10 Oct 2006 07:00
OJSC OC Rosneft10 October 2006 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Six Months Ended June 30, 2006 and 2005 This report reviews the financial and operating performance of OJSC Rosneftfor the six months ended June 30, 2006 and 2005 and should be used together withthe interim consolidated financial statements of OJSC Rosneft and notes theretofor the periods then ended. Such terms as "Rosneft", "Company", and "we" in its different forms in thisreport mean OJSC Rosneft and its consolidated subsidiaries and affiliatedcompanies. This report contains forward-looking statements. Such words as"expect", "consider", "assume", "estimate", "intend", "plan" and the like pointto such forward-looking statements. These forward-looking statements reflect thecurrently available forecasts and views of the Company's management concerningthe future results; however, they cannot guarantee the achievement of the saidresults in the future. All amounts in US dollars are given in millions, unless otherwiseindicated. Figures are rounded; however percent changes are calculated on thebasis of actual indicators. Rosneft's actual results may differ materially from those discussed in suchforward-looking statements as a result of various factors. Overview Rosneft is a vertically integrated oil and gas company with upstream anddownstream operations located principally in Russia. Rosneft is one of theworld's largest publicly traded oil companies in terms of proved crude oilreserves and among the top ten in terms of crude oil production. According toDeGolyer&MacNaughton (D&M), Rosneft's independent reservoir engineers, as of 31December 2005, Rosneft had proved reserves of 18.94 billion boe, includingproved crude oil reserves of approximately 14.88 billion barrels (2.05 billiontonnes) and proved gas reserves of approximately 690.52 bcm. Also according to D&M, as of 31 December 2005, Rosneft had proved and probable crude oil reservesof approximately 23.18 billion barrels (3.19 billion tonnes) and proved andprobable gas reserves of approximately 1,134.86 bcm. Rosneft's reserves arelocated in Western Siberia, Timano-Pechora, the Russian Far East, SouthernRussia and Eastern Siberia. Rosneft also has significant prospective crude oilresources in Western Siberia, the Russian Far East, which includes SakhalinIsland and the Kamchatka Peninsula, Southern Russia and Eastern Siberia. In the first half of 2006, Rosneft, via a group of its consolidatedsubsidiaries, produced 38.111 million tones of crude oil (1,528.63 thousandbarrels of crude oil per day), an increase of 2.88 million tones, or 8%, abovethe first half of 2005 (35.227 million tones). Rosneft sells approximately 70%of this crude oil to customers outside Russia, which includes both sales to CIScountries and exports to international markets other than the CIS. Most of theremainder is refined at Rosneft's two main refineries and at third partyrefineries in Russia and then sold in the form of petroleum products ininternational and domestic markets. Rosneft has an integrated production,transportation, refining and marketing strategy and seeks to maximize netbacksby optimizing its product mix and available transport routes. Rosneft's total revenues increased from USD 9,864 million in the first halfof 2005 to USD 16,356 million in the first half of 2006 and from USD 5,501million in the second quarter of 2005 to USD 8,840 million in the second quarterof 2006. Similarly, adjusted net income (excluding effect of income fromdivestment of CJSC Sevmorneftegas and minority interest) increased from USD1,710 million in the first half of 2005 to USD 1,953 million in the first halfof 2006 and from USD 978 million in the second quarter of 2005 to USD1,108million in the second quarter of 2006. Rosneft's total revenues and net income have grown organically and by wayof acquisition. The most significant recent acquisition was the December 2004acquisition of Baikalfinansgroup, which had won an auction for the sale of76.79% of the shares (100% of the common shares) of Yuganskneftegaz, the secondlargest oil production enterprise in Russia. As of 31 December 2005,Yuganskneftegaz accounted for approximately 73.4% of Rosneft's proved crude oilreserves. It accounted for approximately 69.0% of Rosneft's crude oil productionin the first half of 2006 and 2005. The acquisition of Yuganskneftegazcontributed significantly to the increases in Rosneft's total revenues and netincome starting from 2005. The increases in Rosneft's total revenues and netincome in other periods were due mainly to organic growth. Business Segments and Intersegment Sales The Company operates primarily in the Russian Federation. As geographicalregions of the Russian Federation have similar economic and legalcharacteristics, the Company does not disclose geographic segments separately.The Company also carries out projects abroad, including projects in Kazakhstan,Turkmenistan and Algeria. These projects are at early stages and have had littleto no impact to date on the financial condition or results of operations of theCompany. Business Segments The activities of Rosneft are divided into two main business segments: Exploration and Production ("Upstream"). Geological exploration and development of fields, and crude oil, gas and gas condensate production; and Refining, Marketing and Distribution ("Downstream"). Refining of crude oil, as well as the purchase, transportation, sale and transshipment of crude oil and petroleum products. Rosneft does not separate its distribution and transportation divisionsinto a "midstream" segment. These activities are reflected instead in the"downstream" segment. Other types of activities are incorporated in the "Otheractivities" segment and include banking and financial, drilling and constructionservices. Intersegment Sales Rosneft's two main business segments are interconnected: a portion of therevenues of one main segment is included as expenses of the other main segment.In particular, the holding company, OJSC OC Rosneft, buys crude oil from itsproducing subsidiaries, part of which it sells outside Russia and the remainderof which it delivers to its proprietary or third party refineries in Russia forprocessing. Petroleum products are then sold by the holding company to theCompany's marketing subsidiaries for subsequent retail sale in Russia orwholesale in Russia and abroad. Determining market prices for crude oil in the Russian domestic market,iscomplicated by the significant intragroup turnover within the verticallyintegrated oil companies that dominate the market. Transaction prices for crudeoil between Rosneft companies are established taking into consideration marketprices and transportation costs, but are also affected to a considerable degreeby the capital investment requirements of different enterprises within theupstream segment. Accordingly, an analysis of individual segments in isolationfrom the analysis of other activities could give a distorted view of Rosneft'sfinancial and operating performance. Call option for OJSC Udmurtneft On 20 June 2006, TNK-BP announced that it had reached an agreement to sella 96.86% interest in OJSC Udmurtneft (''Udmurtneft'') to the China Petroleum andChemical Corporation (''Sinopec''). Earlier, in May 2006, Sinopec had grantedthe Company an option to purchase a 51% interest in Udmurtneft. On 20 June 2006,the Company announced its intention to exercise the option once Sinopeccompletes this acquisition. Sinopec became a shareholder of Udmurtneft in August2006. Sinopec will be responsible for financing the acquisition by Rosneft ofthe 51% interest in accordance with the option agreement, and the financing isto be repaid out of cash flows derived from the 51% interest, without recourseto the Company. Udmurtneft is located in the Volga-Ural region and, as of 31 December 2005,had SPE proved crude oil reserves of 551 million barrels (75.32 million tonnes).According to publicly available information, it has 23 producing fields, and in2005, it produced 122.69 thousand barrels of crude oil per day (5,987 milliontones of crude oil per year). Negotiations to complete the transaction are in process as of September 30,2006. Acquisitions Rosneft made a number of significant acquisitions, increased stakes incertain of its subsidiaries and won auctions for a number of licenses during theperiod being analyzed and thereafter. Significant Acquisitions PSA Sakhalin-1 In July Rosneft repaid approximately USD 1.37 billion to ONGC, retiringobligation to ONGC per the carry agreement to finance Rosneft's interest inSakhalin-1. After redemption, 20% of income and expenses of Sakhalin-1 will beproportionally consolidated into Rosneft's accounts. OJSC Nakhodka Oil Seatrade Port In June 2006, the Company purchased 97.51% of the common shares in OJSCNakhodka Oil Seatrade Port (OJSC Nefteport) for USD 19.5 million. The Nakhodka Oil Seatrade Port is located in the Novitsky Bay on thewestern bank of the Nakhodka Gulf and is the largest special commercial tradeseaport on Russia's Pacific coast. The oil harbor is open for navigation allyear-round and does not require ships to be accompanied by ice-breakers duringthe winter months. In 2005, OJSC Nefteport shipped approximately 6 million tons of oilproducts and serviced over 1,000 vessels. Shipment volumes for 6 months 2006amounted to approximately 2.6 million tons. OJSC Nefteport comprises one of the links in the technological andinfrastructural chain for Rosneft's storage and transshipment of oil products.With the acquisition of the OJSC Nefteport, Rosneft has therefore completed theestablishment of a single self-contained industrial complex in Nakhodka Bay, oneof the largest not only in the Far East, but throughout Russia. Increased Stakes in Subsidiaries VBRR (All-Russian Bank of Regional Development) In June 2006, the Company won an auction for 25.49% of the common shares inVBRR, thereby increasing its stake in the common shares of VBRR from 50.98% to76.47%. The purchase price was RUB 333 million (USD 12 million as of the auctiondate). Rosneft - Tuapsenefteprodukt In January 2006, Rosneft acquired 39.26% of the common shares (30.24% ofthe share capital) in OJSC Rosneft-Tuapsenefteprodukt, increasing its stake inthe common shares from 50.67% to 89.93% and in the total share capital from38.00% to 68.24%. The purchase price was USD 100 million. Additional Share Issues VBRR (All-Russian Bank of Regional Development) In September 2006, shareholders meeting of OJSC VBRR approved additionalissue of 223 500 shares each 10 000 RUR at par which will all be acquired by theCompany. The total par value of the shares to be acquired is USD 83 million atthe CBR rate as of June 30, 2006. Daltransgaz In February 2006, the Company purchased its 25% pro rata share of anadditional issue of shares in OJSC Daltransgaz for RUR 722 million (USD 25.6million as of the payment date). In August 2006, the Company purchased 25% ofthe additional issue of shares by OJSC Daltransgaz for RUR 525 