date of these consolidated financial statements which may further result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. Management of the Company makes an assessment of such contingent liabilities which is based on assumptions and is a matter of opinion. In assessing loss contingencies relating to legal or tax proceedings that involve the Company or unasserted claims that may result in such proceedings, the Company, after consultation with legal or tax advisors, evaluates the perceived merits of any legal or tax proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a loss will be incurred and the amount of the liability can be estimated, then the estimated liability is accrued in the Company's consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. However, in some instances in which disclosure is not otherwise required, the Company may disclose contingent liabilities or other uncertainties of an unusual nature which, in the judgment of management after consultation with its legal or tax counsel, may be of interest to shareholders or others.

Taxes Collected from Customers and Remitted to Governmental Authorities

Excise taxes are reported gross within sales and other operating revenues and taxes other than income taxes in the consolidated statements of income and comprehensive income, while value-added tax is recorded net in taxes other than income tax liabilities in the consolidated balance sheets.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Changes in Accounting Policies

In January 2010, the FASB issued Accounting Standards Update ("ASU") 2010‑06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements ("ASU 2010‑06") that amends Topic 820, Fair Value Measurements and Disclosures, of the FASB Codification. ASU 2010‑06 requires separate disclosure of significant transfers between Level 1 and Level 2 fair value measurement inputs and a description of the reasons for the transfers. Entity is also required to present separately information about purchases, issuance, and settlements in the reconciliation for fair value measurements using Level 3 inputs. ASU 2010‑06 amends existing disclosure requirements in regards of level of disaggregation and inputs and valuation techniques. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in Level 3 fair value measurements that are effective for interim and annual periods beginning after December 15, 2010. The Company adopted ASU 2010-06 from January 1, 2010, except for the disclosures about activity in Level 3 fair value measurements that was adopted from January 1, 2011. Adoption of ASU 2010-06 did not have a material impact on the Company's consolidated financial position and results of operations.

In December 2010, the FASB issued ASU 2010-28, Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts ("ASU 2010-28") that amends Topic 350, Intangibles-Goodwill and Other, of the FASB Codification. For the reporting units with zero or negative carrying value, an entity is required to perform the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider any adverse qualitative factors indicating that an impairment may exist. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted ASU 2010-28 from January 1, 2011. Adoption of ASU 2010-28 did not have a material impact on the Company's consolidated financial position and results of operations.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations ("ASU 2010-29") that amends Topic 805, Business Combinations, of the FASB Codification. ASU 2010-29 specifies that an entity should disclose revenue and earnings of the combined entity in comparative period as though the business combination had occurred as of the beginning of the comparable prior annual reporting period. ASU 2010-29 also expands the supplemental pro forma disclosures. ASU 2010-29 is effective prospectively for business combinations occurred on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted ASU 2010-29 for business combinations occurred on or after January 1, 2011. Adoption of ASU 2010-29 did not have a material impact on the Company's consolidated financial position and results of operations.

In April 2011, the FASB issued ASU 2011‑02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring ("ASU 2011‑02") that amends Topic 310, Receivables, of the FASB Codification. ASU 2011-02 sets criteria of considering restructuring a trouble debt restructuring. The update also clarifies the guidance on creditor's evaluation of receivables according to the criteria. Adoption of ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011. The Company adopted ASU 2011-02 in the current consolidated financial statements. ASU 2011-02 did not have a material impact on the Company's consolidated financial position and results of operations.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Recent Accounting Standards

In May 2011, the FASB issued ASU 2011‑03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements ("ASU 2011‑03") that amends Topic 860, Transfers and Servicing, of the FASB Codification. ASU 2011-03 removes from the assessment of effective control the criterion dealing with the transferor's ability to repurchase assets in the event of default by the transferee, and the related implementation guidance. ASU 2011-03 is effective for the first interim or annual period beginning on or after December 15, 2011. The Company is subject to ASU 2011-03 from January 1, 2012. The Company does not expect ASU 2011-03 to have a material impact on its consolidated financial position and results of operations.

