TNK BP Announces Terms of Corporate Restructuring

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<ul><li> 1. april 2005 Corporate Restructuring Terms Announced (p. 1) TNK BP Holds Roundtable on Impact of Oil Prices (p. 8) insideCFO Kent Potter Discusses Corporate Restructuring (p. 3) TNK BP Website Named Best Corporate Site (p. 9)CEO Bob Dudleys Speech at the Russian Economic Forum (p. 6) Overview of 2005 Business Plan (p. 9) TNK BP Announces Existing group structure Terms of CorporateRestructuring Bob Dudley President and CEOOn January 14, 2005, TNK BP announced the terms of its compre hensive corporate restructuring pro gram. This restructuring is designed to deliver a simple and efficient cor porate structure that ensures high levels of corporate governance and enables all shareholders to participate in the company's success. The restructuring program's ultimate goal is to consolidateownership of all TNK BP oil and gas assets in Russia into a single company, owned by majority and minority shareholders andwas approved by the majority and minority shareholders ofregistered in Russia. The new structure will reduce the numberthese companies at their respective Extraordinary Generalof legal entities, streamlining business processes and reducing Meetings (EGM), which took place on March 1, 2005.costs. It will facilitate greater transparency, improve manageApproval of 75% of shareholders present at the EGMs wasment information required for optimal decision making and required and was comfortably achieved at each of the meetings.ensure fair treatment of all shareholders. As such, it will fully All shareholders who voted for accession will now exchangemeet the new standard for operating in the Russian Federation.their shares for shares in TNK BP Holding on the conversionterms recommended by the Boards of Directors of TNK,Through our heritage companies we have inherited a very Sidanco and ONACO.complex, multi tiered corporate structure. This is typical ofRussian oil companies, as the industry consolidated and manyThose shareholders of TNK, ONACO and Sidanco who chosecompanies were built from parts over time. Right now we havenot to vote or who voted against may request a buy out andover 600 legal entities within the group. Our goal is to stream receive cash for their shares. However, if they do not do this,line this structure, make it efficient, transparent and relevantthen their shares will be converted into shares of TNK BPto the current needs of the business. Holding. The table below indicates the 100% equity value ofRestructuring ProcessAccession of TNK, ONACO and Sidanco to TNK BP HoldingA few words on the mechanics of the restructuring process. Asthe first step, at the end of 2004, we registered a Russian compa Conversion rationy called TNK BP Holding, domiciled in the Uvat District of the Company 100% Equityvalue, RUR Billion (shares in TNK-BP Buy-out price per share, RURTyumen Region. This company will eventually consolidate all Holding) shareholdings in TNK, ONACO and Sidanco. Thus the first step TNK-BP Holding 517.8N/A N/Aof the restructuring process, namely the creation of an onshoreTNK 292.52.6692.5Russian holding company, has been successfully completed.ONACO 35.1 1.8965.6The next phase in the process is the accession of TNK,Sidanco 160.1 23.49815.9ONACO and Sidanco into the new holding company. Theaccession of TNK, ONACO and Sidanco to TNK BP Holding </li></ul><p> 2. the value is in the upstream business, with the remainingResults of the independent valuation, per barrelamount in refining and marketing. Of the value in the of production and per barrel of reserves upstream, approximately one third is in our subsidiaries withminority shareholders. TNK BP's international financial adviAggregate value1 /Aggregate value / sor, Morgan Stanley, has confirmed that the methodologiesCompany Production2 ($ 000s)Reserves3used in the valuation process conform to international standards. It is interesting to note that the values of the three comTNK BP Holding$ 17 $ 2.4panies being bought out compare very favorably to previous TNK$ 20 $ 2.0acquisitions on a per barrel of reserves basis. BP paid $1.85 per ONACO$ 14 $ 2.5barrel for its interest in TNK BP while ConocoPhillips recently paid $1.46 per barrel for its stake in LUKOIL. Deloitte val Sidanco$ 16 $ 3.1ued TNK at $2.0 per barrel, ONACO at $2.5 per barrel and1 Aggregate value is the sum of equity capitalization and debt. 2 2003 daily production in barrels. 