million (USD 19million at the exchange rate as of date of transaction), thus maintaining itsshare at 25% plus one share. Spin-off and consolidation RN-Burenie In March 2006 the Company created an entity LLC "RN-Burenie" in accordancewith the Board of Directors' decision to optimize the service segment. Duringthe second quarter of 2006 drilling and other supporting assets were transferredto RN-Burenie from upstream subsidiaries. In the third quarter of 2006 thedrilling divisions of the Company (LLC PNG-Burenie, LLC KNG-Burenie and LLC KNG-Sibir) were consolidated into LLC RN-Burenie. Licenses Won at Auctions Vankor area licenses In July 2006 the Company won an auction for the licenses for thedevelopment and production of crude oil and gas in the Severo-Charsky oil andgas block at the border of Taimir and Yamalo-Nenetsky Autonomous Okrug. Thetotal cost of the licenses was RUR 4,730 million (USD 176 million at the date ofpayment). Taking into account this acquisition, the total number of licenses atVankorsky field in Western Siberia reached 14. In February 2006, the Company won auctions for the licenses for theexploration and production in the Tukolandskiy, Vadinskiy and Pendomayakhskiyoil and gas license blocks in the Krasnoyarskiy Kray. The total cost of thelicenses amounted to RUR 5,377 million (USD 199 million as of the payment date).These blocks will share certain infrastructure with the Vankor field, therebyreducing development costs should commercial volumes of hydrocarbons bediscovered. Other areas In August 2006, the Company won an auction for the license for thedevelopment and production of crude oil and gas in Kulindinsky prospective oiland gas block in Evenkiysky Autonomous Okrug. The total cost of licensesamounted to RUR 1,560 million (USD 58 million at the exchange rate as of thedate of payment). The Kulindinsky block is located in the territory of Tungus-Chusky region (the South-Eastern part of Evenkiya). In June 2006, the Company won an auction for the licenses for thedevelopment and production of oil and gas in Danilovsky oil and gas field inIrkutsk region. The total cost of licenses amounted to RUR 1,210 million (USD 45million as of the date of payment). In April 2006, the Company won an auction for the licenses for thedevelopment and production of crude oil and gas in the Mogdinskiy and Sanarskiyoil and gas license blocks in Irkutsk region. The total cost of the licenses wasRUR 2,523 million (USD 94 million as of the payment date). These blocks arelocated in close proximity to Verkhnechonskoye field, which is currently underdevelopment and will be able to share certain infrastructure with theVerkhnechonskoye field, thereby reducing development costs should commercialvolumes of hydrocarbons be discovered. In March 2006, an exploration and production license for the Vostochno-Sugdinskiy block was obtained, as a result of an auction won by the Company inDecember 2005. An auction fee of USD 10 million was paid in December 2005 andthe remaining consideration of RUR 7,170 million (USD 249 million as of December31, 2005) was paid in 2006. Planned Consolidation via Share Swap In the first half of 2006 many of the Company's principal operatingsubsidiaries had minority interests. In April 2006, the Company's Board ofDirectors, as well as the boards of directors or other relevant corporate bodiesof each of Yuganskneftegaz, Purneftegaz, Selkupneftegaz, Severnaya Neft,Krasnodarneftegaz, Stavropolneftegaz, Sakhalinmorneftegaz, KomsomolskiyRefinery, Tuapsinskiy Refinery, Arkhangelsknefteprodukt, Nakhodkanefteproduktand Tuapsenefteprodukt (each, a ''Merging Subsidiary'' and collectively, the''Merging Subsidiaries''), decided to propose to their respective shareholdersthe consolidation of each respective Merging Subsidiary into the Company througha statutory merger and an exchange of shares at specified ratios (the ''ShareSwap''). On 2 June 2006, the Company's shareholders, as well as the shareholdersof each Merging Subsidiary (other than Sakhalinmorneftegaz) approved the ShareSwap. Due to the lack of a quorum at the shareholders' meeting ofSakhalinmorneftegaz called to approve the Contract on merging, the issue wasonce again considered at the extraordinary meeting on 8 September 2006 when theshareholders of Sakhalinmorneftegaz finally approved the Share Swap. The Company exchanged its Ordinary Shares for shares of these subsidiariesheld by third parties, and these subsidiaries were merged into the Company. TheShare Swap has been completed on September 30, 2006. According to the decisions on reorganization by consolidation into theholding company, approved at the general shareholder meetings, dissentingminority shareholders may require their shares to be repurchased. For thispurpose each subsidiary is entitled to use up to 10% of its net assets, asmeasured under Russian Accounting Standards. As a result of the buyback rightshaving been exercised by the dissenting shareholders, the Merging subsidiariesrepurchased shares for the total amount of 222.17 million RUB (USD 8.3 million). The Company does not expect that creditors of the Merging Subsidiaries willdemand prepayment of amounts that would be material to Rosneft. The Company must also arrange for the transfer of licenses from the MergingSubsidiaries to the Company or their re-issue to the name of the Company. Key operating data and key financial ratios The Company monitors and evaluates its activities on an ongoing basis. Keyoperating data and key financial ratios are given below: Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005 _______________________________________ KEY OPERATING DATAProduction dataCrude oil (thousand barrels per day) 1,567.84 1,427.39 1,540.24 1,423.66Gas (bcm) 3.21 3.07 6.77 6.12Crude oil sales and exports (millionbarrels)Crude oil exported outside the CIS 92.10 68.69 175.56 126.63Crude oil sold in the CIS 9.07 11.78 20.63 24.36Crude oil sold in Russia 0.73 7.39 3.00 23.04 Gas sales (bcm) 2.19 2.12 4.58 4.42 Petroleum products (million tonnes)Total domestic refining throughput 5.47 4.75 11.21 9.49Petroleum products exported outside the CIS 3.23 3.21 6.50 5.84Petroleum products sold in the CIS 0.16 0.07 0.29 0.15 Petroleum products sold in Russia,including those purchased by theCompany's marketing subsidiaries Petroleum products sales via proprietary and rented retail outlets 0.28 0.27 0.52 0.47 Total petroleum products sold in Russia 2.23 1.82 4.66 3.71______________________________________________________________________________ KEY FINANCIAL RATIOSEBITDA (USD millions) 2,261 1,757 4,178 3,302EBITDA margin 25.6% 31.9% 25.5% 33.5%Adjusted free cash flow before interest (USD millions) 760 767 1,785 565Adjusted net income margin before minority interest 12.5% 17.8% 11.9% 17.3%Return on average capital employed, annualized 25.2% 20.6% 24.1% 20.4%Return on average equity, annualized 42.6% 52.2% 39.0% 47.8% Net debt (USD millions) 11,232 11,212 11,232 11,212Net debt to capital employed ratio 0.51 0.57 0.51 0.57Net debt to EBITDA ratio 1.24 1.60 1.34 1.70Current ratio 0.76 1.03 0.76 1.03EBITDA/bbl (USD) 15.85 13.53 14.99 12.81EBITDA/boe (USD) 13.99 11.88 13.11 11.24Upstream capital expenditures/bbl (USD) 5.24 3.71 4.34 3.02Upstream capital expenditures/boe (USD) 4.62 3.26 3.80 2.65Upstream operating expenses/bbl (USD) 2.84 2.43 2.55 2.33Upstream operating expenses/boe (USD) 2.50 2.14 2.23 2.05Adjusted free cash flow before interest/bbl (USD) 5.33 5.90 6.40 2.19Adjusted free cash flow before interest/boe (USD) 4.71 5.18 5.60 1.92______________________________________________________________________________ The Company considers EBITDA margin, ROACE, ROAE, upstream operating expenses/bbl and operating expenses for oil and gas production/boe and the related indicators as important measures of its operating performance. In addition, these measures are frequently used by financial analysts, investors and other interested parties in the evaluation of oil and gas companies. These measures have limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of the Company's operating results as reported under U.S. GAAP. EBITDA/bbl and EBITDA/boe are calculated for any period by dividing EBITDA for that period by the barrels of crude oil or barrels of oil equivalent,respectively, produced during that period. No adjustments to these measures aremade to take into account the effect of changes in inventories during theperiod. Upstream capital expenditures/bbl and upstream capital expenditures/boe are calculated for any period by dividing the capital expenditures in the upstream segment during that period by the barrels of crude oil or barrels of oil equivalent, respectively, produced during that period. Upstream operating expenses/bbl and upstream operating expenses/boe arecalculated for any period by dividing the production and operating expenses ofthe upstream segment during that period by the barrels of crude oil or barrelsof oil equivalent, respectively, produced during that period. No adjustments tothese measures are made to take into account the effect of changes ininventories during the period. Upstream operating expenses include lifting costs, and the costs of gathering, treating, processing and storing the crude oil and gas in the fields and delivering the crude oil and gas to a main pipeline (e.g., a Transneft trunkpipeline transshipment). Operating expenses of oil and gas production exclude aportion of the costs relating to intersegment transactions, mainly operatingleases relating to certain oil and gas facilities. The following table sets forth relevant figures relating to these measures: Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005______________________________________________________________________________Upstream capital expenditures (USD millions) 747 482 1,210 778Upstream operating expenses (USD millions) 405 316 711 601Barrels of crude oil produced (millions) 142.67 129.89 278.78 257.68Barrels of oil equivalent produced (millions) 161.60 147.95 318.65 293.75______________________________________________________________________________ For calculation of key financial measures refer to the section "Selectedfinancial performance indicators". Main Factors Affecting Results of Operations The main factors that have affected Rosneft's results of operations during the period being analyzed, and that can be expected to affect its results ofoperations in the future, are • Changes in crude oil and refined product prices;• RUB/USD exchange rate movements and inflation;• Changes in mineral production tax and export customs duty; and• Changes in transport tariffs. Changes in prices, export customs duty and transport tariffs can have a significant impact on the mix of products and export routes the Company chooses, as it seeks to maximize netback prices for the crude oil it produces. Changes in Crude Oil, Petroleum Product and Gas Prices The prices of crude oil and petroleum products internationally and in Russia have a significant impact on the Company's results of