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ANNUAL REPORTTNK-BP HOLDING

TNK-BP HoldiNg // ANNUAl REPoRT 2008 // contents

MEssAgE fRoM THE PREsidENT ANd CEo 2-3 1 THE TNK-BP HoldiNg gRoUP KEy PERfoRMANCE iNdiCAToRs 4-5 2 KEy EvENTs iN 2008 6-7 3 PRofilE of THE TNK-BP HoldiNg gRoUP 8-11 4 sTRATEgiC PRioRiTiEs 12-13 5 HEAlTH, sAfETy ANd ENviRoNMENT 14-17 6 2008 oPERATiNg REsUlTs 18-33

2008 Economic overview operating Highlights Exploration and Production oilfield services gas Business downstream

7 PERsoNNEl dEvEloPMENT 34-35 8 soCiAl iNvEsTMENTs 36-37 9 RisK MANAgEMENT ANd iNTERNAl CoNTRol 38-39 10 iNfoRMATioN PoliCy 40-41 11 CoRPoRATE govERNANCE iN TNK-BP HoldiNg 42-61

Principles of Corporate governance Board of directors Managing Company – oJsC «TNK-BP Management» Corporate secretary shareholders Equity financial statements under Russian Accounting standards dividends History information on Related Party Transactions

12 CoNsolidATEd fiNANCiAl REsUlTs 62-95 Consolidated financial statements with Report of independent Auditors

REfERENCE iNfoRMATioN 96

This Annual Report contains information on oJsC TNK-BP Holding and its subsidiary/affiliate companies jointly referred to as «the group» or «the TNK-BP Holding group» or «TNK-BP Holding and it’s subsidiaries» in this Annual Report. some sections of this Annual Report contain information on oJsC TNK-BP Holding as a single legal entity which is referred to as or «TNK-BP Holding» or «the Company».

The Annual Report of the oJsC TNK-BP Holding was preliminarily approved by the Board of directors of the oJsC TNK-BP Holding (Minutes No.12 (150), dated 29 Мау, 2009).

TNK-BP HoldiNg // Message froM the President and ceo

2

as compared to 2005 thanks to pipeline replacement and inhibition.

in 2008, TNK-BP invested in mature fields which remain the major source of our hydrocarbon production and reserves replacement. The company also proceeded with the development of priority greenfields that will balance off the natural decline of the mature asset base and help to maintain production levels.

despite a worsening economic environment, TNK-BP Holding was on schedule with greenfield projects, opening up new oil provinces in Russia. in the middle of october we launched commercial production at the verkhnechonskoye oil field in East siberia. Preparation work was completed at the Uvat project in the south of the Tyumen region which allowed to start commercial production in the middle of february 2009. The Kamennoye oil field in West siberia ramped up production by almost 45% and is positioned for future growth.

The sustainability of an oil company is achieved by its ability to consistently renew its reserve base. in 2008, TNK-BP Holding had 10,252 billion barrels of oil equivalent of Total Proved Reserves applying the PRMs (formerly sPE) criteria. This is the result of high professional expertise and skillful technology application of our team.

Accumulated experience helped the company to identify technologies most efficient for our diverse asset portfolio, including 3d seismic, drilling, sidetracking, hydro fracturing and pump optimisation.

We succeeded in finding new reserves both at our mature assets and new acreage with the exploration success rate exceeding 70%.

The company pursued a programme of licence renewal, and in 2006-2008 extended 20 key licences for 25 years. We effectively decreased the idle well stock to 30% at the end of last year – above the official requirements.

TNK-BP Holding improved its operations across the whole value chain – from the well to the end consumer. We continued to modernize our refining portfolio to produce fuel to stringent European quality standards

and upgraded the level of services offered at the company’s retail network.

As a responsible business, we continued to work for the benefit of our shareholders and other stakeholders in the Russian federation. TNK-BP Holding paid 700 bln RUR. in taxes, duties and excises to the state budget. All the shareholders received an interim dividend based on the distribution of 100% of the net income for the first half of 2008 calculated according to the Russian accounting standards. We honoured all our payment obligations to employees and remain committed to do so in the future.

At the end of last year the shareholders of TNK-BP Holding approved the new Charter and voted for the new composition of the Board of directors. A reviewed system of corporate governance reflects the maturity of our company, gives it a new degree of independence and installs safety mechanisms to avoid deadlocked situations.

Testing times lie ahead of us in 2009. We must remember that oil business has a long time horizon and we should not be deterred by current volatilities.

This year, the company will concentrate on maintaining the necessary balance of investing into immediate projects of today and allocating funds for the projects which will ensure our future growth. We will stay focused and committed to preserve our competitive strength and fulfill obligations to our employees and shareholders.

tim suMMers

CHAiRMAN of THE MANAgEMENT BoARd of TNK-BP MANAgEMENT,THE MANAgiNg CoMPANy of TNK-BP HoldiNg

3

WAs AN ExTRAoRdiNARy yEAR foR TNK-BP

HoldiNg. THE CoMPANy dElivEREd iTs BEsT REsUlTs EvER siNCE THE sTART of oPERATioNs.

We increased oil and gas production by 2.6%, put on stream major new projects in West and East siberia, replaced 146% of our production with new reserves and improved the rate of associated gas utilization to benefit the environment in the regions of our activities.

These good results were achieved against the backdrop of an economic and financial crisis which the world entered in the second half of 2008. The oil price dropped by more than 70% from July to december last year while the prices for goods and services in the oil industry and main taxation parameters took longer to adjust to the new economic environment.

The company was not distracted by the market volatility in the fourth quarter of last year and delivered its targets on time and within budget.

in 2008, we continued to work towards the strategic objective to operate without accidents or other health hazards to our employees. The company approved the «golden rules of safety in TNK-BP» for employees and contractors. We are proud of the fact that lost time injury frequency and the rate of road accidents went down by 32% and 50% correspondingly as compared to the previous year. The company remediated about 500 hectares of legacy pollution, built a unique system of floating booms to prevent damage to the volga river and achieved a 65% reduction in oil spills

dEAR sHAREHoldER,

TNK-BP HoldiNg // annuaL rePort 2008

2008

THE TNK-BP HoldiNg gRoUP KEy PERfoRMANCE iNdiCAToRs

1


4

TNK-BP HoldiNg // 1. the tnK-BP hoLding grouP Key PerforMance indicators

5

Proved reserves rePLaceMent rate,� %

days away froM worK cases frequency Per 200,�000 Man-hours

revenue,� us gaaP,� $ MillioN

caPitaL exPenditure,� us gaaP,� $ MillioN

PiPeLines rePLaced,� km

Liquids Production,� MillioN ToNs

2006 2007 2008

74 70.4 70.4

156129

297

179146

82

2006 2007 2008

2006 2007 2008

2006 2007 2008

2006 2007 2008

0.160.14

0.09

32,�11434,�995

45,�128

2,�2343,�266

3,�724by PRMs by sEC-lof

80

60

40

20

0

300

200

100

0

0 200 400 600 800

2006

2007

2008

816

858

627

0.20

0.15

0.10

0.05

0

50

40

30

20

10

0

4

3

2

1

0

6


January

14.01.2008TNK-BP Holding was awarded the first place in the All-Russian Rating «Russian Company of High social Performance» in the «Conservation of Resources and the Environment» nomination.

feBruary

21.02.2008A three-year strategic partnership agreement was signed between TNK-BP Holding group and the omsk Region government. The parties confirmed mutual interest towards the development of subsoil geological research, field exploration and hydrocarbons production.

March

05.03.2008The group and the Krasnoyarsk Territory Administration signed an agreement on social and economic cooperation which provides for effective investment in the area of subsoil use and comprehensive and environmentally safe development of the region’s mineral base.

aPriL

02.04.2008Results of the oil and gas reserves audit performed by the independent firm of degolyer and MacNaughton were released. According to the audit results, the group’s Total Proved reserves amounted to 8.225 billion of oil equivalent on a sEC life-of-field (lof) basis as of 31 december 2007. The Total Proved reserves replacement ratio constituted 179% in 2007.

May

21.05.2008A Memorandum launching a Master’s degree program signed within the framework of cooperation with the Tyumen state oil and gas University and the Royal Holloway, University of london (RHUl).

June

26.06.2008TNK-BP Holding held an Annual general shareholders’ Meeting to approve the Company’s 2007 annual report and financial statements. The shareholders approved dividend payout of 27.9 billion rubles (RUR 1.71 per one common and preference share).

JuLy

17.07.2008TNK-BP Holding group, Transneft and Rosneft signed an agreement on oil swaps through 2015. Under this agreement, the group will deliver up to 13 million tons of samotlor oil to the East siberia – Pacific ocean pipeline per year.

august

01.08.2008Cooperation agreement signed with the Ryazan Region government. The aim of this agreement is to assure active cooperation between the company and the Ryazan Region government designed to support the region’s sustainable social and economic development, meet the region’s demand for petroleum products, and implement various targeted social and economic programs.

KEy EvENTs iN 20082

TNK-BP HoldiNg // 2. Key events in 2008

sePteMBer

03.09.2008oil absorption unit enabling extraction of condensate from associated petroleum gas launched at the Nizhnevartovsk gas Processing Plant. 22.09.2008The TNK-BP Holding group commenced production of Ts-1 jet fuel with sulfur content of 30 ppm or less at CJsC Ryazan oil Refining Company. 30.09.2008TNK-BP Holding held an Extraordinary general shareholders’ Meeting where the shareholders approved dividends of 47.9 billion rubles (RUR 2.94 per one common and preference share) for the first 6 months of 2008.

octoBer

07.10.2008CJsC Ryazan oil Refining Company commenced production of Euro-5 diesel fuel with sulfur content of 10 ppm or less. 15.10.2008Commercial production launched at the verkhnechonskoe oil field; first verkhnechonsk oil was delivered to the custody transfer point for subsequent transportation via the East siberia – Pacific ocean pipeline. 24.10.2008opening of the Center for training and development of professionals in geology and oil and gas. With the TNK-BP Holding group’s support, the Royal Holloway, University of london launched a Master’s degree program in oil and gas geosciences at the Center. 27.10.2008The group won the Russian Corporate donor 2008 Award in the «support for learning and discovering Potential of young People» nomination.

noveMBer

12.11.2008The group’s oilfield service companies were awarded iso 9001, iso 14001, and oHsAs18001 international certificates testifying that the group’s oil field services comply with international standards with regard to the quality of operations, protection of environment, and occupational safety. The certificates were awarded on the basis of audits of the group’s service assets in key production centers in Nizhnevartovsk (West siberia) and Buzuluk (orenburg Region), carried out by Moody international, one of the world’s leading certification companies. 19.11.2008Popup safety boom system launched at the Uvek oil depot. Popup booms are designed to prevent damage to the environment in case of an emergency occurring in the vicinity of the volgograd Reservoir in the course of tanker filling operations.

deceMBer

01.12.2008Tim summers was appointed Chief Executive officer and Chairman of the Management Board of TNK-BP Management. in this role, Tim summers replaced Robert dudley who had served as the group’s CEo since 2003. 22.12.2008TNK-BP Holding held an Extraordinary general shareholders’ Meeting. The shareholders approved the new Charter of TNK-BP Holding and appointed the new Board of directors.

2009 events

21.01.2009New Charter of TNK-BP Holding, approved by the Extraordinary general shareholders' Meeting on 22 december 2008, was registered.

29.01.2009The Managment Board of oJsC TNK-BP Managment has been elected with members as follows: T.d.summers (Chairman of the Managment Board), g.B. Khan, v.f. vekselberg, K.H. sliger, J.W. Muir.

16.02.2009The group announced launch of commercial oil production at Urnenskoe and Ust-Tegusskoe fields in the Uvat district of Tyumen Region. West-bound oil transportation from the fields to the point of transfer to Transneft’s pipeline system is enabled by a 264-km pipeline and a central oil gathering facility, built by the group.

27.02.2009Results of the oil and gas reserves audit as of the end of 2008, conducted by the independent firm of degolyer and MacNaughton, were released. The group’s reserves amounted to 8.112 billion of oil equivalent as of 31 december 2008 on a sEC life-of-field basis, and to 10.252 billion of oil equivalent on a PRMs (former sPE) basis.

20.03.2009i.v. Cheremikin elected Chairman of TNK-BP Holding Board of directors.

14.04.2009Jonathan Muir was appointed TNK-BP Chief financial officer. didier Baudrand appointed Executive vice-President, downstream, and Executive director of TNK-BP.

7

PRofilE of THE TNK-BP HoldiNg gRoUP3


TNK-BP Holding group was formed in 2004-2005 through a process of restructuring and accession of the heritage companies TNK, sidanco, and oNACo, and their respective subsidiaries. The group’s main assets are shown on the map on pages 10 and 11.

TNK-BP Holding group has a diversified upstream and downstream portfolio in Russia. The group’s upstream assets are located in Western and Eastern siberia and the volga-Urals Region. in 2008, total liquids production was 70.4 million tons, while total gas sales amounted to 11.3 billion cubic meters.

since 2003, the entities, which were later merged into the group, have commissioned independent reserves audits from degolyer and MacNaughton. The recent audit showed that as of 31 december 2008, total proved reserves of the group were 8.1 billion barrels of oil equivalent on a sEC (U.s. securities and Exchange Commission) life-of-field basis and 10.3 billon barrels of oil equivalent on a PRMs (formerly known as sPE, i.e. U.s. society of Petroleum Engineers) basis. Total proved reserves replacement ratio in 2008 was 82% on a sEC life-of-field basis. on a PRMs basis, TNK-BP’s total proved reserves replacement ratio was 146%.

The group owns four refineries with total refined volumes of 23.4 million tons in 2008 year, located in Ryazan (Central federal district), saratov (volga federal district), Nizhnevartovsk and Krasnoleninsk (Urals federal district).

The group operates a retail network of over 1,000 retail stations in Russia and is one of the key suppliers to the Moscow retail market.

8

TNK-BP HoldiNg // 3. ProfiLe of the tnK-BP hoLding grouP

9

TNK-BP HoldiNg gRoUP is A lEAdiNg RUssiAN oil ANd gAs CoMPANy ANd is AMoNg THE ToP TEN PRivATEly-oWNEd oil CoMPANiEs iN THE WoRld iN TERMs of CRUdE oil PRodUCTioN.


10

TNK-BP HoldiNg // 3. ProfiLe of the tnK-BP hoLding grouP

11

gREENfiEld

BRoWNfiEld

gAs PRoJECTs

REfiNERy AssETs

Central federal district Norhwestern federal district southern federal district volga federal district Urals federal district siberian federal district far Eastern federal district

MAP of CoRE AssETs of THE TNK-BP HoldiNg gRoUP

RyAzAN REfiNERy

sARATov REfiNERy

KRAsNolENiNsK REfiNERy

KAMENNoyE

sAMoTloR

NizHNEvARTovsK REfiNERy

vERKHNECHoNsKoyE

UvAT

Novosibirsk

orenburg

Moscow

st. Petersburg

Petrozavodsk

Kaluga

Tula

KurskRyazan

Nizhny Novgorod

Ekaterinburg

Nyagan

omsk TomskKrasnoyarsk

Novy Urengoy

saratov

Atrakhan

Rostov-on-don

Krasnodar

RosPAN RUssKoyE

4


12

TNK-BP HoldiNg // 4 strategic Priorities

13

sTRATEgiC PRioRiTiEs

THE CoRE CoMPoNENT of oUR sTRATEgy is To AssURE sUsTAiNABlE dEvEloPMENT THRoUgH loNg-TERM REsoURCE RENEWAl ANd iMPlEMENTATioN of EffiCiENT WoRld-ClAss TECHNologiEs ANd HigH CoRPoRATE govERNANCE sTANdARds. oUR sTRATEgy is BAsEd oN THE gRoUP’s UNiqUE CoMPETENCE iN THE dEvEloPMENT ANd dEPloyMENT of TECHNology, WHiCH ENABlEs PRodUCTioN, REfiNiNg, ANd MARKETiNg of CoMPETiTivE PRodUCTs ANd sERviCEs BoTH doMEsTiCAlly ANd iNTERNATioNAlly.

WE PURsUE THE sTRATEgy of sUsTAiNABlE dEvEloPMENT AloNg sEvERAl PRioRiTy BUsiNEss AREAs:

uPstreaMThe group seeks sustainable growth through maintaining and improving brownfield development, commissioning new license areas, and achieving strong exploration results. The key target is to achieve a reserves replacement ratio of at least 100% of annual production in barrels of oil equivalent to sustain the group’s resource base as a long-term foundation for future operations.

downstreaMThe group’s key strategic objective in downstream is to maximize the value of oil and gas produced and improve the profitability of oil refining. The group plans to accomplish these tasks by upgrading oil refining facilities, continued development of new export sales channels, and through targeted expansion of the group’s retail network.

gasThe group seeks to develop its gas business and transform itself from an oil company into a major oil and gas group. To this end we are actively developing our significant equity gas assets, increasing gas production volumes, which are supplied to the domestic market in cooperation with other companies, and enhancing associated gas value through implementation of a gas utilization program.

PortfoLio ManageMentour portfolio is managed to facilitate accomplishment of our strategic goals and maximize the group’s value. The group may acquire new assets to improve its value and may divest non-core and tail assets.

corPorate governanceThe group maintains and improves its corporate governance system, which is designed to protect shareholder interests, enhance transparency and facilitate efficient and timely management decisions through streamlining of organizational structure, improved financial reporting, and efficient internal control.

hseThe group continuously improves its environmental and industrial safety standards designed to achieve greater transparency of operations and environmental projects via the development and implementation of an HsE reporting and internal control system.

financeThe group pursues a balanced financial strategy aimed at achieving business growth objectives while maintaining a strong balance sheet, ensuring sufficient liquidity, and enhancing financial flexibility.

THE TNK-BP HoldiNg gRoUP’s sTRATEgiC goAl is To BECoME A WoRld-ClAss RUssiAN oil ANd gAs CoMPANy. THE KEy oBJECTivE of THE gRoUP is sTRENgTHENiNg iTs lEAdiNg PosiTioN iN THE UPsTREAM ANd doWNsTREAM sEgMENTs of THE RUssiAN oil ANd gAs iNdUsTRy.

HEAlTH, sAfETy ANd ENviRoNMENT5


14

TNK-BP HoldiNg // 5. heaLth,� safety and environMent

15

iNdUsTRiAl sAfETy, HUMAN HEAlTH ANd ENviRoNMENTAl PRoTECTioN ARE iN THE foCUs of MANAgEMENT PRoCEssEs AT All TNK-BP HoldiNg gRoUP fACiliTiEs.

As a socially and environmentally responsible company, the TNK-BP Holding group strictly abides by the legal requirements in this area and continuously improves its internal standards driven by the world’s best practices. To prevent failures and accidents and to minimize environmental impact, the TNK-BP Holding group has implemented an integrated Health, safety and Environment (HsE) Management system.

occuPationaL and industriaL safety

An integrated occupational and industrial safety program has been introduced across all TNK-BP Holding group subsidiaries and at contractor entities. This program includes training for every member of the staff, provision of appropriate safety equipment for all staff, introduction of monitoring and measurement systems, and leadership commitment to safe operations.

To improve managerial and technical staff competence in occupational and industrial safety matters, the group has implemented the olyMP training and knowledge control system, which enables on-the job employee training and testing in statutory requirements as well as corporate standards.

in 2008, TNK-BP Holding adopted the golden safety Rules. The golden Rules should be observed by both group and contractor personnel.

The Company pays much attention to the improvement of overall contractor management and transparency of contractor reporting. Therefore, a Contractor HsE Performance scorecard has been developed and implemented. The scorecard allows us to select contractors that meet our requirements in terms of transportation and occupational safety.

Particular focus is placed on transportation safety, which has been identified as one of the high risk areas. A number of safe driving initiatives have been introduced, including vehicle passive safety standards and uniform criteria for qualification-based selection of transportation service providers. As a result, the traffic accident rate decreased by 50% in 2008 compared to previous year.

our commitment to high safety standards enabled us to significantly improve our occupational and industrial safety performance indicators in 2008. The days Away from Work Cases rate decreased by 32% in 2008 compared to 2007. The number of high potential incidents decreased by 29% in 2008.


16

PiPeLine integrity ManageMentThe Pipeline integrity Management program includes replacement of worn-out pipelines and anti-corrosion treatment. over the 2004-2008 period, $1 billion was allocated on this program. in 2008, 627 km of worn-out pipelines were replaced and 9,080 km of pipelines were treated with corrosion inhibitors. it resulted in a 26% reduction in the total number of spills in 2008 compared to 2007.

utiLization of associated gasincreasing associated gas utilization is an important strategic area for the group. it allows to boost Russia’s gas supply to the domestic and international markets, reduce atmospheric emissions, and ensures compliance with the group’s license obligations. The group’s production of associated petroleum gas (APg) grew by 14.7% in 2008, reaching 9.728 billion cubic meters. in 2008, APg utilization rate across TNK-BP Holding subsidiaries reached 80%. in the medium-term, the Company plans to continue improving the APg utilization rate.

TNK-BP HoldiNg // 5. heaLth,� safety and environMent

heaLth care

An enduring health care program has been implemented at all TNK-BP Holding group facilities. To date more than 40 medical stations at industrial sites have been re-equipped, more than 30 modern ambulances procured, and around 4,000 first-aid volunteers have been trained.