3 SPE (Society of Petroleum Engineers) proved reserves in barrels of oil equivalent as of December 31, 2003. TNK BP Holding Profile each company, the conversion ratio for shares in TNK BP TNK BP Holding is currently manmajority of TNK BP's Russian oil Holding and the buy out price.aged by TNK BP Management, inand gas assets. The temporary common with the approach exceptions to this are the follow In deciding upon the conversion terms, the Boards of Directorsadopted for OAO TNK, and doesing companies: the network of considered a number of factors, with the primary driver being not have a board of directors. BP branded retail sites in the valuations conducted by the independent appraiser,However before completion of the Moscow, RUSIA Petroleum and Deloitte. Russian law requires that any valuation be carriedaccessions of TNK, Sidanco and Slavneft. These assets will out independently, and Deloitte determined all of the criticalONACO, we expect to seeremain outside of TNK BP changes to the governance strucHolding until an agreement with assumptions (such as production rates, oil price and discount ture. The existing TNK BP Holdingthe other shareholders is reached rates) using reputable international and independent sources. shareholders, together with thoseand the respective businesses The results of this valuation indicated that more than 50% of of TNK, Sidanco and ONACO whoare structured. In addition, TNK the value of TNK BP Holding comes from its ownership in have elected to exchange their BP's assets in Ukraine are not OAO TNK, with roughly 30% from Sidanco, less than 10% shares for shares in TNK BPbeing consolidated into TNK BP from ONACO and the remainder from additional companiesHolding, will decide on this at aHolding, although a similar including Rospan and stakes in various upstream and other joint EGM later this year. restructuring process will be subsidiaries.implemented, over time, with Following the completion of the regard to TNK BP's business in In terms of value distribution across TNK BP's integrated accessions, TNK BP Holding will that country. business portfolio, Deloitte estimates that more than 90% ofreplace OAO TNK as TNK BP's principal onshore borrower. TNK The chart on this page illustrates International Ltd will continue to the main dimensions of the new Valuation and swap ratios for key subsidiariesbe the guarantor for the external company today on a consolidated debt. TNK BP Holding will distrib basis. The upstream dimensions ute income to its shareholders as (i.e., reserves and production) forSwap ratio dividends, as determined in TNK BP (excluding Slavneft) and 100% Equity value,Company (shares in TNK BPRUR million Holding) accordance with Russian joint TNK BP Holding are virtually iden stock company law by the Board tical, while the key differences are 1Orenburgneft 70,392 24.28of Directors and shareholders. in refining and retail, where TNKBP numbers are higher than 2 Udmurtneft32,193 273.93 Following the completion of the those of TNK BP Holding. The dif 3 Saratovneftegaz 8,93881.95 restructuring program, TNK BP ference reflects TNK BP's Holding will consolidate the Ukrainian business. 4Varyoganneftegaz 22,345 28.225Orenburggeologia 4,050 1.64TNK BP Holding: key metrics6 Saratovsky NPZ1,32740.32 TNK BPMetric Period UnitsTNK BP2Holding1 7Neftemaslozavod2,237939.25 Liquids production2004 '000 bpd1,4501,450Ryazansky Zavodas of 857259.73 SPE proved Neftekhimproduktov Dec. 31, billion bbl9.19.1liquids reserves 2003 9 Kaluganefteprodukt32897.40 Rated refining 2004 '000 bpd 700 1,030 capacity 10Tulanefteprodukt13733.62 Refining throughput 2004 '000 bpd 440570 11Ryazannefteprodukt1,824 1.17 Retail network32004Retail sites 1,0002,10012Saratovnefteprodukt 1,96022.06 1 TNK BP Holding data exclude assets that are not part of the 13Rostovnefteprodukt160 2.53 restructuring at this stage: Slavneft, RUSIA Petroleum, STBP Holding (BP branded Moscow retail business) and the Ukrainian business. 14 Orenburgnefteprodukt 2,11992.242 TNK BP data, excluding Slavneft. 3 Retail network includes TNK BP owned and jobbers' gas stations. 2 3. Holding. At that point, minority shareholders in these subGroup structure after accessions sidiaries would once again have two options: to swap into TNK BP Holding, or to be bought out. New swap ratios will be determined at that stage on the basis of a new independ ent valuation. The commencement of this step remains sub ject to successful completion of TNK, ONACO and Sidanco accession to TNK BP Holding, the voluntary offer and obtaining the relevant approvals.Restructuring has been a complex and lengthy process, and it will continue to require a substantial investment of resources and senior management time. Yet I believe this is an important and necessary investment in transforming TNK BP into a more transparent and better governed company. Completion of corporate restructuring will ensure a step change in our cor porate governance, and will generate substantial added value to all shareholders.The investment community and several of our largest minori ty shareholders reacted favorably to our restructuring plans following the announcement on January 14. This reaction is also reflected in the robust increase in the share price for some of our subsidiaries, shares of which are quoted on the organized stock exchanges in Russia. Sidanco at $3.1 per barrel. This supports the view taken by various financial analysts who have commented on the fairness of the valuations.Subject to government approvals, the second step in the cur Kent Potter: All rent phase of restructuring will further