operations. World prices for crude oil are characterized by significant fluctuations that are determined by the global balance of supply and demand. These prices have increased in recent years, and are currently high. The crude oil that Rosneftexports through the Transneft pipeline system is blended with oil of other producers that is of a different quality. The resulting Urals blend is traded at a discount to Brent. Russian domestic market prices for crude oil are difficult to determine, mainly due to the significant intragroup turnover of thevertically integrated oil companies that dominate the market. Moreover, to the extent they exist, crude oil market prices in Russia can be significantly lower than they might otherwise be due to seasonal oversupply and regional imbalances. The dynamics of petroleum product prices in the international and Russianmarkets are determined by a number of factors, the most important among thembeing the level of world prices of crude oil, supply and demand for petroleumproducts, competition in the different markets and distances separating themfrom the refineries where the crude oil is refined into usable end products orintermediate products. Average Crude Oil and Refined Products Prices Worldwide and in Russia Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change, 2006 2005 % 2006 2005 %_____________________________________________________________________________________World market (in USD per barrel)Brent 69.62 51.60 35% 65.69 49.4 32%Urals (average Med+NWE) 64.80 48.20 34% 61.50 45.27 36%Dubai-Oman (Singapore) 65.09 47.16 38% 61.70 44.54 39% (in USD per tonne)Fuel oil 3.5% (average Med) 309 226 37% 296 200 48%Gasoil 0.2% (average Med) 626 482 30% 589 459 28%Naphta (average Med) 586 428 37% 551 419 32% Russian market* (in USD per tonne)Fuel oil 225 135 67% 214 105 104%Diesel fuel 587 474 24% 552 448 23%Low octane gasoline 589 476 24% 561 451 24%High octane gasoline 703 624 13% 686 576 19%_____________________________________________________________________________________* Including VAT Source: Average rates computed based on Platts (world market), Kortes (Russian market) Rosneft's gas sales have been limited to date, but the Company's strategyanticipates a significant increase in its gas business. Gazprom controls accessto the united system of trunk pipelines, and is a monopoly supplier of gas inRussia and the only exporter of gas produced in Russia. Rosneft sells the gas itproduces to Gazprom from time to time and is currently in the process ofnegotiating a comprehensive agreement with Gazprom pursuant to which Gazpromwould purchase gas, produced by the Company. The Russian government regulatesthe prices for the gas Gazprom sells in Russia. While the regulated price hasbeen rising in Russia, and is expected to continue to rise to a level closer toparity with export netbacks, currently it is still significantly below worldprice levels. The regulated price has affected, and is likely to continue toaffect, the pricing of the gas Rosneft sells to Gazprom from time to time orpursuant to the contract it is negotiating. Rosneft's average gas sale price wasUSD 20.55/tcm and USD 19.66/tcm in the first half of 2006 and 2005,respectively, and USD 20.14/tcm and USD 22.12 /tcm in the second quarters of2006 and 2005, respectively. RUB/USD Exchange Rate Movements and Inflation The ruble-U.S. dollar exchange rate and inflation trends in the RussianFederation affect the Company's results of operations since most of Rosneft'srevenues from sales of crude oil and petroleum products are denominated in U.S.dollars, while a substantial portion of its expenses is denominated in Russianrubles. Accordingly, the real appreciation of the ruble versus the U.S. dollarnegatively affects Rosneft's margins. The ruble has appreciated against the U.S.dollar in real terms throughout the periods being analyzed and in nominal termson average as well. Currently, Rosneft does not use currency hedging mechanisms. Whether the ruble appreciates or depreciates in real terms is a function of the relationship between movements in the nominal exchange rate and inflation. The table below sets forth information on exchange rate movements and inflation during the period. Inflation and Exchange Rates Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005__________________________________________________________________________________________________Ruble inflation, (CPI) 1.2% 2.7% 6.2% 8.0%Ruble/U.S.dollar exchange rate at the beginning of the period 27.76 27.83 28.78 27.75Ruble/U.S.dollar exchange rate at the end of the period 27.08 28.67 27.08 28.67Average Ruble/U.S.dollar exchange rate during the period 27.20 28.10 27.68 27.96Nominal appreciation (depreciation) of the ruble 2.4% -3.0% 5.9% -3.3%Real appreciation (depreciation) of the ruble 3.7% -0.4% 12.5% 4.4%__________________________________________________________________________________________________ Sources: CBR, State Statistics Committee of Russia Changes in Mineral Production Tax and Export Customs Duty Mineral production tax and export customs duty composition of Rosneft's total revenues ranged from 25% to 48% during the period being analyzed. The table below sets out the mineral production tax and export customs duty paid byRosneft during this period. When volumes of hydrocarbon supplies remainunchanged, the mineral production tax and export customs duty reduce to aconsiderable degree the impact of upward or downward movements in crude oilexport prices on the Company's net income from the export of crude oil. Rates of Mineral Production Taxes and Export Customs Duty Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change, 2006 2005 % 2006 2005 %_______________________________________________________________________________________________________Mineral production taxCrude oil (RUB per tonne) 2,437 1,768 38% 2,333 1,628 43%Natural gas (RUB per thousand cubic meter) 147 135 9% 147 135 9% Export custom duty (USD per tonne):Crude oil 191 114 68% 179 101 76%Light and medium distilled products 135 78 73% 132 68 93%Fuel oil 73 42 73% 71 43 65%_______________________________________________________________________________________________________ Mineral Production Tax In the first half of 2006, the rate of mineral production tax for crude oil increased by 43% against the first half of 2005 due to an increase in crude oil prices. In the second quarter of 2006, the rate of mineral production tax for crude oil increased by 38% against the second quarter of 2005, due to increased crude oil prices. From January 1, 2006, the rate of mineral production tax for gas increased by 9%, to RUR 147 per tcm. The rate of mineral production tax for crude oil in 2005 and the first half of 2006 was calculated by multiplying the base rate per tonne of crude oil produced by the adjustment ratio equal to (P - 9) * R / 261, where "P" is the average Urals price during the fiscal period, and "R" is the average ruble/dollar exchange rate established by the Central Bank of Russia during the fiscalperiod. The base rate was 419 rubles in 2005. The rate of mineral production taxper thousand cubic meters of gas produced was 135 rubles in 2005. Mineral production tax was USD 11.18 per barrel of crude oil produced and USD 9.78 per barrel of oil equivalent produced in the first half of 2006 and USD7.70 per barrel and USD 6.76 per barrel of oil equivalent produced in the firsthalf of 2005. Export Customs Duty As described in the following table, the rate of export customs duty is linked to the average Urals price in the markets of the North-West of Europe and the Mediterranean in US dollars per barrel of extracted crude oil (expressed in U.S. dollars per tonne). Calculation of Export Customs Duty (from August 2004) Urals price Export customs duty (USD/barrel) (USD/tonne)________________________________________________________________________________Below 15 Export customs duty is not levied 15-20 35% of the difference between Urals price in USD per tonne and USD 109.5 20-25 USD 12.78 per tonne plus 45% of the difference between Urals price in USD and USD 146 above 25 USD 29.2 per tonne plus 65% of the difference between Urals price in USD per tonne and USD 182.5________________________________________________________________________________ Export duties for petroleum products are established by the Russian government depending on prices in the domestic petroleum products market. Export duties are not payable on exports of crude oil and petroleum products to CIS states, except for Ukraine. As a result of these taxes, the net income of businesses that export crude oil and petroleum products from Russia has a reduced sensitivity to changes in crude oil prices. Moreover, the impact of export customs duty on crude oil relative to the impact of excise taxes on petroleum products affects the choice to be made between exporting crude oil and refining it for sale both internationally and in Russia. Changes in Transport Tariffs Rosneft transports most of its crude oil through the pipeline network owned and operated by OJSC Transneft, the state-owned oil monopoly engaged in the transportation of oil in Russia and abroad. Transneft's tariffs for thetransportation of Rosneft's crude oil through Transneft's pipeline network areset by the Federal Tariff Service (the "FTS"). The overall expense per tonne forthe transportation of crude oil depends on the length of the transport routefrom the producing field to the ultimate destination and the number of Transneft"districts" through which the oil is transported. Rosneft seeks to utilizealternative means of transportation, including the Northern route via Rosneft'sBelokamenka export transshipment facility, the Far Eastern route via Rosneft'spipeline "Okha-Komsomolsk-on-Amur" which is located on the Sakhalin Island andthe Southern route via the CPC pipeline. In the first half of 2006 and 2005 Rosneft exported approximately 12% of its petroleum products via Transnefteprodukt's pipeline system. The petroleumproducts were produced under processing contracts at refineries owned by YUKOSlocated in Samara region. Transnefteprodukt is a state-owned petroleum productpipeline monopoly specializing in petroleum products transportation. The FTS isresponsible for setting the transportation fees. Rosneft also transport via railway approximately 24% of its export and domestic sales of crude oil, including crude oil produced by Yuganskneftegaz andPurneftegaz, for sale to China and approximately 80% of its export and domesticsales of petroleum products. The Russian railway system, or RZD, is astate-owned monopoly provider of railway transportation services. RZD's tariffsare also subject to control by FTS and antimonopoly regulation. Production of crude oil, petroleum products and gas Rosneft's ability to generate profit depends on its production of crude oil and petroleum products. In addition, as noted above, an important part of Rosneft's strategy is to expand its production and sale of natural and