The Company’s upstream assets have launched a cardiovascular disease prevention program, which is designed to mitigate risks of lethal cardiovascular conditions at work. our efforts in the area of occupational safety management in the oil and gas sector have won the Company the Best safe Workplace innovation Award in the 2008 Health and safety contest, held under the auspices of the Russian Ministry of Public Health and social development.

hse rePortingThe TNK-BP Holding group’s HsE reporting systems continue to move towards compliance with international standards. The group is the only Russian oil and gas company that actively participates in the oil and gas Producers Association (ogP), and prepares reports according to ogP standards.

environMentaL Protection

Environmentally, the TNK-BP Holding group is focused on three key objectives: cleaning of legacy pollution, utilization of associated gas, and pipeline integrity management.

Land reMediationThe land remediation program has been in place since 2005. As a result, more than 1,700 hectares of land have been cleaned up and handed over to government authorities.

our commitment to the quality and effectiveness of environment protection efforts caused us to revise our approach to land remediation in 2008 and introduce the following guiding principles:

focus on effectiveness of action taken;

use of natural self-repair mechanisms;

a well-balanced use of capabilities offered by the environmental services market.

2008 environmental activities resulted in remediation of 497 hectares of land, successful decommissioning of defunct facilities in Ryazan and saratov, completion of a pilot project to decommission retail sites and oil depots in the Kaluga Region, with 17 oil depots decommissioned and six retail sites dismantled.

in 2008, we completed a unique project at the Uvek oil depot, with construction of popup floating booms system designed to prevent environmental damage in case of a spillage adjacent to the volgograd reservoir in the course of tanker filling operations.

17

2008 oPERATiNg REsUlTs 6


2008 econoMic overview

gloBAl oil PRiCE is THE MosT sigNifiCANT fACToR AffECTiNg PERfoRMANCE of THE TNK-BP HoldiNg gRoUP.

in 2008, the average Brent crude oil price increased by 34.4% over the previous year to $97/barrel, while the Urals (Med/NWE) market increased by 36.8% to $95/barrel.

With the onset of the worldwide financial crisis, oil price started to decline from July 2008. Expectations of weak global demand for energy, brought about by the global economic recession, drove Brent price down to below $40/barrel at the end of 2008.

18

The favorable price environment in the first half of the reporting year had a positive impact on TNK-BP Holding group financials in 2008 in general, though this was partly offset by higher taxes and costs.

The main taxation increases were seen in export duty and Unified Production Tax (UPT), which are linked to the Urals oil price. As a result, a substantial share of the increase in revenue generated by growing oil prices was paid in taxes. lifting and other costs also increased sharply, outpacing the general rate of inflation in the economy, which was 13.3% in 2008 according to the Ministry of Economic development and Trade data.

TNK-BP Holding group’s profitability was impacted by the increases of pipeline tariffs, operating and capital expenses inflation and ruble appreciation against Us dollar in the first half of 2008.

oil production profitability in Russia turned negative in the fourth quarter of 2008 due to an unbalanced taxation system, poorly adapted to sharp price fluctuations on the global oil market. However, several actions were taken by the Russian government to support the oil industry:

The monitoring period and effective term of oil and oil products export duty rates were modified.

starting with 2009, the cutoff price is increased from $9/barrel to $15/barrel in UPT liability calculations as they apply to oil. A zero rate is applied to extremely viscous oil production and oil produced in «new provinces». A reduction factor reflecting fields’ depletion rate was introduced.

Profit tax rate was reduced from 24% to 20%.

New accelerated tax depreciation method reducing useful life of fixed assets used in oil production and increasing depreciation premium to 30% was introduced.

Excise tax rates for 2009 were left at 2008 levels.

The above-mentioned actions will generally impact our financial results starting from 2009.

despite a significant growth of capital investment, Russian oil production volumes decreased to 488.5 million tons in 2008 (by 0.8% as compared to 2007 level). Production volumes in West siberia continued to fall for a second consecutive year despite significant growth in new drilling. This decline reflected an increase in field depletion, growth of base field watercut, and a decline in average flow rate of new wells.

Total volumes of oil refining in Russia increased in 2008 by 3% to 236 million tons. This trend is explained by higher profitability of product sales compared to crude exports, reflecting a more liberal taxation of exported petroleum products compared to crude exports.

According to the Central dispatch division data, in 2008 Russia’s gas production grew by 1.4% compared to the previous year due to high demand both domestically and in Europe through mid-2008. domestic gas prices continue to rise in line with the schedule set by the Russian government, according to which target profitability for gas sales to industrial enterprises should reach export profitability by 2011. This creates favorable conditions for the further development of TNK-BP Holding group’s gas business.

TNK-BP HoldiNg // 6. 2008 oPerating resuLts

19

150

120

90

60

30

0

source: Platts, Kortes, Company estimates

Brent and uraLs Price in 2007-2008

i.07 iii.07 v.07 vii.07 ix.07 xi.07 i.08 iii.08 v.08 vii.08 ix.08 xi.08

dATEd BRENT

URAls Cif

doMEsTiC PRiCE (ExCl. vAT)

$ / B

Bl


20

exPLoration and Production

PerforMance and strategy overviewin 2008, the TNK-BP Holding group’s oil, condensate and natural gas liquids (Ngl) production remained at the previous year’s level and amounted to 70.4 million tons (or 1.5 million barrels per day).

in 2009, the TNK-BP Holding group’s production is expected to remain broadly flat and may grow thereafter as new greenfield projects come on stream.

The TNK-BP Holding group is focused on cost-effective production growth at its mature asset base located largely in Western siberia. At the same time, the group plans to expand exploration and production to new reservoirs in existing areas, as well as completely new fields that will ensure long-term growth in the future.

At present, the group is developing more than ten major new projects, many of which are located in remote regions with limited or no infrastructure. This requires significant investments and application of new technology. Three projects are at more advanced stages: the Uvat group of fields and the Kamennoye field in West siberia, and the verkhnechonsky project in East siberia.

in addition, the group has a number of license blocks that are currently being explored through 3d seismic, wildcat exploration wells, and other exploration activities. The TNK-BP Holding group successfully competes for new licenses through auctions and acquisitions.

overall, the TNK-BP Holding group’s strategy is to grow production and profitability in the long term, whilst assuring a reserves replacement ratio of at least 100% of the annual production on an oil equivalent basis.

We can accomplish this by applying advanced technologies to increase production, maximize recovery of proved reserves, and develop probable reserves. By implementing advanced techniques, such as water flood management, optimization of use of electric submersible pumps (EsP), reactivation of idle wells, well re-injection, hydraulic fracturing, sidetracking, and drilling horizontal and multilateral wells, we increase production potential at mature fields. To develop new fields and enhance recovery at mature assets in the medium to longer term, the TNK-BP Holding group plans to apply internationally tested recovery techniques, including those used by BP.

exPLorationThe TNK-BP Holding group’s 2008 exploration program involved drilling of 69 wells, including those carried over from 2007. over that period, 41 wells were tested with a success rate of 78%.

Throughout 2008, the Company completed 950 sq. km of 3d seismic survey and 4,955 km of 2d seismic survey. The seismic survey program was only partially completed (78% and 67% of planned 3d and 2d scopes, respectively), due to warm winter and low contractor efficiency.


21

oPerating highLights

units of MeasureMent 2006 2007 2008 2008/2007,� %

oiL fieLd deveLoPMent and Liquids Production

Producing well stock wells 13,813 15,335 15,443 1 New oil wells commissioned wells 345 396 425 7 liquids production million tons 74.0 70.4 70.4 - Average daily oil wells flow rate tons/day 13.5 13.7 12.9 -6 Production costs $/boe 2.55 3.59 4.80 34

gas saLes

Natural gas sales mmcm 2,767 1,502 2,504 67 Associated gas sales mmcm 8,099 7,432 8,840 19

Proved reserves (Based on sec Lof MethodoLogy)

Total hydrocarbons mmboe 7,810 8,225 8,112 -1 Reserve replacement ratio % 129 179 82 -54

geoLogicaL exPLoration

Number of exploration and appraisal wells wells 27 45 41 -9 drilling success rate % 63 60 78 23 Exploration and appraisal program $ million 204 247 251 2

oiL refining

Crude oil refining capacity million tons 22.4 23.2 23.6 2 Crude oil and other feedstock refining volume million tons 22.5 22.4 23.4 5 Refining capacity utilization rate % 93.5 97.3 97.5 0.2

saLes voLuMes of crude oiL and PetroLeuM Products

Crude oil exports other than Cis million tons 34.5 34.4 26.6 -23 Crude oil exports to Cis million tons 7.9 7.5 7.1 -5 Crude oil domestic sales million tons 8.8 4.9 7.5 54 Petroleum products exports other than Cis million tons 14.2 14.5 16.6 14 Petroleum products exports to Cis million tons 0.4 0.4 0.7 54 Petroleum products domestic sales million tons 12.6 12.0 12.3 3 Retail network (own and jobber sites) sites 1,017 1,025 1,067 4


22

LicensesAs of 31 december 2008, the TNK-BP Holding group held 195 licenses. despite the fact that there are no key licenses expiring before 2013, the group has a proactive license renewal management program which is launched closer to license expiration. This program includes an analysis of the terms and conditions of the current licenses to confirm the group’s compliance. As part of this program, 25-year extensions were obtained in 2006-2008 for 20 key licenses for the group’s production in south Urals and West siberia, including key samotlor licenses.

The TNK-BP Holding group accomplishes its license obligations in exploration and oil and gas production at each field in accordance with annual programs, which are subject to approval by the Ministry of Natural Resources. We also comply with the requirements set out in our exploration licenses, assuring that fields are developed and operated in accordance with design and process documentation approved by the subsoil Use Management Agency’s Central development Commission.

in 2008, the group continued with license acquisitions aimed at reserves replacement. six new exploration licenses were acquired at mature fields and in new undeveloped areas. At the same time, eight inefficient license areas were returned to the unlicensed subsoil pool of the Russian federation.


23

oJsc saMotLorneftegaz oJsc orenBurgneft oJsc tnK-nizhnevartovsK

share of the grouP’s totaL Production in 2008

32% 23% 12%

Licenses license to develop a significant part of the samotlor field in West-

ern siberia

licenses to develop 100 fields in the southern Urals region

licenses to develop six fields in Western siberia, including the

northern part of the samotlor field

fieLd characteristics samotlor was discovered in 1964; production began in 1969.

Average reservoir depth: from 1,700 to 2,800 meters.

The fields were discovered begin-ning in 1937; operation started

in 1939.Average reservoir depth:

2,800 meters.

The fields were discovered in 1965-1984 and commissioned in

1969-1986.Average reservoir depth:

from 2,200 to 2,700 meters.

fieLd ParaMeters in 2008

Average water cut 94% 70% 87%

oil production 22.2 million tons456,000 bpd

15.6 million tons321,000 bpd

8.3 million tons170,000 bpd

operating production wells 6,379 1,875 1,881

operating injection wells 2,444 881 659

fieLds oPerated By tnK-BP hoLding grouP’s uPstreaM suBsidiaries

reservesThe TNK-BP Holding group uses the two main international reserves classifications for external reserve reporting and internal reserve management:

U.s. securities and Exchange Commission (sEC) standards;

U.s. society of Petroleum Engineers (sPE) standards (in 2007, sPE criteria were amended and reintroduced as Petroleum Resources Management system – PRMs).

Within the sEC framework, reserves are estimated using two methodologies:

reserves are calculated to the license period (life-of-license basis);

reserves are calculated to the entire economic life of the field (sEC lof basis).

for the purposes of reserves management, the group uses the sEC lof approach.

since 2003, annual audits of the group’s proved, probable and possible reserves have been performed by the independent firm of degolyer and MacNaughton. According to the latest assessment, as of 31 december 2008 the group’s aggregate proved reserves were 8.112 billion barrels of oil equivalent on an sEC lof basis and 10.252 billion barrels of oil equivalent on a PRMs (former sPE) basis.

This represents a 82% sEC lof proved reserves replacement ratio in 2008. This high reserves replacement ratio was achieved through drilling, well workovers and improved waterflood management. optimal waterflood system management at Ryabchik, a shallow accumulation at the samotlor oil field, sidetracking in existing wells, and new drilling at samotlor were important elements of successful Total Proved reserves replacement effort.

The impact of low oil prices in late 2008 on reserves replacement results was moderate, as reserves replacement ratios reflect actual reserves additions through wider use of new technologies, enhanced activity of operations and efficient investment.

in the reporting year, the TNK-BP Holding group’s proved reserves growth was primarily delivered through drilling in new areas and expansion of brownfields. New fields include verkhnechonskoye in East siberia, the Uvat group of fields (Urnenskoye, Ust-Tegusskoye, Taltsiyskoye, severo-Tamarginskoye, Protozanovskoye, Kasukhinskoye, zapadno-Epaskoye), and the Kamennoye field in West siberia and the sorochinsk-Nikolskoye field (field outline expansion) in the orenburg Region, as well as several other new projects. These projects will become important sources of proved reserves growth in the future.

oJsc nizhnevartovsK oiL Production enterPrise oJsc tnK-nyagan oJsc vareganneftegaz

share of the grouP’s totaL Production voLuMe in 2008

7% 9% 4%

Licenses licenses for development of 11 fields in Western siberia.

licenses for development of 3 fields in Western siberia.

licenses for development of 5 fields in Western siberia.

fieLd characteristics The fields were discovered in 1971-1997 and commissioned in

1985-2004.Average reservoir depth:

2,700 meters.

The fields were discovered in 1962 and commissioned in

1980.Average reservoir depth:

from 1,300 to 2,800 meters.

The fields were discovered in 1971-1996 and commissioned

in 1976-1996.Average reservoir depth:

from 849 to 2,900 meters.

fieLd ParaMeters in 2008

Average water cut 84% 85% 85% oil production 4.6 million tons

94,000 bpd5.8 million tons

121,000 bpd3.1 million tons

63,000 bpd operating production wells 982 2,121 655 operating injection wells 526 710 238


24


25

project in the group’s history in the future. in full field development, production may reach approximately 7 million tons per year by 2014. TNK-BP Holding owns over 60% of oJsC «vercknechonskneftegas», which holds the license to operate the verkhnechonskoe oil field.

uvat project is located in West siberia, in the southern part of Tyumen Region, with estimated reserves exceeding 1 billion barrels. At present, the group is actively implementing an exploration program, building regional infrastructure, appraising reservoirs and preparing them for commercial development. By the date of this report, a trunk pipeline construction project has been completed, and commercial production of approximately 10,000 tons per day launched at the Eastern development hub, with more drilling projects underway.

Kamennoye field is located in the Tyumen Region in West siberia. oil reserves in excess of 2.2 billion barrels were discovered some time ago, but were considered unrecoverable. Application of advanced technologies, such as 3d seismic reservoir modeling, drilling of horizontal wells, injection of treated water, and other in-place oil recovery factor enhancement techniques led to a re-assessment of the field potential. Currently, drilling and production are under way in the least complex sections. The group plans to reach plateau production in 2012. At the same time, it is planned to continue exploration and pilot production to expand development of the most complex reserves – low-productive vikulov, Jurassic and pre-Jurassic deposits.

oiLfieLd services

ofs’s strategic goal is to become a leader of the Russian market in terms of industrial and environmental safety, operating efficiency, costs and service quality.

When the ofs Business stream was established in 2003, the Company owned over 80 service companies, each with its own quality level, management and control system. over time, the Company has stan-dardized entity management approaches and has reorganized the service business. As a result, the ofs stream headcount was reduced from 42,000 to 7,000 employees. There are currently ten companies in our ofs portfolio: two drilling, one sidetracking, two in well workovers, one in waterproofing, and four asset management companies.

The ofs restructuring program, which continued in 2008, is aimed at the following strategic objectives:

focus on core activities, such as drilling, sidetracking, and workover services.

Upgrade the drilling rig fleet to enable higher efficiency of drilling.

oilfield services are mainly provided to the TNK-BP Holding group entities. in 2008, our Company embarked on a project which implied expansion of this business stream through sourcing of third-party orders. in 2008, 331 wells were drilled, including 25 wells for third parties, 110 sidetracking operations were completed for the group’s companies. in addition, 766 workovers and over 10,000 current workovers were performed.

ofs innovationsofs is a test pad for the majority of the group’s innovative decisions regarding organizational capacity development in the drilling and sidetracking areas.

over 30% of the total rig fleet has been upgraded with new triplex pumps, top drive systems. drilling mud cleaning equipment, new wrenches, and drill pipes.

ofs supports its own iNfoRM web portal, which provides specialists with direct access to the drilling and well workover database.

Production technoLogiesThe TBH group’s Upstream and Technology streams perform various activities aimed at increasing proved reserves to achieve production targets. in the next five years the group plans to convert about 3 billion barrels (30-40%) of its probable reserves to the proved reserves category.

The group’s management believes that its mature fields still have a significant potential to increase both production and reserves. A key to realizing this potential is the application of advanced technologies, which are implemented by a dedicated Technology business stream within the group. The Technology business stream focuses on 3d seismic and drilling, sidetracking and well work, including hydraulic fracturing, optimization of EsPs use, and reservoir management.

The group demonstrates consistently high operational drilling volumes; at the same time, the group’s portfolio of drilling projects is becoming ever more diverse and complicated as our current fields are located in increasingly remote regions with harsh weather conditions. Well designs are becoming more complicated, too: wells are deeper, with greater step-outs. Rig management efficiency is increasing, and becomes more focused on shorter well construction cycles and security.

in 2008, we continued studying the opportunities for the application of the coil tubing drilling (CTd) technology in sidetracking. in addition, to mitigate drilling risks and reduce damage to reservoirs, CTd could be combined with underbalanced drilling.

The success achieved in large step-out drilling in 2008 proved the expediency of using borehole deviation control systems application at samotlor.

drilling of the first multilateral wells showed positive results at samotlor. Work will continue through a combination of highly efficient drilling with a detailed geology analysis, which will allow us to assure world-class production levels at multilateral wells.

2008 was characterized by a significant expansion of well work operations. our range of well work technologies include hydraulic fracturing, submersible equipment optimization, Mean Time Between failure (MTBf) improvements, bottom-hole acidizing, and well recompletions. These supporting technologies enable us to enhance production at our mature fields.

Within the EsP MTBf improvement initiative, TNK-BP Holding continuously engages in joint technical projects with the gubkin oil and gas University, aimed to develop alternative well operation techniques.

Reservoir management involves applying a number of techniques aimed at reservoir pressure maintenance and maximizing oil recovery, including water flood optimization, sidetracking, and horizontal drilling using a downhole drilling control system. Water flood optimization is carried out on a field-by-field basis. its components include reconfiguration of water flood patterns, conversion of existing development wells to injectors, and in-field drilling. gas re-injection is one of the most effective techniques to maintain reservoir pressure, which is used alongside water flooding. This provides for utilization of associated gas and reduction of associated gas flaring. sidetracking is an important way of improving reservoir access by tapping into otherwise uneconomic hydrocarbon reserves and is the primary means of boosting mature field yields.

new ProJectsdevelopment of new fields is a key strategic priority in the TNK-BP Holding group activities. At present, the group has been implementing a number of new field development projects in Western and Eastern siberia. The group intends to ensure long-term reserves replacement through continuously updated exploration plans.

At present, over ten major projects are being implemented. The following three projects are at the top of this list.

verkhnechonskoe field is a new project located in the Katagansky district of the irkutsk Region in East siberia. The field is East siberia’s largest oil field, with estimated probable and possible reserves of about 1.4 billion barrels of oil according to sPE standards. development of the field has been long hampered by the absence of transportation infrastructure, active development of which started some time ago with the Resolution of the Russian government to undertake construction of the East siberia – Pacific ocean pipeline (EsPo). during 2008, the group actively invested in drilling, oil treatment and transportation infrastructure of the verkhnechonskoye field. Coordinated efforts of oJsC «vercknechonskneftegas» staff, vendors and contractors made it possible to commence production on 15 october 2008, as soon as the EsPo pipeline was completed. We plan to expand on this successful launch of the first greenfield


26

cJsc «rosPan internationaL»TNK-BP Holding owns 100% of Rospan, which produces gas and gas condensate in the yamalo-Nenets Autonomous district. Rospan is developing the deep gas reserves of the Novo-Urengoiskoe and vostochno-Urengoiskoe gas condensate fields.

Rospan is currently supplying the gas and condensate it produces to the Russian market. in 2008, gas production and sales totalled 2.5 billion cubic meters, exceeding 2007 production levels by 67%.

Capital investment in Rospan during 2008 totalled $51 million (compared to $77 million in 2007).

downstreaM

TNK-BP Holding group’s downstream business has three principal areas of activity: Refining, sales, Trading and logistics, Marketing and supply.

refiningThe TNK-BP Holding group’s refineries produce high quality petroleum products in volumes and at quality levels to match domestic and international demand. The strategic goal of the group’s refining business is to improve profitability and increase refining volumes.

The group owns and operates four refineries1 with total effective capacity exceeding 23.4 million tons per year in 2008. in 2008, these refineries processed 23 million tons of crude (at a capacity utilization ratio of over 97.5%).