consolidate TNK BP Holding's ownership of its major subsidiaries by making a vol Stakeholders Will untary offer to the minority shareholders in 14 of our larger operating companies to swap their shares for TNK BP Benefit from Holding shares. Five of these companies are key upstream sub sidiaries, three are refineries and the remaining six are market ing and retail subsidiaries. The table on page 2 outlines the Economies of Scale equity values and swap ratios for these 14 companies. and a Better Managed Although there is no legal requirement to base the swap ratios on an independent valuation, we made a conscious decision toPortfolio use the independent valuation carried out by Deloitte for this purpose. We believe this to be a fair and consistent approach. It is also important to note that the exchange offer is volun tary and minority shareholders who choose not to swap will TNK BP CFO discusses corporate remain shareholders in their existing companies.restructuring After the accessions of TNK, Sidanco and ONACO, and assuming final government approvals are received the conQ: What is the essence of the restructuring project? Why is version of some or all of the minority shareholders in the 14 it taking place now? What benefits does it bring to TNK BP major operating companies, the new group structure will beand its shareholders? much simpler, as shown in the table above. At this point, one Russian company will hold most of the group's Russian assetsAfter TNK BP was established in 2003, we ended up with more and operations, creating a much more transparent organization than 600 subsidiaries in the Group. From the start it was clear for management and shareholders alike.that this structure must be optimized not least, for the sake of effective governance. We are working to complete the accessions of TNK, Sidanco Our challenge is to sim and ONACO and the voluntary exchange offers to the 14 operplify the company's ating subsidiaries this year. Upon completion of accessions and structure so that busi the voluntary exchange offer, some shares of TNK BP will be ness, financial and tax in free float. Ultimately, the percentage of floating shares will planning are seamless depend upon the minority take up, but if all minority share and accountability cas holders swapped in the accession of TNK, Sidanco andcades down through ONACO and during the voluntary exchange offer, the TNKout the company. BP Holding free float would be just under 7%. The essence of the The next, and final, stage of the restructuring process, envi restructuring program sions accession of our large operating subsidiaries (both is the consolidation of 100% owned and with minority shareholders) to TNK BPthe majority of TNK april 2005 3 4. national norms or precedents as to how it plans to treat its minority shareholders as part of the proposed restructuring?Kent Potter TNK BP seeks to act responsibly towards all its shareholders,Kent Potter , originally fromKazakhstan and CFO of Chevron minority and majority alike. We realize that our corporate repCalifornia,receivedhis Overseas Petroleum, Chevron's utation represents a great value, and we will do everything posBachelors Degree in engineering international exploration and pro sible to increase that value. Key principles of the restructuringfrom the University of California, duction company.include the fair treatment of all shareholders as well as broadBerkeley, in 1969. After spendingconsultations with all stakeholders, including government,three years as an officer in the USFollowing his last Chevron assign majority and minority shareholders, lenders and rating agenArmy (with service in Okinawament, Mr. Potter assumed thecies. We are committed to doing this at a level of transparencyand Vietnam), he returned to position of Senior Vice President that goes beyond what is required by law. And our internationBerkeley for his MBA.and Chief Financial Officer for al advisors are playing a key role throughout this process. ChevronPhillips ChemicalHe joined Chevron Corp. in 1974. Company (CPChem). While alsoWe have received and continue to receive feedback from theIn his 27 years with Chevron, Mr.serving as a member ofinvestment community ever since we announced the beginningPotter lived in Belgium, England CPChem's Board of Directors, he of restructuring on January 14. That feedback indicates thatand Kazakhstan and held financialhelped direct the merger and people understand what we are doing and appreciate our efforts.management positions in all areasintegration of Chevron's andof Chevron's operations. These Phillips' worldwide chemicalQ: Why are some assets not being brought into TNK BPincluded Finance Director foroperations. In this position, Mr. Holding?Chevron's North Sea operations,Potter was responsible for allCFO of Chevron's mining compafinance and information technol As a general principle, TNK BP intends for all Russian assetsny, CFO of Tengizchevroil in ogy activities of CPChem. to be directly...</p>

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