associated gas. Production of Crude Oil Rosneft produces crude oil at 11 production and development subsidiaries, which are fully consolidated, and at two joint ventures, which it accounts for using the equity method. Yuganskneftegaz and Purneftegaz in Western Siberia andSevernaya Neft in Timano-Pechora collectively account for almost 90% ofRosneft's production in 2005 and the first half of 2006. Yuganskneftegazaccounted for approximately 69%, Purneftegaz 13 and 12% and Severnaya Neft 6%and 7% of production for the first half of 2005 and 2006, respectively. The following table sets forth Rosneft's crude oil production during the periodbeing analyzed: Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,(million tonnes) 2006 2005 % 2006 2005 %______________________________________________________________________________Crude oil production by fully consolidatedsubsidiaries (1) 19,504 17,757 10% 38,111 35,227 8%Crude oil production, including the share inproduction of affiliatedenterprises (2) 19,565 17,925 9% 38,429 35,549 8%______________________________________________________________________________ (1) Crude oil production by subsidiaries includes Rosneft's net share of oilproduced under Sakhalin-1 PSA totaling 157 thousand tonnes. Gross amount of oilretained by Rosneft is 197 thousand tones, that of royalty (8%) and thegovernment's share (2.07%) -18 thousand tonnes, one-off compensation of costspreviously incurred by other participants of the consortium - 17 thousand,pipeline fill-up and other needs (5 thousand tonnes). (2) Crude oil production, together with the share in production of affiliates,includes 50% share of Rosneft in crude oil produced by Polar Lights and AdayPetroleum (Kazakhstan) joint ventures. In the first half of 2006 Rosneft increased its production of crude oil by 8% to 38.1 million tonnes, compared to 35.2 million tonnes in the first half of 2005. This growth was largely attributable to increased production by Yuganskneftegaz and Severnaya Neft. Yuganskneftegaz increased its production from 24.8 million tonnes to 26.9 million tonnes, or by 8%, and Severnaya Neft increased its production from 2.2 million tonnes to 2.8 million tones, or by 24%. Also, commercial production of crude oil and gas started at Sakhalin-1 PSA from October 2005 and for the first half of 2006 amounted to 1 million barrels of oil equivalent. In the second quarter of 2006 Rosneft increased its production of crude oil by 10% to 19.504 million tonnes, compared with 17.757 million tonnes in the second quarter of 2005. This organic growth was largely attributable to the growth of crude oil production at the oil fields of Yuganskneftegaz and Severnaya Neft, as well as Selkupneftegaz and Stavropolneftegaz. Production of Gas Rosneft is currently the third largest producer of natural and associated gasamong Russian oil companies: Three Three Six Six months months months months ended ended ended ended June June June June 30, 30, Change, 30, 30, Change,(billion cubic meters) 2006 2005 % 2006 2005 %___________________________________________________________________________Gas production by subsidiaries 3.21 3.07 5% 6.77 6.12 11%Gas production, including the share in productionof affiliates 3.22 3.07 5% 6.78 6.13 11%___________________________________________________________________________ In the first half of 2006, gas production increased by 11% to 6.78 bcm. The growth was primarily attributable to the growth of gas production in the oilfields of Krasnodarneftegaz and Selkupneftegaz (Yamalo-Nenetsky AutonomousOkrug). In the first half of 2006, the level of associated gas utilization was60.9% compared to 62.5% in the first half of 2005. Production of Petroleum Products Rosneft refines the crude oil it produces at its two major refineries,Tuapsinskiy Refinery on the Black Sea in the South of Russia and KomsomolskiyRefinery in the Russian Far East. Rosneft also arranges for the crude oil itproduces to be processed at refineries owned by third parties. These operationshave increased considerably from the beginning of 2005 as a result of acquiringYuganskneftegaz and allocating oil produced by it to be processed at refinerieswithin the YUKOS group. Rosneft also owns the Nefteprodukt Experimental Refinery in Moscow andmini-refineries in Gubkinsky in the Yamalo-Nenetsky Autonomous Okrug and inUsinsk in the Komi Republic. The following table sets forth Rosneft's petroleum product production during theperiod being analyzed: Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,(million tonnes) 2006 2005 % 2006 2005 %______________________________________________________________________________Petroleum products output by Tuapsinskiy, Komsomolskiy, mini-refineries 2.50 2.55 -2% 5.20 4.99 4%Petroleum products output by third party refineries 2.97 2.20 35% 6.01 4.50 33%Total output of petroleum products 5.47 4.75 15% 11.21 9.49 18%______________________________________________________________________________ In the first half of 2006, Rosneft's output of petroleum products amounted to 11.21 million tonnes, which is 18% more than in the first half of 2005.Rosneft's own refineries output increased by 4% from 4.99 million tonnes in thefirst half 2005 to 5.20 million tonnes in the first half 2006. The increase isdue to commissioning new processing units. Depth of refining by KomsomolskiyRefinery increased from 60.2 % in the first half of 2005 to 61.4 % in the firsthalf of 2006 and by Tuapsinskiy Refinery from 56.1% in the first half 2005 to56.6% in the first half 2006. The output of petroleum products at third party refineries (mainly those within the YUKOS group) increased by 33% from 4.50 million tonnes in the first half 2005 to 6.01 million tonnes in the first half 2006. This was due to a processing agreement, which also included the production of motor oil, with two more refineries of the YUKOS group (Syzransky and NovoKuibyshevsky lubricantrefineries). In the second quarter of 2006, Rosneft's output of petroleum products amounted to 5.47 million tonnes, which is 15% more than in the second quarter of 2005. Rosneft's own refineries processing slightly decreased due to the repairs of a processing unit at Komsomolskiy Refinery and amounted to 2.5 million tonnescompared to 2.55 million tonnes in the corresponding period of 2005. The outputof petroleum products at third party refineries increased by 35% and amounted to2.97 million tonnes. Sales Revenues Tables below set forth the analysis of sales of crude oil and petroleum products in the first half of 2005 and 2006, as well as in the second quarter of 2005 and 2006: Analysis of Sales Revenues Revenue Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,(million USD) 2006 2005 % 2006 2005 %____________________________________________________________________________________________Crude oilCrude oil - export & CIS sales 6,279 3,505 79% 11,384 6,199 84%Europe 4,597 2,616 76% 8,344 4,772 75%Asia 1,337 536 150% 2,300 755 205%CIS 345 353 -2% 740 672 10%Crude oil - domestic 21 177 -88% 79 434 -82% Gas 44 47 -6% 94 87 8%____________________________________________________________________________________________Oil and gas sales 6,344 3,729 70% 11,557 6,720 72% Petroleum productsPetroleum products - export and CIS sales 1,453 1,048 39% 2,757 1,817 52%Europe 780 751 4% 1,590 1,232 29%Asia 625 282 121% 1,081 565 91%CIS 48 15 219% 86 20 329%Petroleum products - domestic 954 621 54% 1,869 1,163 61%Wholesale 809 486 67% 1,589 937 70%Retail 145 135 7% 280 226 24%____________________________________________________________________________________________Petroleum products sales 2,407 1,669 44% 4,626 2,980 55% Support services and other revenues 89 103 -14% 173 164 5%____________________________________________________________________________________________Total sales 8,840 5,501 61% 16,356 9,864 66%============================================================================================ Analysis of Crude Oil and Petroleum Product Sales Volumes Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,Sales Volumes 2006 2005 % 2006 2005 %________________________________________________________________________________Crude oil (mln.bbl) Crude oil - export & CIS sales 101.17 80.47 26% 196.19 150.98 30%Europe 72.42 57.64 26% 139.64 110.68 26%Asia 19.68 11.05 78% 35,92 15,95 125%CIS 9.07 11.78 -23% 20.63 24.36 -15% Crude oil - domestic 0.73 7.39 -90% 3.00 23.04 -87% Crude oil (mln. tonnes)Crude oil - export & CIS sales 13.83 11.00 26% 26.82 20.64 30%Europe 9.90 7.88 26% 19.09 15.13 26%Asia 2.69 1.51 78% 4.91 2.18 125%CIS 1.24 1.61 -23% 2.82 3.33 -15%Crude oil - domestic 0.10 1.01 -90% 0.41 3.15 -87%________________________________________________________________________________Total crude oil sales 13.93 12.01 16% 27.23 23.79 14% Petroleum products (mln. tonnes)Petroleum products - export and CIS sales 3.39 3.28 3% 6.79 5.99 13%Europe 1.76 2.30 -23% 3.82 3.90 -2%Asia 1.47 0.91 61% 2.68 1.94 38%CIS 0.16 0.07 125% 0.29 0.15 92%Petroleum products - domestic 2.23 1.82 23% 4.66 3.71 26%Wholesale 1.95 1.55 26% 4.14 3.23 28%Retail 0.28 0.27 4% 0.52 0.47 11%________________________________________________________________________________Total petroleum product sales 5.62 5.09 10% 11.45 9.69 18% Total crude oil and petroleum product sales 19.55 17.10 14% 38.68 33.48 16%________________________________________________________________________________Gas 2.19 2.12 3% 4.58 4.42 3%________________________________________________________________________________ Note: The total volume sold is different from the volume of crude oil produceddue to changes in inventory levels, purchases for resale, own use of oil byRosneft and losses during transportation and in refining. Average Crude Oil and Petroleum Products Sales Prices achieved by Rosneft The unit prices in the following table may differ from unit prices of crude oil and petroleum products provided by information agencies due to the following factors: • Seasonal and other production variations;• Different conditions of sales and supplies versus those cited in mass media;• Different conditions in local markets;• Discounts or mark-ups depending on crude oil or petroleum product quality, sale volume and timing of transactions; and• Terms of individual contracts differing from average market prices. Three months Three months Six months Six months ended June 30, ended June 30, ended June 30, ended June 30, 2006 2005 2006 2005 ($/bbl) ($/tonne) ($/bbl) ($/tonne) ($/bbl) ($/tonne) ($/bbl) ($/tonne)___________________________________________________________________________________________________________________ Average export & CIS pricesCrude oil 62.07 454.05 43.55 318.59 58.03 424.48 41.05 300.32Europe 63.48 464.34 45.38 331.97 59.75 437.09 43.11 315.39Asia 67.96 497.19 48.46 354.65 64.04 468.52 47.31 346.11CIS 38.04 278.23 29.98 219.33 35.87 262.41 27.59 201.84Petroleum products 428.57 320.01 406.01 303.60Europe 443.09 327.45 416.19 316.31Asia 425.17 309.39 403.36 291.24CIS 300.00 214.29 296.55 133.33 Average domestic