Expansion of refining capabilities, petroleum product quality improvement and facility upgrades were the key development priorities for the TNK-BP Holding group’s refining stream in 2008.

in its refining business, the group aims to enhance the volume and quality of its petroleum products to increase sales in the domestic and international markets. To achieve these goals, significant investments have been made, particularly at the Ryazan Refinery, to upgrade assets and introduce new refining technologies to enable refineries to meet ever increasing Russian and international standards and produce more high octane fuels.

The overall refining depth and light products yield has increased over time, made possible through a major upgrade of the Ryazan Refinery (including installation of the vgo and alkylation units) as well as the installation of a visbreaker at the saratov Refinery; upgrade of the hydro treatment unit at the Ryazan Refinery enabled us to launch low-sulphur (Euro 5) diesel fuel production.


27

Also, the stream has implemented world-class programs and systems to boost operating efficiency, such as RisE&RosT professional enhancement programs, latent downtime management program, preventive action management program, qHsE (quality, health, safety and environment) passport.

All group’s ofs entities have been awarded international certificates iso 9001, iso 14001 and oHsAs 18001.

subsequent to 31 december 2008, the group entered into negotiations with regard to a potential sale of its oil field services business. The Company believes that availability of an independent oil field services market in Russia will lead to improve the quality and improve the standards of oil field services delivered to Russian oil companies.

gas Business

one of the TNK-BP Holding group’s current strategic priorities is to develop its gas business by exploiting its associated gas resources and developing the gas fields of CJsC «Rospan international».

in 2008, our gas business continued to develop, driven by increased natural gas production and sales and utilization of associated gas.

associated gasTNK-BP Holding’s upstream subsidiaries currently produce natural and associated gas in the core oil production areas of the Nizhnevartovsk Region in West siberia and the orenburg Region in the volga-Urals basin. The group sells almost all the gas it produces, using a small portion to generate power for internal demand.

in 2008, equity gas sales amounted to 8.8 billion cubic meters, which represents a 19% growth as compared to 2007. increased gas sales were primarily driven by llC «yugragazpererabotka» processing capacity expansion.

Associated gas utilization is an important element of the group’s development strategy, as it helps reduce hazardous emissions into the atmosphere and ensures compliance with license obligations.

2008 was another successful year for llC «yugragazpererabotka», a joint venture set up by TNK-BP Holding (49%) and oJsC «siBUR Holding» (51%) in 2006 to process associated gas at the Nizhnevartovsk and Belozerny gas processing plants. «yugragazpererabotka» processes associated gas produced in the Nizhnevartovsk Region by the TNK-BP Holding group and other oil and gas companies.

in the reporting year, we continued the expansion of llC «yugragazpererabotka» capabilities to process and transport gas produced at our oil fields; the project was launched in 2007 with a view to achieve maximum efficiency of associated gas monetization and compliance with our license obligations. in 2008, this facility processed 6.9 billion cubic meters of associated gas produced at the group’s oil fields.

in the orenburg Region in 2008, we carried on with the orenburg integrated Project, which is being implemented to utilize associated gas from Pokrovskaya and Bobrovskaya areas and Western and Eastern groups of fields. Additional gas compressor stations and associated gas gathering pipelines were put on stream, which enabled us to utilize approximately 100 million cubic meters of incremental gas volumes.

1The Lisichansk Refinery in Ukraine and 50% of OJSC “Yaroslavnefteorgsintez” (a joint venture with OJSC “Gazprom neft”) are part of the TNK-BP Group but not part of the TNK-BP Holding Group and as such they are left beyond the scope of this Annual Report.


28

suMMary of the tnK-BP hoLding grouP’s refinery activities in 2008


29

the tnK-BP hoLding grouP’s Key refining indicators

2006 2007 2008

refinery inPut,� MiLLion tons

Crude oil 21.9 22.0 23.0

other feedstock 0.6 0.4 0.4

totaL refining voLuMes 22.5 22.4 23.4

conversion ratio 67% 67% 68.3%

Light Products outPut 56% 56% 55.7%

2006 % 2007 % 2008 %

tyPe of Product,� (thousand tons,� excePt %)

gasoline 5,049 24 5,091 24 5,347 24.1

diesel fuel (gas oil) 6,551 31 6,415 30 6,609 29.7

fuel oil (mazut) 6,199 29 6,193 29 6,513 29.3

Jet fuel (kerosene) 1,007 5 974 5 996 4.5

other products 2,414 11 2,546 12 2,761 12.4

totaL outPut 21,�220 100 21,�219 100 22,�226 100

ryazan oiL refinery coMPany saratov oiL refinery

share of the group’s total refining volume in 2008

65% 28%

Effective capacity(1) 15.1 million tons 6.6 million tonsRefining throughput(2) 14.9 million tons 6.6 million tonslight products 54.9% 44.57%

year of commissioning 1960 1933

location advantages located 200 km southeast of Moscow.

Proximity to Moscow and connection to the export pipeline route provides a strong position on both domestic and export

markets.

located near the volga river and vital railroads.

Product mix light products (gasoline, diesel fuel, jet fuel and solvents).

Heavy products (fuel oil, bitumen, lubricants) and other petrochemicals.

gasoline, diesel fuel, vgo, fuel oil, and bitumen.

investment projects A comprehensive upgrading program was implemented in 2006 within the framework of which the following objectives

were met:

The fluid catalytic cracking unit was upgraded.

The selective lubricant hydro treatment shop was revamped and converted to new technologies to use biodegradable and

non-toxicsolutions.

A new vacuum gasoil hydro treatment unit together with a new alkylation unit and a related butane isomerization units were

built.

New sulphuric acid production units and a hydrogen production unit were built, and the corresponding facilities

upgraded.

Hydro treatment units upgrade undertaken in 2008 made it possible to produce diesel fuel with sulphur content of 50 ppm (Euro 5), thereby meeting new European export specifications.

The new visbreaking unit was commissioned in July 2004.

The diesel hydro treatment unit was upgraded in 2007 to supply diesel fuel with lower sulphur content for the export and

domestic markets.

The group is considering implementing further investment projects at saratov Refinery to increase production and to make sure the refinery is ready to meet new product

specifications to be established.

nizhnevartovsKoe neftePereraBatyvayuschee oBedinenie

KrasnoLeninsKiy neftePereraBatyvayuschiy zavod

share of the group’s total refining volume in 2008

6% 1%

Effective capacity (1) 1.4 million tons 0.15 million tons

Refining throughput (2) 1.34 million tons 0.145 million tons

year of commissioning 1998 1998

location advantages located in Western siberia in close proximity to the group’s upstream assets.

located in Khanty-Mansi Autonomous Region at the 39th kilo-meter of the federal Nyagan – Khanty-Mansiysk motorway.

Product mix Produces light fractions such as straight-run gasoline, gasoil and kerosene. A by-product is stabilised oil which is returned to the oil pipeline system.

investment projects The aim of investment is to increase the refinery’s operational safety, to sustain its existing capacity and implement targeted busi-ness improvements.

1 Maximum technical capacity in terms of input (without overhauls).2 Utilization rates in terms of input.


saLes,� trading and LogisticsThe group manages the entire cycle of the supply of crude oil and petroleum products to international and domestic markets. it also manages the supply of crude oil to its refineries and petroleum products to its marketing subsidiaries. Eight different types of crude oil and over 40 different types of refined products are optimized across numerous sales channels in six different geographical zones reaching over 250 different consumers.

in 2008, crude sales amounted to 41.2 million tons, of which 81.7% was exported (including to Cis countries) and 18.3% sold domestically. Petroleum product sales reached 29.6 million tons in 2008, including exports of 17.3 million tones (in particular, to Cis countries).

The logistics and transportation optimization process involves almost all types of transportation, including river transportation, where the group applies the highest standards in the industry and uses only internationally certified vessels for river operations. Ninety percent of produced crude oil is transported to over 50 different destinations via the Russian national crude oil pipeline network operated by Transneft. Export pipeline capacity is limited pro-rated to the company’s share in total Russian crude oil production. in 2008, the group actively pursued East-bound crude delivery routes (such as Kyrgyzstan, Kazakhstan, China), and assured first deliveries of oil produced by oJsC verkhnechonskneftegaz, a joint venture between TNK-BP Holding group and Rosneft.

The group delivers a variety of different grades of petroleum products through the product pipeline network operated by the state-owned company Transnefteproduct to such regular consumers as sheremetyevo and domodedovo airports. in 2008, the group commenced deliveries of 10 ppm diesel fuel to Primorsk via a new pipeline, thus accessing a new sales channel.

over 500,000 rail cars are used each year to transport the remaining volumes of refined products, including specialized cars that are used for gas and high-pressure products.

30


31

MarKetingin 2008, the TNK-BP Holding group continued to pursue its growth strategy on the Russian oil products market. in 2008, domestic petroleum product sales totalled 12.3 million ton; in particular, aggregate retail sales reached 7.5 million tons. Retail sales grew by 10.3% from 2007.

The group employs a wide range of distribution channels to sell its products to retail and wholesale consumers. Practically all gasoline and about 36% of diesel fuel produced by group’s refineries in Russia are sold by its regional subsidiaries either through retail networks (including jobbers, which are third-party companies who sell our fuel and carry our brand provided they comply with our quality requirements for products and services), or by small wholesale channels directly from oil depots. All other group petroleum products are sold directly to large wholesale customers.

The group’s retail network covers 20 Russian regions in the North-Western, Central, volga, southern and Urals federal districts, with 61 oil depots and more than 1,000 retail sites.

Product sales via own network grew by 51.3% in 2008 compared to 2007, reaching 3.17 million tons.

2007 2008

TNK oWN siTEs

TNK JoBBERs siTEs

oTHER JoBBER siTEs

404

208

125

171

496 688

1000

800

600

400

200

0

the tnK-BP hoLding grouP’s retaiL networK


32


33

in the retail business, the group plans to focus its investment activities on the development of own retail sites located in the Moscow and the Moscow Region. The group’s strategy in the Moscow Region includes expansion of the customer base by promoting the high quality of products and service, expanding and optimizing the group’s retail network, and increasing income from sales of fuel and consumer goods.

Beyond Moscow and the Moscow Region, the group will continue to work on expanding its retail network and improving its market share. We can achieve this by expanding cooperation with jobbers in the regions and increasing our presence in regional markets. The jobbers who carry our brand only sell products purchased exclusively from the group’s refineries.

in 2008, we continued rebranding of the TNK retail sites to optimize their market positioning. Rebranding involved changing the sites’ exterior by adding an orange color, installing advanced equipment, and expanding the range of products and services offered at convenience stores and cafes. As of the end of the reporting period, over 330 TNK sites have undergone renovation. At the same time, a broad advertising campaign was undertaken to improve the TNK brand image, with a focus on promoting defensive driving and safe, responsible behavior on the road.

in 2008, the group launched its TNK-branded non-freezing screen wash fluid.

The group believes that strict compliance with quality standards for goods and services is a key factor in successful development of the retail business. Therefore, the group implements a comprehensive quality control system, which includes: product sampling during railway shipment, fuel testing in independent laboratories, a strict fuel acceptance procedure at retail sites, regular and spot checks of fuel delivered by tank trucks, a four-tier filtering system at retail sites, a quality issues hotline, and fuel quality control in mobile laboratories.

The group also aspires to enhance its business in the area of direct supply to major wholesale customers. in particular, 2008 accomplishments include: commencement of jet fuel sales via a dedicated channel, launch of a ship fuel sales program at bunker markets in Russia`s North-West and south; through its efficient pricing policy and implementation of a winter storage program the group became one of the leaders in bitumen sales in European Russia.

The group is one of the key suppliers to the Moscow retail market as well as other markets, and aims to strengthen its position. in 2008, the TNK-BP Holding group started to expand its retail network to st. Petersburg.

By the end of 2008, 13 retail sites were opened in st. Petersburg, with further network expansion plans in place.

MosCoW REgioN

RyAzANNEfTEPRodUCT

TUlANEfTEPRodUCT

KAlUgANEfTEPRodUCT

KURsKNEfTEPRodUCT

KAREliANEfTEPRodUCT

yARoslAvl REgioN

sT. PETERsBURg

sARATovNEfTEPRodUCT

TNK-soUTH (RosTov)

zAPsiBNEfTEPRodUCT

URAls oil CoMPANy

Product retaiL saLes By regionaL suBsidiaries

of the tnK-BP hoLding grouP in 2008

13%

4%

6%

2%

8%

5%

5%

24%

10%

3%

5%

15%

34

TNK-BP HoldiNg // 6. СОЦИАЛЬНЫЕ ИНВЕСТИЦИИ

PERsoNNEl dEvEloPMENT7

reMunerationThe group’s system of employee incentives is based on assessing individual performance and overall group performance, and further factors in the general rates of pay in the industry.

Wage levels in the labor market in Russian regions and across the industry as a whole are constantly reviewed by the group in order to ensure that employee remuneration continues to be competitive and will attract new highly qualified professionals. seeking to receive reliable labor market information, the group initiates salary and compensation surveys in its regions of operations.

sociaL suPPortThe group provides employees with a comprehensive set of social benefits, the extent and design of which are benchmarked against the competition to ensure a competitive package. The benefits currently include:

Participation in an employee-contributed private pension program, in place since January 2008. The program is expected to bring about a significant increase in the non-governmental pension amount. Under this new program, 7,500 Company employees signed participation contracts with TNK-vladimir Private Pension fund in 2008;

Private medical insurance (voluntary medical insurance);

Health resort treatment;

other social benefits, guarantees and compensations in accordance with a collective agreement.

training and deveLoPMentThe group offers its employees a wide range of opportunities for career growth and professional development. its training system brings together corporate programs for developing and enhancing technical and functional skills, leadership development programs, and programs for the introduction of new business processes. The group has created more than 250 internal corporate training programs.

A number of targeted professional training programs in the key areas of group operations have been established and are developing:

Three-year «young drillers» program;

«Current and Capital Well Workover supervisors» program;

«Refining Project Teams» program;

«Power Engineers» program;

«Environment Protection» program;

«integrity Management» program;

Corporate program of individual technical expertise and skills development.

The following leadership development programs are in place:

«Three Horizons» for young specialists;

«Perspective» for entry-level managers;

several other programs («Asset Managers», «New Height», «AssET») for mid-level managers.

The group is working closely with leading Russian universities and professional schools to develop the next generation of professionals with the knowledge and skills required for the modern oil and gas industry.

The following projects were implemented in 2008, within the University Partnering Program:

second TNK-BP grants Contest for Russian oil and gas Universities.

Royal Holloway University of london launched a Master’s degree program in oil and gas geosciences on the basis of the geology and oil & gas Professional Training and Enhancement Center of the Tyumen state oil and gas University.

the «Blue Collar Training system improvement at TNK-BP Regional Training Centers».

34

TNK-BP HoldiNg // 7. PersonneL deveLoPMent

35

THE gRoUP is PURsUiNg A sTAff dEvEloPMENT sTRATEgy AiMEd AT MAiNTAiNiNg ANd dEvEloPMENT THE ExisTiNg oRgANizATioNAl CAPABiliTy foCUsiNg oN disCiPliNEs CRiTiCAl To THE BUsiNEss. iN 2008, TNK-BP HoldiNg ANd All iTs sUBsidiARiEs EMPloyEd APPRoxiMATEly 63,000 PEoPlE.



soCiAl iNvEsTMENTs8


36

The TNK-BP Holding group seeks to be a responsible corporate citizen of Russia, making a noticeable contribution to improvement of the country’s competitiveness, facilitating social and economic development of the regions where is operates and being a reliable partner for government and public organizations in generating a stable and favorable social environment.

To this end, the group implements extensive multi-target external and internal social investment programs.

in 2008, the group spent approximately $95 million on external social programs on a federal and regional levels and about $76.5 million – on social programs targeted at staff.

External social investments are implemented in the form of funding socially significant infrastructure in the regions of the TNK-BP Holding group’s operations, supporting social facilities and institutions, and long-term programs and projects assuring progressive development and social wellbeing of these regions.

in 2008, the funds allocated by the group for Russia-wide programs were implemented in five key areas:

support for vulnerable social groups.

Bringing up a healthy new generation.

support for education and opening up young people’s potential.

Preservation of Russia’s cultural and historic heritage.

implementation of public environmental programs.

The companies of the TNK-BP Holding group sign cooperation agreements with local administrations in the regions of operation on an annual basis and sign similar agreements with various municipal administrations in these regions.

Within the framework of these agreements, various targeted programs were implemented at the regional level, aimed at settlement of both general, acute social problems (in particular, expansion and improvement of social infrastructural institutions, construction of roads, etc.) and dealing with other issues specific to each region (e.g. aid to ethnic communities of indigenous people).

The TNK-BP Holding group’s partners in the implementation of social and charity programs are nonprofit organizations and charity foundations whose high level of performance under the programs is confirmed by extensive feedback from the end beneficiaries.

information on social programs targeted at the Company’s employees is contained in the Personnel development section of this report.

TNK-BP HoldiNg // 8. sociaL investMents

37

soCiAl REsPoNsiBiliTy liEs AT THE foUNdATioN of ANy sUsTAiNABlE dEvEloPMENT sTRATEgy. THE TNK-BP HoldiNg gRoUP RECogNizEs THAT A sUCCEssfUl BUsiNEss sHoUld REly oN CooPERATioN WiTH All sTAKEHoldERs ANd sUPPoRT sUsTAiNABlE soCiAl ANd ECoNoMiC dEvEloPMENT of THE soCiETy.

grouP sociaL investMent governance PrinciPLes

The group’s social investments shall correlate with its business scope and development strategy.

The group shall implement programs that are congruent with its corporate policy, standards and procedures, and that make it possible to achieve a tangible and measurable social effect.

The group shall assure transparency and public reporting in implementing its social investments.

The group shall use its social investments in strict compliance with applicable laws and shall not allow their use for political purposes.


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39

RisK MANAgEMENT ANd iNTERNAl CoNTRol9


the internaL controL systeMTNK-BP Holding group’s internal control and internal audit system underpins the preparation of the group’s financial statements and business operations and reliability of the financial statements produced by group entities. The internal control system has been developed in accordance with the methodology of the Committee of sponsoring organizations of Tredway Commission (the Coso framework).

for all of its key business processes the group ensures that processes are aligned with the internal control framework, and that appropriate controls are tested and documented.

in 2008, TNK-BP Holding group completed a comprehensive internal control improvement project (iCP), taking advice from internationally recognized consulting firms. The iCP project helped identify deficiencies in our internal control system and remediate them. iCP team also focused on computer controls, regarding it an important area of internal control system's integrity.

internal Control department is responsible for monitoring compliance with the internal control procedures. The team performs risk-based analyses of key business processes and control across the group on an annual basis. during 2007-2008, the team implemented a sustainability plan which was aimed to ensure regular updates and assessments of the internal control system and related processes with a view to ascertain their operating efficiency. fast-response internal control teams were also established within Business streams to support the functioning of regular self-assessment, internal control system testing and risk review processes.

in 2007-2008, we analyzed over 90 business processes in 9 of the group’s regions of presence. This effort, undertaken jointly with process owners, included formalization of processes and identification of key existing controls.

The internal Control team supports a permanently functioning system of advice on internal control matters and best practices. Training is provided to business owners, accountants, internal auditors and managment.

A system of independent back offices has been established at TNK-BP Holding group entities to ensure efficiency of the contracting processes. Back office personnel are trained in independent control and monitoring so that they perform these functions in the contracting activities at the regional and Corporate Center levels. starting from 2007, back offices have been complemented by a comprehensive credit control function which comprises the Corporate Credit Committee and stream Commissions. Based on a uniform methodology, the Commissions grant and monitor implementation of credit limits depending on counterparty credit standing. This effort further extends onto the monitoring and control of accounts payable. Reports describing compliance with the contracting procedures and credit risks are submitted to the Top Executives on a regular basis.

internaL auditduring 2008, we continued improving TNK-BP Holding group’s internal audit function core capabilities, level of competence and effectiveness. in the reporting year, the internal Audit function focused its efforts on internal control procedures embedded in key processes, and also developed a multi-year audit program based on the Audit Universe of business processes and risks. This effort is critical for the support of the internal control sustainability program, initiated within the iCP project framework. The results of complementing the internal Control function with internal audit reviews brings significant improvements in the financial and managment reporting quality.

enterPrise-wide risK ManageMent systeMimplementation of the Enterprise-Wide Risk Management system (EWRM) enhances internal control efficiency and quality of business decisions through systematic review and mitigation of major business risks. The risk management system has become an integral element of TNK-BP Holding group’s corporate governance, five-year and annual planning processes and performance assessments.

The risk management system’s regulatory and methodological framework includes the Enterprise-Wide Risk Management system standard approved in January 2006, and the Procedure for Enterprise-Wide Risk Management adopted in July 2007. These documents were developed in course of extensive discussions with risk owners, key executives and representatives of all streams and functions with a view to formulate and explain a uniform group-wide approach and methodologies employed in the risk identification, management and mitigation activities, and in risk status reporting.

The EWRM implementation exercise focused on building a risk management culture through:

understanding of the nature of risks, and financial and reputational consequences of their occurrence;

identification of factors which may trigger occurrence of a particular risk;

development and implementation of appropriate risk management and/or mitigation action;

regular reporting on risk changes and risk management and mitigation action status.