In May 2011, the FASB issued ASU 2011‑04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs ("ASU 2011‑04") that amends Topic 820, Fair Value Measurement, of the FASB Codification. ASU 2011-04 modifies the fair value measurement requirements and updates the wording to converge with IFRS. ASU 2011-04 is effective for the first interim or annual period beginning on or after December 15, 2011. The Company is subject to ASU 2011-04 from January 1, 2012. The Company does not expect ASU 2011-04 to have a material impact on its consolidated financial position and results of operations.

In June 2011, the FASB issued ASU 2011‑05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income ("ASU 2011‑05") that amends Topic 220, Comprehensive Income, of the FASB Codification. ASU 2011‑05 clarifies the options of separate or combined presentation of profits and losses and other comprehensive income, describes items grouping, profit tax presentation and other matters. ASU 2011-12 issued in December 2011 postpone effective date of ASU 2011-05 in part of reclassifications out of accumulated other comprehensive income. All other requirements of ASU 2011-05 are effective for the first interim or annual period beginning on or after December 15, 2011. The Company is subject to ASU 2011-05 from January 1, 2012, except requirement on reclassifications out of accumulated other comprehensive income. The Company does not expect ASU 2011-05 to have a material impact on its consolidated financial position and results of operations.

In September 2011, the FASB issued ASU 2011‑08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011‑08") that amends Topic 350, Intangibles-Goodwill and Other, of the FASB Codification. ASU 2011-08 provides an entity with the option to assess qualitative factors to determine whether it is more likely that the fair value of an investment is less than its carrying amount. If it is not more likely then performing the goodwill impairment test is unnecessary. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for annual periods beginning after December 15, 2011. The Company is subject to ASU 2011-08 from January 1, 2012. The Company does not expect ASU 2011-08 to have a material impact on its consolidated financial position and results of operations.

In December 2011, The FASB issued ASU 2011‑11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities ("ASU 2011‑11") that amends Topic 210, Balance Sheet, of the FASB Codification. ASU 2011-11 introduces new disclosure requirements about offsetting assets and liabilities and related arrangements. ASU 2011-11 is effective for annual and interim periods beginning on or after January 1, 2013. The Company is subject to ASU 2011-11 from January 1, 2013. The Company does not expect ASU 2011-11 to have a material impact on its consolidated financial position and results of operations.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

3. Cash and Cash Equivalents

Cash and cash equivalents as of December 31 comprise the following:

Restricted cash as of December 31 comprises the following:

The obligatory reserve with the CBR represents the amount deposited by the Company's subsidiary bank, VBRR, with the CBR for securing the current operating activity of the bank. Credit institutions are required to maintain a non-interest earning cash deposit (obligatory reserve) with the CBR, which amount depends on the level of funds raised by the credit institution and this amount has certain restrictions for use.

Cash accounts denominated in currencies other than RUB are primarily in US$.

Deposits are interest bearing and denominated primarily in RUB.

As part of its cash management and credit risk function, the Company regularly evaluates the creditworthiness of financial and banking institutions where it deposits cash. Banking relationships are primarily with Russian subsidiaries of international banking institutions and certain large Russian banks.

4. Short-Term Investments

Short-term investments as of December 31 comprise the following:

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

4. Short-Term Investments (continued)

Reverse repurchase agreements are collateralized by trading securities at fair value as of December 31, 2011 in the amount of US$ 720 million (US$ 403 million as of December 31, 2010).

As of December 31, 2011, structured deposits are denominated in US$ and earn interest ranging from 5.1% to 7.0%. As of December 31, 2010, structured deposits are denominated in US$ and have interest rates ranging from 6.22% to 7.2%.

As of December 31, 2011 notes receivable include corporate notes receivable with nominal interest rates ranging from 3.84% to 7.10% with maturities ranging from January 2012 to December 2014 and nominally interest-free corporate notes receivable with weighted average effective interest rate of 6.39% with maturities ranging from January 2012 to February 2014. Long-term portion of notes receivable is included in Long-Term Investments (see Note 8). As of December 31, 2011 the current portion of notes receivable in the amount of US$ 131 million was considered as temporarily impaired therefore an allowance in the amount of US$ 37 million was created. As of December 31, 2010 notes receivable include corporate notes receivable with nominal interest rate of 4.25% with maturity in December 2012 and nominally interest-free corporate notes receivable with weighted average effective interest rate of 3.0% with maturity in June 2015.