priceCrude oil 28.77 210.00 23.95 175.25 26.33 192.68 18.84 137.78Gas (USD/thousand cubic meter) 20.14 22.12 20.55 19.66Petroleum products 427.86 341.41 401.10 313.56Wholesale 414.10 312.73 384.13 289.54Retail 525.26 509.43 535.32 477.80___________________________________________________________________________________________________________________ Revenues were USD 16,356 million in the first half of 2006, a 66% increase over the first half of 2005 (USD 9,864 million). Revenues from the sale of crude oil grew by 72% and revenues from the sale of petroleum products by 55%, in thefirst half of 2006 compared to the first half of 2005. The growth in revenueswas due to increased prices and increased sales volumes of crude oil andpetroleum products. Revenues were USD 8,840 million in the second quarter of 2006, a 61% increase over the second quarter of 2005 (USD 5,501 million). Revenues from the sale of oil and gas grew by 70% and revenues from sale of petroleum products by 44% in the second quarter of 2006 compared to the second quarter of 2005. The growth in revenues resulted from increased prices and increased sales volumes of crude oil and petroleum products. Crude Oil Export Sales In the first half of 2006, crude oil export revenues were USD 10,644 million compared to USD 5,527 million in the first half of 2005, an increase of 5,117 million or 93 %. The growth resulted from a 40% increase in prices, whichincreased revenues by USD 3,008 million, and a 34% increase in sales volumes,which had a positive impact on revenues of USD 2,109 million. The priceincreases were attributable to the general growth of world prices; inparticular, the average price for Urals Mediterranean rose by 36%. Sales volumesgrew, mainly in respect of sales to Asia primary due to an increase in theannual quota for sales to China National United Petroleum Corporation from 4.02million tonnes in 2005 to 8.88 million tonnes in 2006 under the long-termcontract, entered into in January 2005, in connection with the financing of theacquisition of Yuganskneftegaz. Revenues from export oil sales were USD 5,934 million in the second quarter of 2006 compared to USD 3,152 million in the second quarter of 2005, an increase of 88%. The growth resulted from a 42% increase in prices, which increased revenues by USD 1,721 million and an increase in sales volumes, which had a positive impact on revenues of USD 1,061 million. The price increases were attributable to the general growth of world prices; in particular, the price for Urals Mediterranean rose by 34% in the period being analyzed. Crude Oil CIS Sales In the first half of 2006, revenues from the sale of crude oil in the CIS were USD 740 million, an increase of 10%, compared to USD 672 million in the first half of 2005. A 30% increase in prices which would have increased revenues by USD 170 millions, was offset by a 15% decrease in sales volumes, which had anegative impact on revenues of USD 102 million. Volumes grew due to increase insupplies to the Republic of Belarus, which is one of Rosneft's priority marketsdue to absence of export customs duty. The growth in volumes sold to Belarus wasoffset by a reduction of volumes sold to Ukraine, a less profitable CIS marketdue to the presence of export customs duty and lower prices. In the second quarter of 2006, revenues from the sale of crude oil in the CIS were USD 345 million compared to USD 353 million in the second quarter of 2005, a decrease of 2%. This resulted from a 23% decrease in sales volumes, which would have decreased revenues by USD 81, but this was partially offset by a 26% increase in prices, which had a positive impact of USD 73 million. Crude Oil Domestic Sales The volume of crude oil sold in Russia decreased significantly in the first half of 2006 due to low profitability of such sales. In the first half of 2006, crude oil domestic sales decreased by USD 355 million to USD 79 million. This resulted from an 87% decrease in sales volume which contributed USD 378 million of the decrease in revenues, which was partially offset by a 40% increase in prices which had a positive impact on revenues of USD 23 million. The decline in volumes resulted from the allocation of more crude oil to export sales and refining to achieve maximum netbacks. Starting from the second quarter of 2005, domestic oil sales have significantly decreased. In the second quarter of 2006 revenues from domestic sales were USD 21 million, a decrease of USD 156 million compared to the second quarter of 2005. This resulted from a 90% decrease in sales volumes, which would have decreased revenues by USD 159 million, but this was partially offset by a 20% price growth, which had a positive impact of USD 3 million. Petroleum Products Export and CIS Sales Revenues from the export of petroleum products was USD 2,757 million in the first half of 2006 compared to USD 1,817 million in the first half of 2005, an increase of 52%. The growth of petroleum products sales revenue was attributable to a 34% increase in prices, which increased revenues by USD 695 million, and a 13% growth in sales volumes, which had a positive impact on revenues of USD 245 million. The growth in prices was due to the overall increase in world prices; in particular, the average price for fuel oil Med grew by 48%. The growth in volumes was mainly to Europe, CIS and Asia. In the second quarter 2006 revenues from export sales of petroleum products were USD 1,453 million compared to USD 1,048 million in the second quarter of 2005, an increase of 39%. The growth in revenues is attributable to a 34% price growth which increased revenues by USD 368 million, and a 4% increase in sales volumes, which had a positive impact on revenues of USD 37 million. The growth in prices was due to the overall increase in world prices; in particular, the price for fuel oil Med grew by 37%. Domestic Sales of Petroleum Products In the first half of 2006 revenue from the sale of petroleum products on the domestic market grew by 61% to USD 1,869 million compared to USD 1,163 million in the first half of 2005. The growth of petroleum products domestic revenue was attributable to a 28% average price increase, which increased revenues by USD 408 million and a 26% increase in sales volume, which had a positive impact on revenues of USD 298 million. The growth in sales prices was mainly attributable to growth in world prices of petroleum products and inflation in Russia. The volume growth was mainly due to an increase in crude oil production and a decrease in domestic crude oil sales that was facilitated by the agreements signed at the beginning of 2005 with YUKOS group refineries for the refining of crude oil produced byYuganskneftegaz. In the second quarter of 2006, revenue from the sale of petroleum products at the domestic market was USD 954 million compared to USD 621 million in thesecond quarter of 2005, an increase of 54%. The growth of petroleum productsdomestic revenue was attributable to a 25% price increase, which increasedrevenues by USD 141 million, and a 23% increase in sales volume, which had apositive impact on revenues of USD 192 million. Gas Sales In the first half of 2006, revenue from the sale of gas was USD 94 millioncompared to USD 87 million in the first half of 2005, an increase of 8%. Thegrowth in gas sales revenue was attributable to a 4% increase in prices, whichincreased revenues by USD 4 million and a 3% growth in sales volumes whichincreased revenues by USD 3 million. In the second quarter of 2006, revenue from the sale of gas was USD 44 million compared to USD 47 million in the second quarter of 2005, a decrease of 6 %. A decrease of USD 4 million in revenues from sales of gas is attributable to a 9% decrease in prices, and a 3% increase in sales volume resulted in an increase in revenues by USD 1 million. Support Services and Other Revenues In the first half of 2006 support services and other revenues were USD173 million which is 5% higher than in the first half of 2005. This growth wasmainly attributable to an increase in the volume and value of construction andtransshipment services and sales of materials. In the second quarter of 2006 support services and other revenues were USD89 million which is 14% lower than in the second quarter of 2005. Costs, Expenses and Net Income The following table sets forth Rosneft's costs and expenses during the period being analyzed: Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,(USD million) 2006 2005 % 2006 2005 %________________________________________________________________________________________Production and operating expenses 519 411 26% 940 768 22%Cost of purchased oil, petroleum products and refining costs 557 175 218% 1,102 305 261% General and administrative expenses 181 100 81% 348 186 87% Pipeline tariffs and transportation costs 764 538 42% 1,457 896 63%Exploration expenses 63 39 62% 98 64 53%Depreciation, depletion and amortization 408 361 13% 792 698 13%Accretion expense (1) 8 9 -11% 16 17 -6%Taxes other than income tax 1,866 1,176 59% 3,440 2,200 56%Export customs duty 2,629 1,305 101% 4,793 2,143 124%________________________________________________________________________________________Total operating expenses 6,995 4,114 70% 12,986 7,277 78%======================================================================================== (1) Unwinding of discount related to asset retirement obligations. In the first half of 2005, total operating expenses were USD 12,986 million, which is 78% higher than in the first half of 2005 when they were USD 7,277 million. The growth in costs and expenses was driven by higher amounts of export customs duty and mineral production tax, pipeline tariffs for transportation of oil and petroleum products, and by higher amounts of cost of crude oil purchases from Sakhalin-1 PSA. In the second quarter of 2006 costs and expenses were USD 6,995 million, a 70% increase compared to the second quarter of 2005. Production and Operating Expenses Production and operating expenses include costs related to raw materials and supplies, equipment maintenance and repair, wages and salaries, activities to enhance oil recovery, procurement of fuel and lubricants, electricity and other similar costs. Of the total production and operating expenses, the upstream and downstream segments accounted for USD 711 million and USD 162 million respectively in the first half of 2006 and USD 601 million and USD 134 million respectively in the first half of 2005. In the second quarter of 2006, production and operating costs were USD 519million compared to USD 411 million in the second quarter of 2005, an increaseof 26%. The main contributors (excluding ruble appreciation) were an increase instaff and employees salaries and an increase in the cost of materials used inthe downstream segment. In the first half of 2006, production and operating expenses increased by USD 172 million compared to the first half of 2005, or by 22%. The increase ismostly attributable to higher production