The corporate risk portfolio is updated regularly to reflect changes in the business environment and is reviewed by the Policies and Compliance Committee as a comprehensive quarterly corporate risk status report. Review and management of operational risks is the responsibility of the operations Committee, whereas review and management of any risks associated with investment programs is the responsibility of the Corporate investment Committee.

A desired outcome is defined for each corporate risk which is to be accomplished through the implementation of appropriate risk management action plans. The status of plan delivery is monitored on a quarterly basis as part of stream / function Performance Reviews which are an element of the group’s wider performance management system. increased cooperation among risk owners aims to assure accurate evaluation of risk significance, development of risk response strategies and coordination of action taken by various units to respond to specific risks.

TNK-BP HoldiNg // 9. risK ManageMent and internaL controL

iNfoRMATioN PoliCy10


40

in its information policy, the TNK-BP Holding group adheres to the following underlying principles:

regular and timely communication of the group information as required by law;

accessibility of such information to shareholders and other interested parties;

reliability and completeness of such information;

right balance between the group’s transparency and commercial interests;

proper protection of information that constitutes commercial or corporate secret; control over the use of insider information.

The TNK-BP Holding group ensures timely and accurate disclosure of information on all material matters of its operations, complying with statutory requirements applicable in the Russian federation, and disclosing additional information on a voluntary basis.

The TNK-BP Holding group employs a variety of information disclosure channels; in particular, it provides information and materials in response to shareholders’ inquiries, discloses information in the Russian and international media, discloses information on its corporate web-site, publishes press releases, presents information at conferences and other public events, and responds to written inquiries by interested parties.

TNK-BP Holding provides shareholders with all material information on each general shareholders’ Meeting agenda item during preparation for and holding of such meetings, and is stiving to do so before the deadlines envisages by law.

Every year, the TNK-BP Holding group publishes its Annual Report to shareholders which describes key areas of the group’s operating and financial activities, and provides an economic analysis of the reporting year’s results.

The website, www.tnk-bp.ru, is an important source of information about the TNK-BP Holding group and an effective communication tool. The website is used to promptly publish the group’s news, disclose details of the TNK-BP Holding group governance bodies, shareholding structure, statements of material facts, annual reports of TNK-BP Holding and subsidiaries, Charters and internal documents, annual financial statements, information on affiliated persons, and regularly updated information on key operating and financial indicators.

TNK-BP HoldiNg // 10. inforMation PoLicy

41

THE TNK-BP HoldiNg gRoUP’s iNfoRMATioN PoliCy is dEsigNEd To ENsURE EAsy ANd UNREsTRiCTEd ACCEss To THE iNfoRMATioN CoNCERNiNg THE gRoUP’s oPERATioNs foR sHAREHoldERs ANd oTHER iNTEREsTEd PARTiEs.

4343

CoRPoRATE govERNANCE iN TNK-BP HoldiNg11


PrinciPLes of corPorate governance

The strategy pursued by TNK-BP Holding highlights the importance of continuous corporate governance improvement in building a world-class Russian company.

TNK-BP Holding views corporate governance as an important driver for improving its performance and attractiveness to investors, strengthening its business reputation, increasing the Company value, and acting to the benefit of its shareholders.

Principles underlying the system of corporate governance at TNK-BP Holding are:

Recognition and protection of all shareholders’ interests and rights.

Accountability of management to TNK-BP Holding’s shareholders and the board of directors.

Timely and reliable disclosure of information concerning all aspects of the TNK-BP Holding’s activities related to its performance, risks, and financial condition.

Recognition by TNK-BP Holding of the rights and interests of other interested parties besides shareholders and observance of their rights based on principles of fair and responsible relations.

TNK-BP Holding in its activities follows the standards of corporate governance set out in the Russian Corporate Code of Conduct approved by the Russian federal service for financial Markets.

corPorate governance iMProveMentin 2008, significant changes were made to TNK-BP Holding corporate governance system, which signify the Company’s transition to a new level of development.

Changes in 2008 affected the principles underlying appointments of the TNK-BP Holding Board of directors and Board membership. To improve the quality, efficiency and balance of the Board decisions, the Board now comprises four representatives from each of the Company’s main shareholders (i.e. BP and AAR (Alfa group/Access industries/Renova) Consortium) and one independent director. The Board member elected as an independent director must qualify under the independence criteria provided in the Russian Code of Corporate Conduct.

in the reporting year, changes were made to the TNK-BP Holding Board terms of reference. Appropriate changes are reflected in the Restated Charter of TNK-BP Holding.

furthermore, some changes were made in 2008 to the corporate governance practices of oJsC TNK-BP Management, the managing company of TNK-BP Holding.

The Board of directors was eliminated from TNK-BP Management’s system of governance bodies; the Management Board’s terms of reference were revised. New authorities of the Management Board include approval and implementation of changes to TNK-BP Holding business plan, preliminary approval of and changes to the Company’s staff numbers, approval of TNK-BP Management’s Codes and Corporate standards, establishment and dissolution of TNK-BP Management and TNK-BP Holding Corporate Committees, and a number of other functions (see «Managing Company – oJsC TNK-BP Management»).

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The number of the Management Board members was reduced to six, which now include: TNK-BP group CEo; chief operating officer, chief financial officer and executive directors.

All appropriate changes were implemented in the Restated Charter of TNK-BP Holding, approved by the Extraordinary general shareholders’ Meeting on december 22, 2008, and in the Restated Charter of TNK-BP Management, approved by the sole shareholder’s resolution on december 22, 2008.

The next steps in the implementation of the new corporate governance system in TNK-BP Holding will be:

to align the Company’s internal documents, which regulate the proceedings of its governance bodies, with the recent changes in the corporate governance system;

to align the managing company’s system of internal documents with the recent changes;

to align the managing company’s system of Corporate Committees and respective regulations, and executive job descriptions, with the recent system changes;

to keep the Board members and Company personnel informed of the new corporate governance system.

Board of directors

Pursuant to the requirements of the federal law on Joint-stock Companies and TNK-BP Holding Charter, the Board of directors is elected by the Annual general shareholders’ Meeting to serve for one year.

The Company Board terms of reference provided in the Restated Charter differ significantly from those applied earlier. firstly, the Restated Charter introduces the concept of Key subsidiaries, i.e. companies, which hold the most significant assets of key importance to all group business processes. Consequently, the TNK-BP Holding Board’s powers in respect of Key subsidiary activities are different from those in respect of other Company subsidiaries. secondly, the Restated Charter provides for a higher transaction value threshold triggering the requirement for the TNK-BP Holding Board endorsement: now set to over Us$100 million. Thirdly, the Company Charter contains a list of TNK-BP Holding internal documents, which are subject to the Board’s approval. furthermore, the Restated Charter sets out in more detail the Board’s role in the protection of Company and subsidiaries’ assets.

The current Board line-up was elected at the Extraordinary general shareholders’ Meeting of TNK-BP Holding on december 22, 2008. The Board of directors comprises one independent director and four representatives from each of the two main Company shareholders. david R. lasfargue was elected as the independent director. BP is represented on the Board by P. Kitson, g. Warnsby, s. sloan, and P. Charow. AAR representatives on the Board of directors are A. Akimenko, P. Nazarian, i. Cheremikin, and A. savchenko.

TNK-BP HoldiNg // 11. corPorate governance in tnK-BP hoLding

With the exception of i.v. Cheremikin, none of the Board members holds any shares in TNK-BP Holding. i.v. Cheremikin holds 0.0000000184% of TNK-BP Holding common stock.

None of the Board members is related to any person serving on TNK-BP Holding management bodies and/or financial and business control bodies.

Board members were not paid any compensation in 2008.

This section contains information on OJSC TNK-BP Holding as a standalone legal entity (referred to in this An-nual Report as “TNK-BP Holding” or “the Company”) only and does not refer to the TNK-BP Holding Group at large (i.e. OJSC TNK-BP Holding with subsidiary/affiliate companies).

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TNK-BP HoldiNg // 11. corPorate governance in tnK-BP hoLding TNK-BP HoldiNg // annuaL rePort 2008

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cheremikin,� igor vladimirovich CHAiRMAN of THE BoARd of diRECToRs siNCE 2009 NoN-ExECUTivE diRECToR BoARd MEMBER siNCE 2008

akimenko,� anatoly dmitrievich NoN-ExECUTivE diRECToR BoARd MEMBER siNCE 2008

Born in 1972.

graduated from the Military Academy of Economics, finance and law with a diploma in law.

director, legal issues, of Renova Management Ag Branch since 2008. Responsibilities include legal support of businesses, general counseling and corporate procedures within Renova group of Companies.

in 1994 through 2001, occupied various positions with the Ministry of foreign Affairs for the Russian federation. in 2001 – 2003, worked for TNK group of Companies in various managerial roles. in 2003-2004, he was director, legal department, of Renova Consulting services limited Representative office. in 2005-2008, director, legal, of Renova Management Ag.

Born in 1955.

graduated from the geography department of lomonosov’s Moscow state University with a diploma in Economic geography, and from lomonosov’s MsU department of Economics with a diploma in Economic Cybernetics. Candidate of geographic science (1987).

since 2001, vice-President, New Projects, at Access industries. in 2002 – 2007, Managing Partner and member of supervisory Council at «Bogatyr Trans» (Kazakhstan). in 2005 – 2007, member of svyazinvest Board of directors. since 2007, member of Comstar oTs Board of directors. since 2009, Chairman of the supervisory Council and Managing Partner of Mega Page.

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Kitson,� Paul Lindsey NoN-ExECUTivE diRECToR BoARd MEMBER siNCE 2008

Lasfargue,� david rodolphe iNdEPENdENT diRECToR BoARd MEMBER siNCE 2008

Born in 1960.

graduated from the University of liverpool with a degree in Russian language and literature. qualified as a Chartered Management Accountant and as a Corporate Treasurer.

Joined BP in 1987. Currently works with BP as project manager, financial manager.

in 1998, was advisor to vice-President, finance at sidanco. from 2001 to 2004, was first vice-President of lukarco Bv, BP’s joint venture with lUKoil. since 2004, has been a representative of BP for the TNK-BP joint venture. other experience includes Corporate finance, Banking Relations, Mergers and Acquisitions, and Treasury operations.

Born in 1971.

graduated from the University of lyons iii with «Magistere de juriste d’affaires», l.l.M. in Business and Taxation law («dJCE»). Post graduate degree in business law («dEss»), Post graduate degree («dEA») in history of law and public institutions in 1995. Member of the Paris Bar since 1994.

since 2001, has been head of gide loyrette Nouel vostok in Russia. Partner of gide loyrette Nouel since January 2006.

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TNK-BP HoldiNg // annuaL rePort 2008 TNK-BP HoldiNg // 11. corPorate governance in tnK-BP hoLding

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nazarian,� Pavel viktorovich NoN-ExECUTivE diRECToR BoARd MEMBER siNCE 2008

savchenko,� alexey vladimirovich NoN-ExECUTivE diRECToR BoARd MEMBER siNCE 2008

Born in 1972.

graduated from the Bauman’s Moscow state Technical University, holder of Masters in Engineering, specializing in «optical instruments and systems»; from Moscow international Marketing and Management Academy holder of Masters of Economics, with honors; «senior Executive» and «Mergers & Acquisition» programs at london Business school and «Corporate Restructuring», «Mergers & Acquisitions», «financial instruments & Markets» and «valuation» programs at Harvard Business school.

since 2002 has been director of Headquarters of Alfa finance Holdings s.A. (luxembourg) and secretary of its Board of directors. Managing director of the entire international chain of its subsidiaries outside Cis, supervising international compliance, administration, shareholders structure and relationship with local authorities.

Member of the Boards of directors of Alfa Bank (Kazakhstan) and Alfa Asset Management group (Russia). Chairman of the Board of directors of Alfa Capital Holdings (Cyprus) limited. Member of supervisory Boards of Alfa Bank (Ukraine), Alfa Bank (Belarus) and Amsterdam Trade Bank (Netherlands). Member of Advisory Board of great Circle fund (UsA).

Born in 1971.

graduated from the department of Chemistry of lomonosov’s Moscow state University with a diploma in Petroleum and organic Catalysis Chemistry. in 2003 received his MBA degree at iMd Business school in switzerland.

from 1997 to 2005 was Principal, Project director and consultant at The Boston Consulting group (BCg).

in 2006, was Partner at RosExpert Executive search (RosExpert). from 2006 to 2008 was director, strategy and organizational development, Administrative director at Rdi group (llC Rdi group). since 2008, has been director, strategic Planning at CTf Consultancy limited.


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51

sloan,� richard scott NoN-ExECUTivE diRECToR BoARd MEMBER siNCE 2008

warnsby,� grant darren NoN-ExECUTivE diRECToR BoARd MEMBER siNCE 2008

Born in 1964.

graduated from Colgate University (Hamilton, New york, UsA) with a B.A. in Economics, and from the University of Chicago with an M.B.A.

Appointed Cfo of BP Russia in 2009.

formerly, a management consultant at PriceWaterhouseCoopers. Before 2000, held a variety of roles with BP. from 2000-2003, director BP Mergers and Acquisitions focused on Asia, Russia, Kazakhstan and south America. from 2003-2005 Commercial Manager for BP’s North American Exploration organization. from 2005-2009 was Chief financial officer of BP North Africa overseeing, among other things, Algerian and libyan investments; also, board member of in salah gas service limited, a company involved with the marketing of Algerian gas into the European marketplace, and a director of the Medgaz pipeline project.

Born in 1973.

graduated from Keele University (UK) with degrees in law and Management science; later, became a barrister. qualified as a chartered accountant.

since 2008 holds the position of BP Russia senior legal Advisor. Prior to this he held various positions in BP and other multi-national organisations. in 2006 served as legal Manager in the Castrol lubricants business. in 2007 to 2008, worked in JsC «TNK-BP Management» legal support department.

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Composition of the Board of directors elected at the Annual general shareholders’ Meeting on 15 June 2007, re-elected at the Annual general shareholders’ Meeting on June 26, 2008 and active until december 22, 2008: i.v. Maidannik (Board Chairman), s. Truman, R.M. Bezrukov, K. sliger, P. Henshaw, R. Herbert, B.P. Kondrashov, A.A. gorshkov, P. smith.

MaidanniK,� igor vLadiMirovich CHAiRMAN of THE BoARd of diRECToRs iN 2005 THRoUgH 2008.

Born in 1965.

in 1987 graduated from Moscow state University with a degree in jurisprudence.

since 2003 holds the position of oJsC TNK-BP Management Executive vice President, legal, and member of the Management Board of oJsC TNK-BP Management. in 2003, Maidannik was the head of the oJsC TNK Management» legal unit and member of the oJsC «Tyumen oil Company» Management Board. from 2003 until 2005, Maidannik was member of oJsC «Tyumen oil Company» Board of directors, and from 2002 until 2003 he was on the oJsC orenburgneft Board of directors.

truMan,� steve MEMBER of THE BoARd of diRECToRs iN 2007 THRoUgH 2008.

Born in 1948.

in 1973 graduated from the University of British Columbia (vancouver, Canada), Bachelor of law.

in 2007-2008, he was oJsC TNK-BP Management vice-President, international law. in 2005 to 2007, Manager, gas Business legal support department, oJsC TNK-BP Management. Prior to this, he held a variety of positions in BP and has a wide international experience. in particular, in 2001 to 2003 he served as BP’s Regional legal issues Counsel in China; in 2003 to 2005, as BP’s senior Counsel in Kazakhstan.

since 2007 Member of the Board of directors of JsC «Chernogorneft», oJsC TNK-Nizhnevartovsk, «Nizhnevartovskoe Neftepererabatyvayuschee obedinenie» llC, JsC «Td «TNK» MiP», JsC «TNK-stolitsa», oJsC saratovnefteproduсt, oJsC «Nizhnevartovskneftegaz», JsC «yugraneft Corporation», oJsC «Uvatneft», JsC «Tulanefteprodukt», «Kurskoblnefteproduct» llC, CJsC «south Region», «CJsC syRACUsE». in 2007-2008, he was member

of CJsC «Promkataliz» Board of directors and Chairman of CJsC «iRCol» Board of directors; he is member of the latter's Board since 2008. in 2007-2008, he also was member of oJsC «Ural oil Company» and «zapsibnefteprodukt» Boards of directors.

BezruKov,� roMan MiKhaiLovich MEMBER of THE BoARd of diRECToRs iN 2006 THRoUgH 2008.

Born in 1969.

in 1993 graduated from the international law department of MgiMo.

since 2004 holds the position of oJsC TNK-BP Management vice President, Mergers and Acquisitions legal support. director of JsC «TNK-BP Management» international legal department from 2003 until 2004. Head of the JsC «Tyumen oil Company» Corporate law department from 1998 until 2003. Member of the Board of directors of JsC «Tyumen oil Company» from 2004 until 2005.

sLiger,� Kris MEMBER of THE BoARd of diRECToRs iN 2005 THRoUgH 2008.

Born in 1961.

graduated cum laude from Chicago High school (illinois) with an MBA in Economics, finance and international Business. graduated cum laude from Texas University (Austin, Texas) with a Bachelor of science diploma in Petroleum Production Engineering.

since 2003 holds the position of oJsC TNK-BP Management Executive vice President, strategy and New Business development; member of the Management Board of oJsC TNK-BP Management since 2004. Prior to joining TNK-BP Management, he held a variety of management positions in BP and has an extensive background in the energy industry. from 2000 until 2003 he was BP’s vice President for Planning, strategy and Portfolio investment. K. sliger also served as the vice President of the gulf of Mexico shelf Business Unit.

Member of oJsC «severnoeneftegaz» Board of directors since 2008. Member of JsC «orenbourggeologia» Board of directors in 2004-2007. Member of the Boards of directors of JsC «Tyumen oil Company» and JsC «sidANCo» in the period from 2003 until 2005. from 2003 until 2004, Kris sliger was a member of oJsC TNK-BP Management Board of directors.


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charow,� Peter anthony NoN-ExECUTivE diRECToR BoARd MEMBER siNCE 2008

Born in 1954.

graduated from swarthmore College with a degree in Political science; holds M.A. degrees in Political science from Columbia University and Harriman institute. Took a course as a fullbright scholar at the leningrad state University. He also holds an Executive MBA from the Tuck school of Business of dartmouth College (UsA).

since 2008, he has been BP vice-President for Russia and Kazakhstan, with responsibility for strategy, risk management and strategic communications for BP's Russian business. from 2002-2005 was President of BP Russia. in 1994-1997 he founded and led the American Chamber of Commerce in Russia.

since 2007, Mr. Charow is an independent director on the Board of Magnitogorsk iron and steel Works. He also is deputy Chairman of the Mariinsky Theater Charitable Trust in london.

With the exception of R.M. Bezrukov, none of the Board members holds any shares in TNK-BP Holding. R.M. Bezrukov holds 0.0000000184% of TNK-BP Holding common stock.

None of the Board members is related to any person serving on TNK-BP Holding management bodies and/or financial and business control bodies.

Board members were not paid any compensation in 2008.

TNK-BP HoldiNg // annuaL rePort 2008 TNK-BP HoldiNg // annuaL rePort 2008

henshaw,� Peter MEMBER of THE BoARd of diRECToRs iN 2005 THRoUgH 2008.

Born in 1952.

in 1974 graduated from Melbourne University, Bachelor of law.

from 2003 held the position of oJsC TNK-BP Management vice President, Communications and Public Affairs. Prior to joining TNK-BP Management, he served as the director of External Relations at BP Trading, Moscow, from 2000 until 2003.

Member of the Board of directors of oJsC TNK-BP Management since 2004. Member of the Board of directors of JsC «Media-Holding «Western siberia» since 2006. since 2008, he has also been Board member of llC «TNK-BP Businesservice», oJsC «Nizhnevartovskneft», oJsC «Belozerneft», oJsC «samotlorneft», oJsC «Priobneft».

herBert,� richard MEMBER of THE BoARd of diRECToRs iN 2006 THRoUgH 2008.

Born in 1958.

graduated from Bristol University (UK) with a Bachelor of science degree in geology. Member of the london geological society and the American Association of Petroleum geologists (AAPg).

in 2006-2008 he held the position of JsC «TNK-BP Management» Executive vice President, Technology. JsC «TNK-BP Management» vice President, Exploration, in the period from 2003 until 2006. Prior to joining «TNK-BP Management», he held a variety of management positions in BP and has an extensive background in the energy industry. in particular, he served as the Head of the Wytch farm production unit, BP, Aberdeen, from 2001 until 2003.

Chairman of the Boards of directors of oJsC «Uvatneft», oJsC «suzun», oJsC «Russko-Rechenskoye», «Tagulskoe» llC, JsC «gubernatorial Resources Company» from 2006 until 2007; in 2004-2005, Board member of llC «TNK-Uvat», Board Chairman of llC «TNK-Uvat» and oJsC «Payakha» in 2005-2007. Also, Chairman of the Boards of directors of oJsC varyoganneftegaz and oJsC orenburgneft in 2004-2008. in 2004-2007, Board member of JsC «orenbourggeologia». Member of the Board of directors of JsC «Tyumen oil Company» from 2003 until 2005.

Kondrashov,� Boris Petrovich MEMBER of THE BoARd of diRECToRs iN 2005 THRoUgH 2008.