As of December 31 trading securities comprise the following:

As of December 31 available-for-sale securities comprise the following:

As of December 31, 2010, the corporate bonds in the amount of US$ 31 million were pledged under repurchase agreements. As of December 31, 2011 the Company does not have liabilities under repurchase agreements. Amortized cost bases of available-for-sale securities approximate their fair values.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

4. Short-Term Investments (continued)

As of December 31, 2011, the bank deposits are primarily denominated in US$ and earn interest ranging from 3.0% to 7.25%. As of December 31, 2010, bank deposits are primarily denominated in US$ and have interest rates ranging from 4.7% to 8.0%.

5. Accounts Receivable, net

Accounts receivable as of December 31 comprise the following:

The Company's trade accounts receivable are denominated primarily in US$. Credit risk is managed through the use of letters of credit. Credit risk for domestic sales of petroleum products is managed through the use of bank guarantees for receivables repayment.

6. Inventories

Inventories as of December 31 comprise the following:

Materials and supplies mostly include spare parts. Petroleum products and petrochemicals include those designated for sale as well as for own use. As of December 31, 2011 crude oil and associated gas, petroleum products and petrochemicals included oil for processing at Ruhr Oel GmbH ("ROG") and oil products produced at ROG (see Note 8).

7. Prepayments and Other Current Assets

Prepayments and other current assets as of December 31 comprise the following:

Prepaid customs duties represent export duties related to the export of crude oil and petroleum products (see Note 17).

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

8. Long-Term Investments

Long-term investments as of December 31 comprise the following:

As of December 31, 2011 the long-term portion of notes receivable in the amount of US$ 299 million was considered as temporarily impaired therefore an allowance in the amount of US$ 83 million was created.

Long-term loans to equity investees generally have contractual maturities from 3 to 8 years.

In March 2011, the registration of National Oil Consortium Ltd.'s ("NOC") equity capital increase was completed. The increase reflected a conversion of the Rosneft's earlier loan into contribution to NOC's equity. The Company's 20% ownership share in NOC did not change. NOC is involved in geological exploration of the Junin-6 block in Venezuela jointly with a subsidiary of Petróleos de Venezuela S.A., Venezuela's state oil company.

Equity share in profits/(losses) of material investments recorded using the equity method:

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

8. Long-Term Investments (continued)

Ruhr Oel GmbH

In May 2011 the Company acquired 50% ownership interest in ROG. ROG is a joint venture with BP Group engaged in processing of crude oil in Western Europe.

OJSC Kubanenergo

During 2011 the Company concluded that an other than temporary decline in value of the investment in OJSC Kubanenergo exists and recognized loss in the amount of US$ 97 million, based on the quoted price of OJSC Kubanenergo's shares (see Note 24). This loss is presented within Other expenses in the consolidated statements of income and comprehensive income. Investments in OJSC Kubanenergo included into Investments in power and utilities companies.

OJSC Tomsk Distribution Company ("TDC")

In the fourth quarter of 2011 the Company concluded that an other than temporary decline in value of the investment in TDC exists and recognized loss in the amount of US$ 36 million, based on the quoted price of TDC's shares (see Note 24). This loss is presented within Other expenses in the consolidated statements of income and comprehensive income. Investments in TDC included into Investments in power and utilities companies.

OJSC Tomskneft VNK

OJSC Tomskneft VNK is a joint venture engaged in crude oil exploration and production in Western Siberia. The Shareholder Agreement provides that key decisions regarding the business operations of OJSC Tomskneft VNK shall be subject to unanimous approval by both participants and none of the participants has a preferential voting right. The investment in OJSC Tomskneft VNK includes goodwill of US$ 368 million.

LLC Polar Lights Company ("PLC")

PLC is a limited liability company owned 50% by Conoco Phillips Timan-Pechora Inc., and 50% by the Company. PLC is primarily engaged in the development of the Ardalin and satellite fields in the Timan-Pechora Basin located 125 kilometers to the South of the Barents Sea above the Arctic Circle.

JV Rosneft-Shell Caspian Ventures Ltd.