volumes, the appreciation of theRussian ruble, higher electricity tariffs, raw material and supplies costs, andan increase in service costs for well workovers and enhanced oil recovery.Average salaries and allowances were also raised throughout the Company at thebeginning of 2006. In the first half of 2006 and 2005, operating production expenses were USD 2.55 and USD 2.33 per barrel of crude oil produced and USD 2.23 and USD 2.05 per barrel of oil equivalent produced, respectively. In the second quarter of 2006 and 2005 operating production expenses were USD 2.84 and USD 2.43 per barrel of crude oil produced and USD 2.50 and USD 2.14 per barrel of oil equivalent produced, respectively. Downstream production and operating expenses include costs of services provided to third parties (such as transportation and storage of oil products), operating costs of marketing companies, operating costs of oil refineries, and other items. These measures are defined above under "Key Operating Data and Key FinancialRatios". Cost of Purchased Oil and Petroleum Products Cost of purchased oil and petroleum products includes crude oil and petroleum product procurement costs and cost of refining Rosneft's crude oil at third party refineries. The following table shows Rosneft's third party refining costs and crude oil and petroleum product procurement costs during the period being analyzed: Three Three Six Six months months months months ended ended ended ended June June June June 30, 30, Change, 30, 30, Change, 2006 2005 % 2006 2005 %___________________________________________________________________________Refining fees paid to third party refineries(USD millions) 141 67 110% 246 124 98%Rosneft crude oil throughput at third partyrefineries (millions oftonnes) 3.11 2.47 26% 6.36 4.93 29%Refining fees per tonne (USD) 45.27 26.85 69% 38.58 25.15 53%Cost of procurement of petroleum products fromthird parties by thedownstream segment(1)(USD millions) 98 107 -8% 232 180 29%Procurement of petroleum products from thirdparties by the downstreamsegment(1) (millions oftonnes) 0.19 0.23 -17% 0.43 0.39 10%___________________________________________________________________________ (1) The upstream segment also purchases petroleum products from third partiesfor use in its own operations. These purchases are reflected in production andoperating expenses and are included in upstream operating expenses to calculatethe relevant key performance indicators mentioned above. The cost of refining crude oil at third party refineries in the first half of 2006 grew by 98%, which is explained by a 29% increase in the volumes ofrefining and tariffs. The cost per tonne of refining at third parties'refineries increased by 53% compared to 2005 due to a revised agreement withYUKOS to cover capital expenditures in certain refineries to meet the newquality standards EURO-3 and due to expanding the product mix to include moreexpensive petroleum products, in particular, lubricants. In the first half of 2006 the cost of purchased petroleum products was USD232 million, a 29% increase compared to the first half of 2005 (USD180 million). The increase is mainly attributable to the growth of domesticpurchase prices of oil products and a minor increase in purchased volumes. In the first half of 2006 Rosneft purchased almost all crude oil (0.8 million tonnes) produced by the Sakhalin-1 PSA, a consortium of companies headed by Exxon Neftegaz Ltd., for USD 170 million. Approximately 0.6 million tonnes of crude oil were supplied for refining to the Company's refinery inKomsomolsk-on-Amur, and the rest were exported to Asia. Oil production underthis project was started in October 2005, and exports via the Consortium's ownterminal in De-Kastri are expected to commence in the fourth quarter of 2006. In addition, Rosneft purchased crude oil from third parties for shipment via the CPC system within the existing quota. Volumes of oil purchased from third parties and transported through the CPC system were 0.9 million tonnes in the first half of 2006 (USD 454 million). There were no purchases of such crude oil in the first half of 2005 since there was no need to meet Rosneft's quota atthat time, which increased in August 2005. General and Administrative Expenses General and administrative expenses include wages and salaries, bankingcommissions, third party professional service fees for advisory, legal andauditing services, insurance expenses, lease expenses with respect to non-coreproperty, expenses to establish an allowance for doubtful accounts and othergeneral expenses. General and administrative expenses in the first half of 2006 increased to USD 348 million compared to USD 186 million, an 87% increase compared to the first half of 2005. This increase was mainly due to following circumstances: auditing, legal, banking, consultancy, valuation and other professional services were USD 60 million in the first half of 2006 versus USD 18 million in 2005; salaries, bonuses and social benefits were USD 140 million in the first half of 2006 versus USD 99 million in the first half of 2005 due to increases in staff. In addition office rent and insurance costs increased in 2006. Following thedecision of High Arbitrage court of Russian Federation the Company accruedprovision for commitments and contingencies of Severnaya Neft in the amount ofUSD 24 million in the first half of 2006. In the second quarter of 2006, general and administrative expenses wereUSD 181 million, 81% more than in the second quarter of 2005, as describedabove. Pipeline Tariffs and Transportation Costs Pipeline tariffs and transportation costs include costs to transport crude oil for refining at own and third party refineries, and to end customers, and todeliver petroleum products from refineries to end customers. Transportationcosts include the cost of pipeline transportation, sea freight, railway andriver tariffs, handling, port fees and customs costs and demurrage. Pipeline tariffs and transportation costs grew to USD 1,457 million in the first half of 2006 from USD 896 million in the first half of 2005, i.e. by 63% due to an increase in the volume of transported oil and in the tariffs of natural monopolies. In the first half of 2006 Rosneft transported 11 million tonnes (80 million barrels) of crude oil via Transneft to refineries and about 23.7 million tonnes or 173 million barrels (of which 16.7 million tonnes via pipelines) for export sales, and in the first half of 2005 - 9.9 million tones or 72 million barrels and 19.4 million tonnes or 141 million barrels (of which 15.6 million tones via pipelines) respectively. Domestic tariffs increased by 19% and export tariffs by 21%. Also, in the first half of 2006, Rosneft supplied via rail approximately 3.6 million tonnes (26 million barrels) to refineries and about 8 million tonnes or 58 million barrels (of which 2.2 million tonnes via rail) for export sales ascompared to 3.6 million tonnes or 26 million barrels and 4.1 million tonnes or30 million barrels (of which 1.5 million tonnes via rail) respectively in thefirst half of 2005. Domestic rail tariffs increased by 17% and export tariffs by6%. The main driver of domestic rail tariffs' growth by 12.9 % was the overallincrease in RZD tariffs and the abolishment of the discount in early 2006granted to Rosneft by RZD in 2005, for crude oil supplies to KomsomolskyRefinery in the Far East of the Russian Federation. Increased transportationvolumes were due to oil supplies to China under the long-term contract signed inJanuary 2005 with CNPC (see also "Crude Oil Export Sales"). A discount forsupplies to China was granted by RZD provided Rosneft transports the minimumannual volumes agreed in advance. In the second quarter of 2006 pipeline tariffs and transportation costsincreased to USD 764 million compared to USD 538 million in the second quarterof 2005, which represents a 42% increase as described above. Depreciation, Depletion and Amortization Depreciation, depletion and amortization include depreciation of oil and gas producing assets, and other production and non-production assets. In the first half of 2006, depreciation, depletion and amortization was USD 792 million compared to USD 698 million in the first half of 2005. The 13%increase was mainly due to the depreciation of capital expenditure made in 2005and first half of 2006. Taxes Other than Income Tax Taxes other than income tax include mineral production tax, excises forpetroleum products, the unified social tax, property tax and other taxes. Taxesother than income tax have increased as a percentage of total revenue throughoutthe period under review, mainly due to the impact of mineral production tax. The following table sets forth Rosneft's taxes other than income tax during theperiods being analyzed: Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,(USD million) 2006 2005 % 2006 2005 %_______________________________________________________________________________Mineral production tax 1,684 1,065 58% 3,116 1,984 57%Excise tax 41 39 3% 87 89 -3%Social security 51 31 65% 86 59 45%Property tax 7 21 -65% 30 41 -26%Land tax 2 5 -53% 4 7 -46%Tax % and penalties 37 8 381% 64 8 708%Other taxes and payments 44 7 468% 53 12 344%_______________________________________________________________________________Taxes other than income tax 1,866 1,176 59% 3,440 2,200 56%=============================================================================== In the first half of 2006, taxes other than income tax increased by 56% toUSD 3,440 million compared to USD 2,200 million in the first half of 2005. Thegrowth in taxes resulted mainly from an increase in mineral production tax of57% (or by USD 1,132 million) caused by an 8% in crude oil production and a 43%increase in the tax rate. Decrease in property tax was due to reversal ofprevious year's tax accrual for property tax privilege used by the Company. In the second quarter of 2006, taxes other than income tax increased by 59% to USD 1,866 million compared to USD 1,176 million in the second quarter of 2005. The growth in taxes resulted mainly from an increase in mineral production tax of 58% (or USD 619 million), caused by a 38% increase in tax rate and a 8%increase in oil production. Export Customs Duty Export customs duty payable by the Company includes crude oil and petroleum product export customs duties. Export customs duty is discussed above under "Main Factors affecting Results of Operations-Changes in Mineral Production Tax and Export Customs Duty." Export customs duty has increased as a percentage of total revenues through the period being analyzed. The following table sets forth Rosneft's export duties during the periods beinganalyzed: Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,(USD million) 2006 2005 % 2006 2005 %____________________________________________________________________________________Export duty for crude oil 2,306 1,093 111% 4,140 1,848 124%Export duty for refined products 323 212 52% 653 295 