Born in 1957.

in 1978 graduated from sverdlovsk law institute with a degree in legal science. doctor of legal sciences, Professor, state Justice Counselor of the first degree, Retired Police Major general. Awarded defender of free Russia and outstanding service Medals of the second and Third degree, «distinguished Employee of the Ministry of internal Affairs» lapel badge.

since 2003 holds the position of oJsC TNK-BP Management Executive vice President, security, and is a member of the Management Board of oJsC TNK-BP Management since 2003. Head of oJsC TNK-BP Management security in 2003, member of the Management Board of oJsC TNK-BP Management from 2002 until 2003. Head of the security function, first vice President and Member of the Management Board of JsC «Tyumen oil Company», for more than 19 years, B. Kondrashov worked in law enforcement agencies and ultimately held the post of deputy Minister of Justice, Chief Bailiff of the Russian federation. from 1990 to 1993, he was elected People`s deputy of the Russian federation and a member of the supreme soviet of the Russian federation, as well as deputy Chairman of the law and order and Crime Countering Parliamentary Committee.

Member of the Board of directors of JsC «Tyumen oil Company» and JsC «sidANCo» from 2003 until 2004.

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gorshKov,� aLexander aLexeevich MEMBER of THE BoARd of diRECToRs iN 2005 THRoUgH 2008.

Born in 1946.

graduated from Kolomna state institute and the financial Academy under the Rf government on completing a special course in Banking. distinguished employee of Russian culture.

since 2003 holds the position of vice President, Russian government Relations, at oJsC TNK-BP Management. served as acting head of oJsC TNK-BP Management support services in 2003. from 2002 until 2003: Project Manager, geology and oil and gas Production, JsC «Tyumen oil Company»; from 2001 through 2002 director, government Relations department, JsC «Tyumen oil Company».

Member of the JsC «sidANCo» Board of directors from 2004 until 2005, Chairman of the oJsC «Uvatneft» Board of directors and member of the JsC «Radonezh Petroleum» Board of directors from 2003 until 2006.

PauL sMith MEMBER of THE BoARd of diRECToRs iN 2007 THRoUgH 2008.

Born in 1971.

graduated with first class honors from Herriot Watt University in Edinburgh (scotland) with a Bachelor’s degree in Business organization and the Chartered institute of Marketing (UK) in Marketing.

since 2007 holds the position of BU vostok leader, oJsC TNK-BP Management. Prior to joining oJsC TNK-BP Management, he held a variety of management positions in BP’s operational and commercial units and has an extensive international background. in 2004-2007 held the position of Chief Manager of the North sea PU, BP, Aberdeen, scotland; in 2002-2004: Commercial director, BP, Trinidad and Tobago. from 2001 to 2002: Chief Manager of BP Upstream projects, Trinidad and Tobago.

in 2007-2009, Board of directors member at oJsC saratov oil Refinery, JsC «TNK-yugra», Board member of oJsC «severnoeneftegaz» since 2008. in 2007, Board member of JsC «orenbourggeologia».

Members of the Board of directors elected by Annual general shareholders’ Meeting on June 15, 2007 and active until June 26, 2008: i. v. Maidannik (Board Chairman), R. M. Bezrukov, R. Herbert, A. A. gorshkov, B. P. Kondrashov, s. Truman, P. smith, K. sliger, P. Henshaw.


55


56

corPorate coMMittees at tnK-BP ManageMentTo resolve specific corporate governance and project management issues, there are seven Corporate Committees within TNK-BP Management, which cover all aspects of TNK-BP Holding activities, including operations, finance, compliance with corporate standards, human resources and information technologies. The benefits of these Committees are in quick response to business needs, detailed review and promptness of appropriate decisions. Brief description of the seven Committees is provided below.

PoLicies and coMPLiance coMMitteeThe Policies and Compliance Committee is established in order to supervise risk management processes, formulate ethical behavior requirements, manage conflicts of interest, coordinate the establishment of a comprehensive system of internal normative documents.

Main functions of the Committee:

to ensure proper functioning of the enterprise-wide risk management system (EWRM) and the internal control system;

to coordinate adoption and implementation of internal documents;

to review internal normative documents on business ethics as well as main business processes.

hr coMMitteeThe HR Committee is established to ensure consistent implementation and control of the human resources strategy.


development and implementation support of staff policy in the area of human resources;

control over the consistent implementation of HR programs;

development of appropriate recommendations and monitoring of cultural integration processes.

oPerations coMMitteeThe operations Committee is established to review all aspects of operations and measure ongoing performance compared to the annual business plan.


to review current cross-stream and cross-function issues in relation to business plan development and implementation, efficiency assurance, long-term operating performance, cross-stream and cross-function optimization;

to monitor and ensure successful implementation of major projects and operating strategy.

investMent coMMitteeThe investment Committee is established to review and support all new investments and to monitor the progress of large investments.


to review and support all proposals concerning new large investments;

to monitor implementation of large investment projects;

to assure contracting process efficiency.

internaL finance coMMitteeThe internal finance Committee is established to approve and implement the internal financing strategy and key principles and to review financial transactions to ensure consistency with financial strategy.


to determine strategy and key principles of internal financing;

to approve internal financing and joint venture financing matters, in particular, review and endorse financial, legal, and tax aspects of transactions, endorsement of liquidation proposals (CliP).

credit coMMitteeThe Credit Committee is established in order to manage credit risks.


to set, review and approve counterparty credit limits;

to analyze effective credit utilization, accounts receivable and bad debts.


57

Managing coMPany – oJsc tnK-BP ManageMent

on a day-to-day basis, TNK-BP Holding is managed by its managing company, oJsC TNK-BP Management, which was granted with the authority to be the sole executive body of TNK-BP Holding based on the resolution of the sole shareholder dated february 28, 2005.

TNK-BP Holding’s core executives are a team of professional managers with experience in different countries. Within TNK-BP Management, there is the Management Board and seven Corporate Committees to ensure accomplishment of the Company’s objectives.

Executive bodies of TNK-BP Management are authorized to make decisions on all matters of day-to-day TNK-BP Holding management, with the exception of those reserved for TNK-BP Holding general shareholders’ Meeting and the Board of directors.

The changes made in 2008 to the practices of corporate governance in TNK-BP Hold-ing affected terms of reference of TNK-BP Management’s Management Board terms of

reference. in particular, its new authorities include:

approval of amendments to of the Company’s Business Plan;

preliminary approval/change of the Company’s staff numbers;

approval of TNK-BP Management’s Codes and Corporate standards, and any documents concerning the grading system;

establishment/dissolution of TNK-BP Management’s Committees;

resolving as to whether TNK-BP Holding should enter into transactions with shares (with the exception of matters reserved for the general shareholders’ Meeting);

approval of nominations to management and control bodies of all subsidiaries and affiliates; agreement of voting positions at general shareholders’ Meetings of TNK-BP Holding and TNK-BP Management subsidiaries and affiliates;

agreement of constitutive documents of TNK-BP Holding and TNK-BP Management subsidiaries and affiliates.

tnK-BP ManageMent’s ManageMent Board Line-uP eLected on aPriL 14,� 2009

suMMers,� Timothy david Management Board Chairman (since december 1, 2008)veKseLBerg,� viktor feliksovich Executive directorKhan,� german Borisovich Executive directorBaudrand,� didier Patrick Executive vice-President, downstream, and Executive directorMuir,� Jonathan William Chief financial officer

tnK-BP ManageMent’s ManageMent Board Line-uP eLected on January 29,� 2009

suMMers,� Timothy david Management Board Chairman (since december 1, 2008)veKseLBerg,� viktor feliksovich Executive directorKhan,� german Borisovich Executive directorsLiger,� Kris Martyn Executive directorMuir,� Jonathan William Acting Chief financial officer

tnK-BP ManageMent’s ManageMent Board-2008

dudLey,� Robert Management Board Chairman (until November 30, 2008)veKseLBerg,� viktor feliksovich Executive director, gas Business developmentKhan,� german Borisovich Executive directorsuMMers,� Timothy david Chief operating officer, Management Board Chairman (since december 1, 2008)MaidanniK,� igor vladimirovich Executive vice-President, legalconsidine,� Anthony Executive vice-President, downstream (until 15 November, 2008)sLiger,� Kris Martyn Executive vice-President, strategy and New Business developmentBrezitsKy,� sergey vladimirovich Executive vice-President, UpstreamosiPov,� Mikhail leonovich Executive vice-President, oilfield servicesKondrashov,� Boris Petrovich Executive vice-President, securitywright,� Walter Arthur Thomas Executive vice-President, Planning and Performance Management (until 1 december, 2008)herBert,� Richard Executive vice-President, Technology (until 9 december, 2008)Bennett,� simon Executive vice-President, support services, Management Board member (until November 30, 2008)owen,� James Chief financial officer, Management Board member (until december 7, 2008)tyoMKin,� Anatoly Arkadyevich Management Board member (since december 1, 2008)Muir,� Jonathan William Acting Chief financial officer, Management Board member (since december 8, 2008)


it coMMitteeThe iT Committee is established to coordinate information Technology strategy with the overall business strategy and priorities, as well as to supervise implementation of the major iT projects, control iT performance along major directions and assure its link to all streams and functions.


to control efficiency of information technologies;

to manage the main iT projects.

corPorate secretary

To assure that the TNK-BP Holding and TNK-BP Management bodies, and the TNK-BP Management’s Committees and officers adhere to high standards of corporate governance, the Corporate secretary department has been established within the Managing Company TNK-BP Management. The department leader performs the functions of the Company Corporate secretary and acts as the secretary to the TNK-BP Holding Board of directors.

The main functions of the Company Corporate secretary are to:

make necessary arrangements for, and support holding of the Company Board of directors meetings in accordance with legal requirements, the Company Charter and the Board of directors Regulations of TNK-BP Holding;

participate in arranging and holding of the general Meeting in accordance with legal requirements, the Company Charter and the general shareholders' Meeting Regulations of the Company;

assist members of the Company Board of directors in their performance of the functions assigned to them;

ensure that the Company interacts with its shareholders, that any shareholder inquiries are properly acted upon, and that action is taken to avert and settle any corporate conflicts;

ensure storage of corporate documents and disclosure of the Company information;

other functions as provided for in the internal documents of the Company.

The Corporate secretary and the Corporate secretary department personnel exercising their rights and performing their duties always act in the best interests of the Company and its shareholders.

sharehoLders’ equity

The charter capital of TNK-BP Holding is 16,296,807,136 rubles, and is divided into 15,846,807,136 common shares each with face value of 1 ruble each, and 450,000,000 preference shares each with face value of 1 ruble each.

TNK-BP Holding is authorized to issue additionally 43,650,000,000 common shares each with face value of 1 ruble each, and 1,350,000,000 preference shares each with face value of 1 ruble.

As of december 31, 2008, there were 14,663 parties entered in TNK-BP Holding shareholders register, including 17 nominee holders.

58

share MarKetsince december 2005, TNK-BP Holding shares have been included in RTs Board (ticker: TNBPP for preference shares, and TNBP for common shares). RTs Board is an information system for indicative quotation of securities not listed on the RTs stock Exchange.

financiaL stateMents under russian accounting standards

As required by Russian legislation, TNK-BP Holding prepares quarterly financial statements in accordance with Russian Accounting standards (RAs). The statutory Accounts for 2008 are presented for approval at the Annual shareholders Meeting and included in the materials for the meeting.

While the statutory accounts present the financial position and results of the Company on a standalone legal entity basis, the reported statutory earnings represents a ceiling for any dividends pay-outs under the Russian legislation. statutory net income for 2008 amounted to 83 billion rubles (49 billion rubles for 2007).

dividends history

TNK-BP Holding’s practice of dividend pay-out is based on the principle of fair distribution of earnings among shareholders, with due account for investment and other cash requirements of the business.

decision to pay out the dividends on TNK-BP Holding shares are made by the general shareholders’ Meeting based on the Board of directors recommendations.

The dividends level is determined based on the Company’s net income as per its unconsolidated financial statements in accordance with the Russian Accounting standards (RAs) as of the end of the relevant reporting period.

All dividends declared by TNK-BP Holding are paid in cash only by bank transfer to the account of each shareholder or its designee.

dividends are paid within the time frames prescribed by the Charter. Pursuant to the TNK-BP Holding Charter, dividends for the full financial year, the first six months and the first nine months of the financial year are to be paid within six months after the resolution to pay dividends is passed by the general shareholders’ Meeting.

TNK-BP Holding discloses information about its dividend payments to its shareholders, potential investors and other interested parties by publishing information on the TNK-BP Holding website and in the mass media.

starting from 2006, TNK-BP Holding has paid out almost 100% of its RAs-based net income in dividends.


59

MaJor sharehoLders of tnK-BP hoLding (as of 31 deceMBer 2008)

Percentage of ordinary shares share in charter caPitaL

Novy iNvEsTMENTs lTd 91.3% 89.7%

MiNoRiTy sHAREHoldERs 3.3% 5.1%

TNK-BP HoldiNg sUBsidiARiEs 5.4% 5.2%

CJsC “sidANCo-investments”,

CJsC “sidANCo-securities”,

CJsC “sidanko-Neftepererabotka”,

JsC “sborsare Management”


inforMation on reLated Party transactions*

TNK-BP Holding is a vertically integrated oil and gas company. This means that throughout its entire operating cycle, i.e. from oil and gas field exploration and development, through transportation and refining and further to sales to end consumers, TNK-BP Holding is in continuous legal relations with its subsidiaries and affiliates, which specialize in particular phases of operations in this cycle. such relations are regulated via various contracts which, in accordance with applicable law, are recognized to be related party transactions. such transactions are subject to a special approval procedure prescribed by the law.

All related-party transactions of TNK-BP Holding may be divided into the following groups (in terms of transaction subject matter):

purchases of oil and petroleum products from subsidiaries; sale of oil and petroleum products to subsidiaries;

oil refining at the group’s refineries;

services agreements between TNK-BP Holding and its subsidiaries;

TNK-BP Holding funding of subsidiaries (by means of short and long term loans, by increasing charter capital, or through contributing to property);

supply chain managment for subsidiaries (for centralization of purchasing activities);

centralized services provided by third parties to subsidiaries (agency agreements between TNK-BP Holding and its subsidiaries for services by a single contractor);

intra-group transfer of long-term financial investments (transfer of stocks and participation shares in subsidiaries to optimize the TNK-BP Holding group’s corporate structure and settlement procedure using securities);

license agreements with subsidiaries for trademark use rights;

guarantee agreements by TNK-BP Holding to third parties on subsidiaries’ obligations;

miscellaneous contracts where parties to the contracts are TNK-BP Holding and its subsidiaries.

The majority of these agreements are executed by TNK-BP Holding within the normal course of business. At TNK-BP Holding there are detailed procedures pursuant to which various structural subdivisions and committees control compliance of all related party transactions performed with the law and market terms.

60


61

* Detailed information about all related parties transactions approved by the TNK-BP Holding Board of Directors in 2008 is enclosed in the AGM material pack. No major transactions were made in the reporting year.

tnK-BP hoLding dividend Payout rePort*

Period

dividends Per share,�

ruBLes

totaL dividends,�

MiLLion ruBLesdividend PayMent coMPLetion

deadLine

totaL dividends Paid as of 01 aPr

2009,�MiLLion ruBLes

2005 dividends(1)

on ordinary shares 8.06 127,726 31.12.2006 on preference shares 8.06 3,626 31.12.2006

totaL 131,�352 131,�332

first 9 Months of 2006 dividends(2)


totaL 96,�966 96,�925

2006 dividends(3)

on ordinary shares 1.37 21,710 15.12.2007 on preference shares 1.37 616 15.12.2007

totaL 22,�326 22,�322



totaL 21,�674 21,�667

2007 dividends(5)


totaL 27,�868 27,�855



totaL 47,�913 47,�890

* Total declared and paid dividends include amounts related to TNK-BP Holding subsidiaries which own share in the Company’s charter capital. Detailed information about these subsidiaries is presented in the section Shareholders’ Equity.

1 Decision made at the AGM on June 28, 2006.2 Decision made at the EGM on November 15, 2006.3 Decision made at the AGM on June 15, 2007. The amount of 2006 dividends approved by the AGM on June 15, 2007 does not include dividends for 9 months of 2006 approved by the EGM on November 15, 2006.

4 Decision made at the EGM on September 28, 2007.5 Decision made at the AGM on June 26, 2008.6 Decision made at the EGM on September 30, 2008.

63

TNK-BP HoldiNg // 12. consoLidated financiaL resuLts TNK-BP HoldiNg // annuaL rePort 2008

CoNsolidATEd fiNANCiAl REsUlTs12


62

consoLidated financiaL stateMents as of and for the years ended 31 deceMBer 2008 and 31 deceMBer 2007

rePort of indePendent auditorsTo the Board of directors and shareholders of oAo TNK-BP Holding:

in our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in shareholders’ equity present fairly, in all material respects, the financial position of oAo TNK-BP Holding and its subsidiaries at 31 december 2008 and 2007, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United states of America. These financial statements are the responsibility of the Company’s management. our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United states of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Moscow, Russian federation 17 April 2009

zao Pricewaterhousecoopers auditKosmodamianskaya Nab. 52, Bld. 51,5054 MoscowRussiaTelephone +7 (495) 967,6000facsimile +7 (495) 967,6001www.pwc.ru

64


65

TNK-BP HoldiNg // 12. consoLidated financiaL resuLts

consoLidated BaLance sheets R (expressed in millions of Us dollars, except as indicated)

note 31 deceMBer 2008 31 deceMBer 2007

assets

Cash and cash equivalents 5 917 635Restricted cash 5 - 5Trade and other receivables, net 7 12,408 11,093inventories 8 628 1,103other current assets 188 202

totaL current assets 14,141 13,038

long-term investments 11 20Property, plant and equipment, net 9 16,022 13,901other long-term assets 1,005 945

totaL assets 31,179 27,904

LiaBiLities and sharehoLders’ equity

short-term debt and current portion of long-term debt 10 620 277Trade accounts and notes payable 6,663 5,331other accounts payable and accrued expenses 11 491 741Taxes payable 14 526 1,251dividends payable 654 840

totaL current LiaBiLities 8,954 8,440

long-term debt 10 1,184 1,582Asset retirement obligations 9 341 335deferred income tax liabilities 13 561 927other long-term liabilities 319 327

totaL LiaBiLities 11,359 11,611

Commitments and contingencies 17 - -

Minority interest 817 708

Common stock (authorized and issued – 15,847 million shares, RUR 1.00 par value)

12 550 550

Preferred stock (authorized and issued – 450 million shares, RUR 1.00 par value)

12 16 16

Treasury stock, at cost 12 (239) (239)Additional paid-in capital 4,933 4,933Retained earnings 13,791 10,325Accumulated other comprehensive loss (48) -

totaL sharehoLders’ equity 19,003 15,585

totaL LiaBiLities and sharehoLders’ equity 31,179 27,904

consoLidated stateMents of incoMe R (expressed in millions of Us dollars)

noteyear ended

31 deceMBer 2008year ended

31 deceMBer 2007

revenues

sales and other operating revenues 15 45,128 34,995

totaL revenues 45,128 34,995

costs and other deductions

Export duties 13,528 9,256Taxes other than income tax 14 10,884 7,560operating expenses 5,032 3,713Transportation expenses 2,614 2,239selling, general and administrative expenses 1,735 1,542depreciation, depletion and amortization 1,452 1,341Cost of purchased products 1,605 1,874loss on disposals and impairment of assets 160 88Exploration expenses 57 127

totaL costs and other deductions 37,067 27,740

other incoMe and exPenses

Earnings from equity investments 8 4gain on disposals of subsidiaries 60 105interest income and net other income 137 182Exchange gain, net 209 8interest expense (152) (167)

totaL other incoMe and exPenses 262 132

incoMe Before incoMe taxes and Minority interest

8,323 7,387

incoMe taxes

Current tax expense 13 2,073 1,789deferred tax benefit 13 (246) (336)

totaL incoMe tax exPense 1,827 1,453

incoMe Before Minority interest 6,496 5,934

Minority interest 112 202

net incoMe 6,384 5,732

net incoMe Per share of coMMon stocK (us doLLars)

12 0.42 0.38

The accompanying notes are an integral part of these consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements

66


67


consoLidated stateMents of cash fLows R

(expressed in millions of Us dollars)

noteyear ended


31 deceMBer 2007

cash fLows froM oPerating activities

Net income 6,384 5,732Adjustments to reconcile net income to net cash pro-vided by operating activities:

depreciation, depletion and amortization 1,452 1,341deferred income tax benefit (246) (336)Minority interest 112 202loss on disposals and impairment of assets 160 88gain on disposals of subsidiaries (60) (105)Earnings from equity investments less dividends received

(4) (4)

Non-cash provisions 163 (150)dry hole expenses 8 16Exchange loss/(gain) from investing and financing activities

(492) 79

other non-cash adjustments, net (10) 17

Changes in operational working capital, excluding cash and cash equivalents:

Restricted cash 5 1Trade and other receivables, net (1,545) (2,935)inventories 448 (433)Accounts and notes payable and accrued expenses 986 2,217Taxes payable (721) (258)other (39) 14

net cash Provided By oPerating activities 6,601 5,486

investing activities

Capital expenditures (3,724) (3,266)grants used for capital expenditures (622) (566)grants received 673 486Purchase of intangible assets (50) (55)Proceeds from disposals of property, plant and equip-ment