JV Rosneft-Shell Caspian Ventures Ltd. ("JV") is a joint venture in which the Company holds 51% interest. The Articles of Incorporation provide that key decisions regarding the business operations of the JV shall be subject to unanimous approval by both participants and none of the participants has a preferential voting right.

On December 6, 1996, the Company and the JV, entered into an agreement with eight oil and gas companies and government agencies of the Russian Federation and the Republic of Kazakhstan for the establishment of Caspian Pipeline Consortium ("CPC"). The purpose of the consortium is to design, finance, build and operate a pipeline from the oil fields located in Western Kazakhstan through Russia to the port of Novorossiysk. The interest of the JV in the CPC is 7.5%. In October 2001, the CPC pipeline commenced operation.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

8. Long-Term Investments (continued)

OJSC Verkhnechonskneftegaz

OJSC Verkhnechonskneftegaz holds a licence for the development of Verkhnechonskoye oil and gas condensate deposit, which is the largest oil deposit in the Irkutsk region.

In 2008, commercial production began at the Verkhnechonskoye oil field. OJSC Verkhnechonskneftegaz is financed by the Company and other participant pro rata to their interest in share capital of the OJSC Verkhnechonskneftegaz.

CJSC Vlakra

CJSC Vlakra owns rights for certain land plot and office premises located in Moscow.

Sakhalin-1

The Company's primary investment in production sharing agreements ("PSA") is through the Sakhalin-1 project ("PSA 1"), which is operated by ExxonMobil, one of the PSA participants. The Company has a 20% interest in this unincorporated joint venture, which is accounted for under proportional consolidation method.

Taihu Ltd / OJSC Udmurtneft

In November 2006, the Company acquired a 51% equity share in Taihu Ltd, a joint venture incorporated for holding interest in and strategic management of OJSC Udmurtneft. The Company paid 5,100 Cyprus Pounds (approximately US$ 11 thousand) for this investment which has been included within equity method investments. The other party to the joint venture is China Petrochemical Corporation ("Sinopec") with a respective share of 49%.

The Shareholder Agreement in respect of this joint venture stipulates that key decisions regarding its business shall be subject to unanimous approval by both participants and none of the participants has a preferential voting right.

In December 2006, Taihu Ltd, through its wholly owned subsidiary, acquired a 96.86% equity interest in OJSC Udmurtneft for US$ 3.5 billion.

OJSC Udmurtneft is located in the Volga-Ural region of the Russian Federation and holds the licences for the development of 24 productive oil and gas condensate deposits. OJSC Udmurtneft is a group of 17 companies.

Other Investments in Power and Utilities Companies

Investments in power and utilities companies primarily comprise investments in shares of electric power generation, transmission, distribution and maintenance companies located in the Tomsk region and in the south of Russia.

The Company acquired interests in OJSC Tomskenergo and OJSC Kubanenergo through the auctions for the sale of the assets of Yukos Oil Company that were held in May and July 2007. In 2007, OJSC Tomskenergo was merged into OJSC TGK-11. Following the conversion of OJSC Tomskenergo's shares as a result of the above merger, the Company's interest in the share capital of OJSC TGK-11 amounted to 5.28%. In September 2009, the Company received additional shares of OJSC TGK-11, increasing its share in OJSC TGK-11's total equity to 6.77%. As of December 31, 2010 investment in OJSC TGK-11 was included in disposal group and recorded as Assets Held For Sale in the consolidated balance sheet.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

8. Long-Term Investments (continued)

Assets Held For Sale

In December 2010, the Company entered into a letter of intent to exchange its investment in one available-for-sale security and its interest in a number of equity investees and one subsidiary for noncontrolling interest in INTER RAO UES, Russian power and utility company. In May 2011, the exchange in respect of the Company's investment in one available-for-sale security and its interest in equity investees was completed, and the Company acquired 0.4% share in INTER RAO UES. In July 2011, the Company exchanged its 100% interest in the subsidiary for additional shares in INTER RAO UES. Immediately after the transaction Rosneft's share in INTER RAO UES's equity increased to 1.36%. As of December 31, 2011, the Company's investment in INTER RAO UES was accounted for as an available-for-sale security.