121%____________________________________________________________________________________Total export customs duty 2,629 1,305 102% 4,793 2,143 124%==================================================================================== Export customs duties were USD 4,793 million in the first half of 2006 compared to USD 2,143 million in the first half of 2005, i.e. 124% growth. The increase resulted from 30% increase in the volumes of crude oil exported and a 13% increase in petroleum products exported, and an increase in tariffs of export customs duties in the range of 65-93% depending on the kind of hydrocarbons. Export customs duties were USD 2,629 million in the second quarter of 2006compared to USD 1,305 million in the second quarter of 2005. The 102% increaseresulted from factors described above. Exploration Expenses Exploration expenses mainly represents expenses relating to exploratorydrilling, shooting seismic, and geological and geophysical costs. Exploratorydrilling costs are is capitalized if commercial reserves of oil and gas arediscovered, or expensed in the current period in the event of unsuccessfulexploration efforts. Exploration expenses increased by 53% in the first half of 2006 to USD 98million compared to USD 64 million in the first half of 2005. The increase wasmainly due to an increase in seismic, geological and geophysical works inYuganskneftegaz, Vankor fields, Severnaya Neft. In the second quarter of 2006 exploration expenses increased for 62% to USD 63 million, compared to USD 39 million in the second quarter of 2005. This was mainly due to the transfer of seismic, geological and geophysical works to the second quarter of 2006. Exploration work was scheduled for the first quarter of 2006 but was not performed because of the heavy frost in Yuganskneftegaz,Severnay Neft and Vankorneft fields. Interest Expense Interest expense decreased by 5% to USD 373 million in the first half of 2006 compared to USD 391 million in the first half of 2005. In April 2006 the Company entered into a contract providing relief on conditions of existing loanagreements which decreased interest rates to LIBOR plus 0.7% (previously LIBORplus 3%) for loans totaling 5,730 million USD as of 31 December 2005 anddecreasing interest rates to LIBOR plus 0.65% (previously LIBOR plus 1.8-2.2%)for loans totaling 3,177 million USD as of 31 December 2005 In the first half of2005 the Company also refinanced current liabilities by attracting long-termloans at lower interest rates. Newly obtained cheaper financing was used torepay loans with a higher interest rate at the amount of 1,397 million USD. In the second quarter of 2006 interest expense decreased by 18% to USD 170million compared to USD 200 million in the second quarter of 2005. (Loss) / Gain on Disposal of Property, Plant and Equipment The Company disposes off property, plant and equipment from time to time. In the first half of 2006 losses from PPE disposition were USD 17 million compared to USD 2 million in the first half of 2005 due to the write-off of certain social infrastructure assets which were financed by the oil businesses. Gain on Disposal of Share in CJSC Sevmorneftegaz In the first half of 2005, Rosneft sold a 50% interest in CJSC Sevmorneftegaz held by Purneftegaz to Gazprom for USD 1,303 million. CJSC Sevmorneftegaz is developing the Prirazlomnoye and Shtokmanovskoye fields in Yamalo-Nenetsky Autonomous Okrug. Under the terms of the sale, Gazprom paid for this interest in December 2004, while title to the interest passed to Gazprom in the second quarter of 2005. Gazprom also had the right to notify the Company not later than June 2005 of its intention to sell the acquired interest back to the Company, in which case the Company would be obliged to repurchase and pay for it. Gazprom did not exercise this right. Therefore, in June 2005 Rosneft reported proceeds from the sale of its interest in CJSC Sevmorneftegaz in the amount of USD 1,303 million. Foreign Exchange (Loss) / Gain In the first half of 2006, Rosneft's foreign exchange loss was USD 277 million compared to a gain of USD 159 million in the first half of 2005. The loss resulted from the impact of the appreciation of the ruble against the U.S.dollar in the first half of 2006 compared to its depreciation in the first halfof 2005. As a result, the Company's ruble-denominated net monetary liabilityposition increased when denominated in US dollars but remain unchanged whendenominated in rubles. The ruble-denominated net monetary position is negativemainly due to the inclusion in the Company's balance sheet of Yuganskneftegaztax liabilities and deferred taxes. In the second quarter of 2006 foreign exchange loss of Rosneft was USD 118million compared to a foreign exchange gain of USD 145 million in the secondquarter of 2005. The loss of the second quarter of 2006 resulted from the impactof the appreciation of the ruble against the U.S. dollar on the Company'sruble-denominated net monetary liabilities. Income Tax Expenses The following table compares the Company's effective income tax rate under US GAAP and the current income tax rate in Russia, where most of the Company'sassets are located and most of its operations are conducted. Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005_____________________________________________________________________________________Effective income tax rate for Rosneft under US GAAP 30% 26% 30% 26%_____________________________________________________________________________________ The Company does not pay taxes on consolidated income before taxes under Russian law. Income tax is calculated for each subsidiary based on its profits under Russian Accounting Standards. The U.S. GAAP effective profit tax rate during the reporting period was higher than the maximum rate of 24% established by the Russian tax legislation throughout the period under review. This arose mainly because certain expenses incurred by the Company, such as social and charitable expenses, are not deductible for tax purposes, as well as certain expenses accrued in accordance with US GAAP. The effective tax rate also increased due to the tax on ruble-denominated exchange gains which occurred as a result of the USD-denominated loans received by Rosneft due to a the decrease in the US dollar rate, which was not reported in the US GAAP accounting records. Income tax expense was USD 819 million in the first half of 2006 compared to USD 947 million in the first half of 2005. In particular, the current income tax expense decreased from USD 987 million to USD 954 million, while deferred taxes increased from USD 40 million to USD 135 million. The current income tax expense decreased due to the fact that income tax in the first half of 2005 included USD 313 million charge relating to proceeds from the sale of Rosneft interest in Sevmorneftegaz. Minority Interest in Subsidiaries' Earnings Minority interest in subsidiaries' earnings was USD 74 million in the first half of 2006 compared to USD 314 million in the first half of 2005. The primary changes in minority interest were caused by a decrease in net income of Yuganskneftegaz in the first half of 2006 due to foreign exchange losses compared to the gains in the first half of 2005, when minority interest was USD 121 million, and in Rosneft-Purneftegaz where minority interest in the first half of the year was USD 173 million as a result of proceeds from the divestment of the 50% interest in Sevmorneftegaz described above. In the second quarter of 2006, minority interest in Rosneft subsidiaries'earnings was USD 31 million compared to USD 306 million in the second quarter of2005. The decrease was due to the reasons explained above. Net Income As a result of the factors discussed above, net income adjusted for proceeds received from the sale of Sevmorneftegaz increased by 20.4% in the first half of 2006 compared to the first half of 2005, and by 28.7% in the second quarter of 2006 compared to the second quarter of 2005. As a percentage of total revenues, net income was 11.9% and 17.3% in the first half of 2006 and 2005 respectively. Liquidity and Capital Resources Cash Flows The principal items of the statement of cash flows for the second quarter and first half of 2006 and 2005 are as follows: Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,(USD million) 2006 2005 % 2006 2005 %_______________________________________________________________________________Net cash provided by operating activities 1,410 1,219 16% 2,823 1,167 142%Net cash used in investing activities (1,399) (541) 158% (2,905) (941) 209%Net cash provided by / (used in) financing activities 658 (620) -206% 57 (651) -109%_______________________________________________________________________________ Net Cash Provided by Operating Activities Net cash provided by operating activities was USD 2,823 million and USD 1,167 million in the first half of 2006 and 2005 respectively. The operating cash flows before changes in operating assets and liabilities net of acquisitions were USD 2,864 million compared to USD 2,051 million in the first half of 2006 and 2005 respectively, this reflected higher net income (USD 1,879 million and 1,083 million net of income from the sale of Sevmornetegaz in the first half of 2006 and 2005) and higher non cash charges to net income, mainly the impact of foreign exchange movements on cash plus cash equivalents and deferred tax (USD 230 million in the first half of 2006 compared to USD 57 million in the first half of 2005). Increase in operating assets and liabilities net of acquisitions amounted to USD 41 million in the first half of 2006, which resulted mainly from increases in accounts receivable (due to an increase in sales volumes and prices) and combined with an increase in accounts payable. Increase in operating assets and liabilities net of acquisitions was USD 884 million in the first half of 2005 which resulted mainly from increases inaccounts receivable, sales and export VAT, combined with a reduction in accountspayable and accrued liabilities. These increase were partially offset byincreased income tax liabilities and other tax liabilities. These changes resulted from the significant increase in the scale of Rosneft's business following the acquisition of Yuganskneftegaz. In addition, the increase in accounts receivable also reflected a non-recurring change resulting from the initially low level of accounts receivable in Yuganskneftegaz, which normalized during 2005. Net Cash Used in Investing Activities Net cash used in investing activities was USD 2,905 million in the first half of 2006 compared to USD 941 million in the first half of 2005. The increase is principally due to higher capital expenditures amounting to almost USD 1.4billion (see the details below), acquisition of new entities and additionalshares in subsidiaries and the acquisition of YUKOS' debts from a consortium ofWestern banks in the amount of USD 483 million, of which USD 463 millions wasincluded in the cash flow statement for 2006. Net cash used in investing