18 53

Acquisitions of subsidiaries and joint ventures 4 - (739)Proceeds from sales of subsidiaries and joint ventures 61 160Promissory notes repaid 167 -loans issued (161) (138)loans repaid 75 450

net cash used for investing activities (3,563) (3,615)

financing activities

Proceeds from issuance of long-term debt 825 1,245Cost associated with issuance of debt (6) -Repayment of long-term debt (964) (819)Proceeds from issuance of short-term debt 703 294Repayment of short-term debt (426) (415)dividends paid to minorities (4) -dividends paid to shareholders (2,856) (2,420)

net cash used for financing activities (2,728) (2,115)

Effect of exchange rate changes on cash and cash equivalents

(28) 52

net change in cash and cash equivaLents 282 (192)

Cash and cash equivalents at beginning of period 635 827

cash and cash equivaLents at end of Period 917 635

consoLidated stateMents of changes in sharehoLders’ equity R

(expressed in millions of Us dollars, except as indicated)

year ended 31 deceMBer 2008 year ended 31 deceMBer 2007

notesharehoLders’

equitycoMPrehensive

incoMesharehoLders’

equitycoMPrehensive

incoMe

coMMon stocK

Balance at 1 January 550 550Balance at 31 december 550 550

Preferred stocK

Balance at 1 January 16 16Balance at 31 december 16 16

treasury stocK

Balance at 1 January (239) (239)Balance at 31 december (239) (239)

additionaL Paid-in caPitaL

Balance at 1 January 4,933 4,933Balance at 31 december 4,933 4,933

retained earnings

Balance at 1 January 10,325 6,228Net income 6,384 6,384 5,732 5,732dividends 12 (2,918) - (1,635) -Balance at 31 december 13,791 10,325

accuMuLated other coMPrehensive Loss

Currency translation adjustment

Balance at 1 January - -Change during the year (48) (48) - -Balance at 31 december (48) 15,585

totaL coMPrehensive incoMe for the year 6,336 5,732

totaL sharehoLders’ equity at 31 deceMBer 19,003 15,585

31 deceMBer 2008(MiLLions of shares)

31 deceMBer 2007(MiLLions of shares)

nuMBer of ordinary shares issued

At 1 January 15,847 15,847At 31 december 15,847 15,847

nuMBer of Preferred shares issued

At 1 January 450 450At 31 december 450 450

nuMBer of treasury shares issued

At 1 January (850) (850)At 31 december (850) (850)

The accompanying notes are an integral part of these consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements

68


69


note 1: organization

oAo TNK-BP Holding (‘TBH’ or ‘the Company’) is a subsidiary of TNK-BP limited (‘TNK-BP’), a British virgin islands company. TNK-BP was formed effective 29 August 2003 by the Alfa group, the Access-Renova group (jointly ‘AAR’) and BP, to hold their respective interests in their Russian and Ukrainian oil and gas assets. AAR contributed its 100 percent interest in TNK industrial Holdings limited which held a 100 percent interest in TNK-BP international limited, which in turn owned a 96.1 percent interest in oAo Tyumen oil Company (‘TNK’) and a 100 percent interest in sborsare Management limited, which in turn effectively held a 68 percent interest in oAo sidanco (‘sidanco’) for its 50.0 percent interest in TNK-BP. BP contributed its 29.6 percent interest in sidanco, 33.4 percent interest in oAo Rusia Petroleum (‘Rusia Petroleum’) and 75.0 percent interest in BP Moscow Retail (‘BP Retail Assets’), for its 50.0 percent interest in TNK-BP. BP also made a balancing payment directly to AAR in cash and BP shares, payable over three years.

in 2005, TNK-BP completed a number of steps under its corporate restructuring program. Pursuant to the program, in december 2005 TBH, a newly created holding company, accessioned TNK, sidanco and oAo oNAKo (‘oNAKo’), key holding companies of TNK-BP in Russia. As part of this accession, TBH issued shares to the minority interest holders in these entities. furthermore, most of the minority shareholders in 14 key subsidiaries of TNK-BP in Russia were consolidated within TBH through a voluntary share exchange program also completed in december 2005.

As a result of these accessions and the above described share exchange, minority shareholders received approximately 5% of the shares in TBH. All purchases of minority interests have been treated as acquisitions and accounted for using the purchase method of accounting.

The Company and its subsidiaries (jointly referred to as ‘the group’) conduct exploration and development activities and produce oil and gas in the Russian federation, operate petroleum refineries and market oil and petroleum products in the Russian federation.

TNK-BP’s assets held outside of TBH include its equity interest in oAo NgK slavneft, interests in oAo Rusia Petroleum, oAo East siberian gas Company, the BP Retail Assets and its Ukrainian businesses referred to above.

note 2: Basis of Presentation

The consolidated financial statements of the group are prepared in accordance with accounting principles generally accepted in the United states of America (‘Us gAAP’).

The Company and its subsidiaries maintain their accounting records in accordance with the Regulations on Accounting and Reporting in the Russian federation. The accompanying consolidated financial statements have been prepared from these accounting records and adjusted as necessary in order to comply with Us gAAP.

in preparing the consolidated financial statements in conformity with Us gAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from such estimates.

rePorting and functionaL currency R

The Company has determined that the United states (‘Us’) dollar is the reporting currency for the purposes of financial reporting under Us gAAP.

for the majority of subsidiaries of the group, the functional currency is the Us dollar as a significant portion of the group’s business is conducted in Us dollars; management uses the Us dollar to manage the group’s financial risks and exposures, and to measure its performance.

The local currency of all subsidiaries of the group is the Russian Rouble (‘RUR’). for the purposes of financial reporting under Us gAAP, transactions and balances have been remeasured into the functional currency of the subsidiary, which, in the majority of cases, is the Us dollar. in accordance with the relevant provisions of statement of financial Accounting standards (‘sfAs’) No. 52, foreign Currency Translation, monetary assets and liabilities are remeasured at closing exchange rates and non-monetary items are remeasured at historic exchange rates and adjusted for any impairment. The consolidated statements of income and of cash flows have been remeasured at the average exchange rates during the period. Exchange differences resulting from the use of these exchange rates have been included in the determination of net income and are included in net exchange gains and losses in the accompanying consolidated statements of income.

The functional currency of certain subsidiaries, such as oil field services companies (‘ofs’), is the Russian Rouble as the primary economic environment of these entities is the local market.

As of 31 december 2008 and 2007, exchange rates were 29.38 and 24.55 Russian Roubles to the Us dollar, respectively. Average exchange rates for 2008 and 2007 were 24.86 and 25.58 Russian Roubles to the Us dollar, respectively.

Any remeasurement of Russian Rouble amounts to Us dollars should not be construed as a representation that such Russian Rouble amounts have been, could be, or will in the future be converted into Us dollars at the exchange rate shown or at any other exchange rate.

coMParative aMounts R

Certain changes have been made to the prior period presentation to conform with current year presentation. These changes have no effect on shareholders’ equity or net income.

notes to the consoLidated finansiaL stateMents (expressed in Us dollars, tabular amounts in millions)


70


71


note 3: suMMary of significant accounting PoLicies

PrinciPLes of consoLidation R

The consolidated financial statements include the operations of all entities in which the group directly or indirectly owns or controls more than 50 percent of the voting stock and variable interest entities in which the group is the primary beneficiary. Joint ventures and investments in which the group has voting ownership interests between 20 and 50 percent and where the group exerts significant influence are accounted for using the equity method. investments in other companies are accounted for at cost and adjusted for estimated impairment.

cash equivaLents R

Cash equivalents include all liquid securities with original maturities of three months or less when acquired.

accounts receivaBLe R

Accounts receivable are presented at net realizable value and include value-added and excise taxes.

inventories R

inventories are valued at the lower of cost, using the average method, or net realisable value. Costs include applicable purchase costs and production costs.

ProPerty,� PLant and equiPMent R

The group follows the successful efforts method of accounting for its oil and gas properties whereby property acquisitions, successful exploratory wells, all development costs (including development dry holes), and support equipment and facilities are capitalized. Under this method, costs are accumulated with certain exploratory expenditures and exploratory dry holes being expensed as incurred. The group carries exploratory well costs as an asset when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where the group is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expense. Production costs, overheads, and all exploration costs other than exploratory drilling are charged to expense as incurred. Acquisition costs of unproved properties are evaluated periodically and any impairment assessed is charged to expense.

Proved oil and gas properties and other long-lived assets are assessed for possible impairment in accordance with sfAs No. 144, Accounting for the impairment or disposal of long-lived Assets, which requires long-lived assets with recorded values that are not expected to be recovered through future cash flows to be written down to current fair value. fair value is generally determined by estimating discounted future net cash flows to be generated by the assets.

depreciation, depletion and amortization of capitalized costs of proved oil and gas properties and equipment is calculated using the unit-of-production method for each field based upon proved reserves for property acquisitions and proved developed reserves for exploration and development costs. in both cases the proved reserves data used is estimated on a ‘life of field’ basis as management believes it will continue to be successful in the renewal of its oil and gas licences.

Property, plant and equipment which is not associated with exploration and production activities are carried at cost less accumulated depreciation. depreciation of these assets is calculated on a straight-line basis as follows:

Buildings and constructions 5 - 33 yearsMachinery and equipment 5 - 15 years

Maintenance and repairs and minor renewals are expensed as incurred. Major renewals and improvements which extend the useful lives of the assets are capitalized.

caPitaL grants R

The group recognizes capital grants from local governments when there is a reasonable assurance that the group will comply with the conditions attached and that the grant will be received. The capital grants are accounted for as a reduction of the cost of the asset for which the grant is received.

asset retireMent oBLigations R

The group incurs retirement obligations for its upstream assets. The fair values of these obligations are recorded as liabilities on a discounted basis, which is typically at the time the assets are installed. The costs associated with these liabilities are capitalized as part of the related assets and depleted as the reserves are produced. over time, the liabilities are accreted for the change in present value. Asset retirement obligations are not recorded for downstream facilities, because such potential obligations cannot be measured since it is not possible to estimate the settlement dates.

environMentaL LiaBiLities R

liabilities for environmental remediation are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Environmental remediation liabilities are not discounted for the time value of future expected payments. Environmental expenditures that have future benefit are capitalized.

derivative instruMents R

The group recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. The accounting for changes in fair value depends on its intended use and designation and could entail recording the gain or loss through earnings of the current period or as part of other comprehensive income and subsequently reclassifying into earnings when the gain or loss is realized.

Pension and Post-eMPLoyMent Benefits R

The group’s mandatory contributions to the governmental pension plan are expensed when incurred. discretionary pensions and other post-employment benefits are not material.

revenue recognition R

Revenues from the production and sale of crude oil and petroleum products are recognized when title has transferred and collectibility is reasonably assured. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another are combined, considered as a single arrangement and netted against each other on the consolidated statements of income. When the group companies act as an agent for purchases and sales of inventory, they are also reported on a net basis.

incoMe taxes R

deferred income tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, in accordance with sfAs No. 109, Accounting for income Taxes. deferred income tax assets and liabilities are measured using enacted tax rates in the years in which these temporary differences are expected to reverse. included in this calculation are deferred income taxes for unremitted earnings of equity affiliates and subsidiaries on basis differences between the relevant parent company financial statement carrying amounts and the respective tax basis of its investments in subsidiaries and equity affiliates. Management periodically assesses possible methods of remitting the earnings to the parent and adjusts the liability to the amount calculated at enacted rates corresponding to the expected method of distribution. valuation allowances are provided for deferred income tax assets when management believes it is more likely than not that the assets will not be realized.

The group applies the provisions of financial Accounting standards Board (‘fAsB’) interpretation No. 48, Accounting for Uncertainty in income Taxes (fiN 48). fiN 48 is an interpretation of sfAs No. 109, and prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that the Company has taken or expects to take in its income tax returns. income tax penalties expense and payable are included in Taxes other than income tax expense in the consolidated statements of income and Taxes payable in the consolidated balance sheets, respectively. income tax interest expense and payable are included in interest expense in the consolidated statements of income and other accounts payable in the consolidated balance sheets, respectively.



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coMPrehensive incoMe R

The group’s comprehensive income consists of net income and other comprehensive income represented by currency translation adjustments related to those subsidiaries, which functional currency is different from the reporting currency of the group.

accounting changes R

in september 2006, sfAs No. 157, fair value Measurements, was issued and became effective for the group on 1 January 2008 for items that are recognized at fair value in the financial statements on a recurring basis. for the recognition, measurement and disclosure of other nonfinancial assets and liabilities the statement becomes effective for the group on 1 January 2009. The statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of this statement for the items that are recognized at fair value in the financial statements on a recurring basis had no material effect on the group’s results of operations, financial position or liquidity.

in february 2007, sfAs No. 159, The fair value option for financial Assets and financial liabilities including an amendment of sfAs No. 115, was issued and became effective for the group on 1 January 2008. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Upon adoption of this statement, the group did not change its accounting policy for the measurement of financial instruments.

in october 2008, fAsB staff Position (‘fsP’) No. fAs 157-3, determining the fair value of a financial Asset When the Market for That Asset is Not Active, was issued and becomes effective for the group upon issuance. The fsP clarifies the application of sfAs No. 157 and illustrates key considerations in determining the fair value for a financial asset when the market for that asset is not active. The adoption of this fsP had no material effect on the group’s results of operations, financial position or liquidity.

recent accounting standards R

in december 2007, sfAs No. 141(R), Business Combinations, was issued and becomes effective for the group on 1 January 2009. This statement provides guidance for recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed and noncontrolling interest in the acquiree. The statement similarly provides guidance for accounting for goodwill acquired in a business combination or a gain arising from a bargain purchase. The group is currently evaluating the impact of this statement.

in december 2007, sfAs No. 160, Noncontrolling interests in Consolidated financial statements including an amendment of ARB No. 51, was issued and becomes effective for the group on 1 January 2009. This statement provides new standards to govern the accounting and reporting for noncontrolling (minority) interests in partially owned consolidated subsidiaries and for the loss of control of subsidiaries. The statement establishes that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The group is currently evaluating the impact of this statement.

in March 2008, sfAs No. 161, disclosures about derivative instruments and Hedging Activities, was issued and becomes effective for the group on 1 January 2009. This statement requires enhanced disclosures about how and why an activity uses derivative instruments, how derivative instruments and related hedged items are accounted for under sfAs 133, Accounting for derivative instruments and Hedging Activities, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The group does not expect this statement to have a material impact on the preparation of its consolidated financial statements.

in May 2008, the fAsB issued sfAs No. 162, The Hierarchy of generally Accepted Accounting Principles. This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with Us gAAP. The statement is not yet effective pending regulatory approval in the United states of America. The group does not expect this statement to have a material impact on the preparation of its consolidated financial statements.

in April 2008, the fsP No. fAs 142-3, determination of the Useful life of intangible Assets, was issued and becomes effective for the group on 1 January 2009. The fsP amends sfAs No. 142, goodwill and other intangible Assets, to improve the consistency between the useful life of a recognized intangible asset under sfAs No. 142 and the period of expected cash flows used to measure the fair value of the asset under sfAs No. 141, Business Combinations, and other accounting standards. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively.

in November 2008, fAsB Emerging issues Task force (‘EiTf’) No. 08-6, Equity Method investment Accounting Considerations, was issued and becomes effective for the group on 1 January 2009. This EiTf clarifies certain issues raised by sfAs No. 141 and sfAs No. 160 in relation to equity method accounted investments, including impairment considerations. The group is currently evaluating the impact of this EiTf.

in November 2008, fAsB EiTf No. 08-7, Accounting for defensive intangible Assets, was issued and becomes effective for the group on 1 January 2009. This EiTf clarifies how to account for defensive intangible assets subsequent to initial measurement. This issue applies to acquired intangible assets in situations in which an entity does not intend to actively use the asset but intends to hold the asset to prevent others from obtaining access to the asset, except for intangible assets that are used in research and development activities. The group does not expect this EiTf to have a material impact on its consolidated financial statements.

in december 2008, fsP No. fAs 140-4 and fiN 46(R)-8, disclosures by Public Entities about Transfers of financial Assets and interests in variable interest Entities, was issued. This Position requires public entities to provide additional disclosures about transfers of financial assets and involvement with variable interest entities. The group does not expect this fsP to have a material impact on the preparation of its consolidated statements.

in february 2009, the fAsB voted to issue fsP fAs 141 (R)-a, Accounting for Assets Acquired and liabilities Assumed in a Business Combination That Arise from Contingencies, which will amend the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under sfAs 141 (R). This fsP would require for acquired contingencies, to recognize such contingencies at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. This fsP is expected to be issued in the near term, effective for the first annual reporting period beginning on or after 1 January 2009. The group does not expect this fsP to have a material impact on its consolidated financial statements.



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note 4: acquisitions of suBsidiaries and Minority sharehoLders interests

in January 2007, the group completed the acquisition of the 50 percent of the share capital of ooo Jv vanyoganneft (‘vanyoganneft’) not previously held by the group for Usd 485 million in cash. This acquisition has been accounted for using the purchase method. The consideration paid was assigned as follows:

oil and gas unproved properties 451oil and gas proved properties and equipment 143other assets 50long-term deferred income tax liability (117)other liabilities (42)

totaL consideration Paid 485

Effective 18 January 2007, the group consolidated its interests in vanyoganneft and no longer used the equity method of accounting. from 18 January 2007 through 31 december 2007 net income of vanyoganneft included in the consolidated statement of income of the group amounted to Usd 78 million.

in August 2007, the group announced its plans regarding the compulsory buy-out of shares from minority shareholders in five subsidiary companies in which the group holds more than 95 percent of the voting shares. The five subsidiary companies are oAo ‘orenburgneft’, oAo ‘orenburggeologia’, oAo ‘Ryazannefteproduct’, oAo ‘Kaluganefteproduct’, oAo ‘Novosibirskneftegaz’. in october 2007, the group received all the shares from the minority shareholders of these subsidiaries. The consideration for the purchase of these shares amounted to Usd 175 million.

note 5: cash and cash equivaLents and suPPLeMentaL cash fLow inforMation

As of 31 december 2007, restricted cash included cash deposits used to secure bank debt and open letters of credit.

As of 31 december 2008 and 2007, cash balances included accounts denominated in Russian Roubles of Usd 114 million and Usd 499 million, respectively.

during the years ended 31 december 2008 and 31 december 2007, cash payments for interest totalled Usd 16 million and Usd 124 million, respectively, payments for income tax excluding withholding tax on intragroup dividends totalled Usd 2,374 million and Usd 1,566 million, respectively, and payments for withholding tax on intragroup dividends totalled Usd 8 million and Usd 15 million, respectively.

note 6: financiaL and derivative instruMents

fair vaLues R

The estimated fair values of financial instruments are determined with reference to various market information and other valuation methodologies as considered appropriate. in the absence of quoted market values, considerable judgement is required in interpreting market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts that the group could realize or settle in a market transaction. Certain of these financial instruments are with major financial institutions and expose the group to market and credit risk. The creditworthiness of these institutions is routinely reviewed and full performance is anticipated. The group is also exposed to credit risk in the event of non-payment by counterparties. The creditworthiness of customers and other counterparties is continually reviewed. The methods and assumptions used to estimate fair value of each class of financial instrument are presented below.

cash and cash equivaLents,� accounts receivaBLe and accounts PayaBLe R

The carrying amounts of these items are a reasonable approximation of their fair value.

short-terM deBt R

loan arrangements have both fixed and variable interest rates that reflect the currently available terms for similar debt. The carrying value of this debt is a reasonable approximation of its fair value.

Long-terM deBt R

loans under bank arrangements and significant loans from related parties have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying value of the debt to banks and to related parties is a reasonable approximation of its fair value.

derivative instruMents R

The strategy of the group is to obtain competitive prices for its hydrocarbons and allow operating results to reflect market price movements dictated by supply and demand. The group seeks, however, to minimize the distorting effects of individual markets where, for example, it has to negotiate fixed prices within a narrow trading window. To mitigate the price risks of these markets, the group employs short-term price swaps.

derivatives are included at fair value in other current assets or other accounts payable and accrued expenses. As of 31 december 2008 other current assets included Usd 11 million related to the fair value of derivatives. The group reported a net loss related to these derivatives of Usd 2 million for 2008. fair values are calculated by the group based on quoted market prices for hydrocarbons futures. No derivative instruments were entered into in 2007.

for the derivative instruments entered into in 2008, the Company did not apply hedge accounting under the provisions of sfAs No. 133. gains and losses related to changes in the fair value of derivatives were recognised in the consolidated statements of income within interest income and net other income. The group maintains a system of controls that includes the authorization, reporting and monitoring of derivative activity. The limited derivative activities of the group pose no material credit or market risks to its operations, financial condition or liquidity.