Ownership interest to be exchanged was accounted for as Assets Held For Sale in the consolidated balance sheet as of December 31, 2010. The Company measured a disposal group at the lower of its carrying amount or fair value less cost to sell and recognized a loss amounted to US$ 5 million and

US$ 31 million within Other expenses in the consolidated statements of income and comprehensive income for 2011 and 2010, respectively.

9. Property, Plant and Equipment, net

Property, plant and equipment as of December 31 comprise the following:

During 2011, the Company purchased land plots that had previously been leased, and reclassified land leasehold rights in the amount of US$ 86 million from Intangible assets to Property, Plant and Equipment in the consolidated balance sheet as of December 31, 2011.

During 2011 there was a decrease of freight rates and tariffs on the global transport services market. In this regard, the Company identified impairment indicators for its three twin-hull shuttle oil tankers, included in Other activities category of Property, Plant and Equipment. According to ASC 360-10-35, Property, Plant and Equipment: Subsequent Measurement, the Company compared carrying and fair value of these fixed assets. To measure the fair value the Company used market information on similar oil tankers. The Company recognized impairment loss in the amount of US$ 127 million within Other expenses in the consolidated statements of income and comprehensive income.

Exploration and production assets include costs to acquire unproved properties in the amount of US$ 4,192 million and US$ 4,104 million as of December 31, 2011 and 2010, respectively. The Company plans to explore and develop the respective properties. The Company's management believes these costs are recoverable.

The Company used reserves data (see Supplementary oil and gas disclosure) to calculate depletion relating to oil and gas properties for 2011 and 2010 and for the assessment of impairment of oil and gas assets.

Rosneft Oil Company

Notes to Consolidated Financial Statements (continued)

9. Property, Plant and Equipment, net (continued)

As described in Note 2, the Company calculates depletion using the unit-of-production method over proved or proved developed oil and gas reserves depending on the nature of the costs involved. The proved or proved developed reserves used in the unit of production method assume the extension of the Company's production licences beyond their current expiration dates until the end of the economic lives of the fields as discussed below in further detail. The Company's oil and gas fields are located principally in the Russian Federation. The Company obtains licences to explore and produce oil and gas from these fields from governmental agencies. The Company's existing production licences generally expire during the period from 2013 through 2051. Expiration dates of licences for the most significant fields are between 2013 and 2051, and the licence for the largest field, Priobskoye, expires in 2044. The economic lives of the major licenced fields extend significantly beyond these dates. Under Russian law, the Company is entitled to renew the licences through the end of the economic lives of the fields, provided certain conditions are met. The Subsurface Resources Administrator (Rosnedra) extends licences for a period of up to 25 years regardless of the expected life of a field. Article 10 of the Law "On Subsurface Resources" provides that a licence to use a field "shall be" extended at its scheduled termination at the initiative of the subsoil user if necessary to finish production of the field, provided that there are no violations of the conditions of the licence.

The legislative history of Article 10 indicates that the term "shall" replaced the term "may" in August 2004, clarifying that the subsoil user has an absolute right to extend the licence term so long as it has not violated the conditions of the licence. In 2007 - 2011, the Company extended 116 of its main production licences for a period of up to 25 years based on the expected life of each field. The Company's current production plans are based on the assumption, which management considers to be reasonably certain, that the Company will be able to extend all other existing licences. These plans have been designed on the basis that the Company will be producing crude oil through the economic lives of the fields and not with a view to exploiting the Company's reserves to maximum effect only through the licence expiration dates.

Accordingly, management has included all reserves that otherwise meet the standards for being characterized as "proved" and that the Company estimates it can produce through the economic lives of respective licensed fields to proved reserves in the supplementary information on oil and gas exploration and production activities of the consolidated financial statements as of and for the year ended December 31, 2011.

Proved reserves should generally be limited to those that can be produced through the licence expiration date unless there is a long and clear track record which supports the conclusion that extension of the licence will be granted as a matter of course. The Company believes that extension of the licences will occur as a matter of course as fully described above.

10. Leased Property, Plant and Equipment, net

The following is the analysis of property, plant and equipment under capital leases as of December 31, included within Property, plant and equipment, net (Note 9):