activities in the second quarter of 2006 was USD 1,399 million compared to USD 541 million in the second quarter of 2005. Thechange was due to the factors described above. Net Cash Provided by / (Used in) Financing Activities Net cash provided by financing activities was USD 57 million in the first half of 2006 compared to USD 651 million used in the first half of 2005. Changes for the first half of 2005 reflect the net repayments of short-term and long-term debt, as compared with a near balanced net change in the first half of 2006. Net cash provided by financing activities amounted to USD 658 million in the second quarter of 2006 compared to used USD 620 million in the second quarter of 2005. The increase was primarily due to the receipt of USD 1.5 billion from Barclays under a credit facility offset partially by a net repayment of loans in the amount of USD 500 million in the corresponding 2005 period. Capital Expenditures Rosneft's total capital expenditures by types of activities for the first half of 2006 and 2005, and for the second quarter of 2006 and 2005 is as follows: Three Three Six Six months months months months ended ended ended ended June 30, June 30, Change, June 30, June 30, Change,(USD million) 2006 2005 % 2006 2005 %______________________________________________________________________________Upstream 747 482 55% 1,210 778 56%Downstream 81 74 9% 113 88 28%Other activities -12 27 -146% 80 29 175%______________________________________________________________________________Total capital expenditures 816 583 40% 1,403 895 57%============================================================================== Rosneft's total capital expenditures increased by 57% (or by USD 508 million) to USD 1,403 million in the first half of 2006 compared to USD 895 million in the same period of 2005. The growth of capital expenditures in the first half of 2006 was drivenprimarily by the upstream segment where capital expenditures increased by 56%(or by USD 432 millions). This capital expenditure growth was mainlyattributable to investments in Yuganskneftegaz and the Vankor fields. Further,Rosneft paid USD 464 million for new licenses to oil and gas fields in EastSiberia. Capital expenditures in the downstream sector were USD 113 million, a 28% growth in the first half of 2006 due to the acquisition of several gasoline stations in St.Petersburg, expansion of the network in the Far East and Altai Region and reconstruction of the sea terminal at Rosneft-Tuapsenefteprodukt. Capital expenditures in other activities was USD 80 million in the first half of 2006 compared to USD 29 million in the same period of 2005, mainly due to the purchase of real estate for additional office space in Moscow. In addition to capital expenditures described above, the Company madeacquisitions and increased its shareholdings in certain subsidiaries. In thefirst half of 2006 Rosneft spent USD 19.5 million to purchase OJSC Nefteport andincreased its shareholding in Rosneft-Tuapsenefteprodukt (USD 100 million). Inthe first half of 2005 the Company increased its interest inRosneft-Krasnodarneftegaz (USD 110 million) and purchased 25% of additionallyissued of shares in OJSC Daltransgaz (USD 26 million). Debt Obligations Rosneft's total loans and borrowings increased marginally fromUSD 12,203 million as of December 31, 2005 to USD 12,398 million at June 30,2006. As at December 31, 2005 and June 30, 2006, 85.5% and 87.7% of Rosneft'sborrowings were secured against crude oil export contracts. Of the totalexported crude oil volumes in the first half of 2006 and in the first half of2005, 27.21 % and 18.89 % were sold under contracts that were pledged as of June30, 2006 and 2005. Rosneft's long-term borrowings (excluding current portion of long-term debt) increased from USD 8,198 million at December 31, 2005 to USD 8,558 million at June 30, 2006. The rate of interest charged on the Company's long-term bankloans (denominated in US$) increased from 4.35% to 12.92% p.a. Weighted averageinterest rates on these loans were LIBOR plus 0.74% and LIBOR plus 2.19%, as ofJune 30, 2006 and as of December 31, 2005, respectively. Rosneft's short-term borrowings (including the current portion of long-term debt) decreased from USD 4,005 million at December 31, 2005 to USD 3,840 million at June 30, 2006. The average rates of interest on Rosneft's short-term borrowings dominated in US dollars ranged from LIBOR plus 2% to LIBOR plus 2.81% per annum as of 30 June 2006. The ruble denominated loans bear average interest rates of 2.5% to 8% per annum as of 30 June 2006. The following table shows the scheduled maturities of Rosneft's long-term debtoutstanding as of June 30, 2006: (USD million) _____________Up to December 31, 2006 1,1212007 2,2642008 2,5452009 2,4502010 2,1042011 and after 251 _____________Total long-term debt 10,735 ============= Rosneft's plan for 2006 is to finance its budgeted capital expenditures,interest and dividends mainly out of operating cash flows which Rosneft expectsto increase through higher sales volumes (as a consequence of higher productionvolumes). Simultaneously, Rosneft intends to improve its debt profile. For thispurpose, Rosneft intends to continue to rely on long-term borrowings for itsfinancing needs, decreasing the percentage of Rosneft's secured debt anddecreasing the charges associated with Rosneft debt. These activities arealigned with Rosneft's ongoing efforts to improve its operating performance. Selected financial performance indicators The Company monitors and evaluates its activities on an on-going basis. Selectedperformance indicators, as well as other significant financial ratios, areprovided below. Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005______________________________________________________________________________ KEY FINANCIAL RATIOSEBITDA (USD millions) 2,261 1,757 4,178 3,302EBITDA margin 25.6% 31.9% 25.5% 33.5%Adjusted free cash flow before interest (USD millions) 760 767 1,785 565Adjusted net income margin before minority interest 12.5% 17.8% 11.9% 17.3%Return on average capital employed (ROACE), annualized 25.2% 20.6% 24.1% 20.4%Return on average equity (ROAE), annualized 42.6% 52.2% 39.0% 47.8%Net debt (USD millions) 11,232 11,212 11,232 11,212Net debt to capital employed ratio 0.51 0.57 0.51 0.57Net debt to EBITDA ratio, annualized 1.24 1.60 1.34 1.70Current ratio 0.76 1.03 0.76 1.03______________________________________________________________________________ Calculation of adjusted free cash flow before interest (USD millions) Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005________________________________________________________________________________Net cash provided by operating activities 1,410 1,219 2,823 1,167Capital expenditures (816) (583) (1,403) (895)Free cash flow 594 636 1,420 272Cash interest payments 166 131 365 293Adjusted free cash flow before interest 760 767 1,785 565________________________________________________________________________________ Calculation of EBITDA Margin Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005________________________________________________________________________________Net income 1,077 1,662 1,879 2,386Minority interest in subsidiaries' earnings 31 306 74 314Income tax expense 484 690 819 947Total other income/(expenses) 253 (1,271) 598 (1,060)________________________________________________________________________________Operating income 1,845 1,387 3,370 2,587Accretion expense(1) 8 9 16 17Depreciation, depletion and amortization 408 361 792 698________________________________________________________________________________EBITDA 2,261 1,757 4,178 3,302 Total revenues 8,840 5,501 16,356 9,864EBITDA margin 25.6% 31.9% 25.5% 33.5%________________________________________________________________________________ (1) Unwinding of discount related to asset retirement obligations. Calculation of Adjusted Net Income Margin before Minority Interest Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005________________________________________________________________________________Net income 1,077 1,662 1,879 2,386Minority interest in subsidiaries'earnings 31 306 74 314Gain on disposal of share in CJSC Sevmorneftegas - (1,303) - (1,303)Tax on gain on disposal of share in CJSC Sevmorneftegas 313 313________________________________________________________________________________Adjusted net income before minority interest in subsidiaries' earnings 1,108 978 1,953 1,710 Sales revenues 8,840 5,501 16,356 9,864 Adjusted net income margin before minorityinterest in subsidiaries' earnings 12.5% 17.8% 11.9% 17.3%________________________________________________________________________________ Calculation of Capital Employed and Related Indicators 31.12.2004 31.12.2005 31.03.2005 30.06.2005 31.03.2006 30.06.2006_____________________________________________________________________________________Short-term loans andcurrentportion oflong-termdebt 4,720 4,005 4,977 3,775 3,925 3,840Long-term debt 9,022 8,198 8,668 8,026 7,708 8,558Cash and cash equivalents(-) (1,033) (1,173) (531) (589) (489) (1,166)_____________________________________________________________________________________Net debt 12,709 11,030 13,114 11,212 11,144 11,232 Shareholders' equity 3,335 7,433 4,059 5,713 8,235 8,888Minority interest 2,535 1,860 2,491 2,718 1,842 1,851_____________________________________________________________________________________Equity 5,870 9,293 6,550 8,431 10,077 10,739 Capital employed 18,579 20,323 19,664 19,643 21,221 21,971_____________________________________________________________________________________Average Equity 7,491 7,151 10,408 10,016Average Capitalemployed 19,654 19,111 21,956 21,147_____________________________________________________________________________________ Calculation of Return on Average Capital Employed (ROACE) Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005________________________________________________________________________________Operating income 1,845 1,387 3,370 2,587Income tax (484) (690) (819) (947)Income tax on gain on disposal of share in CJSC Sevmorneftegaz 313 313Return used for calculation of ROACE 1,361 1,010 2,551 1,953Average capital employed 21,596 19,654 21,147 19,111 ROACE, annualized 25.2% 20.6% 24.1% 20.4%________________________________________________________________________________ Calculation of Return on Average Equity (ROAE) Three Three Six Six months months months months ended ended ended ended June 30, June 30, June 30, June 30, 2006 2005 2006 2005________________________________________________________________________________Adjusted net income before minority interest 1,108 978 1,953 1,710 Average Equity, including Minority Interest 10,408 7,491 10,016 7,151 ROAE, annualized 42.6% 52.2% 39.0% 47.8%________________________________________________________________________________ This information is provided by RNS The company news service from the London Stock Exchange
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