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note 7: trade and other receivaBLes,� net

31 deceMBer 2008 31 deceMBer 2007

Trade accounts and notes receivable (net of allowance for doubtful accounts of Usd 14 million and Usd 28 million as of 31 december 2008 and 2007, respectively)

10,028 7,364

Advances issued (net of allowance for doubtful accounts of Usd 5 million and Usd 4 million as of 31 december 2008 and 2007, respectively)

1,149 1,295

Recoverable value-added tax 844 1,982Taxes receivable 272 160 other accounts and notes receivables (net of allowance for doubtful accounts of Usd 6 million and Usd 8 million as of 31 december 2008 and 2007, respectively)

115 292

totaL trade and other receivaBLes,� net 12,408 11,093

included in Trade accounts and notes receivable are amounts due from TNK-BP controlled companies of Usd 9,776 million and Usd 6,786 million as of 31 december 2008 and 2007, respectively – see note 16.

Advances issued mainly relate to prepayments to customs and prepayments for transportation services.

Recoverable value-added tax balances mainly relate to crude oil and petroleum products export sale activities. As of 31 december 2008 and 31 december 2007, Usd 55 million and Usd 181 million of export value-added tax, respectively, is not expected to be received within twelve months and has therefore been included in other long-term assets.

note 8: inventories


Crude oil and petroleum products 367 689Materials and supplies 261 414

totaL inventories 628 1,103

note 9: ProPerty,� PLant and equiPMent and asset retireMent oBLigations

costaccuMuLated

dd&anet BooK

vaLue

oil and gas, including: 14,805 (4,080) 10,725Unproved properties 1,077 - 1,077

Refining, marketing and distribution 1,879 (583) 1,296oil field services 629 (438) 191other 244 (69) 175Assets under construction, including: 1,514 - 1,514

Capitalized exploratory well costs pending the determination of proved reserves 89 - 89

BaLance as of 31 deceMBer 2007 19,071 (5,170) 13,901

oil and gas, including: 16,917 (4,829) 12,088Unproved properties 1,019 - 1,019

Refining, marketing and distribution 2,158 (765) 1,393oil field services 529 (306) 223other 281 (85) 196Assets under construction, including: 2,122 - 2,122

Capitalized exploratory well costs pending the determination of proved reserves 108 - 108

BaLance as of 31 deceMBer 2008 22,007 (5,985) 16,022

during the year ended 31 december 2008 the group recognized impairment of oil and gas assets in the amount of Usd 134 million recorded in the loss on disposals and impairment of assets in the consolidated statement of income, including Usd 49 million related to unproved properties. during the year ended 31 december 2007, no impairment was recognized in respect of oil and gas assets.

The group’s oil and gas fields are situated on land belonging to government authorities. The group obtains licenses from such authorities and pays exploration and production taxes to explore and produce oil and gas from these fields. These licenses may be extended provided the group is in compliance with the license terms and approval is obtained from the appropriate regulatory authorities. Management expects to extend such licenses for properties expected to have production subsequent to their license expiry dates.

The following tables provide details of the changes in the balance of capitalized exploratory well costs pending the determination of proved reserves as well as an aging summary of those costs.

BaLance as of 31 deceMBer 2006 52

Additions to capitalized exploratory well costs pending the determination of proved reserves 73 Additions to capitalized exploratory well costs pending the determination of proved reserves recognized on the acquisition of subsidiaries 12Reclassifications to wells, facilities, and equipment based on the determination of proved reserves (33)Capitalized exploratory well costs charged to expense (15)


Additions to capitalized exploratory well costs pending the determination of proved reserves 88Reclassifications to wells, facilities, and equipment based on the determination of proved reserves (55)Capitalized exploratory well costs charged to expense (14)


The following table provides an aging of capitalized exploratory well costs based on the date the drilling was completed:


Capitalized exploratory well costs that have been capitalized for a period of one year or less 80 59 Capitalized exploratory well costs that have been capitalized for a period greater than one year 28 30

Number of projects that have exploratory well costs that have been capitalized for a period greater than one year 5 6

Exploratory well costs that have been capitalized for a period of greater than one year since the completion of drilling consist of costs in the amount of Usd 28 million incurred in 2004-2007 in relation to the projects described below, including the Rospan project (Usd 9 million), the orenburg project (Usd 6 million). for each of these projects exploratory wells have also been drilled in the proceeding 12 months and further exploration drilling is planned in the next year.



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The following table provides details of the projects:

ProJects

cost as of 31 deceMBer

2008 coMMent

OrenburgprOject

44 The project covers exploration and development activities in the orenburg region. These activities are being carried out in areas adjoining large developed and producing areas. A 100% success rate of exploration drilling has been achieved over the last two years, with the associated reserves additions being brought into development in less than one year. The group plans to continue exploration drilling in those areas of the orenburg region where high drilling suc-cess rate could be achieved or where it is possible to promptly bring reserves into development.

rOspanprOject 26 The Rospan project refers to the large gas and condensate field in the yamalo-Nenets Autonomous district. While the reserves already developed cover many years of production at current levels, there is potential for a significant increase in gas output in the event that the restrictions over access to the gas pipeline infrastructure are removed. An optimisation of the flows and infrastructure of Rospan and other group’s subsidiaries in the area is also expected to generate significant synergies. for these reasons as well as for license compliance, work to explore and appraise the currently unproved areas is underway.

nizhnevartOvskbrOwnfields

8 Exploration drilling in Nizhnevartovsk is part of the program for increasing production. Within this program, prospecting and exploration is carried out on adjacent areas which are characterized by much higher flow rates compared to the rates of producing wells in the main fields. The vicinity of these new areas to the existing fields (samotlor, Bakhilovskoye, verkhne-Kolikyeganskoye) enables the existing infrastructure to be used and to efficiently bring into development new deposits within a short timeframe.

Otherfields 30 Exploration and appraisal work is being carried out on potential commercial hydrocarbon quantities; assessments have been completed in a number of cases; certain development options have been identified and are either under evaluation or in the process of execution.

totaL costs caPitaLized 108

Asset retirement obligations are as follows:


Accretion expense 15liabilities of acquired subsidiaries 8liabilities incurred in the current period 24liabilities settled in the current period (26)Change in estimated costs and timing 83


Accretion expense 20liabilities incurred in the current period 23liabilities settled in the current period (22)Change in estimated costs and timing (15)


note 10: deBt

short-term debt and the current portion of long-term debt is as follows:


obligations to banks, Us dollar denominated

Unsecured loans with composite variable interest 50 210Unsecured loans with fixed interest 95 -secured loans with fixed interest 400 -Current portion of long-term debt received from third parties 30 -other short-term debt - 59Current portion of long-term debt received from TNK-BP controlled entities 45 8

totaL short-terM deBt and the current Portion of Long-terM deBt 620 277

short-term debt as of 31 december 2008 was provided by international and Russian banks for funding of working capital and consisted both of secured and unsecured facilities. The weighted average interest rate in short-term borrowings outstanding as of 31 december 2008 and 31 december 2007 is 11.01% and 5.36% respectively.

secured Loans R

in december 2008, the group obtained a short-term credit line with credit limit of Usd 400 million. The loan matures in one year and is to be repaid in four equal installments starting from september 2009. The credit line is secured by mortgage of office property, pledge of land lease rights and pledge of rights under an oil products delivery contract. The loan amount outstanding as of 31 december 2008 was Usd 400 million.

long-term debt is as follows:


long-term debt received from third parties:

Pre-export finance, Us dollar denominated — variable interest debt (libor plus 2.85 percent) 150 -Russian Rouble denominated loans 212 146

long-term debt received from TNK-BP controlled companies:

Us dollar denominated loans - 907Russian Rouble denominated loans 897 537

less: current portion of long-term debt received from third parties (30) - less: current portion of long-term debt received from TNK-BP controlled companies (45) (8)

totaL Long-terM deBt 1,184 1,582

Pre-exPort coLLateraLized finance R

in december 2008, the group entered into an agreement for up to Usd 750 million loan facility with a consortium of international banks. The facility matures in November 2011 and bears interest at liBoR plus 2.85 percent. The loan is to be repaid in ten equal installments starting from August 2009. The facility is secured by assignment of crude oil export contracts. in 2008, the loan was drawn for Usd 150 million, this amount was outstanding as of 31 december 2008.

russian rouBLe denoMinated Long-terM deBt received froM third Parties R

long-term debt received from third parties is represented by seven RUR denominated facilities with total amount of Russian Roubles 6.3 billion (Usd 0.2 billion) and RUR 3.5 billion (Usd 0.1 billion) outstanding as of 31 december 2008 and 31 december 2007, respectively. These facilities bear interest at the refinancing rate of the Russian Central Bank (13 percent and 10 percent as of 31 december 2008 and 31 december 2007, respectively) and mature in december 2011 through september 2013, with interest payable at maturity.

Long-terM deBt received froM tnK-BP controLLed coMPanies R

Apart from long-term debt received from third parties, the group has obtained loans from Russian and offshore TNK-BP controlled companies which are not part of the group. The total amount of these liabilities as of 31 december 2008 and 31 december 2007 was Usd 0.9 billion and Usd 1.4 billion, respectively.



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81


The RUR denominated loans received from TNK-BP controlled companies are mainly represented by a number of facilities received by a subsidiary of the group with a total amount of RUR 19.2 billion (Usd 0.7 billion) and RUR 12.2 billion (Usd 0.5 billion) outstanding as of 31 december 2008 and 31 december 2007, respectively. These facilities bear interest at the refinancing rate of the Russian Central Bank with interest payable at the maturity of the loans with the final maturity in september 2013.

The major part of Usd denominated debt received from TNK-BP controlled companies outstanding as of 31 december 2007 was represented by loans obtained by TBH with a total amount of Usd 0.8 billion with maturity in March 2012. These loans bore composite variable interest of liBoR plus 0.7 percent and were repaid ahead of schedule in 2008.

Aggregate maturities of long-term debt outstanding as of 31 december 2008 are as follows:

31 deceMBer 2008

debt payable to third parties

2010 602011 1022012 872013 85

debt payable to TNK-BP controlled companies

2010 422011 1162012 2302013 462

totaL Long-terM deBt 1,184

note 11: other accounts PayaBLe and accrued exPenses


salaries payable and other related costs 195 192Advances from customers 179 389interest accrued 9 19other 108 141

totaL other accounts PayaBLe and accrued exPenses 491 741

As of 31 december 2008 and 31 december 2007, interest accrued includes income tax interest payable of Usd 6 million and 3 million, respectively – see Note 13.

As of 31 december 2008 and 31 december 2007, the group had long-term interest accrued amounting to Usd 123 million and Usd 54 million, respectively, which was included in other long-term liabilities.

note 12: sharehoLders’ equity

The share capital of the Company comprises 15,847 million authorized and issued ordinary shares of RUR 1 par value and 450 million authorized, issued and outstanding non-cumulative preferred shares of RUR 1 par value.

The treasury stock of the Company comprises 850 million ordinary shares, which are held at cost. The treasury stock was acquired in the course of TNK-BP’s corporate restructuring program.

Profits available for distribution to shareholders in respect of any reporting period are determined by reference to the statutory financial statements of the Company and its subsidiaries prepared in accordance with the law of the Russian federation and denominated in Russian Roubles.

during the years ended 31 december 2008 and 31 december 2007 the group declared dividends of Usd 2,918 million and Usd 1,635 million, respectively.

earnings Per share R

The calculation of earnings per share for the reporting period was as follows:

year ended 31 deceMBer 2008


Net income 6,384 5,732deduct dividends declared on preferred stock (85) (48)

net incoMe avaiLaBLe to coMMon sharehoLders 6,299 5,684

Weighted average number of common shares, millions of shares 15,847 15,847deduct weighted average number of treasury shares, millions of shares (850) (850)

weighted average nuMBer of outstanding coMMon shares,� MiLLions of shares 14,997 14,997

earnings Per share 0.42 0.38

As of 31 december 2008 and 2007, the Company had no securities which would have a dilutive effect on net income per share of common stock.

note 13: incoMe taxes

The group is not subject to corporate income tax on a consolidated basis, rather group entities are assessed for corporate income taxes on an individual basis. for the years ended 31 december 2008 and 31 december 2007 the statutory corporate income tax rate in the Russian federation is 24 percent. The group calculates deferred income taxes in accordance with sfAs No. 109, Accounting for income Taxes. for an entity using the Us dollar as a functional currency, sfAs No. 109 requires deferred income taxes to be computed on non-current assets in local currencies (Russian Roubles in the group’s case) by comparing the historical book and tax basis in local currency after the respective depreciation but before any indexing for either book or tax purposes. The local currency deferred income tax is then remeasured into Us dollars using the prevailing year-end exchange rate.

deferred income tax reflects the impact of temporary differences between the carrying values of assets and liabilities recognized for financial reporting purposes and such amounts recognized for statutory tax purposes.

The total of deferred tax liabilities and the total of deferred tax assets as of 31 december 2008 amounted to Usd 644 million and Usd 327 million, respectively. in November 2008, a new statutory corporate income tax rate applicable in the Russian federation of 20% was enacted effective 1 January 2009. Accordingly, deferred tax liabilities and assets of the group as of 31 december 2008 were calculated using the new rate. The total of deferred tax liabilities and the total of deferred tax assets as of 31 december 2007 amounted to Usd 1,056 million and Usd 378 million, respectively.

deferred income taxes are included in the consolidated balance sheet as follows:


Assets

other current assets 104 105other long-term assets 140 147

liabilities

Taxes payable - 3deferred income tax liability –non-current 561 927

net deferred incoMe tax LiaBiLities 317 678



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The following table sets out the tax effects of each type of temporary differences which give rise to deferred income tax assets and liabilities:


long-term liabilities 104 114operating loss carry forward 68 42Accounts payable 67 98Property, plant and equipment 25 29inventories 15 8other 48 87

deferred incoMe tax assets 327 378

Property, plant and equipment 628 1,011inventories 9 33other 7 12

deferred incoMe tax LiaBiLity 644 1,056

net deferred incoMe tax LiaBiLity 317 678

in 2004, the group entered into an agreement with the Tyumen regional authorities which granted certain subsidiaries of the group a tax concession by way of a four percent relief to the statutory corporate income tax rate subject to certain subsidiaries of the group making qualified capital investments in the region. in 2006, the group entered into a similar agreement with the orenburg regional authorities. for the years ended 31 december 2008 and 31 december 2007, the group’s income tax expense in the accompanying financial statements includes a tax benefit relating to these tax concessions of Usd 359 million and Usd 286 million, respectively.

in addition, during the year ended 31 december 2007, the group recognized a tax benefit related to the reversal of tax accruals of Usd 170 million resulting from the enactment of legislation in the Russian federation which, provided certain conditions are met, eliminated the requirement to withhold taxes on the payment of intragroup dividends within the Russian federation. These benefits are offset by certain non-deductible expenses and accrual of withholding tax on earnings to be distributed to the group foreign holding companies. The effective tax rate of the group approximated 22 percent and 20 percent for the years ended 31 december 2008 and 31 december 2007, respectively.



income before income taxes 8,323 7,387

Notional income tax at Russian statutory rate 1,998 1,773

increase (reduction) in income tax due to:

domestic tax rate differences (359) (286) Unremitted earnings of subsidiaries and equity affiliates and withholding tax on intragroup dividends 17 (170)foreign exchange differences 190 (30)Russian income tax rate change effective 1 January 2009 (62) -other permanent differences 43 166

totaL incoMe taxes exPense 1,827 1,453

uncertain tax Positions R

The group adopted the provisions of fiN 48 on 1 January 2007. The implementation of fiN 48 did not result in a change in the liability for unrecognized tax benefits as of 1 January 2007. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ending 31 december 2008 and 31 december 2007 is as follows:


Additions for tax positions of prior years 15Reductions for tax positions of prior years (22)Exchange loss 2


settlements (27)Additions for tax positions of prior years 8Reductions for tax positions of prior years (7)Exchange gain (1)


As of 31 december 2008 and as of 31 december 2007, the amount of the unrecognized tax benefit which, if recognized in the future, would favorably impact the effective tax rate is Usd 10 million and Usd 37 million, respectively.

during the year ended 31 december 2008, the group recognized a charge of Usd 15 million related to income tax interest and a net credit of Usd 17 million related to income tax penalties which are included in interest expense and Taxes other than income tax, respectively, in the consolidated statement of income. As of 31 december 2008, the group had recorded Usd 6 million for income tax interest payable and Usd 4 million for income tax penalties payable which are included in other accounts payable and Taxes payable, respectively, in the consolidated balance sheet.

during the year ended 31 december 2007, the group recognized a gain of Usd 1 million related to income tax interest and a net credit of Usd 49 million related to income tax penalties which are included in interest expense and Taxes other than income tax, respectively, in the consolidated statement of income. As of 31 december 2007, the group had recorded Usd 3 million for income tax interest payable and Usd 3 million for income tax penalties payable which are included in other accounts payable and accrued expenses and Taxes payable, respectively, in the consolidated balance sheet.

The tax returns of the Russian subsidiary companies in respect of the years ended 31 december 2008, 2007 and 2006 remain subject to examination by the Russian Tax Authorities. Based on management’s interpretation of current legislation, there are no uncertain tax positions which are reasonably possible to change significantly during the next twelve months although, as discussed in Note 17, such legislation is subject to varying interpretations by the tax authorities.



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85


note 14: taxes other than incoMe tax and taxes PayaBLe

Taxes other than income tax expense for the years ended 31 december 2008 and 31 december 2007 comprises the following:



Unified production tax 9,583 6,493Excise taxes 877 799Property tax 180 129Pension fund and other social taxes 150 148Non- recoverable vAT expense 67 26Tax penalties and interest (6) (64)other taxes 33 29

totaL taxes other than incoMe tax 10,884 7,560

unified Production tax R

The rate for the tax is adjusted depending on the market price of Urals blend and the Russian Rouble/Us dollar exchange rate. Average tax rates for 2008 and 2007 were Usd 18.70 per barrel and Usd 13.30 per barrel, respectively.

tax PenaLties and interest R

in November 2007, resulting from a successful appeal the group recognized a gain amounting to Usd 57 million in respect of income tax penalties related to 2001 tax matters. These penalties had been provided for and paid in 2005 – see Note 17.

in december 2008, resulting from a successful appeal the group recognized a gain amounting to Usd 16 million in respect of income tax penalties related to 2001 tax matters. These penalties had been provided for and paid in 2006 – see Note 17.

Current and long-term taxes payable as of 31 december 2008 and 2007 are as follows:


Unified production tax 248 731value-added tax 102 159Excise taxes 55 87Pension fund and other social taxes 36 34Property tax 33 31Tax penalties and interest 21 13income taxes 18 180Current deferred income tax liability - 3other taxes 14 14

Total taxes payable 527 1,252

less: long-term taxes payable (1) (1)

current taxes PayaBLe 526 1,251

note 15: revenues

Revenues for the years ended 31 december 2008 and 31 december 2007 comprise the following:



Crude oil – export (Europe and Cis) 21,685 19,674

Crude oil – domestic 2,302 1,354

Petroleum products – export (Europe and Cis) 10,847 6,990

Petroleum products – domestic 8,984 6,190other revenues 1,310 787

saLes and other oPerating revenues 45,128 34,995

note 16: reLated Party transactions

The group has the following balances in the ordinary course of business with affiliates of Alfa group, a major shareholder:

as of 31 deceMBer 2008

as of 31 deceMBer 2007

Cash and cash equivalents held at Alfa Bank 55 53Trade and other receivables, net 8 4insurance expenses 12.3 8.2

The group has the following transactions and balances in the ordinary course of business with oAo NgK slavneft and its subsidiaries:

as of and for the year ended

31 deceMBer 2008


31 deceMBer 2007

Trade and other receivables, net 25 20Trade and other accounts payable 45 35loans received - 59

sales of crude oil export 266 156volumes (millions of tons) 0.6 0.4

sales of refined products 92 258volumes (millions of tons) 0.1 0.5

Crude oil refining fee 234 193volumes (millions of tons) 6.8 6.3



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87


The transactions and balances with TNK-BP controlled companies are as follows:


31 deceMBer 2008


31 deceMBer 2007

Trade receivables, net 9,776 6,786Advances issued and other accounts receivable, net 59 36short-term and long-term interest receivable 12 42short-term and long-term portion of loans issued 151 110Trade accounts payable 5,330 4,183other accounts payable 12 25dividends payable 567 792other long-term liabilities 98 169loans received 894 1,445sales of crude oil export 18,891 17,267

volumes (millions of tons) 28.2 33.0sales of petroleum products 10,317 6,610

volumes (millions of tons) 15.6 13.2other sales 128 84Purchases of crude oil 631 1,106

volumes (millions of tons) 2.2 4.7other purchases:

Management fees 846 869Consulting services - 18Crude oil refining fee 40 -

volumes (millions of tons) 1.0 -Acquisition of additional interest in subsidiary - 42other purchases 48 14

The transactions and balances with other related parties are as follows:


31 deceMBer 2008


31 deceMBer 2007

loans issued 25 13Accounts payable 15 10sales of natural gas 122 -

volumes (billions of cubic meters) 2.8 -Crude oil refining fee 9 -

volumes (millions of tons) 0.2 -gas processing fee 103 57

volumes (billions of cubic meters) 3.4 1.8

note 17: coMMitMents and contingencies

econoMic and oPerating environMent in the russian federation R

Whilst there have been improvements in economic trends in the Russian federation, the country continues to display certain characteristics of emerging market. These characteristics include, but are not limited to, the existence of a currency that is, in practice, not convertible in most countries and relatively high inflation. furthermore, the tax, currency, and customs legislation within these countries is subject to varying interpretations and changes which can occur frequently.

voLatiLity in financiaL and coMModity MarKets R

The group has been closely monitoring the ongoing crisis in financial and credit markets and the general contraction of worldwide economic activity. The crisis in financial and credit markets has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the international and Russian banking sector, and higher interbank lending rates. such circumstances could affect the ability of the group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions.

in addition, the group’s results are impacted by the demand and prices of crude oil. during 2008, the worldwide demand for crude oil decreased significantly resulting in an unprecedented decline in crude oil prices since mid-year 2008. The spot price for Brent crude oil, a benchmark crude, started 2008 at Usd 97 per barrel and peaked at $144 in early July. At the end of the year, the Brent price had fallen to Usd 36 per barrel. This decline in crude prices in combination with the lag effect of applying Russian export duties based on recent as opposed to prevailing crude prices negatively impacted the group’s operating results and financial condition in the fourth quarter of 2008.

