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

Outlook for Russian Oil Production

Presentation for TUROGE

March 18-19, 2015

AH-14-2127

Gaffney, Cline & Associates Global Footprint

GCA has a global presence, with 11 offices across Europe, the Americas, and Asia-Pacific

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The 150-strong professional staff has an average of 20 years of experience

Main Office

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

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

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$/bbl Change in Oil Prices Since TUROGE 2014

Urals (USD/bbl)

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

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$/bbl Change in Oil Prices Since TUROGE 2014

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kbpd

$/bbl Change in Oil Prices Since TUROGE 2014

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Brent (USD/bbl)

Global Oil Production

mbpd

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How can we understand this situation?

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How can we understand this situation?

The top oil producing countries are engaged in a competition of yağlı güreş

Oil wrestling in the gardens of Topkapı Palace, 1809

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How can we understand this situation?

Three heavyweights are USA, Saudi Arabia, and Russia (10+ mln bpd)

Copyright Pari Dukovic

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Yağlı güreş heavyweight: focusing on Russia

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Yağlı güreş heavyweight: focusing on Russiaand four key factors

Dramatic decline in Urals benchmark oil price Economic sanctions restricting access to credit and technology Significant change in foreign exchange position (Ruble depreciation) New ‘tax maneuver’

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Production reaches post-Soviet high, driven by Rosneft

Post-Soviet high of 10,580 kbpd (~530 mn tonnes) has continued in Q1 2015 (10,660 kbpd)

Though small producers now account for 1 mn bpd, most growth driven by Rosneft and Gazprom Neft; together these two are 52% of overall output

Gazprom Neft growth driven by ramp up at Salym Petroleum Development JV

Rosneft has moved into Phase 2 of 2030 development strategy that includes bringing Vankor cluster to peak output, synergies with TNK-BP’s Suzun and Tagul

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2,000

4,000

6,000

8,000

10,000

12,000

kbpdRussia Oil Production

40%

16%

12%

12%

5%

3%

3%9%

Share of Russian 2014 Oil Output

Rosneft

Lukoil

Gazprom Neft

Surgutneftegaz

Tatneft

Bashneft

Slavneft

Other

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Importance of “hard-to-recover” oil

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Small share of current Russian output comes from ‘unconventionals’ (400-500kbpd)

– National energy strategy calls for share to increase to 20% by 2030 (nearly 2mbpd)

Classification extends beyond concept of ‘tight oil’

– Makes reserves difficult to quantify

Common themes:

– New drilling practices

– Major capital investment

– Often via foreign partnerships

Importance of “hard-to-recover” oil

Bazhenov, Salym, Kara Sea, Pechora (Prirazlomnoye)

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Qualitative impact of four factors

Factor #1: Low oil price

– Companies have cut their capital investment plans (Rosneft -$3 bn, Lukoil -$1.5 bn)

– March 2015 Russian government presented revised budget with deficit spending

Federal BudgetOil Price

($/bbl)RUB/USD

Revenue (tn RUB)

December 2014 96 37,7 15.082

March 2015 Revision 50 61.5 12.455

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Qualitative impact of four factors

Factor #1: Low oil price (capex reduction, revenue loss)

Factor #2: Economic sanctions

– Applications for support from National Wealth Fund; short-term debt obligations (Gazprom Neft $2bn; Rosneft $25 bn)

– Delays at key foreign partnerships; ExxonMobil withdraws from Kara Sea, no offshore drilling planned for 2015

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Qualitative impact of four factors

Factor #1: Low oil price (capex reduction, revenue loss)

Factor #2: Economic sanctions (strain on National Wealth Fund)

Factor #3: Ruble depreciation

– Helps meet national spending targets

– Companies sell export earnings domestically to support currency

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USD/RUB exchange rate vs oil prices

Urals (USD/bbl)

Brent (USD/bbl)

USD/RUB

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Qualitative impact of four factors

Factor #1: Low oil price (capex reduction, revenue loss)

Factor #2: Economic sanctions (strain on National Wealth Fund)

Factor #3: Ruble depreciation (diversion of export revenue)

Factor #4: Tax Maneuver

– Re-direction of oil exports due to customs union

– Export duties to decrease will lead to a 2X increase in Mineral Extraction Tax by 2017

– Disincentive for upstream investment

– Regional markets flooded with Russian petroleum products

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Regional implications

Delay unconventional drilling 2-3 years; risked production volumes up to 1 mn bpd in the short term

Other implications:

– Pass-through of new tax to domestic market

– Kazakhstan refinery investments postponed

– 45-day ban on Russian gasoline imports

What does it mean for Turkey?

– Low oil prices help consumer countries

– May see short-term oversupply of refined products, long-term drop in crude trade

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mn bpd Forecast liquid output in Russia (Lukoil, CDU TEK)

'Unconventional'

New LargeProjects

New Wells

Viscosity > 10,000mPas

Current Wells

Condensate

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Thank you! Teşekkür ederim!

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

Thank you!

AH-14-2127

Teşekkür ederim!

Contents

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Appendix

MidstreamPipelineProcess

Operations

Downstream Chemical

PowerMarketing

FunctionsEconomics

Commercial and FinancialLegal, Regulatory, and Fiscal

Strategy and PlanningOrganization

Business ProcessPerformance Management

UpstreamGeophysics

GeologyPetrophysics

ReservoirProduction

Our oil and gas industry expertise spans the full hydrocarbon value chain as well as major functional disciplines

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Gaffney, Cline & Associates Oil and Gas Industry and Functional Expertise

Oil & Gas Companies Financial InstitutionsSovereigns

Gaffney, Cline & Associates Selected Clients

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GCA’s clients include blue chip majors, independents, national oil companies, and financial institutions