Management is taking these developments and the ongoing volatility in financial and commodity markets into account in the conduct of daily operations and for business planning and believes that it is taking all the necessary measures to support the sustainability and growth of the group’s business in the current circumstances.

gas Production and MarKeting activities R

As of 31 december 2008 and 31 december 2007, the group’s capitalized costs related to its gas subsidiaries amounted to Usd 665 million and Usd 652 million, respectively.

Russian independent gas producers are currently only able to access the domestic gas transmission system upon agreement with gazprom, Russia’s gas monopoly which owns and operates the system. Currently, the group does not have long-term access to this system.

taxation R

Russian tax and customs legislation is subject to varying interpretations and changes which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activities of the group may be challenged by the relevant regional and federal authorities. Recent developments suggest that the authorities are becoming more active in seeking to enforce, through the Russian court system, interpretations of tax legislation which may be selective for particular taxpayers and different to the authorities’ previous interpretations or practices. different and selective interpretations of tax regulations by various government authorities and inconsistent enforcement create further uncertainties in the taxation environment in the Russian federation.

Tax declarations, together with related documentation, are subject to review and investigation by a number of authorities, each of which may impose fines, penalties and interest charges. fiscal periods remain open to review by the authorities for the three calendar years preceding the year of review (one year in the case of customs). Under certain circumstances reviews may cover longer periods. in addition, in some instances new tax regulations have taken retroactive effect. Additional taxes, penalties and interest which may be material to the financial position of the taxpayers may be assessed in the Russian federation as a result of such reviews.



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89


tax audits R

during 2004 and 2005 the Russian tax authorities performed tax audits on certain of the group’s subsidiaries relating to their 2001-2003 activities.

in december 2004, the Russian tax authorities issued a decision challenging, among other things, the use of profit tax concessions claimed by TNK with respect to the reinvestment of profits in fixed production assets in 2001 and made a claim for Usd 143 million (RUR 4 billion) including fines and penalty interest. This amount was paid in december 2006. in december 2008, the group won an appeal related to income tax penalties and recognized a gain amounting to Usd 16 million.

The Russian tax authorities performed a repeat tax audit on TNK’s 2001 activities and in April 2005 presented TNK with a tax act totaling approximately Usd 578 million (RUR 16 billion) which, among other things, challenged the use of reduced tax rate economic zones. following objections presented by the group, the tax act amount was reduced and the Russian tax authorities issued a final decision in the amount of Usd 247 million (RUR 7 billion) including penalty interest and fines. This amount was paid in August 2005. in November 2007, the group won an appeal related to income tax penalties and recognized a gain amounting to Usd 57 million.

Pursuant to tax audits conducted in 2006 and 2007, the Russian tax authorities have presented tax acts and decisions in the amount of Usd 228 million (RUR 6.7 billion) relating to 2003, 2004 and 2005 in respect of income tax and other taxes of group subsidiaries. The group is currently appealing these decisions either with higher tax authorities or in the courts. As of 31 december 2008, the group received favorable court rulings in respect of Usd 63 million of the above amount. The group believes that it has made adequate provision for the outcome of the matters raised by the tax authorities.

Pursuant to tax audits conducted in 2008, the Russian tax authorities have presented tax acts in the amount of Usd 96 million (RUR 2.8 billion) relating to 2006 and 2007 in respect of income tax and other taxes of a number of group subsidiaries. The group believes that it has made adequate provision for the outcome of the matters raised by the tax authorities.

As of 31 december 2008 and 31 december 2007, the group has recorded a liability in the amount of Usd 45 million (RUR 1.3 billion) and Usd 41 million (RUR 1 billion), respectively, related to the matters discussed above.

oiLfieLd and gasfieLd Licenses R

The group is subject to periodic reviews of its activities by government authorities with respect to the requirements of its licenses. Where appropriate, management of the group liaises with government authorities to agree on remedial actions and resolve any findings resulting from these reviews. failure to comply with the terms of a license could result in fines, penalties or license limitation, suspension or revocation.

environMentaL LiaBiLities R

Environmental regulation in the Russian federation is evolving as is the enforcement posture of government authorities. The group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognized immediately. Potential liabilities, which may arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material.

The group’s estimated environmental liability was Usd 228 million and Usd 161 million as of 31 december 2008 and 31 december 2007, respectively. The estimates used by management include uncertainties about a number of factors including the extent of necessary remediation, the technology to be used for remediation and the standards that will constitute an acceptable remediation. As additional information becomes available, management will continue to adjust its estimated provision to an appropriate level. The group’s environmental obligations could range up to Usd 375 million.

LegaL contingencies R

The group is a named defendant in a number of lawsuits as well as a named party in numerous other proceedings arising in the ordinary course of business. While the outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present, management believes that any resulting liabilities will not have a materially adverse effect on the financial position or the operating results of the group.

in february 2002, Norex Petroleum limited filed a lawsuit against TNK and certain other defendants in the United states district Court for the southern district of New york over the ownership of a company, which was owned by an affiliate of the Alfa group and the Access-Renova group. in 2002, this company was acquired by TNK. in february 2004, the case was dismissed based on jurisdiction and venue. in July 2005, the Court of Appeals reversed the decision of the district Court and returned the case to the lower court where in september 2007 the case was dismissed. in october 2007, Norex Petroleum limited petitioned the Court of Appeals for reconsideration of this decision. in february 2009 a Court of Appeal hearing took place, however a decision remains outstanding. Management continues to believe that the resolution of the matter will not have a material adverse impact on the financial position of the group.

on 18 April 2008, a minority shareholder in the Company filed a suit in the Tyumen Arbitration Court against TNK-BP Management (‘TBM’) and BP Exploration services, a subsidiary of BP, alleging that an agreement between BP and TBM to provide services by BP specialists to TBM (the ‘services Agreement’) was invalid. The suit petitioned the Court to rule the services Agreement null and void. Pursuant to the claimant’s application, on 30 April 2008 the Tyumen Arbitration Court issued an injunction suspending all activities under the services Agreement. on 23 July 2008, the Tyumen Arbitration Court ruled the services Agreement null and void. subsequently, following the filing of an appeal by TNK-BP, the minority shareholder withdrew its claim and the case was discontinued in its entirety with all previous court rulings being annulled.

in september 2008, the Russian federal Antimonopoly service (‘fAs’) issued a decision whereby it found TNK-BP Holding in violation of the Russian antimonopoly legislation in respect of jet fuel and gasoline pricing on the wholesale markets. in November 2008, the fAs issued a fine in the amount of Usd 44 million (RUR 1.1 billion) against TNK-BP Holding. The group believes that it has meritorious grounds to appeal the decision of the fAs and related fines and such appeal was filed in January 2009. in addition, the fAs has publicly stated that it intends to conduct further investigations of industry practices with regard to refined products pricing.

other Matters R

in 2008, a number of differences arose between BP and AAR, the shareholders of TNK-BP. These included disputes with regard to the provision of services by BP specialists to the group, the employment of non-Russian nationals by the group and the board of director nomination process for certain subsidiaries of TNK-BP including TNK-BP Holding.

following the Memorandum of Understanding entered into by the shareholders of TNK-BP in september 2008, a revised shareholder Agreement was signed in January 2009. The revised Agreement includes, among other matters, changes to the composition and authority of the TNK-BP Board of directors as well as to the charters of significant TNK-BP subsidiaries and provisions regarding the appointment of executives of the group. Also in January 2009, a new Board of directors of TNK-BP was appointed, which, in line with the revised Agreement, consists of four representatives from each of the two shareholder groups and three independent directors.



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note 18: segMent inforMation

Presented below is information about the group’s operations for years ended 31 december 2008 and 31 december 2007 in accordance with sfAs No.131, disclosures about segments of an Enterprise and Related information.

The group has three operating segments – exploration and production (‘E&P’); refining, marketing, and distribution (‘RM&d’); and oil field services. Management assesses the performance of these operating segments on a regular basis. The E&P segment explores for, develops and produces crude oil and gas. The Rd&M segment processes crude oil into refined products and also purchases, sells and transports crude oil and refined petroleum products. The oil field services segment provides support and maintenance to oil and gas exploration and production facilities.

The other segment primarily includes corporate activities. in addition, the other segment includes gains on disposals of subsidiaries and earnings from equity investments.

The operations of the group as summarized in the segment data provided below are carried out within the Russian federation, which is considered as a single geographical segment by the group.

External revenues are assigned to the country of operation from which the revenues are derived, the Russian federation. The group’s major customers, as defined by 10 percent of total group’s external revenues, are TNK-BP controlled companies. The group’s assets are located in the Russian federation.

Commencing 1 January 2008, certain changes to segment measures reported to management were introduced with the following effects for segment reporting:

The group discloses EBiTdA by segment as a measure of profit. h

All crude oil sales in the E&P segment are presented as intersegment revenues. h

E&P segment revenues are presented using notional intersegment prices which are set at the hlowest netback available depending on type of crude and distribution channel.

Projects related costs incurred on corporate level are allocated to individual segments. h

All trade accounts receivable and export value-added tax receivable are presented as RM&d hassets.

Accounts receivable from and loans issued to group subsidiaries are not allocated to individual hsegments.

segment assets are presented net of intersegment loans as the latter are considered to be hmanaged by the corporate treasury function.

segment information is prepared using forecasted factors. other differences included in the hreconciliation in the table below represent differences between estimated and actual results.

as of 31 deceMBer 2008 and for the year ended 31 deceMBer 2008

exPLoration and

Production

refining,� MarKeting and

distriButionoiL fieLd services other eLiMination totaL

RevenuesThird parties 813 44,230 62 - - 45,105intersegment 19,107 28 551 - (19,686) -

segMent revenues 19,920 44,258 613 - (19,686) 45,105

Revenues not allocated to segments 23

consoLidated revenues 45,128

eBitda 5,429 5,128 158 (390) (376) 9,949

segMent assets 15,459 5,353 322 213 (280) 21,067

Balances with TNK-BP controlled companies 10,112

СonsoLidated assets 31,179

caPitaL exPenditures 3,481 407 123 14 (63) 3,962

EBiTdA for the year ended 31 december 2008 is reconciled to income before income taxes and minority interest as follows:

eBitda 9,949

depreciation, depletion and amortization (1,452)Exchange gain / (loss), net 209loss on disposals and impairment of assets (160)interest expense (152)interest income and net other income 137Non-recoverable vAT (67)other differences (141)

incoMe Before incoMe taxes and Minority interest 8,323

in prior periods, E&P segment revenues were presented based on actual realized prices before the deduction of export duties and transportation costs. Project related costs incurred on corporate level were included in the other segment. intersegment loans and receivables were included in segment assets. Balances with TNK-BP controlled companies were allocated to individual segments. Trade accounts receivable and export value-added tax receivable relating to sales of E&P entities were presented in E&P segment assets. further, segment information was prepared based on actual results.

as of 31 deceMBer 2007 and for the year ended 31 deceMBer 2007

exPLoration and Production

refining,� MarKeting and

distriButionoiL fieLd services other eLiMination consoLidated

Revenues

Third parties 19,433 15,470 38 54 - 34,995intersegment 6,111 294 559 74 (7,038) -

segMent revenues 25,544 15,764 597 128 (7,038) 34,995

depreciation, depletion and Amortization (1,032) (163) (133) (13) - (1,341) Earnings from equity investments 4 - - - - 4 interest expense (67) (156) - (5) 61 (167)

incoMe Before incoMe taxes and Minority interest 5,252 2,967 (72) (613) (147) 7,387

segMent assets 23,629 12,925 455 1,950 (11,055) 27,904

caPitaL exPenditures 3,036 280 121 - (37) 3,400



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note 19: suBsequent events

on 29 January 2009, the group obtained a loan of Usd 500 million repayable in July 2011.

Also, subsequent to 31 december 2008, the group entered into negotiations with regard to a potential sale of its oil field services business. discrete financial information with regard to the ofs business is provided in Note 18.

suPPLeMentaL inforMation on oiL and gas exPLoration and Production activities (unaudited)

This section provides unaudited supplemental information on oil and gas exploration and production activities in accordance with sfAs No. 69, disclosures About oil and gas Producing Activities, in six separate sections:

i. Capitalized costs relating to oil and gas producing activities ii. Costs incurred in oil and gas property acquisition, exploration and development activities iii. Results of operations for oil and gas producing activities iv. Reserve quantity information v. standardized measure of discounted future net cash flows vi. Principal sources of changes in the standardized measure of discounted future net cash flows

i. caPitaLized costs reLating to oiL and gas Producing activities


oil and gas properties and equipment, 16,917 14,805including unproved oil and gas properties 1,019 1,077

oil field services properties and equipment 529 629Assets under construction related to oil and gas properties 1,920 1,347

Accumulated depreciation, depletion, and amortization (5,135) (4,518)

Net capitalized costs for consolidated subsidiaries 14,231 12,263

ii. costs incurred in oiL and gas ProPerty acquisition,� exPLoration and deveLoPMent activities



Consolidated subsidiaries

Acquisition of properties - proved - 143Acquisition of properties - unproved 14 615Exploration costs capitalized 186 113Exploration costs expensed 57 127development costs 3,218 2,705

totaL costs incurred in consoLidated suBsidiaries 3,475 3,703

The total costs incurred in consolidated subsidiaries for the year ended 31 december 2007 include costs associated with the acquisition of vanyoganneft – see Note 4.


suPPLeMentaL inforMation on oiL and gas exPLoration and Production activities (unaudited) (expressed in Us dollars, tabular amounts in millions)

94


95


iii. resuLts of oPerations for oiL and gas Producing activitiesThe group’s results of operations for oil and gas producing activities are presented below. in accordance with sfAs No. 69, transfers to group companies are based on market prices. income taxes are based on statutory rates. The results of operations exclude corporate overhead and interest costs.




Revenue

sales 24,718 21,473Transfers 7,487 5,228

Export duties and transportation expenses (12,015) (9,056)

totaL revenues 20,190 17,645

Production costs (excluding production taxes) 3,823 2,852Exploration expenses 57 129depreciation, depletion and amortization 1,210 1,164Taxes other than income taxes 9,668 6,739Related income taxes 1,119 1,369

totaL resuLts of oPerations of consoLidated suBsidiaries 4,313 5,392

iv. reserve quantity inforMationThe following information presents the quantities of proved oil and gas reserves and changes thereto as at and for the years ended 31 december 2008 and 31 december 2007. The definitions used are in accordance with United states securities and Exchange Commission (‘sEC’) regulations.

Proved reserves are defined as the estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions (i.e. prices and costs as of the date the estimate is made). due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are inherently imprecise, require the application of judgment and are subject to change over time as additional information becomes available.

Proved developed reserves are those reserves which are expected to be recovered through existing wells with existing equipment and operating methods.

All of the group’s and its equity affiliate’s proved reserves are located in the Russian federation. Management has included within proved reserves significant reserves quantities which the group expects to produce after the expiry dates of certain of its current production licenses. Management believes these licenses may be extended provided the group is in compliance with the license terms and approval is obtained from the appropriate regulatory authority; management intends to extend such licenses for properties expected to have production subsequent to their license expiry dates. The group has already extended a number of these licenses and to date there have been no unsuccessful license renewal applications.

Estimated net proved oil and gas reserves and changes thereto for the years ended 31 december 2008 and 31 december 2007 are shown in the tables set out below.

crude oiL,� gas condensate and naturaL gas Liquids,� MiLLions of BarreLs




Net proved reserves as of beginning of year 7,855 7,440Revisions of previous estimates (85) 505Purchase of hydrocarbons in place - 72Extensions and discoveries 214 416Production (532) (530)sales of hydrocarbons in place (6) (48)

net Proved reserves of consoLidated suBsidiaries as of end of year

7,446 7,855

net Proved deveLoPed reserves of consoLidated suBsidiaries as of end of year

4,697 5,105

naturaL gas,� BiLLions cuBic feetyear ended


31 deceMBer 2007


Net proved reserves as of beginning of year 2,140 1,762Revisions of previous estimates 2,126 674Purchase of hydrocarbons in place - 17Production (400) (313)

net Proved reserves of consoLidated suBsidiaries as of end of year

3,866 2,140

Proved deveLoPed reserves as of end of year 2,754 2,140

v. standardized Measure of discounted future net cash fLowsThe standardized measure of discounted future net cash flows is calculated in accordance with sfAs 69, which requires measurement of future net cash flows by applying year-end prices and costs and an annual discount factor of ten percent to year-end quantities of estimated net proved reserves using a standardized formula. The calculation requires extensive judgment in estimating the timing of future production of reserves. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculation. As a result, future cash flows calculated under sfAs 69 are not necessarily indicative of the Company’s future cash flows, nor the fair value of its oil and gas reserves; other assumptions of equal validity could give rise to materially different results.



future cash inflows 131,097 320,020future production and development costs (111,369) (234,373)future income tax expenses (4,200) (20,712)

future net cash flows 15,528 64, 935discount for estimated timing of cash flows (10% p.a.) (7,987) (35,747)

standardized Measure of discounted future net cash fLows of consoLidated suBsidiaries

7,541 29,188

future dismantlement, abandonment and rehabilitation costs are included as a part of future production and development costs.

vi. PrinciPaL sources of changes in the standardized Measure of discounted future net cash fLows

year ended31 deceMBer 2008

year ended31 deceMBer 2007


standardized measure of discounted future net cash flows as of the beginning of year 29,188 19,819

sales and transfers of oil and gas produced, net of production costs (6,595) (7,856) Net changes in prices and production costs, including production taxes (33,177) 16,810Extensions and discoveries, less related costs 347 2,299development costs incurred during the year 2,224 1,547Changes in estimated future development costs 2,793 (3,987)Revisions of previous quantity estimates 1,026 1,619 Net changes due to purchases and sales of minerals in place (15) 288Accretion of discount 3,924 2,550Net change in income taxes 7,826 (3,901)

standardized Measure of discounted future net cash fLows of consoLidated suBsidiaries as of the end of year 7,541 29,188



96


reference inforMation

coMPany oJsc tnK-BP hoLding

CoNTACT dETAilsAddress 60, oktyabrskaya str., Uvat village, Uvat district, Tyumen oblast, 626170, Russian federationРostal address 60, oktyabrskaya str., Uvat village, Uvat district, Tyumen oblast, 626170, Russian federation Telephone/fax +7 495 777 7707/777 7708Web www.tnk-bp.ru

the ManageMent organization oJsc tnK-BP ManageMent

CoNTACT dETAilsAddress 1, Arbat str., Moscow, 119019Рostal address 1, Arbat str., Moscow, 119019 Telephone/fax + 7 495 777 7707/777 7708Web Corporate secretaryRussian mediainternational mediashareholders and analysts

www.tnk-bp.ru+ 7 495 787 9621+ 7 495 363 2757+ 7 495 363 2580+ 7 495 787 9630

registrar Jsc ‘ircoL’

CoNTACT dETAilsAddress 3/4, bldg.1, Boyarskiy per., Moscow, 107078Рostal address P.o. Box 70, Moscow, 107078Telephone/fax + 7 495 208 1515/208 3434E-mail [email protected] www.ircol.ru

liCENsENumber 10-000-1-00250date of issue 09.08.2002 duration unlimitedissuing authority fCsM Russia

auditor zao ‘PricewaterhousecooPers audit’

CoNTACT dETAilsAddress 52, bldg. 5, Kosmodamianskaya nab., Moscow, 113054, Russian federationРostal address 52, bldg. 5, Kosmodamianskaya nab., Moscow, 113054, Russian federation Telephone/fax +7 495 967 6000/967 6001

liCENsENumber Е 000376date of issue 20.05.2002duration 20.05.2012issuing authority Rf Ministry of finance

auditor (suBsidiary coMPanies) LLc ‘fineKsPertiza’

CoNTACT dETAilsAddress 69, bldg. 1, Prospect Mira, Moscow, 129110, Russian federationРostal address P.o. Box 179, 129110, Russian federationTelephone/fax + 7 495 775 2200/775 2201

liCENsENumber Е 002588date of issue 06.11.2002duration 06.11.2012issuing authority Rf Ministry of finance

ANNUAL REPORTTNK-BP HOLDING

tnk-bp holdingir.tnk-bp.ru/~/media/files/t/tnk-bp-ir/documents/annual-reports/ar...tnk-bp holding //...

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